South Korean economic regulators recently decided on extra incentives for companies as part of federal reshoring initiatives in response to rising global geopolitical risks. In the latest policy news for 2024, the Ministry of Economy and Finance said would-be reshorers will become eligible for 100 billion won ($76.2 million) when they stop shipping jobs and return to local production. The regulators also raised incentives for tech firms and foreign-based manufacturers.

While the recent initiatives are welcome, they must be accompanied by regulatory and labor reforms to effectively trigger a reshoring trend.

The conventional wisdom was that it is in the companies’ interest to invest in markets with cheaper labor and access to larger economies. But the recent geopolitical shifts have changed the way companies do business. In addition to Russia and Ukraine gearing up for a long war, the escalating tug-of-war between the United States and China has forced Korean companies to withdraw their operations from Russia and China, prompting them to explore alternative investment partners like India and Vietnam.

In the face of such dynamics, the Korean government should implement landmark policies like the U.S. Inflation Reduction Act (IRA) to incentivize companies to reshore production back to their home country.

Large multinational companies are now subject to a 15 percent global minimum corporate tax for the first time from Monday onwards, as the landmark cross-border tax reform takes effect. The new tax code will likely make companies that ship jobs overseas for lower corporate taxes and more profits consider backshoring as an option. In a 2018 survey conducted by the Korea Economic Research Institute on offshoring companies, over half of the respondents identified challenges such as limited labor market flexibility and tightened regulations as hurdles to backshoring.

These challenges remain even today. To foster the reshoring of companies, sweeping regulatory and labor reforms, including lifting a cap on weekly work hours and restrictions on factory locations, are needed to encourage more companies to reshore and stay competitive.

By Editorial Team

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