Characteristics of Industrial R&D in Korea International Workshop on Research & Innovation in South Korea Jae-ik Choi, Ph.D. Korea Industrial Technology Association 1

Contents I. Current Status of Industrial R&D 1. Industrial R&D History 2. Features of Industrial R&D 3. Features of Industrial R&D Centers 4. Major Achievements II. Industrial R&D Support 1. Tax Credit 2. Manpower 3. Financial Support III. Problems & Policy Directions 1. Problems & Challenges of Korea’s Industrial R&D 2. R&D Trends in Industry 3. Policy Directions IV. Government’s Policies to Attract Foreign R&D Centers 1. Foreign Direct Investments in R&D 2. Incentives for Foreign Direct Investments in R&D 2

I. Current Status of Industrial R&D 3

1960~ 70’s KIST(1966), Ministry of S&T(1967) Technology Development Promotion Law(1972) KOITA(1979) 1980’s National R&D programs and Accreditation system of industrial R&D centers(1981) Industrial R&D support policy launched - Tax credit on R&D(1981), Military service exemption(1981), Customs duties credit(1983) 1990’s Increase in the number of R&D centers Venture Promotion Act(1996): Surge of Venture Companies’ R&D centers 2000’s Industry becoming the core of NIS(10,000, 75% of national R&D) Foreign R&D centers’ increase(134) Industrial R&D History 4

Total(A) Industry(B) 74.9% B/A(%) R&D Investments by Industry in US 100million dollars Features of Industrial R&D Autom obile Electro nics Subtotal Mechanical appliances Food proces sing Chemi cal Others Amount 1.0 Textile 3.3 Other manufa cturing 100.0% Total in US 100million dollars R&D Spending by Manufacturing Sector(2002) 5

Korea Country R&D Intensity of Industry(R&D/Sales) (%) USJapanGermanyKorea International Comparison 3.6%(1999)3.99%(2002)3.90%(1999)2.51%(2002) Features of Industrial R&D 6

Others (%) BA(%) MA(%) Ph.D.(%) By degree B/A % Industrial R&D personnel(B) Total R&D manpower(A) 65,249(55.2)61,437(55.2)51,594(54.7)41,191(60)27,414(70.8)14,280(75.2)5,685(79.3) 37,596(31.8)33,288(29.9)29,166(30.9)20,450(29.8)8,822(22.8)3,594(18.9)612(8.5) 7,324(6.2)6,932(6.2)5,351(5.7)3,373(4.9)1,139(2.9)251(1.3)79(1.1) 62.2% 59.0%53.5%54.9%45.8%34.6% 118,160111,29994,33368,62538,73718,9967,165 3,611(5.3) 128, ,362(3.5) 70, (4.6) 41, (11.0) 20, ,888178,937159,973 9,642(8.7) ,991(6.8) ,222(8.7) 2000 Korea’s R&D Manpower Features of Industrial R&D 7

SMEs Five or more BA or higher degree holders in science and engineering - Two or more researchers for venture companies’ R&D centers LARGE Ten or more BA or higher degree holders Manpower requirements Independent R&D facilities(including space and R&D equipments) necessary for R&D activities - Space should strictly be seperated by the wall Physical Requirements Features of Industrial R&D Centers Eligibility of Industrial R&D Centers 8

Features of Industrial R&D Centers Rapid Growth of Industrial R&D Centers 9

Concentrated on Electrics & Electronics(ICT) 5,573 / 57% of the total Concentrated in the metropolitan areas 7,140 / 73% Features of Industrial R&D Centers SME research centers 8,927 / 91% 10

Market share - 5% (No.5)Steel Market share - 33% (No.1)Shipbuilding CDMA Mobile Phones - No.1ICT DRAM - No. 1 since ’98Semiconductor Market share – 5.5% (No.6) Market Share in the Global Market Automobiles Competitiveness of Korea’s Major Industries Major Achievements 11

II. Industrial R&D Support 12

Tax Credit  Reserve  Reserve 3~5% of profit for future research and manpower development  Tax deduction of either 15% of research and manpower development costs occurred in the taxation year or 50% of the excess of the average research and manpower development costs for the last four years  Deduction of 7% of facility investment for R&D  80% deduction of custom duties imposed on research equipment imported for R&D  Exemption of local taxes including acquisition and registration tax on real estate for R&D  Income tax exemption for foreign R&D personnel  Reserve  Reserve 3~5% of profit for future research and manpower development  Tax deduction of either 15% of research and manpower development costs occurred in the taxation year or 50% of the excess of the average research and manpower development costs for the last four years  Deduction of 7% of facility investment for R&D  80% deduction of custom duties imposed on research equipment imported for R&D  Exemption of local taxes including acquisition and registration tax on real estate for R&D  Income tax exemption for foreign R&D personnel Tax Credit 13

Manpower   Exemption from military service duties for young researchers (MA & Ph.D degree) (2~3,000 a year) employed at accreditated industrial R&D centers   Exemption from military service duties for young researchers (MA & Ph.D degree) (2~3,000 a year) employed at accreditated industrial R&D centers Manpower & Financial Support Financial Support  Direct funding through national R&D programs   Loan from Public Funds : Science Technology Promotion Fund, Information Promotion Fund  Venture Capitals : KDB Capital, Kibo Technology Advancing Capital, Korea Technology Credit Guarantee Fund   Loan from Public Funds : Science Technology Promotion Fund, Information Promotion Fund  Venture Capitals : KDB Capital, Kibo Technology Advancing Capital, Korea Technology Credit Guarantee Fund 14

III. Problems & Policy Directions 15

3~6 yearsUS Japan25%NT 3~5 yearsUS UK60%BT 2~3 yearsUSJapan60~70%IT 40~50% Korea’s Tech Level US Germany Reference Country(100%) 4~5 yearsET Time required to catch up KISTEP(Korea Institute of S&T Evaluation & Planning) Korea’s Technology Level : A comparison with Advanced Countries Problems & Challenges of Korea’s Industrial R&D 16

Number of World’s Top Products by Country of Origin KOTRA(Korea Trade-Investment Promotion Agency), Trade Focus Problems & Challenges of Korea’s Industrial R&D 17

□ Accelerating Hollowing-out of Manufacturing Industries - Approximately 65% of manufacturing firms are planning or considering moving their production plants overseas, while maintaining core R&D operations at home(KOITA Survey) Problems & Challenges of Korea’s Industrial R&D 18

 R&D Drive Geared to the Development of Ten Technologies  R&D Drive Geared to the Development of Ten Technologies Focus on the development of ten growth industries  Utilization of Global R&D Resources, including Research Manpower, Information and Financial Resources  Utilization of Global R&D Resources, including Research Manpower, Information and Financial Resources Global sourcing of R&D Resources  Strengthening Int’l Tech Cooperation and Promotion of Off-shore R&D Activities - Large companies prefer collaboration with global companies while SMEs with domestic universities  Strengthening Int’l Tech Cooperation and Promotion of Off-shore R&D Activities - Large companies prefer collaboration with global companies while SMEs with domestic universities Global Networking R&D Trends in Industry  2004 Survey of Korean Industries - R&D Investment - Increase(53.5%), No change(41.2%) Decrease(4.5%) - R&D Manpower - Increase(51.1%), No change(45.8%) Decrease(2.6%)  2004 Survey of Korean Industries - R&D Investment - Increase(53.5%), No change(41.2%) Decrease(4.5%) - R&D Manpower - Increase(51.1%), No change(45.8%) Decrease(2.6%) Enlargement of R&D Investments & Manpower 19

□ Fostering Next Generation Growth Engines ○ Development of 10 New Growth Industries ― To plan and coordinate the development of the new growth industries, special committee was established under the National Science & Technology Council(NSTC) ○ Link advanced new technologies to the development of the traditional industries Policy Directions 20

10 Strategic Industries – Next Growth Engines(Examples) Policy Directions 21 Next generation semiconductor Next generation fuel cell Future Automobiles Intelligent Robotics Digital TV/ Broadcasting Next generation Mobile Communication Intelligent Home Networks Display Digital contents/SW Solutions Bio/New Medicine

□ Promotion of Basic Research ○ Increase the share of basic research in national R&D budget ― 19.5%(’03) → Over 25% by 2007 ○ Upgrading university capability to a world-top level □ Facilitating the Commercialization of Public R&D Results ― Tech. transfer to private sector ― Increase of the budget to support technology transfer from 1.1% to 3~5% of public R&D budget Policy Directions 22

□ Rearing Core R&D Personnel ○ Fostering S&E Workforce ― S&T Graduate School ― Establishment of Northeast Tech. Management Graduate School ○ Promotion of Science & Engineering Education ― Strengthening special education for young talents ― Linking university education to research ― Funding support to Post-Docs studying abroad ○ Promotion of Job Creation for S&E Graduates ― Salary support for the Ph.Ds and MAs newly employed by SMEs ― Tech training given to SMEs’ R&D managers and researchers □ Attract Foreign R&D Centers Policy Directions 23

IV. Government ’ s Policies to Attract Foreign R&D Centers Attract Foreign R&D Centers 24

The number of R&D centers which invested more than 100,000 US dollars is 932 as of The number of 100% foreign-invested R&D centers is 134 as of R&D center By nation 56(41.8) 49(36.6) 16(11.9) 13(9.7) USA Europe Japan Others By Industry 58(43.3) 35(26.1) 20(14.9) 21(15.7) Electronics Chemistry Machinery Others Total134(100.0)Total134(100.0) Foreign Invested R&D Centers in Korea Foreign Direct Investments in R&D 25 Pateur Research Institute concluded an agreement with KIST(2003) to set up a branch lab within KIST Cavendish Research Center will also come to Korea

Financial Support   CASH GRANT will be provided to new foreign investors who invest over US$10 million dollars in high-tech industries or US$ 5 million in R&D facilities (Comprehensive Plan to Attract Foreign Investment)   CASH GRANT will be provided to new foreign investors who invest over US$10 million dollars in high-tech industries or US$ 5 million in R&D facilities (Comprehensive Plan to Attract Foreign Investment) Incentives for Foreign Direct Investments in R&D Tax Benefits   Income Tax & Corporate Tax – 100% deduction for the first seven(7) years and 50% for additional three (3) years  Acquisition Registration Property Land Tax - 100% deduction for the first five(5) years and 50% for additional three (3) years  Tariff Special Excise Tax VAT – 100% exemption within three(3) years after the report of the R&D equipments is made   Income Tax & Corporate Tax – 100% deduction for the first seven(7) years and 50% for additional three (3) years  Acquisition Registration Property Land Tax - 100% deduction for the first five(5) years and 50% for additional three (3) years  Tariff Special Excise Tax VAT – 100% exemption within three(3) years after the report of the R&D equipments is made 26

Special Zones   Incheon Metropolitan City, Busan Metropolitan City and Gwangyang City designated as Free Economic Zone wherein foreign companies and R&D centers are fully exempted from various taxes for three years and 50% of taxes for additional two years.   Ochang 165,290 square meter(40.5 acre) → 495,870 square meter(121.5acre) : Jinsa(330,580 square meter(81 acre) → 495,870 square meter(121.5acre) (75~100% Discount in Lease)   Easing existing regulations More than US $ 50 million for one company → More than US $ 30 million for several companies(100% Discount in Lease)   Masan, Iksan, Gunsan and Daebul designated(100% Discount in Lease)   14 Science Industrial Parks including Daedeok Science Town   Incheon Metropolitan City, Busan Metropolitan City and Gwangyang City designated as Free Economic Zone wherein foreign companies and R&D centers are fully exempted from various taxes for three years and 50% of taxes for additional two years.   Ochang 165,290 square meter(40.5 acre) → 495,870 square meter(121.5acre) : Jinsa(330,580 square meter(81 acre) → 495,870 square meter(121.5acre) (75~100% Discount in Lease)   Easing existing regulations More than US $ 50 million for one company → More than US $ 30 million for several companies(100% Discount in Lease)   Masan, Iksan, Gunsan and Daebul designated(100% Discount in Lease)   14 Science Industrial Parks including Daedeok Science Town Incentives for Foreign Direct Investments in R&D 27

Improve Living Environment including Traffic, Housing, Medical Service, Education, Culture and Leisure □ Encourage the establishment of foreign schools - Expand tax benefits for donations made to foreign schools - Process will be made easier to support foreign schools or other necessary facilities □ Physical facilities : Guest houses for foreign researchers, Cultural centers, etc. □ Deregulations on immigration processes for foreign researchers Incentives for Foreign Direct Investments in R&D 28

□ Supply of qualified human resources - Establish the Northeast Asian Technology Management University to support qualified human resources to foreign investors - Allocate greater quotas of military service-exempted research personnel to foreign investors □ Establishment of one-stop service system - 『 Korea Foundation for International Cooperation of Science and Technology 』 (KICOS) and 『 Invest Korea 』 Other Incentives Incentives for Foreign Direct Investments in R&D 29