Korea Falls Behind in Money...Urgent Need for Drastic Deregulation [Semiconductor Support]

② Semiconductor Support... Still Insufficient?

U.S. Semiconductor Support Act Federal Subsidy Allocation Plan by Sector
(Table: Korea Institute for Industrial Economics and Trade)

[Asia Economy Reporter Park Sun-mi] Following the announcement of the strategy to become a semiconductor superpower last month, and the enforcement of the National Advanced Strategic Industry Special Act starting this month, Korea's support is still far from sufficient compared to other countries equipped with direct subsidies and exceptional tax benefits. If practical regulatory easing measures, such as speeding up permits and approvals for semiconductor industrial complex development, are not accompanied, there is growing concern that Korea may fall behind semiconductor competitors who receive substantial government subsidies and sequentially operate new factories in 2024-2025.

According to the Korea Institute for Industrial Economics and Trade and the semiconductor industry on the 9th, the U.S. Chips and Science Act passed last month includes a total investment of $52 billion (68 trillion KRW), providing $39 billion in direct subsidies over five years until 2027 for semiconductor manufacturing facility construction, and investing $11 billion in advanced semiconductor R&D such as the National Semiconductor Technology Center and advanced post-processing production programs.

The funds required to implement the Chips and Science Act will be executed through four newly established funds, jointly managed by the Department of Commerce, the Department of Defense, the State Department, and others. Separately, the Semiconductor Promotion Act applies a 25% tax credit on semiconductor facility and equipment investments. The tax credit benefit amounts to $24 billion over ten years and can be prepaid.

In contrast, the Korean government's strategy to become a semiconductor superpower focuses on supporting semiconductor companies to invest more than 340 trillion KRW by 2026 through infrastructure and regulatory improvements rather than providing large-scale direct subsidies like the U.S. For example, regulatory easing such as increasing the semiconductor floor area ratio from 350% to 490%, up to 1.4 times, aims to maximize the allowable expansion of facilities (fabs) on limited land, enabling companies to maximize efficiency. Tax support benefits include raising the corporate semiconductor facility investment tax credit rate for large companies from the existing 6-10% to 8-12%, a 2 percentage point increase, but this is still far below the U.S. rate of 25%.

Belatedly, the ruling party, the People Power Party, proposed the Semiconductor Industry Competitiveness Enhancement Act, which extends the tax credit period for facility investments in national advanced strategic industries such as semiconductors to 2030, and increases the tax credit for large companies from 6% to 20%, for mid-sized companies from 8% to 25%, and for small and medium enterprises from 10% to 30%, aiming to balance tax support benefits with competing countries. However, political controversy over reduced tax revenue has intensified, making passage difficult.

There are even concerns that semiconductor companies might prioritize the U.S. as their primary production base. With rising interest rates and inflation increasing companies' facility investment costs, if there are many direct government subsidies or tax benefits for building or expanding new semiconductor production facilities, there is little reason to choose Korea, which has various regulatory barriers.

In fact, other Asian countries besides Korea are also offering bold government support measures to secure leadership in the semiconductor competition.

The Japanese government urgently allocated a large subsidy of 774 billion yen (7.4 trillion KRW) through a supplementary budget last year to actively support semiconductor companies, and is carefully supporting foreign companies investing domestically, such as providing about 40% of the total investment cost, approximately 4.5 trillion KRW, to TSMC's Kumamoto Prefecture factory. Taiwan has operated about 150 government-supported semiconductor production projects over the past decade and applies a 15% tax credit rate for semiconductor R&D. China aims to increase its semiconductor self-sufficiency rate from only 10-30% to 70% by 2025 and exempts corporate tax for advanced process semiconductor companies for 10 years.

Kyung Hee-kwon, a research fellow at the Korea Institute for Industrial Economics and Trade, said, "The U.S. expects to close the cost gap of advanced semiconductor manufacturing by about 40% compared to companies located in Asia when combining direct subsidies and tax credits," and advised, "To complement Korea's weakened policy support due to the massive U.S. subsidies, regulatory easing measures such as speeding up permits for new advanced semiconductor manufacturing facilities should be pursued more aggressively."

The Korea Institute for International Economic Policy also stated in its report on the U.S.-China semiconductor hegemony competition and global supply chain restructuring, "The U.S. provides subsidies for R&D and securing technology supply chains to revive the semiconductor manufacturing industry, and China is inducing massive investments in the semiconductor sector to reduce dependence on semiconductor imports and supply chain risks," adding, "Along with the government's K-semiconductor development strategy, urgent measures include expanding R&D personnel, establishing a comprehensive semiconductor research institute, supporting semiconductor factory locations in the metropolitan area, and improving regulations."