2016/17 Knowledge Sharing Program (Industry & Trade) with
RUSSIA RUSSEZ 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ
Project Title Consulting for the Development of Russian Special Economic Zones (RUSSEZ)
Prepared by Asia-Pacific Research Center
Supported by Ministry of Strategy and Finance (MOSF), Republic of Korea Korea Trade-Investment Promotion Agency(KOTRA)
Prepared for Government of the Russian Federation
In cooperation with Russian Special Economic Zones ‘Lotus’ Russian Special Economic Zones ‘Alabuga’ Russian Special Economic Zones ‘Uzlovaya’ KOTRA Saint Petersburg Office
Project Directors Won Sok YUN, Executive Vice President for Biz info & Trade, KOTRA Sang Young HONG, Director General, Development Cooperation Office, KOTRA
Senior Advisor Dong Kyu SHIN, Senior Advisor of Kim & Chang (Attorneys at law)
Project Manager Yi Rye KIM, Researcher, Development Cooperation Office, KOTRA Project Officer Jong Ho KIM, Asia-Pacific Research Center at Hanyang University
Authors Gu Ho EOM (Principal Investigator, Director of Asia-Pacific Research Center at Hanyang University)
Chapter 1. Hyun Sub BYUN (HK Research Professor, Asia-Pacific Research Center at Hanyang University) Maxim ARBUZOV (Head of Project Management Department of RUSSEZ) Chapter 2. Hong Yul HAN, Professor (Asia-Pacific Research Center at Hanyang University) Ekaterina BRAGINA (Head of Business Development Team of RUSSEZ) Chapter 3. Sung Wook YOON (Professor, Chungbuk University) Ekaterina BRAGINA (Head of Business Development Team of RUSSEZ)
Government Publications Registration Number 11-1051000-000800-01 ISBN 979-11-6097-655-7 (93320) 979-11-6097-656-4 (95320)(PDF) Copyright ⓒ 2018 by Ministry of Strategy and Finance, Republic of Korea RUSSIA RUSSEZ
2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ Consulting for the Development of Russian Special Economic Zones (RUSSEZ)
2016/17 KSP RUSSEZ Executive Summary Chapter 1. Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ Chapter 2. Regional Development for Job Creation and Business Development Chapter 3. Strategies and Policies to attract Foreign Direct Investments in RUSSEZ Preface
The Knowledge Sharing Program (KSP), sponsored by the Ministry of Strategy and Finance, is the representative knowledge-based development cooperation program in Korea that supports the economic and social development of partner countries and establishes a friendly economic cooperation base with Korea. KSP has been used strategically for economic cooperation and the demand for creating new growth engines in overseas markets has increased in recent years. As such, KOTRA has been participating as a joint general organization of KSP since 2014, providing advice to promising industries such as trade and investment and contributing to the project, making KSP a cornerstone of bilateral economic cooperation.
Together with RUSSEZ, KOTRA has been carrying out the KSP project as part of the ‘2016/17 KSP Industrial and Trade Investment Policy Advisory Program’, sharing the knowledge gained during the economic development process of Korea with partner countries in accordance with KSP’s goals. Rather than delivering the experience of Korea to the partners unilaterally, KOTRA sought to find common implications through communication and cooperation with various participants, including senior officials of partner countries. We also organized an investment seminar in Russia as a linked business to actively explore the economic cooperation agenda between the two countries and encourage participation of Korean companies to expand public-private partnerships.
Since the year 2010, the Russian government has focused on cultivating and laying the foundations for the manufacturing industry through the “Import Substitution Strategy” to diversify its resource-dependent economy. This was done to actively promote policies to reduce the proportion of imports including raw materials and equipment from 2014 to 2020, as well as introduce four types of 26 special economic zones: industrial production zones, technological innovation zones, tourism zones, and port and airport (logistics) zones to innovate the overall structure of the economy by fostering new technology development and non-petroleum sector manufacturing by attracting foreign investment. As the Russian government is currently focusing on reforming the special zone policies and preparing long-term strategies, it asked the Korean government for policy advice on improving the investment environment of the SEZ and hoped to share experiences related to establishing the SEZ policy and investment attraction strategy in Korea to improve operations for the sustainable development of SEZ, attract foreign investment and manufacturing, improve the infrastructure of the SEZ, create jobs and establish measures for attracting direct investment. This report, which is organized by the Ministry of Strategy and Finance, directed by KOTRA and conducted by the Asia-Pacific Research Center of Hanyang University, covers the results of research and policy consultations about RUSSEZ (Russian Special Economic Zone). The KSP project with the Russian central government was conducted for the first time for this year and KOTRA carried out the project under the title “Measure to improve Investment Environment in the Russian Special Economic Zone (SEZ)”.
Chapter 1, "Sustainable Development and Operation of the Russian Special Economic Zones and Sharing Korea’s Experience for Strengthening Competitiveness“, contains the current status of free economic zones in Korea, the establishment of a special economic zone operator and how to generate revenue and policy recommendations on performance evaluation. Chapter 2, "Regional Development for Job Creation and Business Development", discusses the significance of SEZ policies for regional development, employment policy, and policy challenges for job creation. In Chapter 3, "Strategies and Policies to attract Foreign Direct Investment in RUSSEZ”, we have analyzed the policy of attracting foreign investment in the Special Economic Zone, the status of attracting foreign investment in the Special Economic Zone of Korea, searching for ways to attract foreign investment in the Special Economic Zones and implications and applicability of the Korean experience.
Therefore, it is necessary to attract domestic and foreign investors to the special zones utilizing the economic characteristics of the region, which is the core of the development policy of the Russian special economic zone, and to provide consulting services in accordance with the needs of partner countries to foster manufacturing companies that utilize available resources in the region and export processing products.
Prior to the publication of this report, I would like to express my sincere appreciation to Dr. Eom Gu Ho, director of Asia-Pacific Research Center at Hanyang University; Han Hongyul, professor at Hanyang University; Byun Hyunsub, research professor at Hanyang University and Yoon Sungwook, professor at Chungbuk National University, for sharing the experience of Korea's economic development. I am also grateful to K&C law firm advisor Shin Dong Kyu, senior advisor of the Russia KSP project RUSSEZ; KOTRA’s overseas office in St. Petersburg and the Korean Embassy in Russia. Furthermore, I am thankful to those who have offered valuable advice for the completion of the report, including Sung Won Yong, Park Joung Ho, Choi Yong Seok, Mah Jai Sheen and Kim Seoung Su.
Lastly, I’d like to disclose that the contents of this report are opinions of experts who participated in the project, and are not official opinions of KOTRA.
August, 2017 Yun Wonsok Executive Vice President for Business Information & Trade Affairs, KOTRA Contents
2016/17 KSP RUSSEZ ·············································································································1 Executive Summary ················································································································· 6
Chapter 1
Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ
1. Free Economic Zone in Korea ········································································································ 17 1.1 Background of Free Economic Zone Promotion and Designation Status ························ 17 1.2. Free Economic Zone Business Promotion System ······························································· 19 1.3. Preferential system of Free Economic Zone ········································································· 21 1.4. Living Condition in FEZs ·········································································································· 23
2. Korea's SEZ Area Selection and Procedure ·················································································· 26 2.1. Designation procedure ············································································································· 26 2.2. Designation Requirements ······································································································· 29 2.3. Status of selection process for Russian special economic zones and policy proposal 32
3. Ways to Set Up SEZ Management Companies and Make Profits ··········································· 39 3.1. Organization and budget of Korea Free Economic Zone Authority ································ 39 3.2. Present status of operating company in SEZ and policy recommendations ················ 41
4. Free Economic Zone Performance Evaluation ············································································· 47 4.1. Performance evaluation procedures and key indicators of the Korea Free Economic Zone ············································································································································ 47 4.2. Performance evaluation status of the Russian Special Economic Zones and policy recommendations ···················································································································· 50
References ·············································································································································· 57 Contents
Chapter 2
Regional Development for Job Creation and Business Development
1. Significance of Russian Special Economic Zone Policy for Regional Development ············· 62 1.1. Background of Russian Special Economic Zone Policy ······················································ 62 1.2. Status and Performance of Special Economic Zone in Russia ·········································· 67
2. Employment Policies on Special Economic Zones in Russia ···················································· 71 2.1. Overall Assessment ··················································································································· 71 2.2. Incentive Structure of Employment Policy ············································································ 75
3. Regional Clusters to Attract Business and Create Employment ··············································· 86 3.1. Status and Direction of Special Economic Zone Policy ······················································ 86 3.2. A Model of Regional Cluster ··································································································· 95 3.3. Policy Recommendation: Strengthening RUSSEZ function for regional cluster formation ··················································································································································· 101
4. Conclusion ······································································································································· 104
References ············································································································································ 106 Contents
Chapter 3
Strategies and Policies to attract Foreign Direct investments in RUSSEZ
1. Introduction ····································································································································· 109 1.1. overview ···································································································································· 109 1.2. General Situation of FDI in Russia ························································································110
2. Analysis of Russia’s Policies of attracting FDIs in SEZs ··························································· 113 2.1. Current Situation and Policies of Attracting FDIs in Russia ············································· 113
3. Analysis of Korea’s Policies of attracting FDIs in SEZs ···························································· 131 3.1. Current Situation of Attracting FDIs in Korea SEZ ···························································· 131 3.2. Factors of attracting FDIs in SEZ ·························································································· 133 3.3. Appropriateness of Incentive System for attracting FDIs ················································· 141 3.4. Analysis of Korea’s Experiences of attracting FDIs ···························································· 144
4. Policy Recommendation to increase FDIs in RUSSEZ ······························································ 150 4.1. Reform of Foreign Investment Environment ······································································ 150 4.2. Measures to increase FDIs in RUSSEZ ················································································· 152
References ············································································································································ 158
Annex
[Table 1] RUSSEZ KSP 2016/17 Participating Researchers and Their Fields ································· 3
Chapter 1
[Table 1-1] Designation Status of Free Economic Zone (as of August 2016) ···························· 18 [Table 1-2] Tax Reduction and Support System for Free Economic Zones ································ 21 [Table 1-3] Key Success factors of Special Economic Zone ·························································· 26 [Table 1-4] Free Economic Zone Designation Requirements ························································ 29 [Table 1-5] Major location factors of existing main industries ····················································· 36 [Table 1-6] Key Locational Factors of Knowledge-based Manufacturing Industry ··················· 37 [Table 1-7] An example of the key industries that are attracted by Korea's free economic zones ·································································································································· 39 [Table 1-8] Organization of Free Economic Zone Authority (as of end of July 2015) ············· 40 [Table 1-9] Examples of subsidiary shareholding structure of RUSSEZ ······································ 42 [Table 1-10] Comparison of Characteristics of SEZ Authority in Asian Major Countries ········· 45 [Table 1-11] FEZ Performance Evaluation Indicators and Points ·················································· 48 [Table 1-12] Detailed criteria for area-unit evaluation in the field of development projects · 49 [Table 1-13] Direct and Indirect Benefits of SEZs ··········································································· 50 [Table 1-14] Basic items of FEZ statistics ·························································································· 55
Chapter 2
[Table 2-1] Examples of Special Economic Zones in Major Countries ········································ 63 [Table 2-2] Success Factors and Evaluation Criteria of SEZs ························································· 64 [Table 2-3] Competitiveness of Major Economic Zones in Asia and the Pacific ······················· 66 [Table 2-4] Special Economic Zone in Russia (As of July 2016) ··················································· 68 Contents
[Table 2-5] Regional Job Creation and Employment Rate in Special Economic Zones ··········· 70 [Table 2-6] Budget Structure of the Development Zone Policy ··················································· 88 [Table 2-7] Fixed capital formation by industry (billion rubles) ··················································· 89 [Table 2-8] Changes in Performance by Industry in Russia (1991 = 100) ·································· 90 [Table 2-9] Russian Trade Structure by Product Characteristics (1 million USD,%)OECD Database ···························································································································· 93
Chapter 3
[Table 3-1] Comparison of Tax Incentives & Land Price in Russia and SEZ ···························· 111 [Table 3-2] Foreign Direct Investments in Russia (billion $) ······················································· 112 [Table 3-3] Tasks & Relevance between FIAC and SEZ ······························································· 114 [Table 3-4] Advantages and Disadvantages of Transferring management to regions from JSC SEZ ···································································································································· 121 [Table 3-5] Number of Domestic and Foreign Resident firms in KFEZ ····································· 133 [Table 3-6] Industry-Specialization of Korea’s SEZs ····································································· 135 [Table 3-7] KFEZ Incentives for Foreign-invested companies and Developer ························· 136 [Table 3-8] KFEZ Business Support ·································································································· 137 [Table 3-9] Determinant Factors of Attracting FDIs ····································································· 138 [Table 3-10] Location Determining Choice Factors ······································································ 142 [Table 3-11] Influence of government incentives on Location Determining ··························· 143 [Table 3-12] FDI Attractions in Korea’s FEZs ·················································································· 145 [Table 3-13] Moved-In Enterprises in Korea FEZs (Quantities) ··················································· 155 [Table 3-14] Status of Residential Domestic & Foreign Companies related to High-Tech Industry in IFEZ ············································································································ 155 [Table 3-15] Synergy Effect in FDI by Attracting Domestic firms in IFEZ ································· 156 Contents┃List of Figures
Chapter 1
[Figure 1-1] Location Map of Economic Free Zone ········································································ 18 [Figure 1-2] Free Economic Zone Business Promotion System ···················································· 19 [Figure 1-3] One-stop Service ············································································································ 22 [Figure 1-4] FDI performance of FEZ for the last 5 years ······························································ 25 [Figure 1-5] Free economic zone designation procedure ····························································· 27 [Figure 1-6] Determinants to enter SEZ (%) ·····················································································31 [Figure 1-7] First Policy Task for Attracting Foreign Investment in Korean SEZ (%) ················ 34 [Figure 1-8] Overview of Free Economic Zone Performance Evaluation Procedures ··············· 47
Chapter 2
[Figure 2-1] Regional Distribution of Special Economic Zones in Russia ··································· 68 [Figure 2-2] Regional Distribution of Special Economic Zones in Russia Data: Veronika Yu. Maslikhina (2016) ············································································································ 70 [Figure 2-3] Percentage of overseas added value included in exports of major countries ···· 91 [Figure 2-4] Changes in the ratio of overseas added value to exports by manufacturing sector ··········································································································································· 92 [Figure 2-5] Examples of international production division ·························································· 94 [Figure 2-6] Role of Special Economic Zones for the Formation of Regional Clusters ············ 97 [Figure 2-7] Concept of regional cluster: in Korea ········································································· 98 Contents
Chapter 3
[Figure 3-1] FDI Records by year in Korea ····················································································· 131 [Figure 3-2] Types of FDIs in Korea ································································································· 132 [Figure 3-3] KFEZ One-Stop Service for Foreign-invested Companies ····································· 137 [Figure 3-4] Busan-Jinhae& Incheon IPA Matrix ··········································································· 140 [Figure 3-5] Motivation for Investing in Korea by Foreign Firms ·············································· 143 [Figure 3-6] Geographical Location of IFEZ ··················································································· 146 [Figure 3-7] Comparison of Investment Environment between Incheon and Pudong ·········· 147 [Figure 3-8] Barriers of attracting FDIs in IFEZ ·············································································· 148 [Figure 3-9] FDI Regulatory Restrictiveness Index ········································································ 150 [Figure 3-10] Global Competitiveness Index-Russian Federation ·············································· 151 2016/17 KSP RUSSEZ
Jong Ho KIM (Asia-Pacific Research Center at Hanyang University)
1. Background
Many countries operate various types of special economic zones (SEZ) in order to strengthen their industrial competitiveness and growth potential, create jobs, and promote a balanced regional development. According to the World Bank (2015), there are 4,300 SEZs in 135 countries. Approximately 7,000 jobs have been created by special economic zones. Korea also established foreign investment zones (1998), free trade zones (2000), free economic zones (2003), and enterprise cities (2004) in order to to more effectively attract foreign investment.
Russia with a heavy resource dependent economy, adopted the Russian Federation Law No. 116-FZ "Law on Special Economic Zones in the Russian Federation" on July 2005 and established 4 types of special economic zones—industrial production zones, technology and development zones, tourism and recreation zones, and logistics zones—to diversity its economy by nurturing non-energy industries and new technology through foreign investment. As of today, 34 special economic zones are in operation in Russia. However, they have failed to fulfil their role as the hub for attracting foreign investment, while their business infrastructure is underdeveloped and their job creation effect fall below expectations.
On July 2016, the Russian government submitted a request for policy on improvement of the investment environment in the special economic zones of Russia. The request also
2016/17 KSP RUSSEZ 1 included sharing of Korean experiences on SEZ designation and foreign investment attraction. Amidst falling oil prices and sanctions imposed by the West in response of the Ukrainian crisis, Russia faces the challenge of maximizing the efficiency of SEZs as a way of diversifying its resource-dependent industry and escaping the recession. Therefore, our recommendations would be timely and invaluable for the Russian government.
2. Project Timeline
A. Demand Form Submission and Project Organization Selection
In response to the Russian government's submission of a demand form in regards to knowledge sharing program for an improvement plan for Russian special economic zone, the Korea Trade-Investment Promotion Agency (KOTRA) became the head organization of the KSP project and announced a call for proposals. The Asia-Pacific Research Centre (APRC) at Hanyang University was selected as the project executing organization for KSP Russians SEZ KSP 2016-17 after a thorough review of the proposal and interviews. The project’s Russian counterpart was RUSSEZ, the administrative organization that manages special economic zones of Russia.
B. Invitation of Researchers
The APRC’s proposal included names of researchers whose expertise and expertise best meet the demand of the project. Once the proposal was approved, the researchers were formally invited to conclude contracts for participation in the project. The Russian researchers were selected upon recommendations of RUSSEZ after the first project meeting held in St. Petersburg. 2 researchers were invited to participate only after a thorough review of the candidates’ credentials and interviews. Following researchers participated in the project:
2 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ [Table 1] RUSSEZ KSP 2016/17 Participating Researchers and Their Fields
KSP Theme Name Role Affiliation and Position
Project Manager Senior Researcher / KOTRA
Project Kim Yi-rye Project Officer Researcher/ KOTRA management Local Project Director of Trade Center in LEE Suk Ho Manager St. Petersburg/ KOTRA Director, APRC EOM Gu Ho PI Dean, Graduate School of International Studies, Hanyang University SEZ Designation BYUN Hyun Research Professor, APRC at Hanyang and Operation Researcher Sub University Maxim Head of Development and Investment Local Consultant Arbuzov Analysis Department, JSC “SEZ” HAN Researcher Professor, APRC at Hanyang University Job Creation, Hongyul Business Promotion, Head pf Innovation Zone Development, Ekaterina Project Management and Investors Regional Local Consultant Development Bragina Relations Department, JSC “SEZ” YOON Sung Researcher Professor, Chungbuk University Wook Foreign Investment Head of Innovation Zone Development, Ekaterina Project Management and Investors Attraction Local Consultant Bragina Relations Department, JSC “SEZ”
C. Research Topic Selection
The KSP delegation, consisting of researchers from KOTRA and the APRC at Hanyang University, visited St. Petersburg, Russia, on October 10-11, 2016, to hold a kick-off seminar and conduct a KSP demand survey for 2016/17. The delegation interviewed RUSSEZ and other relevant organizations to discuss the possible topics for the project in relation to the demand survey and the direction of future research. As a result, following topics were finalized:
Topic 1: Promoting sustainable development/management and strengthening operation of Russian Economic Zones - Korea’s Selection and Designation Procedures for Special Economic Zones - Methods for Individual SEZ Performance Projection and Analysis
2016/17 KSP RUSSEZ 3 - Profit Generation for SEZ Management Company - Comprehensive SEZ Designation System
Topic 2: Regional development for job creation and business promotion - SEZ Policy Requirements for Regional Development - Effective Human Resource Procurement Policies - Social and Environmental Conditions for Successful SEZs
Topic 3: Foreign direct investment attraction to Russia’s SEZs - Strategies for Attracting FDIs to Russian SEZs - Optimal Ratio of Foreign to Domestic Companies within SEZs - Korean Experiences of Attracting and Localizing Foreign Hi-technology Companies - Evaluation System for SEZ Designation Requirements
D. Additional Field Research (January 21 – 28, 2017)
The KSP delegation visited Moscow from January 21 to 28, 2017 to hold a meeting with officials of RUSSEZ at the RUSSEZ headquarters. Then, in cooperation with local consultants, the researchers visited the Dubna SEZ near Moscow and met with management company executives and conducted detailed surveys on the operation of Russian special economic zones. In addition, the researchers finalized and signed the Terms of Reference with the local consultants, and discussed the details of an interim briefing session and professional training program to be held in Korea. It was also decided at the request of the RUSSEZ headquarters to hold an investment opportunities conference in Seoul during the briefing and training period to attract Korean investors to the Russian special economic zones.
E. Russian Delegations’ Visit to Korea, Interim Briefing, and Investment Opportunities Conference (March 28-31, 2017)
The delegation of the Russian Federation, consisting of Maxim Arbuzov, the Head of Management Department of RUSSEZ, and officials from the RUSSEZ headquarters, Lotos SEZ, Alabuga SEZ, and Uzlovaya SEZ, visited the Incheon Free Economic Zone (IFEZ) and Hanyang University’s University-Industry-Research Clusters at Ansan ERICA Campus. Then on March 30, the interim report was presented to Korean researchers and officials from KOTRA and the Korean Ministry of Strategy and Finance. In conjunction with this, an investment opportunities conference with more than 100 Korean enterprises participating was successfully held. As a result, B2B meetings were held between RUSSEZ and Korean
4 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ companies including Hyundai Corporation, Seoul National University Hospital, and Hyundai Engineering.
F. Final Report (May 29, 2017)
The KSP delegation headed by the chief advisor Dong-kyu Shin, visited Moscow for 3-days between May 28 and 31, 2017, to hold the final briefing session at the RUSSEZ headquarters. The day-long brief session held on May 30 was attended by the Korean KSP researcher including Gu Ho Eom, the KSP CI, 2 officials from the Korean Embassy in Russia, and 5 members of the KOTRA’s regional office. From the Russian side, Maxim Arbuzov and 9 officials from the RUSSEZ headquarters were present to ask questions on the final report. In order to finalize the report, the KSP delegation visited the Skolkovo Innovation Complex located near Moscow and conducted a survey on the current state and vision of the Complex.
2016/17 KSP RUSSEZ 5 Executive Summary
Gu Ho EOM (Asia-Pacific Research Center at Hanyang University)
1. Background and Implications
Russia established 34 special economic zones (SEZs) on the basis of the Federal law “On Special Economic Zones in the Russian Federation” No. 116-FZ enacted on July 22, 2005. Russian SEZs consisted of 10 industrial production zones, 6 technology and development zones, 15 tourist and recreational zones (including 9 tourist clusters in the North Caucasus Province), and 3 logistics zones. On September 28, 2016, however, then Prime Minister Medvedev closed down 8 poorly-performing SEZs and downsized 2 SEZs. Of the 8 SEZs that were terminated, 6 were special tourist zones and the other 2 were seaports, while the downsized SEZs were both tourism zones.
As of today, performance of the Russian SEZs falls short of expectations in terms of economic outcome and job creation compared to investment put into them, because the SEZs did not play a significant role in attracting foreign investment while their overall business infrastructure is deemed insufficient. According to a report by the Account Chamber of the Russian Federation released in April 2016, the ratio of the number of jobs created by tenant companies to the working population of the SEZs was 0.9% in 2014 while the ratio of tenant companies’ revenue to Gross Regional Product (GRP) was 0.17%. The ratio of the volume of tax paid by SEZ tenant companies to that paid by all taxpayers registered to the SEZs accounted for only 0.065%. Job creation by the SEZs falls below expectations as well. As of January 2016, the total number of jobs created by the SEZs was
6 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ 18,177, which was fewer than the expected 25,000 jobs. This meant, approximately 10.2 million rubles—which is equivalent to 25 years’ worth wage of an average Russian worker— was invested to create one job in the SEZs. In addition, only 80 companies (18.4%) of 435 companies operating in the SEZs were foreign companies from 29 countries as of January 1, 2016. Of the total domestic and foreign companies in the SEZs, 118 companies (27.1%) were located in industrial production zones, 256 (58.9%) in technology and development zones, 57 (13.1%) in tourism zones, and 4 (0.9%) in logistics zones. These figures indicate that tourist and logistic zones perform especially poorly in attracting companies. Investment plans that tenant companies had originally submitted proposed 560 billion rubles in investment to the SEZs, but only 188 billion rubles was executed thus far. On the other hand, tenant companies received as much tax benefits and customs exemption as they paid in tax. According to the Account Chamber, the amount of taxes and customs duties paid by tenant companies was approximately 40.2 billion rubles, while the tax benefits and customs exemptions they received reached approximately 22.6 billion rubles.
The Russian government has sought ways to improve the performance of the Russian SEZs and promote their sustainable development by adopting measures to improve infrastructure, create jobs, and attract direct investment. Furthermore, the government has requested Korean experts to share Korea’s experiences of managing SEZs and suggest policy recommendations for maximizing efficiency of the SEZs. In this context, this KSP program consists of 3 policy tasks. Key recommendations for each policy task are as follow. Firstly, the program focuses on sharing Korea's experience of promoting sustainable growth and improving competitiveness of Russia’s SEZs. This includes implications and policy recommendations from Korea’s SEZ selection procedure, establishment of a SEZ management company and its revenue generation experience, and improvements of evaluation process and indicators for measuring SEZ performance.
The selection process and designation requirements for SEZs must be reified. In addition, an establishment plan for a SEZ must be mapped out in advance as was the case of Korea. In Russia, a management company is established only after a region is designated as a special economic zone and therefore, devising a plan for organization and operation of the SEZ in advance becomes difficult. In order to effectively attract foreign investment, the plan and execution of a SEZ development project should be tailored to investment needs of foreign investors. SEZ administration should also periodically update the needs of foreign investors and incorporate them into its investment strategies. Furthermore, in accordance with the principle of 'selection and concentration', it is necessary to foster competitive SEZs with excellent locations and good records of FDI attractiveness as internationally renowned economic zones. Liberal business environment
Executive Summary 7 must also be guaranteed by designating SEZs as negative regulation policy zones exempt from domestic restrictions. It is necessary to establish a (tentatively termed) ‘single-point investment bureau’ that manages overall SEZ development, investment attraction, and service improvement. In designating a SEZ, key site and capacity requirements should be thoroughly reviewed. In deciding what types of business to attract, the SEZ’s location and regional development strategy must be taken into account.
Concerning the establishment of a SEZ management company and its revenue generation, all successful SEZ operational systems across the globe share the following common features: 1) unification of the promotion system; 2) superior authority over other government agencies; and 3) political independence. Major Asian countries have established a task force for special economic zones and carried out consistent investment promotion strategy by delegating all relevant authorities in SEZ operation to the task force. Therefore, Russia’s SEZ management company should also be reorganized accordingly as an administrative body in charge of SEZs, while local governments should delegate relevant authority to the company and support it. In other words, to make the SEZ management company a single-point service provider, the existing operational system should be restructure in such a way that the company takes in charge of all SEZs-related matters while local government assist it. Furthermore, the central or local government level financial support for securing and utilizing experts is also essential. The central government should improve performance of the SEZs by introducing a competitive system in which RUSSEZ allocates government funds according to evaluation of individual SEZ’s performance and also by extending employees incentive which would enhance their morale and help attract more foreign investment.
For improving evaluation process and indicators for SEZ’s performance, non-business factors such as investment attraction activities, enterprise support activities, and settlement environment improvement should be considered, so that a more comprehensive evaluation is possible. It is necessary to include measures taken as a response to the previous year’s evaluation to the next year’s evaluation in order to foster feedback on the evaluation results. Attraction of domestic companies should also be included as an evaluation criterion. To strengthen qualitative as well as quantitative—such as the number of companies entering a SEZ—evaluation, attracting anchor companies with greater economic impact should be set as a main goal. In the case of attracting foreign-invested enterprises, not only the amount of investment but also qualitative aspects such as the type of industry and size of the enterprise should be incorporated into the evaluation while government support should also concentrate on attracting overseas corporations. Furthermore, in addition to shared criteria, there is a need to develop
8 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ evaluation indexes that match the characteristics of each type of special economic zones in Russia. To ensure a fair evaluation process, a performance evaluation committee should be organized and regulations on member selection and operation should be established. It is also necessary to establish a compensation system based on the results of performance evaluation. To ensure a fair and objective evaluation, statistical data on each type of SEZ should be drawn and systematically managed.
Secondly, this report contains suggestions for ways to foster regional development for job creation and business promotion within SEZs. These include policy recommendations for attracting businesses and creating jobs, strategies for expanding businesses and employment through formation of regional clusters, and conditions for linking SEZs with regional development.
Regarding policies for business attraction and employment creation, SEZ policies focused mainly on incentives for investment or infrastructure supported geared towards investment coming from a different domestic location, but it rarely include direct public investment in the strategic production sector. Notwithstanding the risk of direct public investment in the strategic industry, it is necessary to make bolder investment and to create such investment climate.
To maintain a continuous market demand for SEZs, the SEZs need to be incorporated into the global division of labor. It is important to be actively involved in the global value chain (GVC), which would lead to an increase in the proportion of intermediate goods and intra-industry trade. Therefore, it is important to follow a successful ‘chase-up’ process by not only increasing production capacity but also upgrading the GVC.
With regard to the strategy of expanding business and employment through formation of regional clusters, it is important to devise a way to effectively combine national public resources with research institutions in the region including universities. In the case of Korea, universities, government-funded institutes, and national and regional research centers have relatively successful experiences in forming regional clusters through an organic combination. In order to attract outstanding workers in SEZs, it is necessary to improve the overall residential environment and social infrastructure as well as to provide direct support for the workforce. It is important to establish an infrastructure for the procurement of confident personnel by measures such as installing a human resource support center in SEZs. Furthermore, to solve the shortage of highly-qualifying professional manpower, SEZs need to cooperate with training institutions and develop training programs that meets the need of tenant companies within the SEZs. It is desirable to increase the accessibility of on-site training and retraining opportunities by placing
Executive Summary 9 training institutions within SEZs.
In order to link SEZs with regional development, it is also necessary to create a comfortable and stable residential areas with medical services and quality education.
Thirdly, this report outlines suggestions for investment attraction for Russian SEZs. This part provides an analysis of foreign investment attraction policies of Russian special economic zones and recommendations derived from Korea’s experiences of improving investment climate and expansion foreign investment.
It is necessary to carry out a detailed analysis of the foreign invested companies operating in Russian special economic zones. In other words, though surveys, the government may gain information on what influenced the foreign companies’ choice of entering a Russian SEZ (tax benefits, infrastructure, residential environment, etc.) and what they see as difficulties or obstacles. In other words, through such surveys, the government could make a more accurate analysis on factors investors prioritize when considering moving in to a Russian SEZ and difficulties they have in conducting their business activities in a SEZ, which in turn should be reflected in plans to increase foreign investment.
In order to attract foreign investment, it is necessary to eliminate excessive bureaucratic regulation and inefficient administrative services. Considering the fact that Russia has a sizable domestic market and that the Eurasian Economic Union is likely to be expanded, Russia’s attractiveness to foreign investors would undoubtedly rise if the administrative inefficiency is eliminated. Special attention should be paid to the characteristics and differentiation between SEZs to ensure that the SEZs maintain a complementary nature and not the substitute relationship. It is also important to introduce an effective aftercare service, which is considered to be one of the policies that led to Korean SEZ’s success. An effective aftercare service for foreign investors already in SEZs improves SEZs’ image and gives confidence to potential foreign investors. Moreover, in order to improve the competitiveness of SEZs, domestic enterprises should also be attracted to enter the SEZs since it is an important negotiation factor for attracting foreign investors.
10 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ 2. Expended Outcomes
The expected outcomes of the three policy tasks of this KSP program are as follow:
Firstly, the program provides suggestions for promoting sustainable development and strengthening competitiveness of Russia’s special economic zones by introducing the operational system and key agencies of Korea’s special economic zones. This report offers a detailed explanation of Korean SEZ designation requirements and procedures which proposes ways to improve the weaknesses of Russian SEZs. Furthermore, this report makes recommendations on how to select the types of business that best complement the location and regional development strategy of a SEZ, which could be applied to the Russian case. By providing policy recommendations based on case analyses on Korea and other countries operation SEZs and their organizational and operational schemes, this report contributes to restructuring of Russian SEZ operation system. In addition, by proposing suggestions for improving the performance indicators of SEZs, this report contributes to strengthening goodwill competition and employee motivation.
Secondly, this report emphasizes the importance of forming regional clusters by bringing together regional universities and national and local research institutes as a way of promoting both business and employment expansion. An organic cooperation among the institutes contributes to formation of a cycle of enterprise creation that leads to job creation. By providing direct support for procurement of outstanding human resources in SEZs (introduction of tax deduction and subsidy system for income support, human resource support center) as well as expansion of overall residential areas and social infrastructure (provision of high quality medical and educational services), Russia would be able to increase the job creation capacity of its SEZs.
Thirdly, incentive policies such tax reduction are important factors for attracting FDI. However, the analysis presented in this report suggests that market accessibility, infrastructure facilities, and living conditions, are just as, if not more, important factors. Furthermore, the aftercare service of Korean SEZs, which greatly contributed to Korea’s success, should also be benchmarked by Russia.
Amidst falling oil prices and sanctions imposed by the West in response of the Ukrainian crisis, Russia needs to maximize the efficiency of the SEZs as a way of diversifying its resource-dependent industries and escaping the recession. Therefore, benchmarking Korea’s SEZ experiences and, by doing so, improving SEZ efficiency is a both timely and crucial concern for Russia. In addition to the ones founded since 2005, Russian has recently established new special economic zones such as the Advanced
Executive Summary 11 Development Territory and the Free Port of Vladivostok as the key driving force of the development of the Far East region. This KSP report would undoubtedly offer suggestions of efficient operations of these newly established SEZs.
June, 2017
Gu Ho Eom Director of Asia-Pacific Research Center Hanyang University
12 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ Chapter 1
Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ
Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ
Byun, Hyun-Sub (Asia-Pacific Research Center, Hanyang University) Maxim ARBUZOV (Management Department of RUSSEZ)
The Korean government has concentrated its efforts on promoting foreign investment by designating various types of special economic zones. In this chapter, Korea’s free economic zone (FEZ) which shares most similarity with Russia’s special economic zone (SEZ), is suggested as a benchmarking target for improvement of the Russian operations of SEZs in 3 parts—1) SEZ area selection and procedure, 2) establishment of a SEZ management company, and 3) profit generation and performance evaluation.
On April 26, 2012, the government of the Russian Federation approved the requirement criteria for designation of Russian SEZs which are not much different from the requirements for designation of Korean SEZs. But, the criteria need to be more concrete.
▶ It is necessary to specify the designation requirements of SEZ.
▶ The design and operation of the FEZ development project must be tailored to meet the investment needs of foreign investors, which can be expected to attract foreign investment.
▶ International luxury special zone according to the principle of 'selection and concentration'.
14 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ ▶ To apply the negative regulatory system as a Regulation Free Zone.
▶ To establish a "Special Economic Zone Investment Promotion Agency" (tentative name)
▶ To provide an effective one-stop service under the authority and responsibility of the chief executive officer of SEZ.
▶ Be carefully examined and approved, not to randomly designate SEZs in each municipality.
▶ It is important to select the type of attracting business that fits into the regional business environment and strategy of regional development.
Successful operation of SEZs requires an efficient management system, which is not integrated in the Russian SEZs. Successful SEZs in the world share the following characteristics: (1) unified system, (2) strong authority over other government agencies, and (3) political independence of the system Each individual SEZ Authority (management company) is devising plan to secure operating expenses and gradually obtain self-sustainability. This chapter suggests the followings transfer of the management rights of the RuZ, currently managed by the Federal Ministry of Economic Development, to local governments.
▶ SEZ management company cannot procure 100% of its own operating expenses through its own business activities.
▶ Therefore, the central government must continue to provide some budget support, while the local governments should get involved beyond the level of management, and support the operational expenses
▶ To hire local SEZ’s employees as a local government employees
▶ High financial independence and autonomy are guaranteed by establishing and operating funds through ordinances
▶ To introduce a competitive system such as discriminatory budget support through evaluation
▶ To promote morale of the employees by expanding incentive support
Russia is aware of the problems of its poorly-performing special economic zones and is looking for solutions. Based on the results of the audit of the Special Economic Zone, the Board of Audit and Inspection recommended in April 2016 that the SEZ supplement the mechanism of establishment, development and operation, including the SEZ's
Chapter 01_Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ 15 rationality, profitability, and payback period. As a result, on July 7, 2016, the efficiency index for SEZ was created, according to the Russian Federation government administrative order. However, the evaluation index only covers the performance that has already been shown by activity-related indicators of resident companies, effectiveness indicators for budget input, and indicators related to the activities of operating agencies. Therefore, we suggest the followings for enhanced efficiency in evaluation of the SEZs.
▶ External factors of business should be included to Russian efficiency evaluation indicators: attracting investment activities, corporate support activities, improvement of settlement environment
▶ It is necessary to induce smooth feedback on the evaluation result: the degree of improvement efforts of the points indicated in the previous year
▶ Attracting domestic companies should be also an important indicator of the performance evaluation, and especially attracting anchor companies with large economic impact should be set as the main performance targets
▶ In the case of attracting foreign-invested companies, should be reflected in the performance evaluation not only the amount of investment but also qualitative aspects such as attracting industry types and size of enterprises.
▶ To be developed evaluation indexes according to the types of SEZ
▶ A performance evaluation committee should be formed and the evaluation criteria should be set specifically and clearly
▶ To establish a compensation system based on the results of performance evaluation
▶ For objective and rational evaluation, statistics related to each SEZ should be produced and managed through system construction
16 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ 1. Free Economic Zone in Korea
1.1 Background of Free Economic Zone Promotion and Designation Status
Korean FEZs are territories established to improve business management environment for foreign-invested enterprises and living condition for foreigners. Foreign businesses enjoy benefits including various tax and cost exemptions, deregulation, and infrastructure support (Act on Free Economic Zone, Article 1)1)
FEZs were first promoted on January 14, 2002, in accordance with the government’s "Northeast Asia Business Hub Plan" established to enhance national competitiveness. Its main objectives were to designate areas near Incheon International Airport, Busan New Port, and Gwangyang Port as SEZs to promote their systematic development and to create a foreigner-friendly business and residential environment. As a result, the ultimate goal was to build an international business city during 15-20 years of combined development, integrating industrial, commercial, and residential complexes.
Since the basic plan was announced, the "Law on the Designation and Management of Free Economic Zones" was adopted by the National Assembly in November 2002, and implemented since July 1, 2003, in order to institutionally support FEZs. The districts of Songdo, Yeongjong, and Cheongna of Incheon Metropolitan City were designated as the first FEZs by the Second Free Economic Zone Committee held by the Ministry of Finance and Economy (now the Ministry of Trade, Industry and Energy or MOTIE) on August 5, 2003. Later, Busan, Jinhae, and Gwangyang Bay areas (2003); the Yellow Sea, Daegu, Gyeongbuk, and Saemangeum (2008); the East Coast and Chungbuk provinces (2013) were added. Currently, 8 FEZs are in operation. Korea’s FEZs are divided into 95 districts which covers the total area of 321㎢. Of this, about 30.4% (97.6㎢ as of the end of August 2016) has not been developed (Free Economic Zone Development is scheduled to be completed by 2022). This is due to the fact that the demands for industrial parks in some municipal free economic zones have been overestimated because the Ministry of Industry has not conducted a thorough review of the demands.2) As a result, the FEZs that were either designated excessively in comparison to developmental demands or lacked commercial viability were restructured twice on December 28, 2010, and on August 5, 2014.3) The total area of free economic zones was reduced by 44.6% from 580㎢ to 321㎢ after the restructure. From 2004 to 2015, the FEZs attracted the total of about $ 5.6 billion in foreign
1) Audit Office, Report of Audit Results on Free Economic Zone Designation and Operation Status, 2015. p.4. 2) Audit Office, Report of Audit Results on Free Economic Zone Designation and Operation Status, 2015. p.14. 3) Audit Office, Report of Audit Results on Free Economic Zone Designation and Operation Status, 2015. p.13.
Chapter 01_Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ 17 investment. As of December 2015, there were 2,189 companies (1,952 domestic companies, 237 foreign-funded enterprises) with 96,449 employees (26,781 foreign- invested companies) in the Korean FEZs.4)
[Table 1-1] Designation Status of Free Economic Zone (as of August 2016)
Name Launch Date Initial Area Current Area District (unit) Incheon ’03. 8.11 209㎢ 124㎢ 34 Busan · Jinhae ’03.10.30 104㎢ 51㎢ 19 Gwangyang bay area ’03.10.30 89㎢ 78㎢ 21 Yellow Sea ’08. 5. 6 39㎢ 4㎢ 2 Saemangeun·Gunsan ’08. 5. 6 67㎢ 28㎢ 3 Daegu· Gyeongbuk ’08. 5. 6 55㎢ 20㎢ 8 East coast ’13. 2.14 8㎢ 9㎢ 3 Chungbuk ’13. 2.14 9㎢ 7㎢ 5 Total 580㎢ 321㎢ 95
Source: Ministry of Trade, Industry and Energy, “Improvement of policies for revitalization of SEZs,” 2016.8.
[Figure 1-1] Location Map of Economic Free Zone
Source: Ministry of Trade, Industry and Energy, “Improvement of policies for revitalization of SEZs,” 2016.8.
4) Ministry of Trade, Industry and Energy Press Release, "Minister Visited the Free Economic Zone, Listened to Troubles," August 19, 2016.
18 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ 1.2. Free Economic Zone Business Promotion System
The project promotion system consists of a dual organization of the central government and the local government. At the central government level, the Free Economic Zone Committee in charge of deliberation and registration of policies and plans, and the Planning Office of the Free Economic Zones dedicated day-to-day operation of the Committee are established under the MOTIE. At the local government level, municipalities provide budget and manpower to each FEZ Authority for building infrastructure such as roads, water supply and sewerage as well as for residential facilities such as housing, hospitals, and educational institutions. At the time, they run projects for foreign investment attraction. Actual development is carried out by a potential project developer including foreign-invested company or a public institution (e.g. The Korean Land and Housing Corporation) after it signs a contract with the local governments and applies for the MOTIE’s approval on a development and implementation plan (See Figure 1-2).
[Figure 1-2] Free Economic Zone Business Promotion System
Free Economic Zone Committee (Chairman: MOTIE)
Planning Office of the Free Economic Zones
Free Economic Zone Authority local government
Infrastructure Formulation of settlement Investment attraction Construction conditions
Source: Summary by Author
The Free Economic Zone Committee is the highest decision-making body of FEZ-related issues and deliberates and legislates the following:
- Basic policy of FEZs
- Designation, termination, and change of a FEZ,
- Free Economic Zone Development Plan,
- Administrative services for foreign-invested enterprises,
- Mediation between the central administrative agencies and city/provincial governors,
Chapter 01_Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ 19 - Improvement of management environment and living condition of foreigners.5)
The Free Economic Zone Committee is composed of 1 chairperson, 1 vice chairperson, ex officio members, and appointed members. The chairperson is the Minister of Trade, Industry and Energy, while the vice chairperson is elected among the appointed members. Ex officio members are vice ministers of 12 central government agencies. The appointed members, on the other hand, are not civil servants but experts working in a sector related to FEZs including foreign investment, logistics, and urban policy. There are currently 10 appointed members.
The Planning Office of the Free Economic Zones is responsible for the following major tasks:
- Planning and designing policies and systems for free economic zones
- Implementing legislations on free economic zones
- Negotiating development plans for free economic zones
- Supporting the Free Economic Zone Committee by drafting agendas and assisting its daily operation,
- Conducting research and public relations- and overseas cooperation-related activities.
Of course, there is criticism towards inefficiency of promotion system of Korean FEZs. The Free Economic Zone Committee’s and Planning Office’s deliberation and adjustment functions for policy improvement are weak while conflicting interests among ministries cause difficulties in coordinating policy issues. As a result, the central government’s role as control tower is limited. Consequently, strategy differentiation among economic free zones is lacking. In addition, the Free Economic Zone Authority, an administrative agency responsible for free economic zone projects, is established as a 'local government branch office' or 'local government association,' and thus local governors appoint regional directors of the FEZ Authority. As a result, the organization’s personnel, finances, and operation are inevitably depended on the local authorities, making it difficult to independently promote flexible and efficient projects.6)
5) Special Act on Designation and Operation of Free Economic Zones (http://www.law.go.kr/lsInfoP.do?lsiSeq=188111&efYd=20170603) 6) Korea Institute for International Economic Policy (KIEP), Research on the Development Strategy of Free Economic Zones for the Northeast Asia Economic Center, 2012. p.161.
20 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ 1.3. Preferential system of Free Economic Zone
In order to actively attract foreign investment, FEZs offer a range of favorable conditions such as tax reduction, financial support, and etc., to create an optimal business environment and living conditions.7)
[Table 1-2] Tax Reduction and Support System for Free Economic Zones
Tax benefits Category Benefits Investment Requirement Manufacturing: $10 million more Tax benefits for 5 years Tourism: $10 million or more ∙ First 3 years: 100% exemption Logistics: $5 million or more Corporate ∙ The following 2 years: 50% Medical institutions: $5 million or more tax reduction R&D: $1 million or more National Service: $10 million or more tax Income Tax benefits for 7 years Manufacturing: $30 million or more tax ∙ First 5 years: 100% exemption Tourism: $20 million or more ∙ The following 2 years: 50% Logistics: $10 million or more reduction R&D: $2 million or more Tariff 100% exemption for 5 years Imported capital goods only 100% tax exemption for up to Acquisition Local tax 15 years in accordance with local tax ordinances Tax reductions for up to Property tax 15 years in accordance with local ordinances Business Support The minimum cash grants is 5% of ∙ Foreign-invested companies with a Cash grants the FDI, and the actual amount shall foreign-investment ratio of 30% or higher be decided through negotiation ∙ 50% of the infrastructure construction costs is Support for infrastructure including Support for covered by government budget roads, railways, airports, ports, water infrastructure ∙ If the Free Economic Zone Committee and sewage, waste treatment facilities approves in, 100% of the cost will be covered Support for Financial support for the ∙ Certain conditions as reputation and education and establishment, operation and contribution to national development should research construction of education and be met facilities research facilities Government or publicly owned land can be leased for up to 50 years. The Support for rent ∙ Foreign-invested companies rent shall be around 10/1,000 of the and price Lease fee 50-100% tax reductions in accordance exemption and ∙ Foreign-invested companies with local ordinances reduction
Source: http://www.fez.go.kr
7) Lee, Young-min, "Role of Free Economic Zones for New Logistics Base in Northeast Asia," Journal of e-Trade Research, Vol. 13, No. 1, 2015. p.91.
Chapter 01_Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ 21 [Table 1-2] Continued
Deregulation ∙ Not obliged to fill vacant job positions with persons of national merit, the disabled, Relief from or the elderly control on labor ∙ Unpaid leave is permitted affairs ∙ May expand the type of work and terms of dispatched worker assignments Any foreign-invested firm in an FEZ shall be relieved from the application of provision Exemption from in Seoul Metropolitan Area Readjustment Planning Act (Article 7: Restricted actions Seoul in the overcrowding control area, Article 8: Restricted actions in the growth regulations in management area, Article 12: Imposition and collection of the overcrowding charges, metropolitan Article 18: Quota system management for crowd-inducing facilities, Article 19: Control area on the mega-scale project development) Easier foreign A foreign invested firm may directly engage in foreign currency transfer to clear a payment business transaction, up to a limit of $10,000
Source: http://www.fez.go.kr
Each FEZ designates individual project managers who support investment procedures from preliminary review for investment to follow-up management8). The project managers provide business consulting for new investment opportunities and prospective investment partners as well as administrative support for legal affairs, accounting, and tax management9).
[Figure 1-3] One-stop Service
Source: http://www.fez.go.kr
However, there is criticism that compared to special economic zones in other countries, Korean FEZs lack an incentive system and offer less deregulation. In other
8) Homepage of Planning Office of the Free Economic Zone (http://www.fez.go.kr) 9) Homepage of Planning Office of the Free Economic Zone (http://www.fez.go.kr)
22 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ words, although there is a tax exemption system for foreign-invested companies, Korea has relatively higher corporate tax rates than Singapore and Hong Kong, and reduction rates are applied rigidly10). In addition, due to the low level of incentives compared to other similar domestic special zones, FEZs lack the differentiation factor. Therefore, it is necessary to introduce an incentive system that would attract more efficient and strategic investment under the constraints of government finances.11) By the end of 2014, 7 revisions to the Law on Free Economic Zone have been made in order to improve the system to better promote foreign investment.
1.4. Living Condition in FEZs
Foreign language communication and traffic are mentioned consistently as challenges faced by foreign residents in Korea. Compared to Hong Kong and Singapore, English is not widely used while traffic problem is also severe. Therefore, the government is planning to gradually and continuously improve services for foreigners by attracting foreign educational institutions and providing foreign language support. Indeed, in recent years, improving not only business environment but also non-business factors such as living conditions have played an important role in attracting foreign investment. An environment in which professionals working for foreign companies can live and work comfortably needs to be created. In order to create a consumer-centered special economic zone, all daily necessities such as housing, medical service, education, shopping, and leisure should be included within the zone. With this in mind, the Korea Free Economic Zone Authority is striving to create a global educational environment with world's leading universities, provide world-class medical service, and build high-quality cultural facilities12).
1.4.1. Environment for International Education
Korea’s FEZs have invited internationally-renowned universities, high schools, middle schools, and elementary schools, to offer high-quality international education to their residents. Educational institutes in the Incheon FEZ include the international campuses of New York State University, George Mason University, the University of Utah, and Ghent University of Belgium. Those in the Busan-Jinhae FEZ hosts Germany’s FAU Erlangen- Nürnberg13).
10) Homepage of Planning Office of the Free Economic Zone (http://www.fez.go.kr) 11) Homepage of Planning Office of the Free Economic Zone (http://www.fez.go.kr) 12) Homepage of Planning Office of the Free Economic Zone (http://www.fez.go.kr) 13) Homepage of Planning Office of the Free Economic Zone (http://www.fez.go.kr)
Chapter 01_Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ 23 1.4.2. State-of-the-art Medical Services
The quality of Korea’s advanced medical system is demonstrated by the increasing number of foreign travelers visiting Korea for medical tourism. Every residential area has its own small- and medium-sized hospitals and pharmacies. General hospitals where foreign patients do not face communication barriers are located across the nation. Korean FEZs are striving to establish foreign for-profit hospitals and a cluster of foreign medical institutions combined with hotels, condominiums, and therapeutic spas for more advanced medical services14).
1.4.3. Upscale Cultural Infrastructure
Korean FEZs have mega-size theme parks, marine-tourism facilities, large shopping malls, and golf courses adjacent to residential areas to ensure healthy and happy lifestyle. Theaters and performance facilities offer not only world famous performances but also Korean cultural programs. Residents can enjoy a culturally-fulfilling life in the pleasant living and business environment of FEZs15). In this way, Korea's FEZs have a legal support system for improving the living condition— education and medical care—for the foreign employees of foreign-invested enterprises. International educational institutions (elementary/middle/high schools, universities) may be established with KFEZs’ assistance with provides financial support for land purchases, construction, and school operation. Opening and managing international medical institutions or foreigners-only pharmacies are also permitted. Exceptions may be made for medical institutions to run a subsidiary business—(for example, a hot spring). Building a foreigners-only casino is also permitted to foreign investors who invest more than $500 million. Foreign broadcasting channels are expanded and operated through local cable networks16).
On the other hand, Free Economic Zones in Korea share similar problems with Special Economic Zones in Russia. In other words, they both lack narrowing-down effect due to overlapping designation of special zones, resulting in sluggish performances in terms of attracting foreign investment (only 1.5% of foreign-invested companies among all foreign-invested enterprises in the nation are registered within FEZs). Despite the recent global economic downturn, however, FZEs’ FDI in 2016 was steadily increasing, rising 66.1% from US $ 1.46 billion in 2015 to US $ 2.24 billion17).
14) Homepage of Planning Office of the Free Economic Zone (http://www.fez.go.kr) 15) Homepage of Planning Office of the Free Economic Zone (http://www.fez.go.kr) 16) Homepage of Planning Office of the Free Economic Zone (http://www.fez.go.kr) 17) Ministry of Trade, Industry and Energy Press Release, "The biggest prospect since 2013 to attract foreign investment in Free Economic Zone," December 20, 2016.
24 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ [Figure 1-4] FDI performance of FEZ for the last 5 years
Source: Ministry of Trade, Industry and Energy Press Release, "The biggest prospect since 2013 to attract foreign investment in Free Economic Zone," December 20, 2016. Note: The proportion of the total FEZ in total domestic FDI (as of December 19, 2016)
On September 28, 2016, the Russian government decided to shut down 8 Special Economic Zones (including 6 Special Tourism Zones and 2 port special zones) and reduced the size of 2 special tourism zones among the existing 34 SEZs18). In addition, the operating rights and assets of SEZs were transferred from the Special Economic Zones JSC (RUSSEZ) under the Ministry of Economic Development to regional SEZ corporations under the control of local governments. In this situation, the RUSSEZ requested Korean experts to share the experience of Korean SEZs through the KSP project. This report is a project of the project and composed as a response to the questions asked by the RUSSEZ. The Russian inquiries focused on the four items identified by the World Bank as success factors of Special Economic Zones: deregulation, incentives, location and development19). I hope that the Korean experience and case-studies of other nations’ SEZs presented in this report help improve efficiency of operation of Russian Special Economic Zones.
18) Byun, Hyun-Sub and Han, Hong-Yul, "Problems and Improvement Directions of the Special Economic Zone (SEZ) in Russia: Focusing on the Implications for the ADT", Slavic Research, Vol. 33, No. 1, 2017. p.45. 19)Korea Institute for International Economic Policy (KIEP), Research on the Development Strategy of Free Economic Zones for the Northeast Asia Economic Center, 2012. p.75.
Chapter 01_Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ 25 [Table 1-3] Key Success factors of Special Economic Zone
Main items Detailed Success Factors ▸Performance-based, flexible tax reduction and exemption Incentive ▸Strengthening of city competitiveness based on facilities (infrastructure) and services rather than focusing on tax reduction and exemption benefits
▸Simplification of procedures (especially business registration procedures) ▸Simplification of licensing procedures such as land, architecture, labor, Deregulation health, security ▸Acceleration of customs procedures ▸Strengthening of organization autonomy (especially authority over human resources, budget, expenditure, policy decision Role of ▸Politically-independent organization of key government officials, private promotion representatives system ▸Construction of a single system ▸Exercise of superior authority over other government agencies ▸Sub-functions (service sector, etc.) are transferred to the private sector ▸Establishment of a national guidelines (land use plans, etc.) Location· ▸Selection of optimal location to minimize government infrastructure costs Development ▸Principles of cost recovery ▸Subsidies for land rent, lease of building site, other services (electricity, etc.)
Source : Korea Institute for International Economic Policy (KIEP), Research on the Development Strategy of Free Economic Zones for the Northeast Asia Economic Center, 2012. p.75.
2. Korea's SEZ Area Selection and Procedure
It is necessary to examine the contents of the Special Act on the Designation and Operation of Free Economic Zones in relation to the selection and procedure of SEZ area in Korea.
2.1. Designation procedure
After establishing a development plan, city/provincial governor requests the minister of the MOTIE to designate a FEZ. After consulting with the heads of relevant administrative agencies, the MOTIE designates a FEZ based on deliberation and resolution of the Free Economic Zone Committee20).
The specific procedure for designating economic free zones is shown in the following figure.
20) Audit Office, Report of Audit Results on Free Economic Zone Designation and Operation Status, 2015. p.13.
26 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ [Figure 1-5] Free economic zone designation procedure
Development Planning The provincial governor ▼ Listening to residents' Notification within 15 days from the end of the review opinions (over 14 days) period when submitting comments ▼ Free economic zone designation request (including The provincial governor→ Minister of Industry development plan) ▼ Consultation with the heads of relevant administrative Minister of Industry agencies ▼ Review and decision of the Free Economic Zone Minister of Industry Committee ▼ Confirmation of development plan, designation of free Minister of Industry economic zone and notification ▼ Notification of Designated Free Economic Zones (without Minister of Industry →The provincial governor delay) ▼ Residents’ reading about specification of FEZ The provincial governor (over 14 days)
Source : Audit Office, Report of Audit Results on Free Economic Zone Designation and Operation Status, 2015. p.13.
In other words, a Free Economic Zone can be designated in two ways: that is, either at the request of a city/provincial governor or by need of the MOTIE. A city/provincial governor who wishes to have his city/province designated as a FEZ first devises a Free Economic Zone Development Plan and requests the Minister for the designation. If the proposed Free Economic Zone expanded over more than one city and province, the relevant city/province governors need to jointly request for designation. Upon receipt of the request, the Minister submits the Plan to the Free Economic Zone Committee. After the deliberation and approval by the Committee, the Plan is confirmed and a FEZ is designated. The Committee listens to the opinions of the city/provincial governor before making its decision on the Development Plan. When a decision is made, designation of a
Chapter 01_Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ 27 FEZ is announced on the Ministry’s official notice and notified to the city/province. Upon this, the governor makes the decision and its content publically-accessible for more than 14 days.
When a FEZ is designated by the Ministry of Trade, Industry and Energy without a request from a city/provincial governor, the Ministry first needs to obtain consent from the city/provincial governor of the designated area. Establishing and designating a Free Economic Zone Development Plan through deliberation and resolution of the Free Economic Zone Committee follows the same procedure as when the request is made by a governor. The designation decision is announced to the city/provincial governor and made accessible to the public.
To apply for FEZ designation, a Free Economic Zone Development Plan must first be composed. The Plan should include the following: - Name, location, and total area of the proposed FEZ, - Needs behind designation, - Conductor for developmental projects within free economic zones, - Implementation Plan for the developmental projects, - Financial sources - Land use and major infrastructure plan, - Population and residential facility plan, - Transportation management plan, - Industrial attraction plan, - Health care, education, welfare facility installation plan, - Environmental preservation plan, - Plan for foreign investment and residence attraction plan, - Information on the provision of proposed site for FEZ, - Reinvestment of developmental profit, - Land or buildings to be acquired or used.
Before establishing a Free Economic Zone, it is necessary to establish a long-term development plan called the Free Economic Zone Development Plan to enable a thorough evaluation of feasibility, objectives, and potential as well as preparedness of a SEZ beforehand.
28 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ 2.2. Designation Requirements
According to Article 5 of the Free Economic Zone Act, a territory in which necessary conditions—such as compatibility with the Basic Plan of the Free Economic Zone, possibility of securing the residential demand of domestic and foreign companies, and possibility of securing a foreign settlement environment—are met is designated as a FEZ. The Free Economic Zone Commission deliberates and reviews requirements for the designation21). At this stage, an evaluation team consisted of civilian experts is established to carry out quantitative evaluation based on designation requirements so that areas with a clear possibility for success are designated as FEZs. In addition, if the evaluation score is below a standard score (60 points), the plan is no longer considered by the Committee. In particular, in April 2011, Article 5 of the Free Economic Zone Act was amended to include: "The Minister of Trade, Industry and Energy shall designate only the territory that meets the requirements of securing sufficient domestic and foreign companies as a Free Economic Zone”. This measure was taken in order to prevent excessive designation of FEZs and to designate only those territories with business potential and development demands22).
[Table 1-4] Free Economic Zone Designation Requirements
Designation Requirements Specification requirements Compliance to Economic Development strategy evaluation, land use plan Free Zone Basic Planning Demand for enterprise Development demand, conditions for enterprise registration, registration foreign investment attraction plan Possibility of securing environment for foreign Plan for residential environment for foreigners residents Site acquisition plan, Infrastructure development plan such as Possibility of site and wide area transportation network, information communication infrastructure acquisition network, water, electric power Economic feasibility Cost for land formation, development effect of development The feasibility of the Possibility of financial planning such as financial burden of funding plan local government and private capital attraction plan Promotion system, professional manpower procurement, Others possibility of early realization, developmental sustainability etc.
Source : Audit Office, Report of Audit Results on Free Economic Zone Designation and Operation Status, 2015. p.12.
21) Audit Office, Report of Audit Results on Free Economic Zone Designation and Operation Status, 2015. p.12. 22) Audit Office, Report of Audit Results on Free Economic Zone Designation and Operation Status, 2015. p.22.
Chapter 01_Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ 29 When selecting the location of a FEZ, the following points are primarily considered:
- Good accessibility and easy construction of road facilities23)
- Low land prices and favorable conditions for higher economic feasibility24)
- Possible impediments on migration measures and increased civil complaints25)
- Possible restrictions on development due to a superior plan such as urban- development or military basic plan and relevant regulations26)
- In case the inclusion of a restricted territory is inevitable, a detailed examination and consultation are required in advance27)
In fact, according to the results of a survey conducted by the Korea Development Institute (2014)28) on companies located in Korea's special economic zones, the most important factors for determining the location of foreign-invested enterprises were clients/customers proximity and market accessibility (27.1%), infrastructure conditions such as transportation (24.2%), reasonable land sales and use cost (22.2%), and finally tax exemption and financial support (15.9%). In other words, more than half of the foreign-invested companies surveyed saw market accessibility and infrastructure conditions of a SEZ as the most important location factors, followed by lower land lease and financial support system. Therefore, in designating SEZs, it is important to secure a consumption market and to select a territory with lower land sales and lease price. In addition, it is necessary to establish a fund to support low-interest investment loans as well as tax reductions, and special provisions to let or sell land below cost if necessary.
23) Jung, Chu-Cheol, A Study on the Establishment of Land Use Plan Using Environmental Impact Assessment, 2009. 24) Jung, Chu-Cheol, A Study on the Establishment of Land Use Plan Using Environmental Impact Assessment, 2009. 25) Jung, Chu-Cheol, A Study on the Establishment of Land Use Plan Using Environmental Impact Assessment, 2009. 26) Jung, Chu-Cheol, A Study on the Establishment of Land Use Plan Using Environmental Impact Assessment, 2009. 27) Jung, Chu-Cheol, A Study on the Establishment of Land Use Plan Using Environmental Impact Assessment, 2009. 28) Korea Development Institute, Business Group for Activation Support of Special Economic Zone, Report, Supported by Ministry of Planning and Finance, 2014. p.201.
30 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ [Figure 1-6] Determinants to enter SEZ (%)
Good access to major customers and markets 27.1
Reasonable land price/rent 22.2
Relationship with the location of SEZ 2.9
Excellent infrastructure conditions such as logistics and transportation 24.2
Superiority of support system such as tax reduction and financial support 15.9
Direct effects such as harmonious connection with related companies 3.4
Ease of supply of technology and production manpower 2.4
Welfare enhancement and commutiong convenience of employees 0.5
Convenience of administrative procedures and level of deregulation 1.4
Source: Korea Development Institute, Business Group for Activation Support of Special Economic Zone, Report, Supported by Ministry of Planning and Finance, 2014. p.201.
Development projects such as FEZ require a huge amount of money for long-term investment, so a careful review, analysis, and evaluation of the plan in advance are necessary. Therefore, investment decisions and optimal investment alternatives should be selected through a series of procedures that include an analysis of development conditions and evaluation of physical and economic feasibility for target businesses. This review process for business feasibility usually follows the steps outlined below:
Business feasibility review procedure
Analysis of Development Conditions (Higher Plans, Natural and Human Environment, Local Economy) → Demand, development scale, development direction → Economic feasibility study (cost, income estimation, cash flow analysis, and financial profitability analysis) → Establish a development strategy
A project developer must manage the project strictly through conducting a thorough analysis of profitability at times when business conditions change due to FEZ territory
Chapter 01_Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ 31 designation, development and execution planning, budget readjustment, or investment and recovery plan modification. The profitability analysis follows the steps outlined below:
Method of cash flow analysis
Net present value(NPV) method ∙ Cash inflow – Cash outflow, NPV > 0
Internal rate of return (IRR) method ∙ Discount rate that makes cash inflow and cash outflow the same ∙ IRR > Required yield
Profitability index (PI) method ∙ Cash inflow / Cash outflow, PI > 1
2.3. Status of selection process for Russian special economic zones and policy proposal
The Government of the Russian Federation issued the resolution on the "Special Economic Zone Establishment Standards" only on April 26, 2012, 7 years after the law on SEZs had been enacted29). This means SEZs had been established without clear standards. In fact, according to the RUSSEZ, the Titanobaya Valley Industrial Production Zone, the Ulyanovsk Port Special Zone, and Tourism Zones including Russkiy Island were founded by political decisions of a higher agency. These SEZs are in crisis due to poor performance.
On April 26, 2012, the Government of the Russian Federation approved the following criteria for establishment of SEZs. The criteria are considered, including:
1. Natural economic and geographic competitive advantages for implementation of investment projects corresponding to specialization of proposed SEZ.
2. Conformity to SEZ establishment objectives to priorities of integrated territorial development.
3. Forecast for positive dynamics (with substantiation) for growth in volume of additional revenues coming into budgets of all levels in connection with proposed SEZ.
4. Investment project (including their financial and economic indicators) and potential investors who have confirmed in writing their readiness to execute the project in proposed SEZ.
29) The decree of the RF Government dated 26.04.2012 and N 398 "On approval of criteria for the establishment of special economic zone." http://lawru.info/dok/2012/04/26/n23013.htm
32 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ 5. Substantiation for development plans and cost evaluation for technological, transportation, innovational, social, and other infrastructural development in proposed SEZ
6. Substantiation for forecast effectiveness indicators of for proposed SEZ.
7. At least one business entity expressing its intension to exercise the role of a management company for proposed SEZ
8. Ability to attract settlers to propose SEZ as key human resource for execution of SEZ development plan
9. Experience of successfully managing a major investment project with participation of Russian and foreign investors
10. Availability of transportation, innovation, social and other infrastructure for development of proposed SEZ
11. Territorial development plan approved by the Russian central government and municipal governments in accordance with integrated assessment of territorial use.
The above criteria are not much different from those required for designation of Korean FEZs, but they need to be more concrete. In particular, the establishment plan for a SEZ should be established beforehand like the case in Korea. Potential domestic and foreign investors can be found or attracted, based on a concrete SEZ establishment plan. For this reason, first, it is necessary to establish an organization under the federal government or municipalities that manages SEZs similar to the Korea Free Economic Zone Planning Committee or the Free Economic Zone Authority. However, in the Russian case, such organization is established only after a SEZ is designated. Therefore, a thorough evaluation of a SEZ’s design and operation in advance is impossible.
Second, in order to attract foreign investments, the design and operation of an FEZ development project must be tailored to meet the investment needs of foreign investors. The needs and demands of foreign investors related to SEZs should be regularly checked through demand surveys by such agencies as the Free Economic Zone Planning Commission or the Free Economic Zone Authority. The survey results should be used for the establishment and implementation of foreign investment attraction strategies.
In a survey conducted by the Korea Economic Research Institute on 274 foreign- invested companies and business operators (128 respondents) registered at special economic zones in Korea, the respondents selected ‘integrating similar and overlapping SEZs based on their competitiveness’ (25.7%) and ‘establishing “regulation free zones” and “one-stop-service”’ (18.2%) as the two most important tasks for revitalizing foreign
Chapter 01_Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ 33 investments30). In addition, the respondents requested ’differentiated systemic operation reflecting characteristics of local industry'(16.2%), ‘provision of tax incentives and sites at the level comparable to competing countries’(16.2%), and ’unified SEZ system of management, operation and promotion’(15.4%)31).
[Figure 1-7] First Policy Task for Attracting Foreign Investment in Korean SEZ (%)
Regulation freezone, one-stop service 18.2
Operating differentiated system reflecting 16.2 characteristics of local industry
Providing tax incentives / sites in the level of 16.2 competitive country
Unified SEZ system of management, operation & promotion 15.4
integrated operation by focusing on competitive SEZ 25.7
Lowering wage level and enhancing labor maket flexibility 6.7
Others 1.6 0 5 10 15 20 25 30
Source: Yang Geum Seung, Performance Analysis and Investment Promotion Project of the Special Economic Zone of Korea, Korea Economic Research Institute, 2015. p.65.
Third, according to the principle of 'selection and concentration', it is necessary to cultivate as an internationally-renown special zone consisted of competitive economic zones with excellent location and FDI attractiveness. The effectiveness of a development plan should be carefully examined and approved so that SEZs are not designated randomly in each municipality.
Fourth, it is necessary to apply a negative regulatory system by designating SEZs as regulation free zones where domestic regulations are applied. In other words, in SEZs, all regulations should be reviewed at a zero base, and all necessary regulations should be excluded (negative system) to ensure free enterprise activities32).
Fifth, it is necessary to establish a "Special Economic Zone Investment Promotion Agency" (tentative) which would be in charge of overall management of a SEZ including development and investment attraction, and improvement of services for tenant companies. An agency should be established under local authorities of existing SEZs to
30) Yang Geum Seung, Performance Analysis and Investment Promotion Project of the Special Economic Zone of Korea, Korea Economic Research Institute, 2015. p.65. 31) Yang Geum Seung, Performance Analysis and Investment Promotion Project of the Special Economic Zone of Korea, Korea Economic Research Institute, 2015. p.65. 32) Yang Geum Seung, Performance Analysis and Investment Promotion Project of the Special Economic Zone of Korea, Korea Economic Research Institute, 2015. pp.65-68.
34 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ provide an effective one-stop service. In other words, civil services were handled separately by the relevant administrative unit. However, civil services for SEZs should be handled exclusively and as a one-stop administrative service by the “Special Economic Zone Investment Promotion Agency.”33).
Sixth, it is necessary to conduct a thoroughly review of location requirements and capacity requirements, which are important requirements for the designation of SEZs. The possibility of settlement of foreigners and the possibilities of attracting companies should be easy to access, so that they could be easily connected to international airports, international ports, wide area transportation networks, and information communication networks. Capability requirements are likely to evaluate if there is a long-term plan for free zones34). Local governments and stakeholders wishing to attract free zones should establish a more thorough plan and consider whether there is a possibility to attract foreign companies based on previous efforts and results of attracting foreign companies, their financial abilities for site acquisition, as well as their abilities to manage industries they wish to attract, and etc35).
Finally, it is important to select the type of business that fits the regional development strategy and local conditions. Since the ultimate purpose of SEZs is to improve management environment of foreign-invested enterprises and living conditions of foreigners, thereby promoting foreign investments, strengthening national competitiveness, and ultimately promoting a balanced regional development, it is necessary to consider factors closely related to strengthening of national competitiveness when considering designation area, industry and tenant enterprises. If the initial performance is achieved or if the enthusiasm is raised only for attracting foreigners, it may not be possible to exclude companies that are not related to competitiveness36). In addition, SEZs should be promoted in conjunction with balanced regional development. Even if the government designates a priority area, it should be carefully considered in order to make synergy effect in connection with industries and specialties of other regions. In order to revitalize the regional economy through establishment of a special economic zone, the attracted domestic and foreign enterprises must have a high correlation with local industries. Therefore, in order to adapt to changing industrial environment and support local industrial development strategies, it is necessary to select or re-select the key industries that could help differentiate the SEZ37). (Re-)Designation key industries of a SEZ will
33) Yang Geum Seung, Performance Analysis and Investment Promotion Project of the Special Economic Zone of Korea, Korea Economic Research Institute, 2015. pp. 65-68. 34) Lee, Ik Hyun, "Law on the Designation and Operation of Free Economic Zones," Legal System, December 2002. p.72. 35) Lee, Ik Hyun, "Law on the Designation and Operation of Free Economic Zones," Legal System, December 2002. p.72. 36) Lee, Ik Hyun, "Law on the Designation and Operation of Free Economic Zones," Legal System, December 2002. p.71.
Chapter 01_Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ 35 strengthen the linkage between the SEZ with regional industries and solve the problem of overlapping key industries in multiple FEZs. Furthermore, it will spread the ripple effects of SEZs and result in even development of regional economy38).
The first step for selection of key attracting industries begins with a site suitability analysis that examines whether locational conditions of a FEZ are suitable for the industries to attract in the FEZ. Locational determinants of a specific industry refer to factors commonly affecting firms in that industry, such as location factors found in physical and technical characteristics of the industry. Therefore, unlike knowledge-based manufacturing industry, existing industries are affected by traditional location factors such as labor force, traffic, related industries, markets, paper, and water39). On the other hand, unlike existing manufacturing industries, knowledge-based manufacturing emphasizes soft infrastructures such as information, technology, and high-quality manpower40).
[Table 1-5] Major location factors of existing main industries
Petroch Home Semicon Shipbuil Division Fiber Clothing Shoes Steel Machine Car emical Appliances ductor ding Labor force ◎ ◎ ○ ○ ○ ○ ◎ ◎ Transportation ○ ○ ○ ◎ ◎ ○ ○ ○ ◎ ◎ Related ○○ ◎○ industries Market◎◎○ Land ◎ ◎ ○ ○ ◎ Water ◎ ◎
Remark: ◎ very important, ○ important Source: Korea Institute for International Economic Policy (KIEP), Research on the Development Strategy of Free Economic Zones for the Northeast Asia Economic Center, 2012. p.218.
37) Korea Institute for International Economic Policy (KIEP), Research on the Development Strategy of Free Economic Zones for the Northeast Asia Economic Center, 2012. p.216. 38) Korea Institute for International Economic Policy (KIEP), Research on the Development Strategy of Free Economic Zones for the Northeast Asia Economic Center, 2012. p.216. 39) Korea Institute for International Economic Policy (KIEP), Research on the Development Strategy of Free Economic Zones for the Northeast Asia Economic Center, 2012. p.217. 40) Korea Institute for International Economic Policy (KIEP), Research on the Development Strategy of Free Economic Zones for the Northeast Asia Economic Center, 2012. p.217.
36 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ [Table 1-6] Key Locational Factors of Knowledge-based Manufacturing Industry
Semico Electronics, New Fine Precision Mecha Enviro Division Biology nductor information materials Chemicals equipment tronics nment
Simple labor force ◎ ○ ○ ○
Labor force with high-technologica ◎○ ○ l adaptability
Highly skilled ○◎ ○ ◎◎◎ workforce
Proximity to relevant research ◎◎ ◎ ○○ institutes Proximity to relevant university ○○◎○◎◎○ facilities
Proximity to ○○ ◎○ ○○ highway IC Proximity to ◎○ ○○ ○ ○ airport Proximity to port ◎
Remark: ◎ very important, ○ important Source: Korea Institute for International Economic Policy (KIEP), Research on the Development Strategy of Free Economic Zones for the Northeast Asia Economic Center, 2012. p.218.
Chapter 01_Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ 37 After industries that fits the site that conforms an analysis of site suitability is selected, various types quantitative methodology within the available statistics mythology could be applied. Analyzing location quotient, which examines whether an industry is more specialized in a SEZ than in any other areas, specific than other regions, can be applied to analysis of the revenue and employment creation effects, future market size, growth prospects, and contribution to local economy. In order to determine an LQ, the formula shown in Table is used.
Location Quotient (LQ)
Value Implication Area has proportionally more workers LQ > 1 employed in a specific industry sector than LQ = the larger comparison area Area industry has potential to be classified LQ ≥ 1.25 as exporter May indicate opportunity to develop LQ < 1 businesses in the local area
Source: Korea Institute for International Economic Policy (KIEP), Research on the Development Strategy of Free Economic Zones for the Northeast Asia Economic Center, 2012. p.217.
In parallel with the quantitative analysis, it is also possible to carry out a qualitative analysis that examines whether the attracted industries are in line with the sectors that the government intends to cultivate in the areas where a free economic zone is located41). Based on the above selection method, the following table shows an example of key industries that are attracted by Korea's free economic zones. In other words, it is a result of comprehensive consideration of location conditions of free economic zones and quantitative analysis at the regional level, and the linkage of the relevant regions to the leading strategic industries.42).
41) Korea Institute for International Economic Policy (KIEP), Research on the Development Strategy of Free Economic Zones for the Northeast Asia Economic Center, 2012. p.219.
42) Korea Institute for International Economic Policy (KIEP), Research on the Development Strategy of Free Economic Zones for the Northeast Asia Economic Center, 2012. p.219.
38 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ [Table 1-7] An example of the key industries that are attracted by Korea's free economic zones
FEZ Leading Strategic Industry in the Region Focused businesses (example) IT, BT, Education, Medical, Incheon Knowledge Information Industry Logistics Wind turbine components, nuclear power plants, chemical fusion materials, Automobile parts, shipbuilding Busan· intelligent machine parts, equipment, precision machinery Jinhae environment-friendly vehicle parts, parts, renewable energy aviation, offshore plant equipment, green equipment shipbuilding equipment Solar power, wind power system, bio Assembled metal, chemical Gwangyan food, bio active material, optical parts, material, shipbuilding equipment, g bay area light source, green vehicles and parts, machine parts green & leisure vessel Solar cell, fuel cell, medical device, smart Medical equipment, IT parts, Daegu· mobile, smart automobile parts, practical automobile parts, green energy Gyeongbuk robot, high-tech metal. Ceramic material, parts high-tech textile material Next Generation Medicine, Solar Cell, Secondary Battery, Nano-Fusion Material, Automobile parts, machinery Yellow Sea Wireless Communication Convergence, parts, chemical materials, steel Semiconductor, Display, Power-Based Machine Parts Solar power, wind power system, bio General machinery, auto parts, Saemange food, bio active material, optical parts, renewable energy parts, un light source, green vehicles and parts, shipbuilding green & leisure vessel
Source: Korea Institute for International Economic Policy (KIEP), Research on the Development Strategy of Free Economic Zones for the Northeast Asia Economic Center, 2012. pp. 216-219.
3. Ways to Set Up SEZ Management Companies and Make Profits
3.1. Organization and budget of Korea Free Economic Zone Authority
Local governments (cities and provinces) have set up and operated the Free Economic Zone Authority, a specialized administrative organization, in order to establish regional development plans, promote foreign investments and development, and provide various administrative services43).
Chapter 01_Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ 39 Staffs of the Free Economic Zone Authority are consisted of civil servants dispatched from each municipality. The period has been recently expended from 2 years to 5 years. Once dispatched, staffs normally served for 2 or more years. The extension was a measure taken to improve professionalism of dispatched personnel and ensure project continuity. In addition, to ensure that highly-capable public officials are dispatched, the government provides positive incentives to dispatched officials serving the Free Economic Zone Authority.
Nevertheless, since the dispatched workforce consists of short-term workers serving the Authority less than 5 years, there is little motivation for active business promotion. It also lacks expertise in regional development or business performance evaluation.
[Table 1-8] Organization of Free Economic Zone Authority (as of end of July 2015)
(Unit: persons, million won) Fixed Organization Current number of Budget type staff people 1 Vice Commissioner, 4 Headquarters, 1 Strategic Incheon Branch office 334 327 579,635 Business Support, 16 Divisions, 66 part.
Busan- 2 Headquarters, 1 Association 75 75 39,900 Jinhae Departments, 9 Team 2 Headquarters 5 Gwangyang Departments, 1 Office, 1 Association 159 122 115,963 Bay area Promotion Officer, 10 Divisions, 8 Teams 2 Headquarters, 2 Offices, 4 Daegu· Departments, 4 Divisions, 10 Association 116 105 24,747 Gyeongbuk teams
1 Headquarter 3 Divisions, 7 Yellow Sea Branch office 31 31 1,420 teams
2 Headquarters 5 East coast Branch office 63 63 7,109 Departments, 17 teams
1 Headquarter 1 Branch Chungbuk building, 4 Departments, 11 Branch office 47 46 30,421 teams
Source: Audit Office, Report of Audit Results on Free Economic Zone Designation and Operation Status, 2015. p.8.
43) The Saemangeum Free Economic Zone Authority is abolished in August 2013 and the Saemangeum FEZ is under the jurisdiction of the Ministry of Land.
40 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ The central government, that is the Ministry of Trade, Industry and Energy, may support the following expenses required by the Free Economic Zone Authority (Article 28 of the Enforcement Decree of the Free Economic Zone Act)
- Operating expenses for FEZ administration, expenses for attracting domestic and foreign investments, expenses for research and development, etc.
- Personnel expenses of dispatched officials
The revenue and expenditure of the Free Economic Zone Authority are as follow (Article 28-3 of the Enforcement Decree of the Free Economic Zone Act):
- Tax Revenue
- Government subsidy
- Contributions of local governments
- Revenue incurred from FEZ project operation such as land sale
- Rent collected from letting public facilities and other fees
Expenditures of the Free Economic Zone Authority
- Expenditure required for development of a free economic zone such as infrastructure installation cost and for attraction of investments
- Operation expenses of the Free Economic Zone Authority
In order to ensure transparency, revenues and expenditure of free economic zones are regulated separately from the general account of the local governments. In other words, pursuant to Article 27 (6) of the Free Economic Zone Act, the city and provincial governor are required to manage the Free Economic Zone Authority’s revenues and expenditures in one of the two following ways: 1) by establishing a special account under the Local Finance Act, or 2) by establishing a separate sub-account under the cities’/provinces’ general or special accounts of cities and provinces.
3.2. Present status of operating company in SEZ and policy recommendations
Successful operation of SEZs requires an efficient management system. But such a system is not integrated for Russian SEZs44). When Russia first implemented SEZs, it
44) Byun, Hyun-Sub and Han, Hong-Yul, "Problems and Improvement Directions of the Special Economic Zone (SEZ) in Russia: Focusing on the Implications for the ADT", Slavic Research, Vol. 33, No. 1, 2017. p.50.
Chapter 01_Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ 41 established a Special Economic Zone Management Office under the Ministry of Economic Development (MED), responsible for the operation and management of SEZs45). Russia, however, abolished the Special Economic Zone Authority on October 5, 2009 under the Presidential Order on the "Problems of the Ministry of Economic Development." Instead, its functions were transferred to RUSSEZ, a corporation in charge of managing contractual relations and infrastructure maintenance of SEZs on April 12, 2006, Special Economic Zones "(RUSSEZ)46).
However, the managing corporation had originally been 100% publically-owned , but on November 30, 2011, the Special Economic Zone Law was amended to allow private contractual companies to oversee SEZ operations47). As of January 1, 2016, 5 such corporations were owned by the public enterprise RUSSEZ, 19 were owned by the subsidiaries of the RUSSEZ, and 3 special economic zones were managed by corporations not related to the RUSSEZ48). The remaining 6 SEZs, of which the Ministry of Economic Development has not yet transferred their management rights to the RUSSEZ, were still facing problems with operational efficiency due to diversification of management institutions49).
[Table 1-9] Examples of subsidiary shareholding structure of RUSSEZ
% of RUSSEZ in Capital Size (Million Subsidiary of RUSSEZ subsidiary capital Ruble) Innovation SEZ ‘Dubna’ 70 492.9 Innovation SEZ ‘Tomsk’ 74 650 Industrial SEZ ‘Alabuga’ 65.01 10672.04 Industrial SEZ ‘Lipetsk 58.4 3731.285 Tourist SEZ ‘Turquoise Katun’ 75%-1 share 1360
Source: Shevtsova S. N., “Specificity of management of special economic zones in Russia at the present stage,” bulletin of Belgorod university of cooperation, economics and law,” 2012.
45) Byun, Hyun-Sub and Han, Hong-Yul, "Problems and Improvement Directions of the Special Economic Zone (SEZ) in Russia: Focusing on the Implications for the ADT", Slavic Research, Vol. 33, No. 1, 2017. p.50. 46) Byun, Hyun-Sub and Han, Hong-Yul, "Problems and Improvement Directions of the Special Economic Zone (SEZ) in Russia: Focusing on the Implications for the ADT", Slavic Research, Vol. 33, No. 1, 2017. p.50. 47) Byun, Hyun-Sub and Han, Hong-Yul, "Problems and Improvement Directions of the Special Economic Zone (SEZ) in Russia: Focusing on the Implications for the ADT", Slavic Research, Vol. 33, No. 1, 2017. p.50. 48) Byun, Hyun-Sub and Han, Hong-Yul, "Problems and Improvement Directions of the Special Economic Zone (SEZ) in Russia: Focusing on the Implications for the ADT", Slavic Research, Vol. 33, No. 1, 2017. p.50. 49) Byun, Hyun-Sub and Han, Hong-Yul, "Problems and Improvement Directions of the Special Economic Zone (SEZ) in Russia: Focusing on the Implications for the ADT", Slavic Research, Vol. 33, No. 1, 2017. p.50.
42 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ According to the "Special Economic Zone Establishment Criteria" approved on April 26, 2012, there must be at least one management company in order for a proposed territory to be designated as a special economic zone. The management company has to attract more than 50% of the investment out of the government budget necessary for the establishment and sustainment of the proposed SEZ. It would also be the main shareholder of the RUSSEZ when the federal government supports construction of the SEZ’s infrastructure. Local governments as well as individual investors may participate as shareholders. The role of an operating company include providing a range of administrative services: supporting the preparation of a business plan for investment projects submitted to the MED, overseeing its execution, supplying electricity, gas, water, and sewage service, maintaining buildings, letting offices and land, providing logistics and customs services as well as accounting and legal services, recruiting workers for tenant companies, and linking the tenant companies with loan banks. .
SEZ operation systems of countries that are successful promoting their SEZs share the following common features: (1) unification, (2) strong authority over other government agencies, and (3) political independence50).
Asian nations with successful economic zones have a specialized agency that oversees investment policies. In other words, these countries have formed a specialized SEZ organization to which they delegate all authorities related to SEZ projects, which in turn allowed them to establish and enforce consistent and long-term policies for attracting foreign capital. The Singapore Economic Development Board (EDB), a government agency dedicated to attracting foreign investment, is regarded as having played a crucial role in in turning Singapore into an advanced and highly competitive country by successfully implementing economic development strategies based on foreign investments. In addition, the EDB is responsible for establishing and implementing policies for foreign and domestic companies already in Singapore, as well as for attracting and supporting investments, and maintaining Singapore's attractiveness as a business and investment destination. It is a statutory body under the central government established in accordance relevant laws and regulations for attracting foreign capital and efficient use of national capabilities. It is affiliated to the Ministry of Trade and Industry, but is based on political support and expertise of the Prime Minister. It exercises a significant level of authority and autonomy to bring about legal and government supports for activities geared towards attracting foreign investment such as construction of industrial complex, supply of manpower, implementation of tax incentives, and building of foreign workers' residential
50) Korea Institute for International Economic Policy (KIEP), Research on the Development Strategy of Free Economic Zones for the Northeast Asia Economic Center, 2012. p.114.
Chapter 01_Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ 43 facilities. The Singapore EDB secures its independence by incorporating a deliberative decision-making body within it administrative organization, which determines business objectives and overall direction. In particular, the system which allows the EDB’s director as a ministerial official to directly report to the country's top leader (Prime Minister) is in place. A large number of CEOs and union representatives of foreign-invested enterprises, who are the main actors of economic special zones, participate in committees responsible for deliberations and resolutions of the EDB, so that their demands reflected in policies51). In addition, to smoothly respond to the needs of investors, the government and the related authorities cooperate to deal with licensing and administrative procedures, and provide comprehensive one-stop services such as post-management. The Shanghai Pudong New Area Management Committee of China is a subordinate administrative body of the city of Shanghai, but exercises high autonomy and has exclusive authority over foreign investment as well as import and export. In addition, it has centralized more than 10-20 licensing and authorization offices with the authority delegated from the Pudong New Area Management Committee to provide an one-door service52). Therefore, the Russian special economic zone management company should also redefine its role as an exclusive administrative agency for the Russian SEZs. Ful support and delegation the authority from the local government head to the company is also necessary. In addition, in order for the company to play a role as a responsible management agency, it should be given decretory authority over a wide range of activities including developing investment attraction industries, providing various incentives for investment attraction, promoting investment, supporting and administering investment attraction activities, meeting demands of attracted companies, and providing follow-up services53). In order to provide a complete one-door service, the management company should lead SEZ projects with fully authority over the zones while relevant institutions should play supportive roles. For example, it is necessary to consider how to designate and operate the Free Economic Zone Authority as a special local government entity54).
51) Korea Institute for International Economic Policy (KIEP), Research on the Development Strategy of Free Economic Zones for the Northeast Asia Economic Center, 2012. p.117. 52) Yang Geum Seung, Performance Analysis and Investment Promotion Project of the Special Economic Zone of Korea, Korea Economic Research Institute, 2015. p.60. 53) Jang, Heung-Hoon and Lee, Jong-Kyu, "A Study on the Marketing Mix Strategy for Investing in Free Economic Zone in Gwangyang Bay Area," Journal of Korea Port Economics, Vol. 24, No. 3, 2008. p.120. 54) D. Bogataj and M. Bogataj, “The Role of Free Economic Zones in Global Supply Chains—A Case of Reverse Logistics,” International Journal of Production Economics, Vol.131, No.1, 2011, pp.366-368.
44 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ [Table 1-10] Comparison of Characteristics of SEZ Authority in Asian Major Countries
Singapore Economic Korea FEZ China Pudong New Area China Development Board Committee / / Shenzhen Technology (EDB) Planning Office Management Committee Development Zone
Initiative of local Initiative of local Central government, government, government OO Central Central Government agency Government Support Support
O X ∙ Holding ∙ Transfer of Economic ∙ Establishment of administrative Development Plan deliberation organization and Consultation Right to organization deliberation & Local Government in ∙ SEZ management (committee) decision organization 1988 committee Independence outside in organizational ∙ (Shenzhen SEZ) establishes and of agency ∙ Deliberation structure Exemption from tax operates funds Committee ∙ Deliberation return duty for central by the ordinance Chairperson ≠ Committee and municipal Head of Chairperson = Head government for the first administrative of administrative 10 years organization organization
Unification of OX O O management
∙ The Minister of ∙ System of direct Industry is also ∙ A voice equivalent to Status reporting to the Chairman of the vice mayor of - national top leaders the Deliberation Shanghai Committee
Source: Korea Institute for International Economic Policy (KIEP), Research on the Development Strategy of Free Economic Zones for the Northeast Asia Economic Center, 2012. p.114.
Currently, Russia is transferring management authorities of the Special Economic Zone (RUSSEZ) under the Federal Ministry of Economic Development, to local governments in each zone. Each individual SEZ Authority (management company) is devising plan to secure operating expenses and gradually obtain self-sustainability. As of now, individual SEZ company can afford less than 10% of its total operational expenses. Yet, the plan is to expand the companies’ revenues and manage them as self-supporting profit system.
There is no big difference between the Russian and the Korean case considering the fact the Korea's Free Economic Zone Authority is also supported by local government budget. In recent years, there has been a plan to charge fees for consultation and one-stop service provided to tenant companies to secure the Authority’s minimum operational expenses. But there is the concern that this may present an obstacle to
Chapter 01_Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ 45 attracting foreign investment, so a careful approach is needed. Charging fees for professional services that tenant companies acquire from external organizations—such as providing consultation for license documents or statistical data for business feasibility studies—would not impose a financial burden for tenant companies and also serve as a major source of income. However, if these be charged, it may become a burden on the tenant or a price increase factor, which may become an obstacle to attracting domestic and foreign investors. Therefore, the SEZ management company cannot procure 100% of its own operating expenses through its own business activities. To hire and retain competent staff with enough English-proficiency to effectively communicate with foreigners and enough expertise in business plan analysis to select potential foreign tenet companies, government financial support for the company’s operational expenses is crucial. Furthermore a system that would increase efficiency of the RUSSEZ as a management company should be installed. For example, the Singapore Economic Development Board (EDB) and the Hong Kong Investment Agency have been promoting professionalism by recruiting former and current employees d of private companies and foreigners. In the case of the Singapore Economic Development Board, it trains graduates from the world's top universities including MIT, Harvard and UC Berkeley and former and current company workers to become experts in each industry. These experts identify tax benefits, infrastructure, and settlement conditions each industry requires and provide investment guidance services55). Therefore, it is essential for to procure highly-qualified professional manpower and to support expenses for utilizing it at the central or the local government level. It is also possible to provide government support for labor cost by creating an administrative organization under the government like the case of Singapore or by dispatching civil servants to work for the Authority like the case of Korea. It is also worthwhile to note that in China’s Technology Development Zones, the China Technology Development Zone Commission (a SEZ agency) was able to gain a high-level of financial independence and autonomy by establishing and operating funds through government ordinances56). Furthermore, it is necessary for the central government to improve a RUSSEZ management company’s performance by introducing a competitive system such as imposing a differential financial support system based on its performance, and to promote the morale of its employees through implementing an incentive support expansion. These measures would help attract foreign investment.
55) Song, Young-Kwan, "Evaluation of Special Economic Zones Policy and Policy Recommendations for Activating Free Economic Zones," KDI FOCUS, October 28, 2014 (Volume 47). pp.5-6. 56) Korea Institute for International Economic Policy (KIEP), Research on the Development Strategy of Free Economic Zones for the Northeast Asia Economic Center, 2012. p.118.
46 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ 4. Free Economic Zone Performance Evaluation
4.1. Performance evaluation procedures and key indicators of the Korea Free Economic Zone
According to Article 28-3 of the Special Act on the Designation and Management of Free Economic Zones, the Minister of Trade, Industry and Energy evaluates business performance of Free Economic Zones for the their developments. It is stated that the government’s administrative and financial support provided to FEZs may vary between FEZs according to the Minister’s evaluation. Therefore, the MOTIE evaluates fulfillment of previous year’s Free Economic Zone Development Plan annually, in accordance with the "Free Economic Zone Performance Evaluation Guidelines" (Dec. 28, 2010) and the "Yearly Free Economic Zone Evaluation Plan."57)
[Figure 1-8] Overview of Free Economic Zone Performance Evaluation Procedures
• Planning Office of the Free Economic Zones Evaluation plan notification (Ministry of Industry) → Free Economic Zone Authority ▼ Submission of self-evaluation • Free Economic Zone Authority → Planning Office of the Free result report Economic Zones ▼ Organization of Performance • Planning Office of the Free Economic Zones Evaluation Committee ▼ • Planning Office of the Free Economic Zones Preliminary Evaluation of → Performance Evaluation Committee Consultation on operation Performance Evaluation plan of on-site inspection etc. Preliminary Evaluation by Committee Subcommittee ▼ Field inspection • Survey on the Actual Situation by Free Economic Zone Authority ▼
Comprehensive evaluation • Comprehensive evaluation result report
▼ • Confirmation of performance evaluation result and follow-up Free Economic Zone Committee plan ▼ • Free Economic Zone Authority ↔ Free Economic Zone Planning Appeal and Settlement Office
Source: Audit Office, Report of Audit Results on Free Economic Zone Designation and Operation Status, 2015. p.374.
57) Audit Office, Report of Audit Results on Free Economic Zone Designation and Operation Status, 2015. p.37.
Chapter 01_Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ 47 [Table 1-11] FEZ Performance Evaluation Indicators and Points
Points Field Item First Later selected selected SEZ SEZ Business Validity of the planning process 5 20 Planning Efficiency of business promotion system 10 12
Business Funding Performance 9 9 Operation Foreigner support and PR 21 21
Business Development Project Performance 30 25 Performance Scale of Attracting Foreign Investment 25 13 Sum 100 100
Source: Korea Institute for International Economic Policy (KIEP), Research on the Development Strategy of Free Economic Zones for the Northeast Asia Economic Center, 2012. p.251.
The MOTIE conducts an annual evaluation in three criteria which includes business planning, operation, and performance58). The evaluation results are reflected in budget support, restructuring, and promotion of development. For example, the 'area-unit evaluation' criterion is divided into stages of development—completion, in-progress, and undeveloped development—and each stage is assigned a color—green (satisfactory), yellow (with delays), and red (extremely poor)59). This is called a ‘traffic light evaluation system.’
58) Since 2013, the Ministry of Industry has expanded the evaluation items to five areas including business organization & operation, development project promotion, investment attraction, enterprise support, and settlement environment, but does not disclose specific indicators. 59) Audit Office, Report of Audit Results on Free Economic Zone Designation and Operation Status, 2015. p.38.
48 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ [Table 1-12] Detailed criteria for area-unit evaluation in the field of development projects
Development Traffic light Detailed criteria stage classification Green No difficulty in pre-sale/occupancy in the future. Development Yellow Expected sales/occupancy low. completed There is no pre-sale order for a long-period of time; the Red prospect of pre-sale and occupancy uncertain. Development completed on time according to schedule Green (progress rate over 80%) Development in Development considerably delayed according to original Yellow process schedule (progress rate at 50-80%) Extremely poor development (progress rate less than Red 50%) Green Sufficient occupancy demand etc. If operator is found within a short-period of time, Development Yellow implementation plan or construction may be delayed a not started little. Construction is delayed for a long-period of time after Red enactment of development plan.
Source: Audit Office, Report of Audit Results on Free Economic Zone Designation and Operation Status, 2015. p.38.
In addition, this assessment system is also utilized as an index for restructuring such as area reduction or FEZ cancellation when development has been halted or delayed for a long-period of time. The formula to calculate the development rate is:
Development rate (%) = (completed development + development progress area) / total area of free economic zone x 100
The area-unit that receives the lowest grade in the development progress evaluation excluded from next year’s infrastructure support targets. If the unit receives the lowest grade for three consecutive years, its FEZ designation may be cancelled. Best practices and successful cases found through the performance evaluation are shared by all free economic zones and actively utilized when promoting investment. In addition, the MOTIE grants differentiated incentives to the Free Economic Zone Authorities and rewards of excellent employees based on the results of the evaluation. Such measures strengthen the efforts for continuous development and investment promotion in SEZs. As for performance evaluation standards applied to Korean SEZs other than FEZs, SEZs
Chapter 01_Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ 49 are generally granted the benefits of greater economic liberalization compared to other parts of the country. The expected direct and indirect benefits include simplification of administrative procedures, tariffs and tax exemption. The following direct and indirect benefits could be used as the quantitative criteria for evaluating the performance of SEZs.
[Table 1-13] Direct and Indirect Benefits of SEZs
Direct Benefits Indirect Benefits Foreign exchange earnings Skills upgrading Attracting FDI Test-Bed for Regulatory reform Job creation Technology transfer Government revenue Demonstration effect Export growth Export diversification Enhancing trade efficiency of domestic firms
Source: Korea Institute for International Economic Policy (KIEP), Research on the Development Strategy of Free Economic Zones for the Northeast Asia Economic Center, 2012. p.88.
For example, Yiming Yuan et al. (2011) evaluated the following items in the case study of the Shenzhen Special Economic Zone to quantitatively analyze the performance of the Shenzhen Special Economic Zone.
① Rapid economic growth and industrialization
- GRDP in Shenzhen, National income in Shenzhen, Ratio GDRP by industry, Employment structure by industry
② Foreign trade performance
③ Performance of attracting FDI (by destination, by industry and country)
④ Promotion of High-tech industries
- High-tech industrial production, export proportion, number of patent applications
4.2. Performance evaluation status of the Russian Special Economic Zones and policy recommendations
Russia’s SEZ policy achieved far less than the desired goals. As of January 1, 2016, 435 investors were registered to 33 SEZs, of which about 80 were overseas companies (18.4%) with investments from 29 countries. If we look at the distribution of companies including both Russian and overseas by type of SEZ, there are 118 companies (27.1%) in industrial
50 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ production special zones, 256 (58.9%) in technology innovation special zones, 57 (13.1%) in special tourism zones, and 4 (0.9%) in port special zones. The special tourism zones and the port special zones performed particularly poorly in terms of attracting enterprises. Also, the amount invested by companies registered in SEZs is far below what was originally planned when they first began their operations in SEZs. The investment plan that the companies submitted originally projected about 560 billion rubles of investment, but the actual amount invested so far is estimated to be about 188 billion rubles. On the other hand, the tax and customs preferences obtained by the companies have been higher than the invested amount. In other words, according to the data from the Russian Supervisory Board, the amount of taxes and customs duties paid by the companies was only 40 billion rubles while the tax and customs preferences they received reached 22.6 billion rubles. As a result, it is estimated that SEZs do not fully function as a part of industrial policy. In fact, as of January 1, 2015, the sales volume of companies operating in SEZs accounts for only 0.17% of the gross production of 20 regions where SEZs are located.
SEZs’ sluggish performance clearly shows the limitations of SEZs as a regional development policy. In other words, the ratio of the number of jobs created by tenant companies to the workable population in 2014 was 0.9%, while the ratio of sales of tenant companies to GRP was 0.17%. The rate of tax paid by the companies to total tax was only 0.065%. In other words, SEZs’ contribution to regional development is relatively small when compared to the preferences SEZs receive. Jobs creation was also far below expectations. As of January 2016, the total number of jobs created in SEZs was 18,177, which was significantly fewer than what was projected in the original plan (25,000). This means 10.2 million rubles—which is equivalent to 25 years of the average wage of Russian workers— was invested to create one job in SEZs, , considering the average wage of Russian workers. Although investments to SEZs and wages in SEZs cannot be directly compared, it is undeniable that the job creation effect is minimal, at least at the present time.
Russia is aware of the problems with the performance of its SEZs and is seeking ways to improve. Based on the results of its evaluation, the Board of Audit and Inspection recommended introduction of a mechanism for establishment, development and operation of SEZs which would also oversee SEZ’s objectives, feasibility, and profitability in April 2016.
As a result, an efficiency index of the SEZ was created on July 7, 2016, according to the Russian Federation government administrative order. Henceforth, the Ministry of Economic Development will conduct an efficiency evaluation for SEZs and assess the following absolute and relative quantitative performance indicators:
Chapter 01_Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ 51 - Number of tenants, including the number of tenants companies with foreign investors involved as shareholders (projected and actual);
- Number of jobs created (projected and actual);
- Actual amount of investments, including capital investments made in accordance with agreements on the implementation of activities in SEZ (projected and actual);
- Amount of tax revenues, excluding VAT, (in accordance with tenants’ profit and loss statements calculated by applying general taxation system) and/or amount of income (in accordance with tax declaration for tax paid in connection with application of a simplified taxation system; tenants applying the simplified taxation system) received by tenants (projected and actual);
- Federal budget funds aimed at financing construction of engineering, transport, social, innovation and other infrastructure facilities in SEZ (planned and actual);
- Size of the budget from the central- and local-government budgets aimed at financing construction of engineering, transport, social, innovation and other infrastructure facilities in SEZ (planned and actual);
- Amount of tax paid by tenants to the budgets of all levels of the Russian Federation’s budgetary system (planned and actual);
- Amount of customs payments paid by tenants (planned and actual);
- Amount of tax privileges tenants received credited to the federal budget (planned and actual);
- Amount of privileges used by tenants for payment of customs payments (planned and actual);
- Number of planned and built/operating engineering, transport, social, innovation and other infrastructure (planned and actual), as well as their capacities;
- Size of undeveloped funds (balance) allocated from the federal budget to the creation of infrastructure, accumulated by the end of a reporting year;
- Amount of undeveloped funds (balance) actually from the budget subject to the Russian Federation and the local budget to the creation of infrastructure, accumulated by the end of a reporting year;
- Share of the total area of land plots leased and/or owned by tenants in relation to the total useful land (planned and actual);
- Proportion of infrastructure capacity confirmed by the contractual obligations of
52 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ tenants in relation to the total capacity of infrastructure facilities commissioned and/or constructed (planned and actual).
The Ministry of Economic Development submits the report to the Russian government by the first day of July of the following year after conducting the annual efficiency evaluation for SEZs according to the above indexes. In addition, the law on efficiency evaluation requests an evaluation be conducted on the 3rd, 6th, and 10th year—that is in 2018, 2021, and 2025. SEZs that fail the evaluation will be closed accordingly. The law also assigns financial responsibility on the part of the local governments to return a portion of the financial support received from the federal government based on the evaluation results.
Therefore, if the law is implemented properly, it will significantly improve efficiency of operation of Russian SEZs. However, the evaluation index focuses on indicators related to activities of tenant companies, effectiveness indicators for budget input, and indicators related to activities of operating agencies. Therefore, it requires some complements.
First, a more comprehensive evaluation will be possible if external factors of business such as investment inducement activities, corporate support activities, and improvement of settlement environment are included to the efficiency indicators.
Second, it is necessary to include measures taken as responses to the previous year’s evaluation as a factor for this year’s evaluation to provide smooth feedback. In other words, it is necessary to add ‘efforts to improve previous year’s indicators” as an evaluation index to existing evaluation system.
Third, in order to revitalize SEZs, it is also important to attract domestic companies as well as foreign-invested companies. Therefore, attracting domestic companies should also be an important indicator of the performance evaluation, and especially attracting anchor companies with large economic impact should be set as the main performance targets.
Fourth, in the case of attracting foreign-invested companies, not only the amount of investment but also qualitative aspects such as attracting industry types and size of enterprises should be reflected in the performance evaluation. In the case of attracting foreign-invested companies, the quality evaluation, such as the type of industry and size of enterprises, should be reflected in the evaluation of performance, not simply the amount of investment.
Fifth, there are four types of special economic zones in Russia. In addition to the common indexes, therefore there should be evaluation indexes developed specifically for each type of SEZs.
Sixth, in order for a fair evaluation, a performance evaluation committee should be
Chapter 01_Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ 53 formed, and a set of regulations on committee selection and operation should be established. The evaluation criteria should also be established specifically and clearly so that the evaluation results are accurate and objective.
Seventh, it is necessary to establish a compensation system based on the results of performance evaluation. Periodic performance evaluation can build competitiveness among SEZs and provide a strongest motivating force for employees of SEZs. In other words, not only government subsidies and infrastructure projects but also incentives for the employees can stimulate development of special zones and foreign investment attraction.
Finally, for an objective and rational evaluation, statistics related to each SEZ should be produced and managed through a system. In the case of the Korea Free Economic Zone, the quantitative performance evaluation had to be limited to relying solely on the results of foreign investment attraction (based on the reported amount) because SEZ is scattered among 10 regional governments and there is not enough statistical data and its processing system. As of now, basic data such as the status of tenant companies in each FEZ is insufficient, and consequently quantitative indicators for performance and problem identification are very limited. Statistical data on developmental state and foreign investment have been generated, but statistics on business, production, export, employment (job), and business expenses, which are also important indicators of FEZ development, are weak. There is no system for generating statistical data. When needed, data from 8 FEZs are collected and utilized. The Russian Special Economic Zones would also need to benchmark the national statistical yearbooks of China and establish the statistics on the Gross Domestic Product, Employment & Population Trends and Income Trends in the Free Economic Zone as well as the Foreign Investment Promotion Results.
Currently, the Incheon Free Economic Zone Authority publishes statistical data on its own business annually. The main content of the report is.
Source: Korea Institute for International Economic Policy (KIEP), Research on the Development Strategy of Free Economic Zones for the Northeast Asia Economic Center, 2012. p.252.
54 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ In addition to performance evaluation, statistical analysis is also necessary for the establishment of policies (basic plans, etc.) and publicity of policies. In addition to the current performance evaluation system based on a specific moment in time, quantitative data for analyzing performance and obstacles of FEZs over a period of time should be constructed by establishing statistical data on common issues for each SEZ every year. In order to construct the necessary statistical data, it is possible to designate and operate a dedicated department and a person in charge at the Special Economic Zones Authority and the management companies of the special economic zones, and if necessary, utilize specialized agencies such as research companies and local statistics offices. The statistical survey item is created by distinguishing the basic items from the other items, and the basic items are commonly generated so that they can be compared with each other and other statistics can be created if necessary for each SEZ.
- Basic items: statistical items that can analyze the basic status and the performance of the system operation required by the State in operating the Free Economic Zone System
- Other items: statistical items according to characteristics and administrative needs of each FEZ
[Table 1-14] Basic items of FEZ statistics
Field Survey item Remarks Survey by GRDP, resident population (Koreans + foreigners), imports &exports, Management General number of tourists, etc. Company of each SEZ (Current status) Material, type (head office /factory/branch/shop), industry type, capital stock, operation rate (factory) (Employment) Employees (domestic/foreign), Research professionals, Regular/Irregular employees Business (Earnings) Sales, operating profit, exports (item, amount, exporting Separate Status country), investment (total investment, facility investment / R&D) investigation
Chapter 01_Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ 55 [Table 1-14] Continued
Field Survey item Remarks Education: Status of School, University, Graduate School Survey by Medical institutions: by type, medical staff, drugstore, number of Residential Management hospital beds, etc. environment Company of Status of environment related to residential environment including each SEZ cultural facilities
Total business expenses (by region / district / business, national / Survey by Financing / local / private) Management input Existing investment amount(by region / district / business, national / Company of local / private) each SEZ
Source: Korea Institute for International Economic Policy (KIEP), Research on the Development Strategy of Free Economic Zones for the Northeast Asia Economic Center, 2012. p.254.
56 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ References
Board of Audit and Inspection of Korea(2015), 『Report of Audit Results on Free Economic Zone Designation and Operation Status』. Homepage of Planning Office of the Free Economic Zone (http://www.fez.go.kr) Special Act on Designation and Operation of Free Economic Zones (http://www.law.go.kr/lsInfoP.do?lsiSeq=188111&efYd=20170603) Korea Institute for International Economic Policy(KIEP)(2012) 『Research on the Development Strategy of Free Economic Zones for the Northeast Asia Economic Center』. Byun, Hyun-Sub and Han, Hong-Yul(2017), "Problems and Improvement Directions of the Special Economic Zone (SEZ) in Russia: Focusing on the Implications for the ADT", Vol. 33, No. 1, 『Slavic Research』. Ministry of Trade, Industry and Energy Press Release, "The biggest prospect since 2013 to attract foreign investment in Free Economic Zone," December 20, 2016. Ministry of Trade, Industry and Energy Press Release, "Minister Visited the Free Economic Zone, Listened to Troubles," August 19, 2016. Ministry of Trade, Industry and Energy, "Regulatory Improvement for Activating Free Economic Zone," August 2016. Lee, Young-min(2015), "Role of Free Economic Zones for New Logistics Base in Northeast Asia, 『Journal of e-Trade Research』, Vol. 13, No. 1. Lee, Ik Hyun(2002), "Law on the Designation and Operation of Free Economic Zones," 『Legal System』. Location quotient: LQ, http://sea8525.blog.me/110156716584 Location coefficient, http://sea8525.blog.me/110156716584 Song, Young-Kwan(2014), "Evaluation of Special Economic Zones Policy and Policy Recommendations for Activating Free Economic Zones," 『KDI FOCUS』, October 28, (Volume 47). Yang Geum Seung(2015), 『Performance Analysis and Investment Promotion Project of the Special Economic Zone of Korea』, Korea Economic Research Institute. Jang, Heung-Hoon and Lee, Jong-Kyu(2008), "A Study on the Marketing Mix Strategy for Investing in Free Economic Zone in Gwangyang Bay Area," Journal of Korea Port Economics, Vol. 24, No. 3. Jung, Chu-Cheol(2009), 『A Study on the Establishment of Land Use Plan Using Environmental Impact Assessment』.
Chapter 01_Sharing Korea's experience for sustainable development, operation and competitiveness of the Russian SEZ 57 Korea Development Institute(2014), 『Business Group for Activation Support of Special Economic Zone』, Report, Supported by Ministry of Planning and Finance,. Бюллетень Счетной палаты Российской Федерации №5(221) (2016). Донкина Елена, “Новотроицк Оренбургской области будет претендовать на статус ТОР,” http://kommersant.ru/doc/3058583 Постановление Правительства РФ от 26.04.2012 N 398 "Об утверждении критериев создания особой экономической зоны" http://lawru.info/dok/2012/04/26/n23013.htm Шевцова С.Н.(2012), “СПЕЦИФИКА УПРАВЛЕНИЯ ОСОБЫМИ ЭКОНОМИЧЕСКИМИ ЗОНАМИ В РОССИИ НА СОВРЕМЕННОМ ЭТАПЕ,” ВЕСТНИК БЕЛГОРОДСКОГО УНИВЕРСИТЕТА КООПЕРАЦИИ, ЭКОНОМИКИ И ПРАВА,. D. Bogataj and M. Bogataj(2011), “The Role of Free Economic Zones in Global Supply Chains—A Case of Reverse Logistics,” International Journal of Production Economics, Vol.131, No.1.
58 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ Chapter 2
Regional Development for Job Creation and Business Development
Regional Development for Job Creation and Business Development
Hongyul Han (Hanyang University) Ekaterina Bargina (Business Development Team of RUSSEZ)
Russia's SEZ policies aim at the balanced development of regions through industrial development. This makes the SEZ policies inherently an industrial policy. The Russian SEZ can be defined as a functional approach in which investment attraction is expected through the improvement of a 'business environment'. The Russian SEZ policy reveals far less performance than the desired expectation in the areas of business and employment creation. In order to achieve the goal of ‘the balanced regional development’, SEZs should carry out effective implementation of industrial policy measures. Even though Russia offers incentives in full scale, the investment performance is not in line with expectations. It is necessary to find a model to effectively combine national public resources with Research & Development institutions in the region including universities. At present, RUSSEZ generally practices the function of 'management' of SEZs, and it is hard to say whether it is actively contributing to the accumulation of industrial activities.
In this regard, this report suggests that the special economic zone should form a regional industrial cluster and change the function of RUSSEZ. Firstly, the formation of regional clusters should be set as the mainstream direction of the SEZ policy (Mainstreaming of Regional Cluster Policy. Secondly, the SEZ policy measures should be redirected from the functional approach to the more direct input of public resources for regional development and industrial development. Thirdly, the formation of regional
60 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ clusters for the development of regional economies should aim at establishing a virtuous cycle structure: public resource input => production capacity expansion => domestic and overseas demand development => strengthening of regional growth base. Fourthly, the most important factor in the formation of regional clusters should be securing and developing human resources.
Specifically, RUSSEZ needs to redefine its function as a techno park in order to create a cooperative program by effectively combining industrial, educational and research resources within the region. As a techno park, RUSSEZ requires the development of a variety of resources and supporting measures to foster industry. RUSSEZ can form and operate a cooperative committee that collectively coordinates the roles of industry, educational institutions and local governments in the region. The committee can also play a role in mediating the support of central and local governments
In order to effectively form regional clusters, it is necessary to cultivate the functions of central government and local government. Granting higher responsibility to local governments in the process of regional independent management of SEZs will have a stonger effect on the formation of regional clusters through maximizing the competitive advantage of the region. RUSSEZ should form an organic network with educational institutions; RUSSEZ should work with local governments as a techno park to provide or co-develop field education, vocational training spaces, and common technical support for SMEs. Also, it should play an intermediary role for the combination of university research function and SME R & D capacity.
The current incentive system for SEZs has a very general pattern and needs to be streamlined to reflect the nature of regional characteristics and the nature of SEZs. In particular, it is desirable to strengthen the direct support for attracting people, in addition to the expansion of the overall residential environment and infrastructure. Specifically, it is necessary to devise an incentive system led by local governments in the following direction including support for income tax on foreign workers in the SEZ investment enterprise and exemption system for foreign-invested enterprises, linkage of the subsidy system and vocational training system for companies investing in SEZ and implementation of 'Technical Support for Foreign Enterprises' Project.
Chapter 02_Regional Development for Job Creation and Business Development 61 1. Significance of Russian Special Economic Zone Policy for Regional Development
1.1. Background of Russian Special Economic Zone Policy
The Russian Special Economic Zone policy aims at the balanced development of regional territories. The core measures of this policy are the development of infrastructure to support the strengthening of industrial production and export capabilities, and various investment and employment incentives. The Russian industry policy seeks to move away from the current resource-dependent economic structure and to pursue the diversification and modernization of the industrial structure (Han et al., 2015). SEZ policies have strong industrial policy aspects as well as traditional balanced regional development policy. However, the SEZ policies follow the conventional approach in that they are actively utilizing industrial policy measures for regional development.
Given that the SEZ policy has been widely adopted for regional development since the 1950s worldwide, it seems difficult to object to Russia’s choice. Although both local development and industrial development are closely related, however, it should be noted that both policies pursue separate policy goals in a strict sense. Therefore, there is no guarantee that industrial policy is always an appropriate choice for Russia's traditional goal of balanced regional development. This view is justified by the past examples of regional development policies in Europe. The first generation of European countries' regional development policies (until the early 1980s) adopted industrial policy instruments as the primary means of implementation. The expectation was that industrial development could achieve its goal of regional development. However, since the 1980s, the regional development policies of European countries have shifted from the industrial policy approach to strengthening the enduring growth base through strengthening the regional competitive advantage (Bachtler and Yuill, 2001). Thus, the industrial policy may not be sufficient as a means of regional development.
62 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ [Table 2-1] Examples of Special Economic Zones in Major Countries
Name Area Free trade zone Conventional Name(After 19th Centuries) Foreign trade zone US, India, Japan Industrial free zone Ireland, Liberia Free zone UAE Maquiladora Mexico Export free zone Ireland Free export zone Korea(1970s) Export processing zone Philippines, Malaysia, Pakista Special economic zone China Investment promotion zone Sri Lanka
Source: Kim, Jaeyong (2017)
SEZ is an industrial policy instrument that is universally used throughout the world today. Many countries are seeking to strengthen the industrial productivity and expand employment by supporting the liberal reform of the domestic economy through special economic zones mostly aimed at attracting foreign direct investment. SEZs generally provide various incentives (taxes, administrative regulations, subsidies, etc.) for resident companies in geographically limited areas. The types of SEZs include the Free Trade Zone (FTZ), the Export Processing Zone (EPZ), the Enterprise Zone, the Industrial Park, the Free Economic Zone Economic Zone) (Table 2-1).60) The value of the policy as an effective strategy for industrial development has been acknowledged as the special economic policy is adopted worldwide (World Bank, 1992). SEZ policies are typical industrial policy instruments from a functional point of view. Except for the feature that it is targeted to a certain region, it falls with the category of the conventional industrial policy to promote the supply capability of the strategic industry sector through mobilization of the government. In the case of Russia, the modernization of resource-dependent economic structure and industrial diversification are the main objectives of the recent industrial policy. In other words, the Russian special economic policy is ultimately aimed at regional development and utilizes industrial policy as the main means of implementation (Han, 2016). Therefore, the SEZ policy can successfully achieve the purpose of regional development by successful consolidation of industrial production capacity.
60) The The OECD emphasizes a new approach that focuses on local strengths and opportunities rather than central and local government support. (A New Approach to Regional Development) http://www.oecd.org/regional/ regionaldevelopment.htm Special SEZs have traditionally had a function as a free trade zone or export processing zone, but recently they have developed regional development strategies such as production and trade, research and development, aAs well as the role played by both.
Chapter 02_Regional Development for Job Creation and Business Development 63 In general, in order for industrial policies to be effective, the following three elements of policy need to be successfully implemented (KDI 2013). Firstly, it is the creation of policy resources necessary for policy implementation (Resource Mobilization). It includes securing human resources as well as policy competencies essential for successful implementation. Secondly, the mobilized resources should be appropriately channeled to the targeted industry or regional development (Channeling to Strategic Sectors). Economists' negative views on industrial policy originated from the concerns about risk, waste and corruption in this process. Finally, long-term management of the industrial policy is a difficult task even if a certain level of production base is secured by the successful implementation of industrial policy.
For the success of regional development, it is common to focus more on microscopic factors that are necessary for successful SEZ policies. For example, various factors such as the international position advantage of SEZs, the appropriateness of special purpose zones, the feasibility of special zone management and implementation plans, the simplification of regulatory systems and procedures, the political will and the international economic environment are suggested. In particular, it is important to overcome the inefficiency of government administration and active civilian engagement in order to enhance general management factors (infrastructure and geographical requirements, etc.) (Table 2-2). There have been many studies on the success factors of SEZs . In general, the implementation of such a strategy of securing supply of experts to support SEZs, institutional support and the construction of social overhead capital were considered to be the most important factors (ILO, 1988).
[Table 2-2] Success Factors and Evaluation Criteria of SEZs
Area Factors Standard Access Geographical Location Location Market Market Size: Population, GDP Growth Infrastrutures Transportation, Logistics, Living Infrastructure Social Infra Education, Information, Labor Force Policy Tax Rate, Incentive Policy Regulatory Environment Labor, Education, Medical Service Autonomy Authority, Budget Management Efficiency Administration, FDI Attraction Labor Environment, Wage, Labor-Business Labor Social Factors Relations, Labor Laws Openness Market Openness, Liberal Economic System
64 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ [Table 2-2] Continued
Area Factors Standard Int’l Economic International Int’l Economic Situation, Investment Treaty, Environment, Economic Environment Trade Environment Agreement Vision, Cooperation, Vision, Goals, Plan, Design, Dialogue, Process Sustainability Cooperation
Source: Kim, Jaeyong (2017)
Based on the above discussion, the success factors of SEZs can be summarized as follows. Firstly, there are two criteria for locational factors: international accessibility to SEZs, and domestic and international marketability around SEZs. The first criterion is the international accessibility which is evaluated by the geographical location and accessibility of SEZs. Domestic and overseas marketability is the main evaluation criterion such as the population behind the special economic zones, domestic and international markets accessible. On the other hand, the expansion of infrastructure is one of the most important requirements for the competitiveness of SEZs. Also, in addition to logistic infrastructure such as transportation, airports, ports, etc., living conditions of international standard and social infrastructure such as education and information are important. Recent trend is that 'living infrastructure' and 'social infrastructure' are regarded to be more important. As far as the policy factor is concerned, SEZs should provide the benefits of higher flexibility in regulatory system and easier administrative procedures as well as various incentives such as government support and tax benefits. Finally, the most overlooked aspect of the policy factors is the capacity to implement policy, that is, the efficiency of administrative procedures and the support and cooperation system for the private sector.
Chapter 02_Regional Development for Job Creation and Business Development 65 [Table 2-3] Competitiveness of Major Economic Zones in Asia and the Pacific
Russia Korea China Singapore USA Canada Japan TASED unit SEZ Corporate % of 10 15 17 33 23.5 26.4 13.5 10 Income Tax Profit Transportation $/20ft 700 550 440 1,320 1,660 970 1,800 440 Cost container Electricity 7.3 7.4 13.6 6.9 7.4 17.9 11.7 6.9 Cent/kWh Social % of Security/ 8.8 26.7 16.0 7.7 8.7 25.6 14.0 7.6 Payroll Payroll Tax Period of Construction 29 67 26 27 163 193 244 26 Days Permit Energy Supply 28 41 36 68 142 105 254 28 Days Network Export 54 4 4 5 3 2 5Points Assistance IPR 2 3 4 5 4 5 3 5IPRI Points Availability of high high high high Average High Low High Professonals Availability of high high high high Average high Low High Suppliers
Source: Modification made in Byun Hyup Sub (2014)
Macroscopic factors include institutional infrastructure such as labor laws and systems, business-labor relations, attitudes toward liberal policy and culture (Watson, 2001). In the early stages of the SEZ policy, low labor costs and proficiency are regarded most important However with the advancement of industry, effective management of labor force and labor productivity are more emphasized. Social attitudes and the cultures of SEZs can also be important factors, as some countries are concerned about the possibility of damage to the independence of the domestic economy.
Currently, SEZs seem to have three policy priorities. First, it is a large-scale investment in infrastructure, which is fully reflected in the recent adoption of TASED (Territory of Advanced Social and Economic Development) as it includes the modernization of the Trans-Siberian Railway (BSI) and the Baikal-Amur Railway (BAM). TASED aims to expand the infrastructure to improve the export capacity of regional economies. Secondly, it intends to create an internationally competitive corporate environment in order to attract domestic and foreign investment. Therefore, the Russian government’s introduction of TASED can be regarded as the strengthening of existing special economic zones. Thirdly, in recent years, SEZ policies are actively pursuing integration into the Asia-Pacific region and seeking investment promotion and export promotion. It was best shown by the designation of Vladivostok as a free port for internationalization in the Far East region.
66 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ 1.2. Status and Performance of Special Economic Zone in Russia
Russia is seeking to modernize its industry and to move away from the oil-dependent industrial structure. To this end, recognizing that the development of new technologies and attracting foreign investment are essential policy tasks, Russia has set up special economic zones and established related laws.61) Special zones of economic specialization have been established in four categories: industrial production, technological innovation, tourism, logistic services (port and airport) (See Figure 2-1 and Table 2-4).62) It is estimated that the special economic zone has not achieved expected results (job creation and economic growth) with respect to attracting foreign investment mostly because of insufficient infrastructure for business activities.
The TASED (Advanced Development Territory) policy recently adopted by the Russian government is a strong commitment to improve this situation. For example, it has experimentally introduced a new model of SEZs, such as designating Vladivostok as free port for the development of the Far East. Although this policy change is based on reflection of the poor performance of existing SEZ policy, the criticism is that there is no essential difference from existing SEZs. In other words, the policy measures in the development zone are limited to strengthening the SEZ policy and are not based on an objective analysis of the failure factors of the SEZ policy. So one of the main purposes of this chapter is to suggest that the creation of employment in the SEZ will not be attained if the policy remains at the level of complementing existing incentive structure a more fundamental policy shift .
61) 1. Federal Law No. 377 \ _FZ of November 29, 2014 "On the development of the Crimean Federal District and the free economic zone on the territory of the Republic of Crimea and the city of federal significance of Sebastopol," 2. Federal Law No. 104 \ _FZ of May 31, 1999 "On the special economic zone in the Magadan region." 3. Federal Law No. 16 \ _FZ of January 10, 2006 "On the special economic zone in the Kaliningrad region and on amendment of some legislative acts of the Russian Federation" 62) As of the end of July 2016, a total of 34 SEZs are in operation, but the number of SEZs has partially changed in accordance with the Russian government's policy of restructuring SEZs in 2017.
Chapter 02_Regional Development for Job Creation and Business Development 67 [Figure 2-1] Regional Distribution of Special Economic Zones in Russia
Resources: RUSSEZ, Special Economic Zones in Russia http://www.jp-ru.org/5forum/data/alabuga1.pdf
[Table 2-4] Special Economic Zone in Russia (As of July 2016)
Year of Types of SEZs SEZs creation Industrial production SEZs 1. “Lipetsk” 2005 2. “Alabuga” 2005 3. “Togliatti” 2010 4. “Titanium Valley” 2010 5. “Moglino” 2012 6. “Lyudinovo” 2012 7. “Vladivostok” 2014 8. “LOTUS” 2014 9. “STUPINO QUADRAT” 2015 Technology development SEZs 10. “Zelenograd” 2005 11. “St. Petersburg” 2005 12. “Dubna” 2005 13. “Tomsk” 2005 14. “Innopolis” 2012 15. “Istok” 2015 Tourism and recreation SEZs 16. “Altai Valley” 2007 17. “Baikal Haven” 2007 18. “Turquoise Katun” 2007 19. “Gate of Baikal” 2007 20. “Russky Island” 2010 21-29. The tourist cluster in the North 2015 Caucasian Federal District, Krasnodar Territory and the Republic of Adygeya (it includes 9 SEZs)
68 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ [Table 2-4] Continued
Types of SEZs SEZs Year of creation Port SEZs 30. “Zavidovo” 2015 31. “Ulyanovsk” 2009 32. “Sovetskaya Haven” 2009 33. “Murmansk” 2010 Complex SEZs 34. “SEZs in the Republic of Crimea and 2014 (3 federal laws regulate SEZs: Sevastopol” 1999 1. Federal Law No. 377-FZ of November 35. “SEZs in the Magadan Region” 2006 29, 2014 "On the development of the 36. “SEZs in the Kaliningrad Region” Crimean Federal District and the free economic zone on the territories of the Republic of Crimea and the city or federal significance of Sebastopol.” 2. Federal Law No. 104-FZ of May 31, 1999 "On the special economic zone in the Magadan region.” 3. Federal Law No 16-FZ of January 10, 2006 "On the special economic zone in the Kaliningrad region and on amendment of some legislative acts of the Russian Federation”)
Source: Veronika Yu. Maslikhina (2016)
In general, the SEZ policy aims to consolidate production bases of strategic industries by attracting domestic and foreign companies through the provision of infrastructure and incentives centering on specific regions. From this point of view, the Russian SEZ policy reveals far less performance than the desired expectation. According to Byun (2017), "The expected investment plan by the enterprises in the special economic zone was originally about RMB 560 billion, but the actual amount invested so far is only about 188 billion rubles." "The amount of taxes and customs duties paid by private enterprises in the SEZ is only 40 billion rubles, while the tax and tariff exemption and reduction for tenant companies are only 22.6 billion rubles." These results indicate that the SEZ policy does not play a sufficient role in expanding the industrial production of the Russian manufacturing sector, in particular. According to this study, "In fact, as of January 1, 2015, the contribution of beneficiary enterprises to Gross Domestic Product (GDP) in 20 regions of SEZs are actually only 0.2%."
Chapter 02_Regional Development for Job Creation and Business Development 69 [Table 2-5] Regional Job Creation and Employment Rate in Special Economic Zones
Number of jobs created by Workable Population in SEZ Employment Special Economic Zones SEZ residents Region rate 2016.1.1 2015.1.1 2015.1.1 2015.1.1 ОЭЗ ППТ в Республике Татарстан 5 504 5 052 45 571 11,1 ОЭЗ в Липецкой области 3 070 2 751 26 178 10,5 ОЭЗ в Самарской области 283 206 434 577 0,1 ОЭЗ в Свердловская области 81 48 24 552 0,2 ОЭЗ в Псковской области 4 0 23 033 - ОЭЗ в Калужской области 443 128 22 864 - Industrial Production Special Zones 9 385 8 185 576 775 1,4 ОЭЗ в г. Санкт-Петербурге 1 643 966 409 360 0,2 ОЭЗ в г. Москве 2 969 1 062 137 700 0,8 ОЭЗ в Московчкой области 2 310 1 684 44 704 3,8 ОЭЗ в Томской области 1 623 1 474 12 592 11,71 ОЭЗ ТВТ в Республике Татарстан 0 0 14 228 - Technical Innovation Special Zones 8 545 5 186 618 584 0,8 ОЭЗ в Алтайском крае 51 45 14 283 0,3 ОЭЗ в Республике Алтай 15 14 22 829 0,1 ОЭЗ в Ресублике Бурятия 15 13 14 981 0,1 ОЭЗ ТРЗ в Иркутской области 31 30 64 327 0,1 ОЭЗ ТРТ в Приморском крае 0 0 409 480 - Туристический кластер 119 111 681 249 - Tourism Leisure Special Zones 231 213 116 420 0,2 ОЭЗ в Ульяновской области 16 24 6 588 0,4 ОЭЗ в Мурманской области 0 0 214 365 - ОЭЗ в Хабаровском крае 0 0 24 901 - Port Special Zones 16 24 245 854 0,1 Total 18 177 13 608 1 557 633 0,9
Source: Byun (2014)
[Figure 2-2] Regional Distribution of Special Economic Zones in Russia Data: Veronika Yu. Maslikhina (2016)
Data: Veronika Yu. Maslikhina (2016)
70 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ The Russian government also seems well aware of the situation. According to the same study of Byun (2017), the Audit Bureau recommended, "based on the audit results of the special economic zone audit, improvement of the operating system of SEZ is necessary” in April 2016. Also on May 27, 2016, “President Putin made an executive order directing the development of a unified strategy for special economic zone operations, and a mechanism to optimize budget investment and transfer management powers to local governments." Putin also urged "to stop the establishment of a new special economic zone until the development of an integrated approach to the Special Economic Zones and the Advanced Development Zones" and "to shut down the ten inefficient special economic zones in accordance with the findings of the Board of Audit and Inspection.63) The position of the top policymaker in Russia reflects the low performance of the SEZ policy and it is the direct background of the recent TASED policy.
2. Employment Policies on Special Economic Zones in Russia
2.1. Overall Assessment
The main state institutions responsible for human resource development and employment in Russia are:
• Government of the Russian Federation;
• Ministry of Education and Science of the Russian Federation;
• Ministry of Labor and Social Protection of the Russian Federation.
Labor law in Russia protects the interests of workers more than the interests of employers and is characterized by fairly strict obligations of employers to pay wages, to notify workers of job cuts, requirements for the organization of jobs and labor protection, and also especially protects certain categories of workers: pregnant women, single mothers, etc. There is a policy of quotas for attracting foreign specialists. Russia is a country with one of the highest education indicators in the world.
63) As a result, on September 28, 2016, a total of 8 special tourism zones were closed and the area of 2 special tourism zones was reduced. For more information ПРАВИТЕЛЬСТВО РОССИЙСКОЙ ФЕДЕРАЦИИ ПОСТАНОВ ЛЕНИЕ от 28 сентября 2016 г. № 978 "О досрочном прекращении существования особых экономических зон". (Http://government.ru/media/files/Tq2rMpxuJ3YAh0lRm4AFV0rArSLlDMTp.pdf, search date: 2016.10.03.)
Chapter 02_Regional Development for Job Creation and Business Development 71 Education: highest level of education in OECD countries:
• Highly educated labor force
• One of the 7 leading countries by the number of Nobel Prize winners, most prizes awarded for
• achievements in the field of physics
• High level of basic education
• Significant scientific research and technical resources base
• Substantial human capital supporting favorable opportunities for innovative growth.
The World Bank report notes that the United States has a significant share of the highest scores in international student knowledge surveys, but South Korea's performance is the same as that of Germany, and the Russian Federation is slightly inferior to it. The educational system is integrated with the European one: Russia has switched to the Bologna system of higher education. Officially, the decision to apply the principles of the Bologna Convention in Russia was made back in 2003. In 2016, assessing the results of the transition, the Minister of Education Olga Vasilieva stated that the transition in one decade was hasty and led to errors. At the same time, the director of the department of educational programs of the Institute of Education, HSE, Alexander Sidorkin believes that the introduction of a two-tier system of higher education as a whole justified itself, because this allowed Russia to integrate more deeply into the educational process.
During the Gaidar Forum in 2013, a World Bank (WB) report on job creation was presented. New jobs are the foundation for the development of the economy of any country, said Martin Rama, Director of the World Bank's World Development Report-2013 project group. The increase in the number of jobs affects the poverty indicators and labor productivity of citizens. The more jobs the economy can offer, the higher the social cohesion of society and the sense of security of each member. To determine the specifics of the Russian labor market, M. Rama noted, two concepts will fit: "a country with resources" and an "aging country". Countries that have raw material resources often do not form new jobs and do not diversify the economy. In countries with an aging population, overall productivity declines, and additional resources are needed to ensure the working capacity of the population. The WB recommends that such countries provide "high-skilled" employment, which allows workers to stay engaged in the labor process longer. In addition, it is necessary to increase employment in those sectors that are oriented to global markets, rather than to the state support of the labor market.
72 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ A few more conclusions can be drawn from the WB report, said Vladimir Gimpelson, professor at the Higher School of Economics.
• Jobs are one of the key factors in the development of the country, and the state should implement policies that stimulate the creation of jobs. And these jobs should be "good", that is, modern and high-tech.
• The country is to a large extent the kind of jobs it creates.
• The private sector plays a key role in creating jobs.
• Fundamental economic indicators are incredibly important for the labor market.
The fact is that the source of many problems in the labor market is outside this market. That is, it is useless to insist on creating modern workplaces by companies if they do not seek to expand production in the Russian Federation due to the unresolved problems with the protection of property rights, an imperfect judicial system and widespread corruption.
The card of the Russian labor market, Vladimir Gimpelson, calls stable employment and extremely volatile wages. So, even in the post-crisis period (after 2008), as well as in the period of the crisis of 2014-2016, these indicators have been quite low. The unemployment rate at the end of 2016 was 5.4%, in March 2016 – 6% (the same number was observed in January 2013), from November 2015 to February 2016 – 5.8%
The specifics of the labor market can have a historical origin. It should be noted that in the Soviet period parasitism was punishable by law. Even the Constitution of RSFSR of 1918 deprived of political rights persons who lived on unearned income and used hired labor. In 1961 it was adopted by Decree of the Presidium of the Supreme court of the RSFSR "On strengthening the struggle with persons (idlers, parasites, parasites), evading socially useful labor and leading anti-social parasitic way of life", establishing the penalty of exile for lack of work. The struggle against parasitism was conducted prior to the adoption in April 1991 of the law "On employment of population" to abolish criminal responsibility for parasitism and recognized unemployment.
However, experts continue, positive statistics do not reflect the essence of the problems of the Russian labor market. Concerns among experts are, for example, the high rate of liquidation of jobs in Russia. At the same time, new jobs are being created less and less, especially in the manufacturing industry. There is one more peculiarity: private firms organize fewer jobs than state structures. The lack of a mechanism to create new jobs is the main problem of the Russian labor market, says Irina Denisova, a professor at the New Economic School. The quality of jobs depends on the relationship in society, the level of
Chapter 02_Regional Development for Job Creation and Business Development 73 poverty, social cohesion (this figure affects the place of work, the level of wages, and the possibility of access to insurance systems). Negative changes in these areas contribute to lower labor market indicators, adversely affecting the quality of jobs and the economic growth of the country as a whole. A change in the situation on the labor market can only occur through serious reforms, Denisova agrees with Gimpelson, in particular, through improving the investment climate, establishing the rule of law, and supporting competition in the market. One of the ways to stimulate job creation is to support innovative business. The World Bank report notes that a company that has been successfully expanding its staff is usually relatively new, has a small staff and is more inclined to innovate. In general, larger firms are characterized by a more active introduction of innovations and a higher level of productivity. They invest more in machinery. In addition, they are much readier than small companies to develop new product lines, introduce new technologies, open and close enterprises, outsource and create joint ventures with foreign partners. These companies produce more per unit of labor, and also export more. In addition, they pay relatively higher salaries than micro- and small enterprises. Problems in employment are not the same everywhere. The purpose of increasing the number of jobs may be universal, but the types of jobs that can contribute most to development are determined by the conditions of a particular country. In some cases, the most important jobs may be those linking the country's economy with the world economy; in others, the greatest returns are given to jobs that reduce poverty or neutralize conflicts. Undoubtedly, the level of development is also important. The program of action in the field of employment is not the same for an agrarian country and for a country in which the process of urbanization is rapidly developing. And it is quite different in countries that are still trying to figure out the extent to which the official sector of the economy can be expanded. The source of specific problems in the field of employment may be the availability of natural resources, including features of the geographical situation, and the nature of institutions. Countries that have rich natural resources can receive significant revenues in foreign currency, but these revenues may not lead to the creation of jobs in areas other than the exploitation of natural resources. In fact, the abundance of foreign currency can have a negative impact on the competitiveness of other exports. Some resource-rich countries redistribute part of their national wealth in the form of transfers or subsidies to support jobs in the public sector, while unskilled labor remains with migrants. Such an approach can maintain a certain standard of living, but only at the expense of productivity and social cohesion. In such countries, the unremunerated types of employment that contribute to the diversification of exports can bring great development benefits.
74 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ 2.2. Incentive Structure of Employment Policy
Special economic zones are created for the development of regions by the attraction of direct foreign investments and creation of workplaces. The responsibility for creating jobs is in fact borne by the resident company of the SEZ. Moreover, the number and structure of jobs in the company's project is one of the key parameters by which the project of a potential resident is evaluated by the Expert Council when it is deciding to grant the status of a SEZ resident.
The main forms of initiatives and stimulation of jobs creation:
1) Tax incentives (for residents of the SEZ and for companies operating in certain industries).
2) State (federal and regional) programs and grants for the development of human resources and the attraction of highly qualified specialists to Russia.
3) The policy of quotas for attracting highly qualified foreign specialists to work in Russia.
4) The WorldSkills movement is the championship of working professions, and the development based on the movement of competencies necessary for the future professions – FutureSkills.
5) Private initiatives: joint programs of commercial enterprises (including SEZ residents and SEZ management companies, as well as universities) to train students for specific companies.
2.2.1. Tax benefits
In Russia, apart from the personal income tax (which is standard for any person and has a flat rate of 13%, the responsibility for paying it is borne by a specific individual, the employer is a tax agent and performs the functions of calculation and transfer the amount of tax) to the labor remuneration fund also include social contributions that are transferred to the relevant funds. The total social contribution rate is 30%. To date, companies must pay the following fees for their employees and people with whom civil law contracts are concluded:
• Pension Fund of the Russian Federation - 22%.
• The Social Insurance Fund of the Russian Federation - 2.9% (including payments for incapacity for work and maternity).
• The Mandatory Medical Insurance Fund - 5.1%.
Chapter 02_Regional Development for Job Creation and Business Development 75 • Insurance against accidents at work and occupational diseases - 0.2-8.5% (depending on the harmfulness of working conditions).
In accordance with the logic of stimulating the transition of the economy to innovative development and a new technological structure, there are reduced tariffs for social contributions for some categories of payers that are allowed to apply in accordance with Article 58 of Law No. 212-FZ. During the period 2016-2017, the following taxpayers apply reduced tariffs for insurance premiums (8% in the Pension Fund, 2% in the FSS, 4% – in the Federal Financial Monitoring Service, and 14% in total):
• Business associations and business partnerships, application (introduction) of the results of intellectual activity;
• organizations and IPs that have concluded agreements with the management of special economic zones on the implementation of technical and innovative activities;
• organizations and IPs that have concluded agreements on the implementation of tourist and recreational activities and make payments to individuals working in tourist and recreational special economic zones united by a decision of the Government of the Russian Federation in the cluster;
• organizations that carry out activities in the field of information technology.
Residents of technical innovation special economic zones are provided with reduced rates of social contributions with their gradual (by years) increase to the country's new level. This allows residents conducting technical and innovative activities to reduce the tax burden on the Wages Fund and create more high-tech and, therefore, higher-paying jobs. At present, residents' fears are related to the fact that starting from 2017, the social contribution rate for residents of technology-innovative SEZs starts to increase (in 2018 - 21%, in 2019 - 28%). Residents and potential residents note that the privilege on social contributions is an essential factor for making a decision on the localization in the territory of special economic zones of the technical-innovative type. The remaining benefits on social contributions relate primarily to pharmacy organizations, organizations and IPs that apply a simplified or patent taxation system, charitable organizations, non-profit organizations that apply a simplified taxation system that work in the field of social services, scientific development, health, culture and art, ship crews.
The competitive SEZ for the localization of high-tech business in Russia is the Skolkovo development institution. Organizations that received the status of a participant in the Skolkovo project must pay 14% to the FIU, 0% to the FSS, 0% to the FFOMC. According to information for 2016, the corresponding benefits can also be extended to organizations
76 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ from other innovative and territorial clusters, which will significantly worsen the SEZ's position. Because the tax system in Russia is two-tier (federal and regional), and some taxes – for example, income tax, are compound (according to the general order , 2% are transferred to the federal budget and 18% - to the regional budget), regions can compete with each other in terms of reducing regional tax rates for SEZ residents located in a particular region. Social contributions refer to the federal level, and here the initiative of the regions should be supported by either the Russian Ministry of Economic Development or the JSC "SEZ". For JSC "SEZ", the project to reduce tariffs for social contributions for residents of the SEZ can become an image project that allows consolidating the significance for regional management companies, with the proper and successful implementation of this project.
2.2.2. Federal and Region programs
Resettlement of members
The Decree of the President of the Russian Federation dated June 22, 2006, No. 637 "On Measures to Promote the Voluntary Resettlement of Compatriots Living Abroad to the Russian Federation" approved the State Program for the Promotion of Voluntary Resettlement of Compatriots Residing in the Russian Federation to the Russian Federation Abroad (hereinafter referred to as the State Program). The main goal of the State Program is to stimulate and organize voluntary resettlement of compatriots to the Russian Federation on the basis of increasing the attractiveness of its subjects, as well as compensation for the natural loss of population in the country as a whole and in its individual regions by attracting immigrants to permanent residence in the Russian Federation. To achieve the objectives of the State Program, the following tasks should be accomplished:
- the creation of political, socio-economic, organizational conditions, including the provision of necessary information support to facilitate the resettlement of compatriots to the Russian Federation for permanent residence;
-Normative and legal regulation of the process of voluntary resettlement of compatriots to the Russian Federation within the framework of the State Program in accordance with the Constitution of the Russian Federation and federal laws;
- the formation of a mechanism for the organization of voluntary resettlement of compatriots to the Russian Federation, including the monitoring of the composition of possible participants in the State Program, developing , on the basis of a model program of the subject of the Russian Federation to assist the voluntary resettlement
Chapter 02_Regional Development for Job Creation and Business Development 77 of compatriots, projects of the corresponding programs of the subjects of the Russian Federation (hereinafter – regional resettlement programs) Voluntary resettlement of participants of the State Program in accordance with the conditions of participation in it, organization of work with migrants in the constituent entities of the Russian Federation;
- ensuring effective state and public control over the process of resettlement, observing the rights of settlers, fulfilling their obligations and fulfilling the obligations of the Russian Federation.
Regional programs for the development of human resources
Since 2006, on the initiative of Tatarstan’s President Rustam Minnikhanov, the region has been implementing a grant program funded by the Government of the Republic of Tatarstan for the training, retraining and training of citizens in Russian and foreign educational and scientific organizations (currently the Algarysh program). This is the first regional program of its kind in Russia. It simultaneously solves two important tasks of the social and economic development of the Republic of Tatarstan: the preparation and support of the intellectual elite of the republic and the satisfaction of the needs of the republic's economy in highly skilled cadres. Currently, the program provides for financing on a competitive basis the following categories of grantees from Tatarstan:
• Young specialists, graduate students and young scientists under 35;
• Teachers and researchers of universities of the Republic of Tatarstan;
• employees of general education institutions and institutions of primary and secondary vocational education;
• double diplomas;
• educational organizations of higher professional education
•project groups.
• Worldskills
Special attention is paid to the support of talented youth. More than 70% of the total program budget is invested annually for the preparation and internship of specialists, graduate students and young scientists less than 35 years of age. The grant covers the costs of training, accommodation, meals, educational literature, pocket expenses and travel tickets. Over 10 years, the program has invested more than 1 billion rubles. More than 3.4 thousand people were sent to study and practice on priority specialties for the
78 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ national economy. More than 700 of them are based at the leading educational and scientific centers of the world located in the USA, Canada, Australia, Great Britain, Ireland, Germany, France, Switzerland, Sweden, Italy, China and other countries. Through their success in studying, grantees form a positive image of the Republic of Tatarstan in the country and abroad. In 2008, under the program, a subprogram for undergraduates "Nikolai Lobachevsky", implemented jointly with the German Service for Academic Exchanges (DAAD) on parity financing terms. The Association of graduates of the grant program is created, whose activity is primarily aimed at uniting talented people with leadership potential, their self-development and self-realization with the goal of further professional and personal growth for the benefit of society and the republic.
In 2009, the Ministry of Education and Science of the Republic of Tatarstan came up with an initiative to modernize the grant program. The purpose of modernization is to increase the effectiveness of the program administration and to improve the quality of selection of grant applicants. On May 21, 2010, by Resolution No. 398, the Cabinet of Ministers of the Republic of Tatarstan approved a new provision on the grant. By the same decree, the program has obtained its own name – Algarysh. As a result of the changes, a new category of applicants for the grant was introduced – "Workers of educational institutions, educational institutions of primary and secondary vocational education, located on the territory of the Republic of Tatarstan". At the same time, the categories of grant applicants from among the "Heads of ministries, departments and municipalities" and "Top and middle managers of enterprises and organizations, independent members of the Board of Directors of joint-stock companies" were transferred to the Ministry of Economy of the Republic of Tatarstan. In addition, the basic conditions for participation in the competition have changed. In particular, the competition for a grant for a master's degree study is now conducted among applicants who have independently enrolled in the chosen university. Requirements for applicants planning to study abroad with respect to their proficiency in foreign languages have increased - applicants at their own expense and by their efforts pass international language exams. In accordance with the decree, the Ministry of Education and Science of the Republic of Tatarstan together with the Center for Economic and Social Research of the Republic of Tatarstan develops new standards for financial costs associated with the payment of scholarships to grant recipients. The results of the above changes have a positive impact on the quality of the selection of grant applicants, transparency of the competitive procedures, the effectiveness of administering the grant program and spending budget funds.
Since 2010, the Algarysh program has operated a project for the training of educators in
Chapter 02_Regional Development for Job Creation and Business Development 79 the field of "education Management", educating heads of educational institutions of different levels, employees of education authorities in the master's program at the State University - Higher school of Economics (HSE) (Moscow). Upon completion of training, graduates will receive a master's degree in Economics and Manchester University (UK) and a diploma of retraining at the Moscow higher school of social and economic Sciences (MSSES).
The policy of quotas for attracting foreign specialists
A highly qualified specialist (Article 13.2, 115-FZ) is a foreign citizen with work experience, skills or achievements in a specific field of activity, if the conditions of his involvement in labor activity in the Russian Federation involve the receipt of wages (compensation). In the usual case, this is 167 500 rubles a month – a fairly high wage even for Moscow. For residents of the SEZ, reduced requirements for attracting highly qualified foreign specialists are established (on March 8, 2015, Federal Law No. 56-FZ of 08.03.2015, amending article 13.2 of the Federal Law "On the Legal Status of Foreign Citizens in the Russian Federation"):
• For residents of industrial-industrial SEZ (as well as tourist-recreational and port SEZ) – 83 500 rubles per month. This restriction also applies to teachers and researchers, for IT professionals, as well as for highly qualified specialists employed to work in the SEZ. The Republic of Crimea and the city of federal significance Sevastopol
• For residents of technical and innovative SEZs – 58 500 rubles per month. It should be noted that foreign citizens participating in the implementation of the Skolkovo project can be invited to work without taking into account the requirements for the size of wages.
WorldSkills
WorldSkills is an international non-profit movement, its goal is to enhance the prestige of working professions and develop vocational education by harmonizing the best practices and professional standards worldwide through the organization and holding of professional skills competitions, both in each individual country and around the world generally. The founders of WorldSkills Russia are the Ministry of Education and Science of the Russian Federation, the Agency for Strategic Initiatives and the Ministry of Labor and Social Protection. Today in Russia:
• 84 regions of the Russian Federation, joined the movement WorldSkills Russia;
• 177 regional championships (of which 67 regional championships in 2016);
80 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ • 20 qualifying championships for individual competencies (held in 2016);
• 6 semi-finals in 2015, 6 semi-finals and 2 inter-regional championships in 2016;
• more than 30 000 contestants, more than 30 000 experts, more than 100 international experts, 900 000 spectators;
• 4 Finals of the National Championship;
• 3 National championships of end-to-end working professions of Hi-Tech high-tech industries.
In 2016, the Russian national team showed outstanding results. In the 1990s serious changes occurred in the structure of secondary specialized and higher education. In fact, after the collapse of the USSR, professional technical schools (secondary education, work specialties) were transformed into colleges with a significant loss of the quality of education in the working professions. Mission of WorldSkills Russia - "Development of professional competencies, increasing the prestige of highly qualified personnel, demonstrating the importance of competencies for economic growth and personal success". 45 world championship WorldSkills will be held in 2019 in Kazan, Republic of Tatarstan.
2.2.3. Corporate programs with the participation of management companies and residents of the SEZ
Corporate University "Alabuga"
In 2016, a corporate university was established on the basis of the SEZ "Alabuga". By 2023, about 100 factories are planned to be commissioned in the SEZ "Alabuga", qualified personnel with modern knowledge in the field of industrial management are needed. Young specialists with higher or secondary vocational education take part in the program. To participate in the program, candidates pass a professional three-stage selection procedure. In 2016, out of 200,000 potential candidates from the Head Hunter vacancy database, 1,000 participants were selected throughout Russia for online testing by a professional consulting company. Of these, 250 were selected for Skype interviews, the top 50 were invited to participate in business games in the SEZ "Alabuga". Following the results of the multi-stage selection system, 25 students were invited to study at the Corporate University of the SEZ "Alabuga". As a result of the course, 12 students were employed. The training lasts for 3 months and represents a theoretical block, business games and business simulations, an internship both in the management company and at
Chapter 02_Regional Development for Job Creation and Business Development 81 resident enterprises, as well as the final protection of projects. Core competencies included management of industrial projects.
Joint departments of residents with local universities for staff training
In 2011, one of the anchor residents of the SEZ in St. Petersburg, Novartis, signed a memorandum of cooperation with the St. Petersburg Chemical and Pharmaceutical Academy. The parties, with the support of the Committee for Economic Development, Industrial Policy and Trade of St. Petersburg, launched a joint educational project "The Time for New Ideas". According to the Memorandum, the resident and SPFA will develop cooperation in the field of training scientific, medical and pharmaceutical personnel in order to develop high-tech pharmaceutical products and provide high-quality medical services in St. Petersburg. The first project within the framework of the partnership is an annual cycle of lectures and scientific and practical seminars with the participation of leading experts from Novartis under the title Time for New Ideas on the basis of SPCPA. More than 1000 students, graduate students, and research workers from relevant universities and research institutes of St. Petersburg took part in them and gained knowledge in such fields of modern pharmaceutics as molecular diagnostics, mathematical modeling in the development of medicines, vaccinology, etc. The development of cooperation with the scientific community is part of the strategic investment program "Novartis" in Russia totaling $ 500 million, designed for a five-year period. The program, which was announced in December 2010 as part of the signing of the Memorandum of Understanding with the St. Petersburg Administration, includes a comprehensive cooperation aimed at solving three tasks: the organization of local production, cooperation in research and development and the improvement of the healthcare system in Russia.
In May 2011, the resident of the Zelenograd SEZ Plastic Logic started recruiting the first personnel for the under construction plant among MIET students and Zelenograd specialists - the first 25 specialists were to be trained for three months on the basis of MIET, then spend three months in Dresden at the Plastic Logic plant, And the five best "students" were promised to be sent to the company's basic research center at Cambridge University (UK) to form the PL engineering nucleus in Russia. The company planned in 2012 to prepare another 50-60 people: in January 2012, MIET announced the recruitment of students and undergraduates for the professional retraining program "Organic Electronics". The company actually formed the TOR for the preparation of the necessary specialists, MIET included in the program the fundamentals of technological processes for organic electronics. The training was provided by Russian and foreign teachers. The
82 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ training was to be free of charge, without breaking away from basic education, and began in March 2012. The possibility was discussed of launching a small experimental line for the development of organic electronics products within the framework of the development program of the research university. Thus, the cooperation of the resident with the university was not only applied - the training of relevant personnel, but also developed the university's training programs and increased its attractiveness for students. Unfortunately, the resident project did not take place due to changes in the marketing strategy.
Current Situation of Social Facilities
Factors influencing the heterogeneous distribution of social infrastructure objects in specific special economic zones are the following:
• Zones are created in regions with different development potential and different housing conditions.
• Zones by type (industrial-production and technology-innovative) were created in different proximity / remoteness from cities. Traditionally, industrial and production sites are remote from cities, and technical and innovative ones are created practically in the city. For example, the northern site of the SEZ in St. Petersburg is within 5 minutes by car from the city, respectively, from the residential complex being built by the Finnish developer company, as well as from the nearest metro station. Some SEZ of the industrial-production type (for example, SEZ Togliatti) are also created in the immediate vicinity of the city, which solves the issue of social infrastructure.
• Different rates of development of SEZ after their creation. Those zones that develop less actively (for example, SEZ "Titanium Valley") have not yet begun to create social infrastructure.
In fact, the most optimal way was the SEZ Alabuga, creating near the SEZ cottage village "Three Bears" 7 km from the SEZ, a total area of 40.47 hectares with ready-to-move-in cottages and prepared areas for construction. Also for workers of enterprises-residents of the SEZ a residential house for 64 apartments has been erected, for visitors - a guest house. Alabuga International School, a unique educational institution offering international education under the International Baccalaureate program, operates on the territory of the village. The school teaches native English speakers with many years of experience worldwide.
In the SEZ "Dubna" it is also planned to build residential quarters near the left-bank platform to accommodate specialists and their families. At present, the construction of the first multistory cooperative complex is being completed.
Chapter 02_Regional Development for Job Creation and Business Development 83 Innopolis
Innopolis is the project of a new city in the Republic of Tatarstan, which is aimed to unite young highly qualified specialists from all over the country, creating the potential for innovative development of the Russian Federation. The idea of the Innopolis project was born in October 2010. Initially, the project was named IT Village and assumed a maximum total population of up to 50,000 people, but in the process of developing the draft master plan it was decided to develop the project to an IT city with a total population of up to 155,000 people. The economy of the city is based on high-tech industries. Innopolis has created a unique urban environment with modern residential infrastructure, ecology, safe environment, wide opportunities for education and professional development. On June 9, 2012, Dmitry Medvedev, Prime Minister of the Russian Federation, together with the President of the Republic of Tatarstan Rustam Minnikhanov and the Minister of Communications and Mass Media of the Russian Federation Nikolai Nikiforov, laid a capsule with a message to future residents at the launch site of the city. After only three years, on June 9, 2015, the solemn opening ceremony of Innopolis was held - the official start of the life of the new city was given. The territory of the city is 1200 hectares.
The core of the city is the University of Innopolis. The university is engaged in the training of high-level IT specialists, borrowing the experience of the best universities in the world. So, the main Master's program is developed and read together with Carnegie Mellon University. University of Innopolis is a non-state educational institution and does not have budget financing. The university’s development is entirely sponsored through the targeted contributions of sponsors interested in the development of IT education and science, donations of companies, charitable foundations, and individuals; competitive and project sources of financing. University of Innopolis was established on December 10, 2012 as an autonomous non-profit organization. The supreme management body of the ANO "University of Innopolis" is the supervisory board, whose exclusive competence includes the decision of such important issues of the University activity as determining the priority directions of its activities, the principles of the formation and use of its property, the election, control and early termination of the director's powers, approval of the annual report And the annual balance sheet, approval of the financial plan of the University and making changes to it. The presence of a collegiate management body gives sponsors and donors a guarantee of targeted and effective use of the funds received by the university.
In 2013, the first students began to study at the University of Innopolis. In 2014, the city of Innopolis was officially affixed to the map of Russia. Currently, the city has already built all necessary infrastructure, while active construction continues. Infrastructure will
84 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ expand as the city settles in accordance with the urban development plan. As the project initially developed in a complex way and was positioned exactly as a new city, special attention was paid to the creation of modern and high-quality residential and social infrastructure. There are already apartment houses and townhouses in Innopolis. Most apartments are provided to residents on the basis of a lease agreement with all the necessary furniture for life and household appliances. A particular attention is paid to the development of the social infrastructure of the city. In the immediate vicinity of the city there are ski slopes, a snowboard park, shooting range for stand shooting, a golf club, and –there is a sports complex in the city proper. Education in the Innopolis school is operated similarly to educational institutions in the UK: children from lower grades study separately from senior pupils, and the primary school is integrated with the kindergarten. The junior school includes a kindergarten, and the children who go to it really study. Education in junior school (from 2 to 11 years) is designed for the comprehensive development of children, who are taught English at an early age, acting skills, mental arithmetic, robotics and other subjects. In high school (from 12 to 18 years), the training is based on a combination of an international educational program (Cambridge Primary & Secondary Curriculum) and the Russian Educational Program (GEF). In 2016 in Innopolis the Lyceum-boarding school of information technologies was opened at the University of Innopolis. To attract the largest and most promising technology companies to Innopolis, a special economic zone has been created on the territory of the city.
Accommodation in the SEZ "Innopolis" gives a whole set of advantages to resident companies. The key infrastructure facility of the SEZ is the technopark. This is a complex of modern buildings in which all conditions for comfortable work of residents are created. At the moment, residents are housed in the A.S. Popov administrative and business center, designed for 2,200 professionals, a total area of 43,000 square meters. The University of Innopolis is the intellectual core of the new city and a new Russian university specializing in education and research in the field of modern information technologies. The teaching staff consists of leading Russian and foreign experts in the fields of IT and robotics. Educational programs are oriented to the actual needs of business and industry, forming a qualitative flow of specialists for work in resident companies of Innopolis. In September 2016, the number of students was 600 people.
2.2.4. Policy Initiatives for and Constraints against creating social facilities
The Federal Law "On Special Economic Zones in the Russian Federation" of 22.07.2005 №116-FZ stipulates that the placement of housing facilities is not allowed in the special economic zone, except for the tourist-recreational special economic zone. In fact, SEZ is a
Chapter 02_Regional Development for Job Creation and Business Development 85 joint project of the federal center and regions, which are now almost completely transferred to the regional level, with the transfer of powers for management and property of the SEZ to the regions. Thus, it is the region where the SEZ is located that invests in the creation of social infrastructure objects. However, for example, a hotel "Resident-Hotel" was created on the territory of the SEZ "Dubna". The hotel is suitable both for short-term accommodation, and for the permanent residence of employees of the management company and resident companies.
3. Regional Clusters to Attract Business and Create Employment
3.1. Status and Direction of Special Economic Zone Policy
Russia's SEZ policy is a classical approach to regional development through industrial development. This is also typical of regional development policies that have been implemented since the 1950s. Therefore, SEZ policies and successful regional development are important for effective implementation of industry and accompanying trade policy instruments. From a theoretical point of view, industrial policy is to correct market failures through government intervention. It may be natural to focus on industrial policies such as SEZ because there is a consensus that the current industrial structure of Russia needs to be 'corrected' from the perspective of Russian society.
Industrial policy is always considered a high-risk public policy because it implies the possibility of 'government failure'. Regional development and industrial development can interact directly or indirectly, but in a strict sense, the goals of both policies do not necessarily coincide. As described above, in Europe, first-generation regional development policies adopted most industrial policies until the early 1980s, but then shifted toward strengthening regional competitive advantage. Successful implementation of industrial policy is not automatically guaranteed, and even if it is successfully implemented, there is no guarantee that it will lead to the goal of regional development. It is also possible to understand that since industrial policy itself involves a number of risk factors, European regional development policies have shifted from industrial policy approaches to emphasizing endogenous growth since the 1980s (Bachtler And Yuill, 2001)
In addition to the Russian special economic zone policy, the newly developed regional policy of industrial and regional development can be defined as a functional approach such as infrastructure construction and tax benefits. The evaluation of this approach is not
86 2016/17 Knowledge Sharing Program (Industry & Trade) with Russia RUSSEZ premature yet, but it seems to be insufficient to evaluate positively. First of all, it is because Russia's industrial policy is limited not only by industrial structural characteristics but also because of lack of appropriateness of policy instruments. The following section examines the effectiveness of the SEZ policy as an industrial policy and examines how the characteristics of the Russian economic structure limit the policy effect.
3.1.1. Special Economic Zone Policy as Industrial Policy
The advancement of the industrial structure goes through the process of nurturing manufacturing industry. It does not necessarily mean that the development of manufacturing industry can be identified with economic development. However, securing a certain level of manufacturing sector seems to be a necessary condition for economic development in most countries. After the Industrial Revolution, it seems that there is little controversy considering the process of capital formation in developed countries, the industrialization of late developed countries such as the United States of America, and the growth process of Asian emerging industrialized countries after the Second World War. In the latter half of the 20th century, China and India have been successful in economic growth because they succeeded in developing manufacturing industries and in securing export capabilities.
According to Han (2015), "Another important aspect to be emphasized in the industrialization process is the necessity of strengthening the relationship between overseas outsourcing and international division of labor between countries taking advantages of forward and backward linkage effects. This phenomenon is particularly apparent in the relatively rapid growth of trade in intermediate goods and parts between developed and developing countries (Das and Han, 2013). The study by Das and Han (2013) notes that "this tendency has occurred naturally in the process of generalization of the trade in tasks (fragmentation) of the production process". In other words, the international tendency to deepen the international production and division of labor means that the Russian industry must be effectively integrated into the global value chain in order to effectively develop the manufacturing sector.
As with all public policies, in order to achieve the policy objective of the special economic zone policy as an industrial policy, policy resources must be sufficiently developed and effectively channeled into the policy object.