1. Characteristics of Industrial R&D in Korea International Workshop on Research & Innovation in South Korea 2003. 3. 4. Jae-ik Choi, Ph.D. Korea Industrial Technology Association 1

2. 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

3. I. Current Status of Industrial R&D 3

4. 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

5. 76.2 124.8 95.1 2001 70.9 46.7 33.1 1990 65.4 13.9 9.1 1985 41.1 5.2 2.1 1981 144.3 108.1 122.5 90.7 121.9 89.1 Total(A) Industry(B) 74.9%74.073.1B/A(%) 199520002002 R&D Investments by Industry in US 100million dollars Features of Industrial R&D 14.8 13.7 Autom obile 53.4 49.4 Electro nics 83.4 77.1 Subtotal Mechanical appliances 1.8 1.7 Food proces sing 10.5 9.7 Chemi cal 15.2 14.0 Others 92.63.11.0Amount 1.0 Textile 3.3 Other manufa cturing 100.0% Total in US 100million dollars R&D Spending by Manufacturing Sector(2002) 5

6. 2.51 2002 2.57 1997 2.51 1995 2.02 1991 2.372.15Korea 19952000Country 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

7. 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) 128,315 1995 1,362(3.5) 70,503 1990 871(4.6) 41,473 1985 789(11.0) 20,718 1981 189,888178,937159,973 9,642(8.7) 2001 7,991(6.8) 2002 8,222(8.7) 2000 Korea’s R&D Manpower Features of Industrial R&D 7

8. 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

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

10. 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

11. 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

12. II. Industrial R&D Support 12

13. 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

14. 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

15. III. Problems & Policy Directions 15

16. 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

17. 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

18. □ 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

19.  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

20. □ 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

21. 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

22. □ 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

23. □ 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

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

25. The number of R&D centers which invested more than 100,000 US dollars is 932 as of 2003. The number of 100% foreign-invested R&D centers is 134 as of 2003. 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

26. 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

27. 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

28. 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

29. □ 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