(ADB) Economic Corridor in Sri Lanka

Support for Development of the Colombo-Trincomalee Economic Corridor in Sri Lanka
2016/17 KSP-ADB Joint Consulting Project :

2016/17 KSP-ADB Joint Consulting Project :
Support for Development of the
Colombo-Trincomalee Economic Corridor
in Sri Lanka
Ministry of Strategy and Finance, Republic of KoreaⅠGovernment Complex, Sejong, 30109, Republic of Korea www.mosf.go.kr
The Export-Import Bank of KoreaⅠ38 Eunhaeng-ro, Yeongdeungpo-gu, Seoul, 07242, Republic of Korea www.koreaexim.go.kr
2016/17 KSP-ADB Joint Consulting Project
Project Title Support for Development of the Colombo-Trincomalee Economic Corridor

in Sri Lanka
Prepared by Korea University, Ajou University, Dongguk University
Financed by Ministry of Strategy and Finance, Republic of Korea
Supported by The Export-Import Bank of Korea (Korea Eximbank)

- Seung Ho Sohn, Director General
- Jae Jeong Moon, Director of KSP Team
- Yu Shin Kim, Senior KSP Specialist of KSP Team
- Sun Young Lim, Researcher of KSP Team
Asian Development Bank (ADB)
Prepared for Ministry of Land, Sri Lanka

State Ministry of Industry & Western Development, Sri Lanka
Ministry of Development Strategies and International Trade, Sri Lanka
Project Manager Hong Shik Lee, Korea University
Researchers Moon Sung Kang, Korea University

Sei yong Kim, Korea University
Han Sung Kim, Ajou University
Back Hoon Song, Dongguk University
Jong Wha Lee, Korea University
Keun Hee Park, Korea University
Jun Yun Kim, Korea University
Kyeong Eun Lim, Korea University
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Contents 2016/17 KSP-ADB Joint Consulting Project
Summary
Ⅰ. Project Overview ·········································································································· 1

1. Project Background and Objective ······························································································1
2. Project Activities and Expected Results ·····················································································2
3. Project Implementation Plan ··········································································································3
Ⅱ. Urbanization Strategy ································································································· 5

1. Current Status and the Future of the Urbanization of Sri Lanka ····································5
2. The Development of Korea's National Regional Plan ·························································10
3. Emergence and Growth of Industries and Industrial Comples ········································21
4. Policies for Industrial Complex Planning System ··································································40
5. Frameworks for Urbanization and Regional Planning ·························································57
6. Future Policy Recommendation for Enhancing Sri Lanka Urbanization ························61
Ⅲ. Improving Trade Facilitation: Implementation of Single Window System: ··· 72

1. Customs Procedure in Sri Lanka ·······························································································72
2. Development of Korean Customs Administration ·································································83
3. Implementation of Single Window System ·············································································90
4. Policy Recommendation ··············································································································106
Ⅳ. Strategies to Attract Foreign Investors ···························································· 113

1. Current State of Sri Lanka ········································································································115
2. Korea's FDI Polic ··························································································································116
3. Determinants of FDI Location from Perspectives of Korean MNCs ·····························125
4. Korea’s Policies to Utilize Trade Agreements to Make Korea Investor-Friendly ·····138
5. Policy Recommendation ··············································································································146
Ⅴ. Strengthening the Competitiveness of Sri Lanka SMEs through

Participation in GVC ······························································································ 155
1. Introduction ·····································································································································155
2. SME Status and GVC Participation in Sri Lanka ································································156
3. Competitiveness Enhancement through Korean SME's Participation in GVC ···········161
4. Policy Suggestions ························································································································170
Ⅵ. Conclusions and Suggestions ·············································································· 172
References ························································································································ 174
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List of Tables
Table 1 Global Competitiveness Index, Infrastructure Rankings ·········································6

Table 2 Population Statistics and Population by Major Cities ············································8
Table 3 Table of Summary Outlining the Transition of CNTP ·········································20
Table 4 Increase in Urban Population ······················································································21
Table 5 Types of Industrial Sites ·······························································································24
Table 6 Specialized Industrial Complexes for Each Business Category ·························27
Table 7 Operation Status of Ulsan National Industrial Complex ·····································30
Table 8 Operation Status of Changwon National Industrial Complex ····························32
Table 9 Five New Towns in Capital Region for Housing Provision ································36
Table 10 Changes in Industrial Location Policy and Related Institutions ························41
Table 11 Site Selection and Validation Procedure for Industrial Complex
Development ·····················································································································42
Table 12 Osong BioHealth Science Technopolis Support Centerfacilities
and areas ···························································································································45
Table 13 Stages of Development of Industrial Complexes ··················································47
Table 14 Land use planning procedures ···················································································48
Table 15 Estimating demand for commercial area ································································48
Table 16 Estimating demand for industrial area ····································································49
Table 17 Standards for green space ··························································································50
Table 18 Land Pooling/Readjustment Index ·············································································52
Table 19 Considerations for Supply Planning ···········································································54
Table 20 Spatial Use Assessment Criteria by Items/Functions ··········································60
Table 21 The Basic Guideline ········································································································64
Table 22 LPI Country Comparison ·······························································································73
Table 23 Documents and Agencies Needed for Imports and Exports against
Japan in Sri Lanka: Case Study ·················································································75
Table 24 Korea Customs Service UNI-PASS Exporting Log ··············································102
Table 25 Economic Impact of Implementation of UNI-PASS ············································105
Table 26 Share of the Total FDI Inflows over Sectors ······················································118
Table 27 Share of the Total FDI Inflows over Teypse ·······················································119
Table 28 FDI Tax Support: Reductions of National and Local Taxes ····························122
Table 29 Free Economic Zones in Korea ················································································124
Table 30 Korea’s Investment in Vietnam ················································································126
Table 31 Stages and Characteristics of Korean Investment in ASEAN ·························127
Table 32 Samsung’s Capacity to Produce Mobile Phones over Plants in Countries ·····128
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Table 33 Samsung Electronics’ Subsidiaries in Vietnam ····················································129

Table 34 FTAs in Korea ················································································································138
Table 35 Investment Chapters in Selected FTAs in Korea ················································145
Table 36 Export Processing Zones and Industrial Parks in Sri Lanka ···························151
Table 37 Sri Lanka Small Business Classification Standard ··············································156
Table 38 Sri Lanka's Business Statue ······················································································157
Table 39 Status of Sri Lanka Production, Employment by Industry ······························157
Table 40 Sri Lanka Export Promising Industry ······································································159
Table 41 Change of Korea's Value-Added Exports ·····························································162
Table 42 The Change of Value Added Ratio of Foreigners Generated by Exports
by Industry in Korea ····································································································164
Table 43 Korea Small Business GVC Participation Support Program ·····························166
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List of Figures
[Figure 1] Pattern of Annual Nighttime Light Growth of New Delhi and Colombo ····7
[Figure 2] The Paradigm Shift in Urban Planning and Development System ············12
[Figure 3] The formation of industries along the road network and the 1st CNTP ····14
[Figure 4] The 2nd CNTP ·············································································································15
[Figure 5] The 3rd CNTP ···············································································································16
[Figure 6] The 4th CNTP ···············································································································17
[Figure 7] The (7+1) National Territorial Structure and the π Structure ··················18
[Figure 8] Timeline of Industrial Belts of Korea ···································································22
[Figure 9] Gyeongbu Expressway of Korea, main industrial complexes and
regional clusters ··········································································································23
[Figure 10] Strategic Industrial Clusters by Region ·······························································25
[Figure 11] Ulsan National Industrial Complex ········································································28
[Figure 12] Drawing of Ulsan Urban Planning ········································································29
[Figure 13] Drawing of Changwon Urban Planning (1977) ················································31
[Figure 14] Changwon National Industrial Complex Urban Planning ·······························31
[Figure 15] Urban Planning of Gumi National Industrial Complex ···································34
[Figure 16] The of the 4th Industrial Complexof Gumi ·························································35
[Figure 17] Location of New Cities that Surround the Metropolis (Seoul) ···················38
[Figure 18] Examples of Specific Industries (LQ) by Specific Regions ···························43
[Figure 19] Osong BioHealth Science Technopolis District Unit Planning and
the Aerial View ···········································································································45
[Figure 20] Iksan National Food Cluster District unit planning and the aerial view ··46
[Figure 21] Infrastructure Planning (diagram) ·········································································53
[Figure 22] Smart Management (diagram) ··············································································55
[Figure 23] Decision-making Processes in Industrial Area Designation ··························57
[Figure 24] The System and Hierarchy of the National Territory Plan ··························63
[Figure 25] Land Use Pattern for Different Types of Industrial Complexes ··················68
[Figure 26] An Example of Division between Industrial Area and the Urban ··············69
[Figure 27] Diagram for Achieving Smart City Principles ····················································71
[Figure 28] Comparison of Sri Lanka’s LPI by category: 2014 ·········································74
[Figure 29] Sri Lanka’s Export Procedure ·················································································78
[Figure 30] Sri Lanka’s Import Procedure ·················································································80
[Figure 31] Tea Exporter with ASYCUDA World ·····································································81
[Figure 32] Flow of Cross-Border Trade before and after Single Window ···················91
[Figure 33] Customs-Oriented Single Window ········································································93
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[Figure 34] Single Window Infrastructure Model ····································································94

[Figure 35] Logistics Single Window Model ·············································································95
[Figure 36] Logistics Single Window Model ·············································································96
[Figure 37] Logistics Single Window ···························································································99
[Figure 38] Improvement of Customs Procedure after Implementation of
UNI-PASS ····················································································································103
[Figure 39] Changes in Trade Volume, the Number of Overseas Travelers and
Customs ·····················································································································104
[Figure 40] Survey Result regarding Satisfaction of Korea’s Customs Procedure ···· 105
[Figure 41] Connectivity through Single Window ·································································106
[Figure 42] Gradual Construction of Korea’s Single Window System ···························110
[Figure 43] Single Window Service Provider ·········································································111
[Figure 44] FDI Inflows in Sri Lanka ························································································113
[Figure 45] Korea’s FDI Performance ·······················································································117
[Figure 46] Korea’s FDI Promotion Regime ···········································································120
[Figure 47] Korea’s One-Stop Solution System ···································································121
[Figure 48] Application for Cash Grants ·················································································123
[Figure 49] Vietnam’s Exports over Ownership ····································································133
[Figure 50] Value Added Ratio of Foreigners Generated by Exports by Industry
in Korea in 2011 ······································································································158
[Figure 51] Sri Lanka Top Ten Value Creation Industry ···················································163
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List of Abbreviations
ADB Asian Development Bank

AP Advance Payment
APTA Asia-Pacific Trade Agreement
BTN Brussels Tariff Nomenclature
BITs Bilateral Investment Treaties
CCC Customs Cooperation Counci
CCS Customs Clearance System
CMT Cut, Make and Trim:
CNTP Comprehensive National Territorial Plan
COO Certificate of Origin
CTEC Colombo-Trincomalee Economic Corridor
CUSDEC Customs Declaration Message
DA Documentary Acception
DP Documentary Collections
EDB Export Development Board
EDI Electronic Data Interchange
FCBU Foreign Currency Banking Unit
FIZ Foreign Investment Zone
FTZ Free Trade Zone
FEZ Free Economic Zone
GVC Global Value Chain
IK Investment Korea
IRD Inland Revenue Department
KISC Korea Investment Service Center
KOTRA Korea Trade-Investment Promotion Agency
KSP Knowledge Sharing Program
LADM Land Administration Domain Model
LC Letter of Credit
LPI Logistic Performance Index
LQ Location Quotient
MOUD Ministry of Urban Development
NEDA National Economic and Develpment Authoruty
NSO National One-Stop Services
ODM Original Design Manufacturing:
OEM Original Equipment Manufacturing
vii
OLOLI Ownership, Location, Internalization

RCEP Regional Comprehensive Economic Partnership
SAFTA South Asian Free Trade Agreement
SLSI Sri Lanka Standard Institution.
SOC Social Overhead Capital
STDM Social Tenure Domain Model
WTO World Trade Organization
WCO World Customs Organization
viii
Summary
Summary
Sri Lanka has its priority on rebuilding its economy ever since the end of civil war in 2009
and it has been experiencing rapid economic growth (e.g. 8% in 2010 and 2011) as a result.
Also, Sri Lanka lies at the intersection among countries in Europe, Asia, and Africa; therefore,
its geographical location allows Sri Lanka to become the global hub for the distribution of
goods.
Despite its continuous growth and potential, Sri Lanka suffers from problems like low Foreign
Direct Investment (FDI), lack of competitiveness within small and medium sized industries,
and inefficient customs clearance, which lead to low export rate and formed economic
imbalance throughout the regions. Also, due to the civil war that lasted for a long time, Sri
Lanka’s shipping infrastructure was limited in terms of expansion and maintenance, especially
in the Eastern areas where much of the shipping infrastructure was destroyed. Even though
the majority of the shipping and transport procedures take place on roads, Sri Lanka suffers
from poor road infrastructure. Insufficient infrastructure and facilities lead to restricted
economic growth due to lack of foreign investment and inefficiency in terms of economic
activity. Therefore, the government of Sri Lanka is working to implement social infrastructure
to achieve regional balance and sustainable development. Accordingly, the ADB has launched
the Colombo-Trincomalee Economic Corridor (CTEC) project to form integrated social
infrastructural network in Sri Lanka.
Under the purpose to establish the development plan for interregional economic balance
in Sri Lanka, the KSP-ADB joint project contains policy implications for 1. applying urbanization
strategy, 2. developing trade facilitation by implementing national Single Window, 3. enhancing
FDI, and 4. increasing export from Small and Medium sized Enterprises (SMEs).
The Chapter One introduces successful examples of urbanization in Korea, and suggests
policy implication for urbanization in Sri Lanka along with the Colombo-Trincomalee Economic
Corridor. The project documented factors that led to successful urbanization in Korea. Korean
government has connected Seoul with other cities like Ulsan and Busan where heavy/light
ix
industries were developed, and has considered ways to utilize human capital from the regions.
In order to purse balanced development between regions, the Korean government considered
the division of the industrial functions for each specific region and/or the allocation of specific
functions into specific regions. Also, the Korean government responded to both the dramatic
changing conditions within and abroad, and also accomplished the idea of sustainable
development in the national territorial management and development processes.
Some policy implications for Sri Lanka urbanizations are as follows: first, in order to
successfully launch economic corridor linking Colombo and Trincomalee in Sri Lanka, active
policy formulation and implementation as well as consensus among countries and regions are
required. In particular, the problems of hidden urbanization, messy urbanization, and air
pollution that have direct impact on the citizen’s health should not be neglected. Policies to
maintain the sustainable national territory and develop urban space should be considered
together. Second, the government of Sri Lanka should take long-term perspective and take
measures to reduce the social costs incurred between the development of urban and industrial
complexes. Third, it is necessary to actively review Smart City techniques to monitor
environmental pollution, vulnerability of natural disasters due to urban development, energy
and power management, and to improve traffic system. However, given the fact that specific
planning indicators are different for the smart cities internationally, that the initial input costs
for urbanization may be subject to increase, and that there is no national consensus on the
smart cities, it is expected that localization of technology and planning techniques should be
prepared from a long-term perspective by examining the efficiency of technologies and
technologies that can be introduced later in the regional unit through a test bed (experiment
project) and through anchor points between regional economic corridor development.
In Chapter Two, the project introduces the case study of Korean Single Window system
in customs procedure, and explores ways to facilitate trade in Sri Lanka. The customs
procedure’s roles are split amongst several agencies in Sri Lanka, and this disunity requires
excessive documents. Also, lack of automation and computerization require costs and time,
which place burden to traders. In order to solve this problem, implementing Single Window
system that integrates necessary procedures for trade, and simplifying and integrating data
are needed. Korean Single Window system, UNI-PASS, has become globally renowned for its
capabilities and is now being actively exported to other countries.
To implement Single Window system effectively in Sri Lanka, it is important to consider

following four points: first, the government should pursue strategically with mid- to long-term
goals when implementing a Single Window system. Second, the construction of a Single
Window system is the process of integrating the functions of various government agencies
related to customs administration. Therefore, if problems arise due to differences in
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Summary
standardization, there is a need for a device to mitigate the conflicts between the governments
by establishing standardization and revising laws and systems, which the ministries and
agencies can follow. Lastly, it is necessary to continuously improve and adjust the system
that reflects the opinions of the users in the step-by-step process to provide the maximum
convenience to the users.
In Chapter Three, the project shares Korea’s experience of attracting FDI to provide
implications for Sri Lanka. In Korea, Invest Korea (IK), the national investment promotion
agency, provides all-round services for foreign investors including consultations, administrative
assistance with investment notification and corporate establishment, support for business
activities in Korea and conflict resolution. It also provides various investment promotion
activities abroad using its own overseas network. Meanwhile, the Korean government has been
providing various incentive programs to attract FDI such as tax support, cash grants, and
industrial site support. Chapter Three also categorizes the FDI deciding factors considered by
multi-national enterprises (MNEs) such as Samsung, and introduces the case study of Vietnam
which is the top destination of Korea’s investment among ASEAN member countries. The
Vietnamese government provides incentives for tax, land, and etc. to attract Korean MNEs;
therefore, it increases trade and actively participates in Global Value Chains (GVCs).
To attract FDI to Sri Lanka effectively, four points should be considered. First, it is important
for the Sri Lankan government to understand what industries to be developed further for the
Sri Lankan economic prosperity and development, and how the benefits of FDI can be spread
out into every area of the country and include all sectors and people in the country. Second,
the Sri Lankan government needs to focus on how to diversify and differentiate incentive
programs from rival countries in this region. Third, it is important to establish Industrial Cluster
and the designate a specific zone or park to a specific industry, considering the zone’s
infrastructure, environment, demographics, and industrial characteristics of the selected
industry. Lastly, Sri Lanka needs to improve the existing FTAs to enhance business environment
and increase greenfield investments from developed countries.
The Chapter Four investigates current situations and problems of Sri Lanka’s SMEs, and
analyses methods to strengthen competitiveness of the MNEs in Sri Lanka by reflecting on
Korean cases, and to increase Sri Lanka’s participation in the GVC. Like many developing
countries, Sri Lanka is also concerned about how to strengthen the competitiveness of SMEs,
which are the backbone of the industry. While it is possible to increase the competitiveness
of SMEs through various methods such as inflow of FDI, securing of technological power, and
strengthening export competitiveness, in this study we aimed to enhance the competitiveness
of SMEs by participating in the GVC of SMEs in Sri Lanka. In a situation where the domestic
market is limited, it is effective for the Sri Lankan government to let SMEs participate in export
xi
in order to increase industrial competitiveness.
In this chapter we take a look at Korea’s support for Sri Lankan SMEs to participate in the
GVCs, see how Korea’s participation in GVC has changed overtime, and strategies that Korean
SMEs took to participate in the GVCs. Based on the Korean experience, we suggest possible
policies for Sri Lankan SMEs. First, it is necessary for the government to provide a virtual
space where large foreign corporations and Sri Lankan SMEs can meet online to provide SMEs
with the opportunity to participate in overseas GVCs. Second, as textiles, apparel, leather,
footwear, and other industries are expected to reduce production costs the most in the global
value chain, the government of Sri Lanka should prioritize the development of various policies
to increase the participation of companies belonging to these industries in GVC. Third, by
eliminating unnecessary trade barriers through the FTA and improving the investment
environment of foreign companies, Sri Lankan government can attract global companies to
invest in Sri Lanka. This will enable Sri Lankan SMEs to become more involved in GVCs. Lastly,
as attracting FDI is essential for GVC participation, it is necessary to develop policies that
provide additional incentives for foreign direct investors to encourage Sri Lankan SMEs to
participate in the GVC.
Competition among countries and regions are fierce in the global market. The economies
of Sri Lanka and Southwest Asia are expected to grow by following various ways to facilitate
trade, FDI, or MNEs, and by benchmarking the experience of Korea as mentioned in this project.
Korea can take advantages from this project as well by getting closer to Southwest Asian
markets in advance. We expect this project to be the new stepping-stone for economic growth
in Sri Lanka and expect Sri Lank to become the global logistic hub.
xii
Ⅰ. Project Overview
1. Project Background and Objective
1.1. Project Background
Sri Lanka has its priority on rebuilding its economy ever since the end of civil war in 2009;
therefore, it has been experiencing a rapid economic growth as a result. The economic growth
rates of Sri Lanka were 8% steadily from 2010 to 2011; furthermore, in 2013 its GDP per
capita increased to 3,127 USD, which enabled Sri Lanka to be classified as low-middle income
country rather than low-income country according to World Bank standards.
Despite the continuous growth of its economy, Sri Lanka still has some problems that must
be dealt with. Low export rate and economic imbalance throughout the regions are problems
caused by low Foreign Direct Investment compared to its potential, lack of competitiveness
within small and medium sized industries, and inefficient customs clearance. When we take
a look at the total amount of export, we can see its continuous decrease recently. Total amount
of export in Sri Lanka decreased from 10.8 billion USD in 2014 to 9.7 billion USD in 2015.
Sri Lanka, in 2016, experienced 1.8 billion USD of Foreign Direct Investment (FDI) which was
27% decrease of its 2.5 billion USD in 2015. Eastern, Southeastern and North-central regions
occupied 6% each. The Northern regions occupied only 3%.
To overcome regional imbalance, Sri Lankan government has identified different ways such
as encouraging the growth of the private sectors, building regional economic power and
competitiveness, increasing trades, developing rural areas, and solving regional disparity. Along
these efforts, the implementation of social infrastructure is necessary to achieve regional
balance in Sri Lanka. Due to the civil war that lasted for a long time, Sri Lanka’s shipping
infrastructure was limited in terms of expansion and maintenance, especially in the Eastern
areas where many of the shipping infrastructures were destroyed.
1
1.2. Objective
As a part of the solution to such issues, Sri Lankan government has proposed the project
of Colombo-Trincomalee Economic Corridor (CTEC) to Asian Development Bank (ADB) in order
to form an integrated social infrastructural network and to stimulate economic growth in the
cities between Colombo and Trincomalee. CTEC will intersect from Colombo to Trincomalee
of Sri Lanka, and the development of ports and transportation infrastructure will lead to the
development of undeveloped regions. Through general industrial development methods,
including the formation of high value added industrial clusters; therefore, the fundamental
base for the national strategy that illustrates an export based economy structure will be formed.
Therefore, CTEC is predicted to contribute to further growth by expanding economic
opportunities in the urban hinterlands and connecting small towns or village centers with the
industrial clusters.
To stimulate economic growth within the corridor, the Asian Development Bank (ADB) has
launched projects that are associated with the implementation of economic corridors. Under
the collaborated consulting works with the ADB and KSP, this project entitled ‘Support for
Development of the Colombo-Trincomalee Economic Corridor in Sri Lanka’ seeks for the
formation of new economic belt along Colombo-Trincomalee economic corridor allowing the
exchange of human/physical assets with connection to multiple regions.
2. Project Activities and Expected Results
2.1. Project Activities
Under the purpose to establish the development plan for interregional economic balance
in Sri Lanka, this project covers four research topics: 1. Urbanization Strategy, 2. Trade
Facilitation, 3. Foreign Direct Investment, and 4. Small and Medium sized Enterprises.
First, through the analysis of the current status for the regions or key sites between Colombo
and Trincomalee, KSP team explores urbanization strategies and methods for the production
of small towns along with policies and systems of Korea’s urbanization and experiences of
forming new cities.
Second, this project identifies and solves problems in Sri Lankan distribution industries by
referring to the successful electronic customs clearance and Single Window customs system
in Korea. The focus is on how to improve Sri Lanka’s environment of physical distribution
2
and to facilitate trade activities.
Third, this project analyzes the obstacles that hinder Foreign Direct Investment in Sri Lanka,
and explores methods to attract Foreign Direct Investment based on Korean cases.
Lastly, this project investigates current status and problems of Sri Lanka’s small and medium
sized enterprises, and analyzes methods to strengthen competitiveness of the MNEs in Sri
Lanka by considering Korean cases, and to increase Sri Lanka’s participation in the global value
chain.
2.2. Expected Results
There are three main predicted effects from this project. First, we expect to suggest
economic development plan for Sri Lanka's east-west regions by understanding the local
demands in Sri Lanka.
Second, by sharing Korean successful experiences, we expect to establish strategies to

enhance MNEs and to facilitate trade in Sri Lanka so that this project would lead to more
regional balance, continuous economic growth, increasing middle class, and stronger domestic
markets in Sri Lanka.
Lastly, Korea can be benefited from this project as well by getting closer to Sri Lankan
markets in advance, which is the possible logistic hub in Southwest Asia, and by increasing
trade and investment with Sri Lanka. Also, the network of human capital between Korea and
Sri Lanka will be the foundation of industrial cooperation in the near future. In addition, as
many cases from the previous growth experience of Korea are reconsidered in this project,
it can also give ideas for further economic growth in Korea.
3. Project Implementation Plan
The details of this project are as follow: First, for urbanization strategy and for creation
of small towns, this project is based on the industrial structure of Sri Lanka and East Asia
to investigate the demand, location, shape, type, production and employment status. By looking
at the formation of Korean industrial complexes that considered both regional balances and
production/manufacture/distribution methods, models for Sri Lankan industrial complexes
(country, foreign investment, general, agricultural, and etc.) are designed. Also, Korean land
information systems and other foreign cases that are being the standards for the LADM (Land
3
Administration Domain Model) and STDM (Social Tenure Domain Model) are considered to
suggest improvement schemes for land registering systems and intellectual informatization
efficiency in Sri Lanka. This project adopts a Smart City Index that is applicable to Sri Lanka’s
current status and makes suggestions to implement smart-city-related technologies, functions
and business models.
Second, this project introduces the case studies of National Single Window and explores
ways to facilitate trade in Sri Lanka. After analyzing automation of Sri Lanka’s custom clearance
and the state of computerization, this project identifies parts that require immediate
improvement. Examining the success of Korea’s trade facilitation as the fundamental ground,
this project illustrates a roadmap to enhance Sri Lankan customs system and procedure, and
then suggests step-by-step improvement strategies. Through adopting commendable systems
such as UNI-PASS in Korea, Sri Lanka can improve the efficiency of customs administration
due to increase in trade. Also, distinct characteristics and specific factors of Sri Lanka are
considered prior to the adoption of Korea’s experiences and technology.
Third, this project seeks the ways to increase Foreign Direct Investments (FDI) in Sri Lanka.
We analyze Sri Lanka’s FDI records for each sector, find areas that need FDIs, examines the
current Sri Lankan government policies on FDI, and discover ways to attract FDIs in Sri Lanka.
Successful Korean cases of attracting FDIs are examined along with the process of liberalization,
and the correlation between Korea’s FDI records and its economic development is studied as
well. For Sri Lanka to effectively follow Korea’s FDI examples, distinct characteristics and
current conditions of Sri Lanka are considered from taking local experts’ opinions. As a result,
we devise rules and methods to attract FDIs that are suitable to the current situation of Sri
Lanka’s policies and systems.
Lastly, this project investigates the method to increase competitiveness and GVC
participation of small and medium sized enterprises (SMEs) in Sri Lanka. In precise, detailed
analysis on ‘why’, ‘what’, ‘how’, ‘evaluation’ and ‘benchmarking’ are conducted to analyze
competitiveness of Korean SMEs and to make implications for Sri Lankan SMEs.
To suggest methods for Sri Lanka's active involvement in GVC, this project examines Sri
Lanka’s current participation in GVC for each industry as well as its competitiveness before
choosing the particular field with the greatest industrial potentials. In details, we follow the
work of Timmer et al (2016); moreover, the analysis of Sri Lanka’s levels of participation in
GVC for each industry is identified with reference to the OECD World Input-output table and
Sri Lanka’s National Input-output table.
4
Ⅱ. Urbanization Strategy
1. Current status and the future of the urbanization of Sri

Lanka
1.1. General Information of the Site
1.1.1. Introduction
The South Asian infrastructure (transportation/computer network) forms a medium and

large scale clusters in Pakistan (Islamabad) India (Delhi) Southern India (Mumbai)
Bangladesh (Dhaka) and Sri Lanka (Colombo). Even though Sri Lanka displays high level of
connectivity between countries, it lacks in connectivity at the national level [World Bank,
(2016)].
Korea's regional road network construction and metropolitan urban development models
are considered as one of the best practices by the World Bank and United Nations-Habitat
(UN-Habitat). Korea’s examples can be applied to enhance intercity connectivity in East Asian
regions. This report aims for the increased intra-connectivity between the key regions of Sri
Lanka through expanding the infrastructure. The report analyzes the case studies of Korea,
Japan and Taiwan to derive relevant implications, planning techniques, and other related
factors.
5
Table 1 Global Competitiveness Index, Infrastructure Rankings
GCI ranks Infrastructure Rank Percent of Roads paved

Sri Lanka 󰀺 65 󰀺 73 22%
India 󰀺 60 󰀺 85 18%
Butan 󰀺 109 󰀺 87 38%
Bangladesh 󰀺 110 󰀺 132 under 3%
Nepal 󰀺 117 󰀺 144 5%
Pakistan 󰀺 133 󰀺 121 under 3%
Source: World Bank (2016)
Accordingly, Sri Lanka’s Colombo-Trincomalee Economic Corridor (CTEC), is an extensive

project that covers industries such as agriculture, service, tourism, and trade. Hence, Sri Lanka
needs to review the current status and the locational conditions of strategic base areas (cities)
prior to the construction of infrastructure and the allocation of functions. It is also necessary
to identify the basic conditions involving the evaluation of existing physical, social, and natural
conditions and related systems, as well as referring to the Sri Lanka Urban Vision 2030 when
selecting the strategic base facilities (cities). In particular, this economic corridor requires the
implementation of a complex internationalization plan that encompasses small and medium
sized enterprises (SMEs), the National Single Window, and the Global Value Chain. The location
of the facilities must be evaluated and reviewed thoroughly.
1.1.2. Current status of urbanization
According to the United Nations, by 2030, 250 million people are expected to live in
Southwest Asia. The growing population will increase urban population inflow and the following
are necessary in achieving sustainable urban environment: expansion of transportation,
residential and environmental infrastructures.
Sri Lanka’s urbanized area is expected to increase from 17% in 1990 to 34% by 2050. This
is relatively higher than other developing countries. It has also experienced the highest urban
expansion rate between 1999 and 2000 which led to some of the main urbanization problems
such as urban sprawl and ribbon/strip development.
6
Figure 1 Pattern of Annual Nighttime Light Growth of New Delhi and Colombo
Urbanization Pattern (New Delhi, 1999-2000)/Urbanization Pattern (Colombo, 1999-2000)

Source: World Bank, 2016, Leveraging Urbanization in South Asia, World Bank
In particular, the outskirts of Colombo, which is the center of the economic corridor, reflect
high levels of congested urbanization along its major roads and railway networks. To be
specific, the outskirts of Colombo’s hidden urbanization are beyond the usual statistical
expectation; more than twice the existing urban area. The starting points of this project,
Colombo, Kandy and Galle/Matara, are confronted with the problem of overgrowing cities as
their outskirt areas combine with the adjacent residential areas. Therefore, the economic
corridor of Colombo and the construction of small cities should identify methods to prevent
the congestion/hidden urbanization. At the same time, residential problems, employment
issues, and living environment for the vulnerable population residing in the target area and
the adjacent areas must be taken into account.
Meanwhile, World Bank's analysis shows how more than one-third of the population living
in urban areas of Sri Lanka are statistically unclassified as a resident of 'urban areas'. This
is not due to decrease in population in the national territorial/city in developed countries, but
it is caused by the hidden urbanization in the process of urban planning and thereby requires
most immediate attention. While the population density of Sri Lanka is approximately 300 per
2 2
km , Colombo has a population of 2,000 peopleper km . Gampaha, Kalutara, Matara,Badulla
and Kandy also have high population densities.
7
From the industrial and economic perspective, Colombo-Kandy-Galle Belt is responsible for
more than 80% of the country's total production, among which Colombo accounts for 50%.
However, 50~75% of the low income (below 40% income level) groups of Colombo lives in
the belt. Thus, urban problems due to industrialization and urbanization are continuously raised.
Meanwhile, the primary industries are shrinking due to urbanization. Unlike other countries
in Southwest Asia, the Sri Lankan government had continued to expand and supply basic
infrastructure in rural areas. For such reasons, Sri Lanka is expected to have a relatively small
incidence of farming related urban problems because comparatively less number of people
tend to give up farming in Sri Lanka.
Table 2 Population Statistics and Population by Major Cities
Population distribution states Region Population(2008)

Colombo 2,488,000
Gampaha 2,152,000
Kaluthera 1,118,000
Kandy 1,396,000
Matale 483,000
Nuwara Eliya 749,000
Galle 1,063,000
Matara 822,000
Hamabanthota 558,000
Jaffina 603,000
Mannar 102,000
Vauniya 167,000
Mullaitivy 150,000
Kilinochchi 150,000
Batticaloa 530,000
Ampara 624,000
Trincomalee 361,000
Kurunegala 1,535,000
Source: Kurukulasuriya, 2012, Sri Lanka 2011-2030 National Physical Plan and Project Proposals, National Physical
Planning Department
8
The major environmental pollution source in Sri Lanka is air pollution caused by
transportation. The number of registered vehicles has surged from 4.4 million (2011) to 6.3
million (2016). Also, 70% of the total registered vehicles in Sri Lanka are motor vehicles with
unspecified emission regulations, which contributes to exacerbating air pollution problem. The
air pollution index exceeds 3.6 times the World Health Organization (WHO) regulatory
standards, and about 7,792 people died from air pollution related diseases in 2016. Colombo
is the fourth worst city in the world to live in, not only because of lacking
architectural/transportation infrastructure, but also due to accelerated heat island effect caused
by growing greenhouse gas emissions (GHSs).
During the last 30 years, Colombo experienced rapid industrialization and urbanization which
created illegal landfills and residential areas. As a consequence, 68,800 residential areas of
Colombo are considered to be extremely vulnerable to natural disasters such as heavy rain.
The Sri Lankan government provided various measures to solve this problem in 2012. However,
implementation of a system that can effectively and systematically manage the measures as
well as the residential areas is necessary.
1.2. Methodologies and Vision
Sri Lanka has set up a plan to build a transportation infrastructure by 2030. The plan aims
to extend the railroads by 50% (2,179km extension when completed) and the roads by 1,000km
(12,679km when completed). Fortunately, the starting point and destination of the economic
corridor, the Colombo-Trincomalee, already has a wide road network. This allows efficient
use of transportation facilities, especially when the new construction (Kuruneglal-Harbana)
is complete and the transfer for the new railway improves.
The final destination of the economic corridor, eastern Trincomalee, has regional industries
which are highly concentrated on eco-tourism that utilizes natural resources. Current plans
outline the establishment of strategic areas and/or facilities for export as well as improving
the living environment, conservation management, and port-related industries. The current
plan implies that Colombo (the starting point of the economic corridor) will maintain its role
as the center of economy, industry, finance, production and export. Moreover, the North
Central Metro Regional Area Plan of India and nearby area will cater for tourism, trade, and
the residential improvement. The South will be responsible for the protection of historical and
natural resources/environment, as well as the development of the strategic belt through the
efficient use of subway. Moreover, the South (Mahiyanganaya, Padiyatalawa, Bibile) will
become the hub for the formation of living environment.
9
When looking at the integrated industrial portfolio that outlines the direct and indirect
impacts of Sri Lanka’s exports, the main industry of Sri Lanka is tourism, textile (clothing),
and agriculture which includes tea and rice. The clothing industry has a share (22.5%) of the
European market (45% of the total exports), but lacks product diversity and the price
competitiveness is lower than that of India and Pakistan [World Bank, (2015)]. Therefore,
by looking at the current industrial structure in the establishment of the main business plans
and evaluating the mid to long term industrial portfolio, the step-by-step procedure that is
applicable for each industry as well as national/regional territorial plans is required.
National territorial planning and development must consider the mid to long term
perspective, the key industry of the country and national development. Also, Sri Lanka must
actively cope with the future changes of its neighboring countries such as the development
of smart cities in India. The development of the economic corridor aimed at Sri Lanka in the
mid to long term particularly requires the establishment of plans and the consideration of many
different aspects. These include designating key industry at the national level and establishing
industrial infrastructure based on industrial portfolio, along with the development of national
infrastructure for the benefit of mid and long-term development and growth of the country.
The economic development of under-developed countries and the countries with emerging
economies is based on industries. Thus, the formation and regulation of industrial complexes
and the surrounding facilities are regarded essential for sustainable management of the
national territory.
2. The Development of Korea’s National Regional Plan
2.1. The Characteristics of Korea’s National Regional Plan
2.1.1. Overview
From the perspective of the national territorial development and urbanization, South Korea
has more than 90% of the population living within 8 cities, accounting over 1 million. The
national GDP in 2015 is estimated to be 1.38 trillion U.S. dollars with GDP per capita of 27
thousand U.S. dollars and most people live within ‘a half-day life zone’ in terms of connectivity
to other regions.
Since the 1960s, such growth has been enabled by the implementation of national territorial
and urban planning methods that resulted in the development of the national territory and
in the industrial advancement. Especially through the establishment and improvement of
10
Korea’s Comprehensive National Territorial Plan (CNTP), which were strategically managed
and administrated by the government, Korea was able to experience industrial growth. These
implications regarding the growth of Korea’s national territory and urban planning as well as
the CNTPs can be provided to the developing countries or countries with emerging economies.
The CNTP sets up the basic blueprint for the use, development and conservation of the
Korean national territory. CNTP was first designed and applied in 1972 and was active until
1999. The Korean government monitored and reviewed the CNTP every 5 years and when
necessary, made changes to fit to social and economic changes that manifested at the time.
CNTP carried the title of “the Comprehensive Plan for the Construction of National Territory”
until 1999, and a year later it was given a new name as “Comprehensive National Territorial
Plan”. This plan considers the changes in the circumstances abroad and within, thus it is
susceptible to change. At the same time, it is an upper plan for the related laws. In the past
40 years of rapid growth, the main role of the Korean land use plan was to concentrate the
limited capital and technology into a specified region for maximized economic growth. This
was powerful in the sense that the government-centered decisions had influenced the urban
area as well as land use planning and management.
In order to construct and develop the local government system as well as to solve urban
problems, Korean government introduced "The Urban Master Plan". The Urban Master Plan
was first introduced in 1981 to prevent inappropriate or arbitrary changes in zoning. By
involving the mayor and the governor in the urban planning processes, the limitations of the
initial Urban Master Plan (1962), such as the future-oriented national territory and/or land
development as well as the lack of flexibility in the use of land, were considered in the local
government’s pursuit for maximized efficiency in the use of urban space.
Since the 1990s, the introduction of the various paradigms for the strengthening of local
governmental systems, the utilization of future-oriented national territory, and the participation
of the citizens has enabled Korea to establish the current system of national land use
management. In 2002, Korea enacted the "National Land Planning and Utilization Act" which
integrates the Urban Planning Act and the Act on The Utilization and Management of the
National Territory. This Act is meaningful because it separated urban planning into the Urban
Master Plan and The Urban Management Plan. In the past, the urban area and the non-urban
area were divided into the Urban Planning Act and the Act on The Utilization and Management
of the National Territory respectively. The introduction of the National Land Planning and
Utilization Act enabled unification of the two previous laws and thereby facilitated efficient
management and operation of the system.
11
Therefore, Korea’s integrated land use management system pursued maximized economic
development with the efficient use of limited national territory. This was a top-down approach
that could be applied to undeveloped land, prevent overpopulation in metropolitan areas, and
promote government-centered economic growth.
The shifts in the paradigm, such as the changes in domestic and external circumstances
in the related plans of Korea, the demands for sustainability of the national territory and urban
space, or the implementation of plans at the local level were reorganized into a triangular
horizontal structure as shown in Figure 2. The paradigm is expected to continuously change
into the future.
Figure 2 The Paradigm Shift in Urban Planning and Development System
Source: Park (2004)
12
2.2. Transition of the CNTPs
2.2.1. The 1st CNTP (1972~1981)
The beginning of the contemporary Korean urban planning is marked as the 1934 Town
Planning Law of the Japanese Colonial era. In January 1971, the Urban Planning Act was
completely revised for industrialization/urbanization. The main reason for the complete revision
was because the existing planning act and regulations could not solve various urban problems
caused by rapid industrialization and overcrowded population. Overcrowding was common in
large cities such as Seoul where the rate of urbanization struck over 50% at the time and
in the 1970s, the national income had rose to 437 dollars with a dramatic increase in export
of 1,133 million dollars. The economic development of the 1960s had brought about the
necessity for the expansion of Social Overhead Capital (SOC) in terms of transportation,
electricity and communication.
The Revised Urban Planning Act responded to the changes in social and economic changes
and included policies for limited facilities area, development restriction area, as well as
prearranged urban development zone. Through the 1st CNTP (1972-1981), which was enacted
on October 1971, the Korean government not only sought for solutions to the problems related
to overpopulation and overconcentration of industrial buildings in Seoul, but also created nodes
to maximize the efficiency of use with limited resources which were intended to support Korea’s
industrialization and economic growth. Through connecting the nodes (specific areas) using
transport and expanding SOCs at the same time, the government pursued abundant supply
and efficient use of land and environment. The government also aimed to enhance in the
quality of the living environment which showed that the government had considered cultural
and environmental aspects as well as the urban.
The construction of Gyeongbu expressway (1968) emphasized the connection of Seoul and
Busan in one-day life zone as well as the formation of main industrial complexes along the
southeastern coastal industrial belts. Through building highways (expressways), roads, and
ports to link major industrial estate and metropolitan regions, it was possible to connect the
relevant regional infrastructures which led to the development and growth of industrial cities
and metropolis. The construction of the Gyeongbu expressway was completed on July 7, 1970,
with the length of 428km (currently 413km), width 22.4m, and under the budget of 42.9 billion
KRW which was 23.6% of the national budget of that time. This not only strengthened
connectivity and network by encompassing regions like Suwon, Cheonan, Daejeon, Yeongdong,
Hwanggan, Gimcheon, Daegu and Gyeongju, but allowed Ulsan, Pohang, Masan, Changwon,
Yeosu to prosper industrially through direct/indirect impacts.
13
Figure 3 The Formation of Industries along the Road Network and the 1st CNTP
Source: Korea Research Institute for Human Settlements (2012)
In the pursuit for the efficient management of the national territory, the 1st CNTP defined
the nation with Han river, Geum river, Yeongsang river and Nakdong river as the catchment
areas. Urbanization method focused on the river enabled the efficient supply of public
/agricultural water catered for each region. This shows efficient use in the division of limited
national territorial resources. Based on the growth of rural provinces through the development
of the key areas/sites along the Gyeongbu expressway, it is meaningful in the sense that this
urbanization method had partially contributed to the dispersal of overcrowded population,
which is one of the problems experienced in undeveloped countries.
2.2.2. The 2nd CNTP (1982~1991)
nd
The 2 CNTP aimed to improve the national territorial balance as well as the national welfare
under the similar context as the 1st CNTP; it initially grew with the development of the local
regions but expanded further to the metropolitan areas, the central, the south western and
the south eastern regions, creating regional economy. Reflecting on the success story of the
southeastern industrial belt of the 1970s, the 2nd CNTP aimed to expand that effect to the
other regions of the national territory. Through the expansion of SOCs, improved transportation
and communication for balanced regional development, which were the main characteristics
of the 1st CNTP, it sought to designate key areas in order to create a basis for the regional
14
growth of each region. This emphasized the notions of sustainability of the region and the
formation of economy in order to enhance the position on the global level.
On the other hand, it became evident that the issues concentrated on metropolitan areas,
such as air pollution, water resources, residential environment and the loss in the motivation
to pursue balanced regional development, collectively rendered the government to seek for
the installation of industrial and related facilities based on location analysis. The main objectives
set by the government was to prevent environmental pollution due to industrialization. Along
with the attempt to solve environmental problems, unqualified factories of the metropolis were
transferred to the outskirt areas. The storage site for raw materials was formed for stable
and sustainable supply and the rural-based industries that were engaged in the active use
of raw materials of the rural area were encouraged and supported for the growth and prosperity
of the primary industries.
However, the plan had to be revised in the 2nd CNTP of 1987 due to the lack of action
programs, the aggravation of regional gap, and the Olympic Games that were expected to
be held in 1988. Responding to the changes in the circumstances within and abroad, the
national territorial development encompassed Jeju, Taebaek, Dadohae, and 88 Olympics
Expressway. At the same time, it pursued regional development in areas including Jeonju and
Gwangju for balanced development, and rejected large scale industrial complex but allocated
small and medium sized industries in rural province. This plan is perceived to have contributed
to the 1st CNTP and the efficient planning and use of the national territory.
Figure 4 The 2nd CNTP
15
2.2.3. The 3rd CNTP (1992~2001)
The objectives of the 3rd CNTP’s detailed strategy enabled facilitation in the growth of the
rural area, the restriction in the growth of the metropolis, and the increase in the exchange
and cooperation between the South and the North. Embracing the notions of growth, balance,
stability and independent economic structure, the 3rd CNTP (1992-1999) sought to construct
the new industrial areas in the form of clusters. With a great emphasis on balanced and
rd
decentralized national development, the 3 CNTP was designed to create multi-centered
national territorial structure and to improve the central function of large cities, as well as to
manage such cities and their surrounding areas located outside the metropolitan areas of
Korea.
The 3rd CNTP attempted to improve the limitations of the previous CNTPs and create
decentralized structure of the rural national territories. One of its important results was the
growth of the rural areas due to the restricted growth in the metropolitan areas. The
diversification in the industrial portfolio that responded to globalization and in the locations
of the industries were also meaningful results. To be specific, five new cities of the 1stst
development phase (Bundang, Ilsan, Pyeongchon, Sanbon and Jungdong) facilitated the
dispersal of the metropolitan population of 1.17 million, through which the housing supply
increased from 69.8% in 1985 to 74.2% in 1991.
rd
Figure 5 The 3 CNTP
16
By developing and interconnecting the eastern, southern, and western coasts with a
U-shaped model of industrialized and localized city network, the 3rd CNTP aimed to build a
sustainable and comprehensive transportation network (7x9 arterial road network) that would
help facilitate South-North exchanges and prepare for the unified Korea in the long future.
Such transportation network was also perceived to enhance connectivity in order to support
accelerated exchange of goods (trade). Moreover, along with the expansion of the investment
for housing, waterworks/sewerage, and environment orientated towards the increase in
livability for the citizens, management systems related to environmental preservation and
national territorial use were implemented and exercised.
2.2.4. The 4th CNTP (2002~2020)
The 4th CNTP emphasized notions of balance, greenery, openness and unity. The Korean
government made these shifts in the face of the economic crisis of the late 1990s which allowed
th
the 4 CNTP to set up the open integration among the main regions—Northeast Asia, South
Korea, and North Korea. This led to cooperative development of the Korean national territory.
Figure 6 The 4th CNTP
The 4th CNTP (2006-2020) has been oriented towards the multi-nucleus networked spatial
structure of the national territory, which embraced integrated development and environmental
preservation. The planning period was extended from 10 years to 20 years. As a response
17
to the changing paradigm of government administrative activities, the plan was predominantly
designed to achieve balanced development of the national territory and to emphasize the
multi-functional administrative city plan. The multi-functional administrative city plan refers
to the relocation of public agencies outside the Capital Region of Korea and related Innovative
Cities. To be specific, the planning for administrative city involves moving the main public
agencies to in Seoul and Gwacheon to Chungnam Yeongi-gun (currently Sejong Metropolitan
Autonomous City) in order to pursue balanced development achieved through the division of
urban functions.
Figure 7 The (7+1) National Territorial Structure and the π Structure
Source: Ministry of Land, Infrastructure, and Transport
Since 2008, President Lee’s administration has been trying to revise the Revised 4th CNTP
in order to make the plan to set its base on greenery (environmentally-friendly) growth and
‘5+2’ area-wide economic region. Greenery growth stressed the ideas of competitiveness,
welfare, sustainability and unity. Moreover, it emphasized balanced regional development
through building pi-shape territorial axis open towards Pan Yellow & Pan East Sea Regions
(to serve as “strategic gateway”) and also functioned to promote the regional competitiveness.
For regional competitiveness, the (7+1) economic belt/region encompassing the metropolitan
areas, Kangwon province, Chungcheong province, Jeonbuk province, Gwangju province, Daegu
province, Busan Province and Jeju Province was constructed to form the strategic basis of
th
development. The strategic development refers to the fact that the 4 CNTP had created 163
innovative cities and enterprise cities through the approach which considered the specialization
of the different regions.
In brief, CNTP has acted as a framework that considered development in an environmentally

friendly perspective. It is also halfway through the change between a plan of centralist/
18
top-down nature to a plan based on the effective and active participation of regional interest
groups and stakeholders. This means selecting the bottom-up approach rather than the
top-down approach so that local citizens can also be involved in the national territory planning
processes.
2.2.5. Summary and Implications
From looking at how the Korean government was involved in the establishment and
implementation of CNTP, it is possible to draw a strategy that explains how the division of
the industrial functions for each specific region and/or the allocation of specific functions into
specific regions had pursued balanced development between regions. Not only had the Korean
government responded to the dramatic changing conditions within and abroad, but also
accomplished the idea of sustainable development in the national territorial management and
development processes. Thus, it is recommended that the strategy and implementation of Sri
Lanka’s Economic Corridor Development adopt such techniques if necessary. Throughout the
history, Korea’s CNTP has acted as a blueprint or a milestone in the growth and development
for many developing countries. The characteristics of the CNTP can be divided into three key
aspects.
Firstly, during the period from 1960 to 1980, Korea’s territorial development policies were
centered on economic development in terms of supplying infrastructure such as roads, railways
and industrial complexes. After the 1990s, and after the introduction of the provincial/local
government, the focus was mainly narrowed down to the detailed and practical regional
development. Throughout the 2000s, the balanced national territorial development had formed
the basis to contribute to actual growth.
Secondly, CNTP responded to the situations and changes at the time. The changes in
circumstances at both the national and international level were considered and appropriate
responses were prepared. In particular, the industrialization of Korea between the 1960s and
the 1970s had brought many changes to the table. These changes include the diversification
in the supply of investment and the expansion of SOC that were tailored to the goal of
increasing exports aimed at the development of the national economy. Unfortunately, the
global oil crisis had induced the degradation in the macroeconomics. The policies then had
to be shaped and molded to fit to the idea of improving the quality of the structure which
were described by the notions of growth, equilibrium and efficiency. After the 2000s, plans
were tailored to meet the needs of the environment preservation and protection. It also
emphasized accompanied growth at the regional and national level; and responded
appropriately to the changes in global circumstances operating at the time.
19
Table 3 Table of Summary Outlining the Transition of CNTP
Category 1stCNTP 2ndCNTP 3rdCNTP 4thCNTP

Duration 1972-1981 1982-1991 1992-1999 2000-2020
The point of
establishment 319 USD 1,824 USD 7,007 USD 10,841 USD
GNP (per capita)
- response to thest
changes in 21 century
- growth in the national - improvement in the - lack of SOC and lack of - new national vision for
power living environment competitiveness the prosperity of the
Background - solve overcrowded
- promotion of autonomous regional country and the
industrialization population in the development enhancement in the
metropolis areas life quality of the
citizens
Method growth based development regional development balanced development balanced development
Area 4 Major Rivers 4 economic belts 7 regions 10 regions
4 specific areas
- formation of a
- maximize land use decentralized national
planning efficiency structure Point:st execute
- increase in the basis of - population dispersal - pursue production and
resource efficient 21 centurynationa
national territorial - expand development lterritorial plan
development potential national territorial
Objectives management
- development/ - improve social welfare Goals:
preservation of the - preserve national - improve social welfare balance/greenery/ope
national resources territory and preserve national nness/unity
- improvement in the territory
living environment - prepare for the
possible unity of South
and North Korea
- growth of the rural- form open and
- form multi-nucleus areas/restrain growthintegrated national
- create large scaled structure in the of the metropolis territory
industrial basis national territory with - creation of new - encourage regional
- maintenance of development of the industry and competitiveness
transport, surrounding regions advancement of the - form healthy and
Development communication and - restrain growth in industrial structure pleasant national
strategy and the supply of water metropolises such as - form integrated and territory
policies and energy resources Seoul, Busan, rapid logistics network
- build rapid transport
- develop less developed - expand SOC for - increase in investment
and information
areas and promote regional development in living and exchange networks
regional scale purposes environment - manage areas of
development - promote and facilitate - manage areas of cooperation and
development in less exchange between exchange between
developed areas South Korea and the South Korea and the
North Korea North Korea
- growth of the west - open and integrated
- establish an industrial coast new industrial national territory
belt in the metropolis - encourage balanced areas and rural build coastal axis + the
area and the southeast development across provinces east and west inland
coast the national territory axis
- development
Characteristics - pursue growth based - lack of specific and orientated approach - promote balanced
and limitations development detailed enforcement and prevent improper- regional development
- concentration of plans led to continuous - enforce strategies that
regional disparity and development
population and - poor response to create a harmony
industry along the environmental globalization, between development
Gyeongbu expressway problems and environment for
openness, and
localization the active preservation
of the national territory
Source: Local business manual, Ministry of Construction and Transportation (2007)
20
Lastly, the government pursued diversity in the level of development with respect to the
changes in the implementation methods. To be specific, the 1st CNTP and the 2nd CNTP aimed
for the interconnectivity between cities as well as the development of the local economy
through the allocation of functions of the industrial and manufacturing complexes. Meanwhile,
the 3rd CNTP and the 4nd CNTP discussed the formation of the new administrative capital,
the innovative cities and the enterprise cities. These were predominantly based on leading
industries of the broader regional economic belt with region-specific and strategic businesses
and highlighted the importance of achieving locational balance. This was the most important
factor that explained the success in the variety of different businesses that were ultimately
based on the selection of a ‘key point’ or a ‘strategic area’.
3. Emergence and Growth of Industries and Industrial

Comples
3.1. Overview
Table 4 Increase in Urban Population

(Unit %, 10,000 people)
Category 1960 1970 1980 1990 2000 2005 2010 2012

Total
2498.9 3143.5 4339.0 4796.4 4896.4 4878.3 5051.5 5094.8
Population
Urban
978.4 1575.0 2573.8 3555.8 4237.5 4398.2 4593.3 4638.2
Population
Rural
1520.5 1568.5 1171.1 783.2 557.9 480.1 458.2 456.6
Population
Urbanization
39.1 50.1 68.7 81.9 88.3 90.2 90.9 91.0
Ratio
Source: Korea Industrial Complex Corporation (2015)
21
Urbanization rate of Korea increased rapidly from 39.1% in 1960 to 88.3% in 2000.
Nevertheless, many reports reflect positively towards industrialization and urbanization which
have arguably enabled Korea's economic growth. In particular, the expansion of urban
infrastructures such as the Gyeongbu Expressway, along with the urbanization and fostering
the growth of the national key industries, are considered as important case studies for
developing countries.
Figure 8 Timeline of Industrial Belts of Korea
Source: Summarized by the author(s)
Especially until the 1970s, the light industry-based development contributed to the increase
in production and exports in the short term. This led to greater reliance on imported raw
materials and equipment, eventually resulting in the increased international trade surplus and
investment was centered on the Gyeongi-Busan axis along the Gyeongbu (Seoul to Busan)
expressway (highway).
st
Along with the 1 and 2nd CNTP, the weakening of global competitiveness of the light
industries triggered the government to create and promote heavy and chemical industries.
Under government-led plans and policies, large-scale coastal industrial complexes were
developed along southeastern coastal areas in the form of massive clusters and the related
industries led to increase in exports which resulted in development of the national economy.
Moreover, each export/import based regions in the surrounding cities as well as the growth
of industrial cities gave opportunities for the industry and the city to grow together as one.
The southeastern industrial belt of Korea and the start of industrial development was
fueled by the construction of Gyeongbu Expressway. The industrial clusters formed along the
Gyeongbu Expressway of the southeastern national territory allowed the economic
development as well as the formation of one-day life zone. Also, coastal specialized industrial
complexes such as Gumi, Ulsan, Changwon, and Pohang are some of the examples that were
made possible by the Gyeongbu Expressway. These areas and neighboring areas were directly
and indirectly linked to the Gyeongbu Expressway as well as the development of industrial
cities, which reinforces the importance of location in the development and formation of
industrial complex.
22
Gyeongbu Expressway of Korea, main industrial

Figure 9
complexes and regional clusters
Expressway Network (2015) 7 Pilot Complexes (2005)
12 Industrial Complexes 5+2 Pan Regional Clusters (2014)
Korea, with respect to the Industrial Location and Development Act (Article 2, paragraph
2), defines industrial complex as “complexes planned and developed according to a
comprehensive plan for the collective establishment and development of factories.” In
paragraph 8 of Article 2, an industrial complex is defined as “a collective land designated and
developed according to a comprehensive plan in order to install factories, facilities related to
23
knowledge-based/cultural industry, information and tele-communications/recycling industry,

resource accumulation, and logistics, along with related facilities such as education/research
/business/support/information processing/logistics, and affiliated facilities for enhancing the
functions of the facilities stated above including residential/cultural/environmental/park/
medical/tourism/sports/welfare facilities”.
In particular, the role of the public is very important in the sense that the Korean government
led the development of industrial complexes. In general, industrial complexes are private
industrial complexes founded by capital contributions from major domestic or foreign firms.
This is one of the most common form of overseas entry made possible by attracting or investing
in developed countries or using foreign capital. The second is a private joint-venture industrial
complex developed by the private sector with support from the government subsidies or
long-term loans. The third is a government industrial complex developed by the central
government or the local government. The countries with emerging economies or developing
countries have particularly undertaken a number of government-led industrial complex and
industrial city projects to promote industrialization.
Table 5 Types of Industrial Sites
Type Purpose of Development Developer

National-scale industrial
National industrial
development promoted by MLTM
complex
the central government
General (Regional) Stimulus of regional

City/Provincial Govt.
industrial complex economies
Planned Site
(Industrial Site) Fostering of high-tech
Urban High-Tech industries, including
City/Provincial Govt.
industrial complex knowledge, culture and IT
industries
Agricultural Increased income of farming City/County/Provincial

industrial complex and fishing towns Govt.
Increased productivity
Individual Sites through the flexible Private corporations
operation of industrial sites
Source: Industrial Location and Development Act
24
In the formation of the public led industrial complexes Korea currently categorizes the types
of industrial sites under the concept of planned sites as national complexes, general industrial
complexes, and agricultural industrial complexes. This is also based on the location of the
industry. Much of the focus in the past were centered on developing national industrial
complexes for the growth of the national industrial complex. The establishment of the
Urban/Town planning and the person in charge of designating such as the mayor or the
governor were able to designate the industrial complex for the activation of each region. Such
methods allowed the establishment and creativity to persist in the businesses that are catered
for each region. But recently, the need for a system of categorization based on function, rather
than the discretion of the designating authority, is being raised by some.
Figure below exhibits a summary of the specialized industrial complexes with their locations.
They will be discussed further in the next Korean case studies section.
Figure 10 Strategic Industrial Clusters by Region
Source: Ministry of Knowledge Economy and Korea Industrial Technology Foundation “National Territorial and Regional
Development Policy : Focusing on Comprehensive National Territorial Plan” (2012)
25
3.2. The growth of the Korean Industrial Complexes and Urbanization
3.2.1. The Introduction and Growth of the Industrial Cities
Korea’s industrial complexes have fueled Korea’s economic development where 7 initial
industrial complexes expanded nationwide during the ten-year period, forming 78 mini clusters
with active network. Recently, the demand for hi-tech industry for future development and
the decrease in size of the industries had acted as the basis for the 76 small sized industrial
clusters. Gumi's electronics and machinery cluster, Changwon's machinery cluster, Gwangju's
photonics cluster and Ulsan's automobile cluster are only few of the many success stories
of Korea’s industrial clusters.
From the economic perspective, Korea’s 7 representative industrial clusters can be analyzed
to show the trend of the economic growth. Total production of the seven clusters in 2014
was 387.4 billion KRW1), export amount was 1,560 billion dollars, and employment was
658,000. These figurescompared to those of 2004have increased by 2 folds, 1.7 folds,
and 1.6 folds respectively, reflecting a great increase over the decade.
The most prominent change is the 12% annual increase in the number of cluster participating
firms led by the government; the number of firms increased from 2,706 in 2005 to 7,512
firms by the end of 2014. This is due to the active exchange of information and social network
between the firms. Along with the increase in the number of participating firms, number of
network activities also increased to 7,846 activities in 2014, which is a consequence of 16.3%
annual increase since 2005. Korea’s industrial complex is still growing.
The Korean government has been most actively involved in the growth and improving the
industry from the past with the development of the CNTP, which led to the formation of
surrounding (hinterland) cities for the industrial workers and through which the government
attempted to achieve the ultimate goal of balanced regional development. However, changes
in economic structure and structural changes in domestic and foreign exports and imports
affected not only the growth and the saturation of the city but also cause the life cycle of
the city to decline. Thus, it is crucial to focus on the introduction of industries as well as the
specific characteristics and changes in the industrial city planning. Referring to the early stages
of industrialization and urbanization, examples from the southeastern industrial belt provide
suggestions and implications for the future of the East-West economic corridor that links
Colombo-Trincomalee.
1) 343.8 million USD (2017.08.05)
26
Table 6 Specialized Industrial Complexes for Each Business Category
Category Region Remarks

Chemical Industries Ulsan, Yeosu -
Light Industries Free Export Free Export Zone 2 in Biin and Gunsan
Biin, Gunsan
Zones areas not developed as planned
Pohang, Nakdong River Steel industrial base as Nakdong River
Steel
Estuary estuary not developed as planned
Electronic Industry Gumi -
Shipbuilding Busan, Ulsan, Geojae -
Heavy and Chemical Not developed as Free Export Zone
Onsan
Industries Free Export Zone due to change in business category
The southeast industrial belt or the southeast coast industrial zone are the coastal cities
which are collectively referred to as cities with industrial complexes that are based on
geographical conditions favorable for the import and export of raw materials. This concept
can be applied to Busan district, Ulsan district, Masan (Changwon) district, Pohang district
and Yeocheon district where these districts are designed for the dispersion of population and
industrial functions outlined in the 1 CNTP. In the economic perspective, these regions have
adopted export-oriented initiatives rather than domestic ones, and were developed and
promoted as centers of heavy-chemical industrial complexes where raw materials are imported
and exported smoothly.
In the 1970s, the Korean government focused its industrial policies on the heavy and
chemical industry. In order to foster the heavy and chemical industry and to construct
large-scale industrial bases, the government enacted the Industrial Base Development
Enhancement Act and the Industrial Base Development Corporation Act in 1973. They were
responsible for developing industrial bases. By using these Acts, Changwon Mechanical Industry
Complex (1974), Yeocheon Chemical Industry Base (1973), Pohang Steel Industry Base (1975)
and Banwol Industry City were constructed.
Case Study 1) Introduction and Development to the Ulsan Industrial City
Ulsan is a successful port city that benefited from the 5-year Economic Development Plan.
Towards the end of 1961, a policy for the development of Ulsan new town was proposed.
This policy declared Ulsan as a specific industrial district on January 27, 1962 and the
groundbreaking ceremony took place one week later on February 3, 1962.
27
The government’s plan was to create an industrial cluster based on its industrial fostering
strategy aiming at reducing dependence on foreign aids and securing economic independence.
Ulsan was perceived as the most adequate place to build the first industrial cluster since it
was located near the ports. This location made Ulsan ideal for export activities and enabled
the industry focused growth, which had been confirmed over the history of Koryo Dynasty
and the Japanese colonial era.
Figure 11 Ulsan National Industrial Complex
Source: Invest Korea (http://www.investkorea.org/)
Undeniably, Ulsan’s locational advantages enabled it to become the first domestic industrial
complex despite its lacking industrial foundation. Ulsan was located not only within proximity
to the Gyeongbu Expressway but also the import/export market of each region that allowed
Ulsan to act as a domestic transportation hub equipped with both marine and inland
transportations. Ulsan had the ideal conditions for industrial location in terms of transportation
and logistics.
The development of Ulsan City followed the same procedure as Ulsan Industrial Center.
Before 1962, the Ulsan City was a small fishing village and a majority of the jobs were occupied
by primary industry workers (23,482), which accounted for 71.4% of the total workers. Initially,
the oil refinery and fertilizer factory were constructed in the central Ulsan area, then followed
the related petrochemical industries. More job opportunities were present especially after 1964
when the construction of Ulsan refinery factory was completed, and the production volume
of Ulsan City increased dramatically. The growth was accelerated as large companies decided
to move to Ulsan Industrial Center, such as Hyundai Motor Company who started the operation
of its factory at the center in November, 1968 and Hyundai Ulsan Shipyard which was
completed in March, 1972.
28
Figure 12 Drawing of Ulsan Urban Planning
Source: Ulsan City (https://www.ulsan.go.kr/)
One of the key characteristics of the urban planning for the southeast coastal industrial
belt at the time was the clear division between industrial facilities and the residential (and
surrounding facilities), including Ulsan. Shipbuilding and petrochemical industries, which
reflected relatively high employment rates due to large export/import activities, triggered the
formation of the surrounding facilities. Urban planning responded by installing green area
among industrial complexes and the residential to pursue satisfactory living environment.
29
Table 7 Operation Status of Ulsan National Industrial Complex
Items 1963 1980 2000 2009

Number of Resident
23 154 488 806
Enterprises
Number of
7.3 43,298 458,270 976,562
Employees
Production
0.3 1,699 19,328 44,651
(KRW 100 million)
Export
1,236 67,587 87,529 88,278
(USD 1 million)
Source: Statistics Korea (2016)
Case Study 2) The Growth and Development of Changwon
Having designated as a machine industrial base in 1973, Changwon−located in

Gyeongnam-do (Gyeongnam province) was assigned as the development district for the
machinery related industrial base by 1974 and the construction of an industrial complex
commenced. When Changwon industrial complex was first created, large enterprises of Korea
grew through operating the trading business, the construction business or the light industries
including fabrics, textiles, sugar, wigs and plywood manufacturing businesses. On the contrary,
as the machinery industry required a greater amount of capital investment, advanced
technology, as well as a long period for return of capital, it was difficult to expect domestic
firms to make new investments.
30
Figure 13 Drawing of Changwon Urban Planning (1977)
Source: Changwon City (http://www.changwon.go.kr/main/main.jsp
Figure 14 Changwon National Industrial Complex Urban Planning
Source: Changwon City (http://www.changwon.go.kr/main/main.jsp)
31
Initially, the target development area was approximately 21km2 with the target population
of 300,000. Since 1973, the population rose to 509,000 in 10 years; as of the end of 2003,
the population stood at 514,463. The city started to serve as a central city of the Gyeongnam
area (southern coastal region of Korea) with the population twice its target population.
Changwon was selected for development as its location could help reduce regional
imbalances, which was fundamentally caused by industrial concentration on specific regions.
Changwon also linked the existing facilities in the Gyeongnam region and satisfied needs for
national security. Moreover, Changwon met the conditions and objectives that were proposed
by the government at that time which aimed to create a large-scale general machinery
industrial complex, to foster capable technicians and skilled labor forces, develop an industrial
education base that can accommodate laboratories, and to construct a new industrial city that
could facilitate an industrial complex.
Furthermore, since firms from developed countries were not making overseas investment
due to a recession caused by an oil crisis, the biggest challenge was to attract domestic firms
to Changwon industrial complex. In order to overcome this challenge, the government adopted
exceptional strategies to attract resident enterprises by giving financing and taxation benefits,
and the president declared the strong commitment to promoting the machinery industry.
Finally, the government successfully attracted enterprises in the complex.
Table 8 Operation Status of Changwon National Industrial Complex
Items 1975 1990 2000 2009

Number of Resident
44 315 1,026 1,893
Enterprises
Number of
1,151 80,084 71,554 80,015
Employees
Production
15 59,690 182,770 494,398
(KRW 100 million)
Export
0.61 1,446 6,522 17,542
(USD 1 million)
Source: Statistics Korea
A development plan was established while taking into account the comprehensive national
territory development plan and Busan regional development plan. Through efficient land use
and development of transport routes, Masan and Changwon were set as a broad city region
that shared Masan’s urban functions. A new industrial city environment was planned, designed
and created through the residential environment formation for the employees of the industrial
32
complexes; the plan for adequate support facilities and industrial complex environmental
reorganization followed. In the structural perspective, the case study of Changwon shows
similarities with Ulsan in terms of separating the industrial facility and the surrounding facilities.
Land use was planned as follows: Changwon new town’s total area was 53.12km2, with
the industrial area making up 22.6km2, semi-industrial area 1.17km, residential area 14km2,
commercial area 2.8km2, and green area 12.43km2. The road connecting Masan-Changwon-
Jinhae and Busan was planned with the minimum width of 35m, and the main roads of the
industrial complex were planned to be wider (50m, 70m); the street within the area was
planned to have minimum width of 25m. Green area was considered essential to the quality
of the living environment and since it contributes to industrial complex environmental
reconstruction. The green area was classified as park, facility green area, cultural asset
preservation district, and natural green area. The industrial area that could not be used for
a factory site was partially converted into a green area. A stable residential and living
environment was generated as a result of successful formation of a national industrial complex.
Housing supply was critical in the growth of the Changwon National Industrial Complex to
transform itself into a global machine industry complex.
Case Study 3) Gumi New Town and Industrial development
Gumi, a small “eup” (unit area), was far from an industrial city until 1968. As the Gyeongbu
Expressway construction commenced, the government sought for desirable sites to build
industrial complexes along the expressway. Despite having none of the preconditions for the
development of the electronics industry, that is, technology, capital and a market, Gumi was
selected and developed as a local industrial complex in March 1969 with a specific goal to
trigger the export growth. In 1973, the construction of a general industrial complex and an
electronic industrial complex was completed.
Gumi National Industrial Complex has led the success story of Korea's electronics industry
for the past 40 years, by changing its major production item from black and white TV in the
1970s to color TV and VCR in the 1980s, LCD and PDP in the 1990s, and mobile phone products
in the 2000s. The production activity of Gumi was fueled by the introduction of companies
like Korea Polyester, Toshiba Korea and Youngjin Electric Co. Goldstar (previous name for LG
Electronics Co.), the pioneer of the domestic electronic industry, was also one of the first
companies to move in. It moved into the complex on September 18, 1973.
Gumi is the outpost area for Korea’s electronics industry related exports. The export volume
of Gumi complex in 1971 was 8.24 million USD, but it grew to 8.12 billion USD in 1980, growing
about 1000 times in 10 years. This growth was equivalent to annual growth of 53%,
33
representing a surprising export growth of about twice as high as domestic export growth
rate of 28%. The complex still contributes to export. Its export has accounted for more than
4% of the total domestic export volume since the 1980s, recording 7% in the 1990s and 11.6%
(3.76 billion USD) in 2006 of the total export volume (325.5 billion USD).
The introduction of such industrial complexes and economic gains from the introduction
resulted in the gradual increase in population and the government had to propose a solution
rd
for the growing population. On July 23 1977, the Gumi New Town Project Plan was approved
by the President of Korea, and the housing site development project was implemented in
December 1977. The development period took 8 years from 1977 to 1985, the planned
development area was about 3.5 million m2, and the target population was around 54,000.
At the end of 2007, the population of Gumi City was around 390,000. This population of Gumi
and the surrounding area grew about 8 times larger than initially planned.
Figure 15 Urban Planning of Gumi National Industrial Complex
Source: Gumi City (http://www.gumi.go.kr/main.do)
34
Figure 16 The of the 4th IndustrialComplexofGumi
Source: Gumi City (http://www.gumi.go.kr/main.do)
Recently, the complex, which has grown into a global digital cluster, is gaining attention
as a global hub of mobile R&D, test and production. In addition, as large domestic firms are
expanding into new energy industry such as secondary battery and solar energy industries,
the complex is leading the economic development of not only Gumi but also Daegu and
Gyeongbuk areas with a focus on electronics and next-generation energy industries. When
its fifth complex is completed, the total area of the Gumi Complex will reach 34.6 million m2.
If the reconstruction of the deteriorated 1st complex is carried out, the Gumi complex is
expected to emerge as the world's largest display and mobile cluster.
3.2.2. Industrial Belts and Networks
Industrial belt, industrial cities, and the specialization of industries were implemented for
economic growth and balanced regional development along with policies related to national
territory such as the economic development plan and the CNTP. The policies were focused
on dispersing the growth effects of Seoul and Busan to other big cities including Ulsan and
Changwon while developing medium sized clusters, i.e., industrial belts.
Unfortunately, most industries were focused on medium to large scaled shipbuilding,

machinery and petrochemical industries. This made the northwestern areas to be undeveloped
since the majority of development was concentrated on the metropolitan areas and
southeastern regions. Despite the government’s efforts to disperse the urban population, urban
population to total population ratio in Korea increased from 59.17% (population of Seoul 6.88
million) in 1975 to 69.4% in 1980 (Seoul 8.36 million). In particular, urban population was
concentrated in the capital and southeast regions, whereas middle and southwest regions were
excluded from economic growth and development.
35
To prevent population concentration in Seoul, the government established the Population

Relocation Plan in the Capital Area (1977~1986). The government also established the Industry
Base Relocation Act in 1977 to restrict construction of new heavy and chemical factories in
the capital area and to build appropriate industry complexes in five local metropolitan cities
(Busan, Daegu, Incheon, Daejeon, and Kwangju) and in new industrial bases such as Yeocheon
and Pohang.
The New Administrative Capital Development Plan, which was proposed in February 1977
but cancelled, was another strategy for the Korean government to reduce urban sprawl in
Seoul as well as to form the basis for the construction of new cities. Nevertheless, the
population of Seoul still increased.
3.2.3. Expansion of the Industrial Cities and the Construction of the

New Cities of the First Development Phase
Urbanization and the growth of industrial cities that were focused on metropolitan areas
had contributed to the growth of the main cities. The metropolitan population including Seoul
continuously increased beyond the expectation and brought greater demand for the housing.
This induced the government to construct large scale new cities to increase the housing supply.
Table 9 Five New Towns in Capital Region for Housing Provision
Category Total Bundang Ilsan Pyeongchon Sanbon Jungdong
Area (km2) 50.1 19.6 15.7 5.1 4.2 5.5
Housing units
292.0 97.6 69.0 42.0 42.0 41.4
(thousand)
Population
1,168 390 276 168 168 166
(thousand)
Green areas (%) 19.0 19.4 23.5 15.7 15.4 10.7
Construction
1989~1996 1989~1996 1990~1995 1989~1995 1989~1995 1990~1996
period
Costs (US$,
9,753 9,875 2,478 1,099 587 1,714
10thousands
Source: Korea Industrial Complex Corporation (www.kicox.or.kr)
36
The Residential Site Development Promotion Act, enacted in December 1980, provided a
legal basis for acquiring large amounts of land to be used to fulfill residential supply at a
cheap price. Seoul announced the plan of new cities to be located within 10km from the
downtown Seoul area. Based on this criteria, Mok-dong and Sinjeong-dong were built as
sub-centers of Seoul. Seoul also developed large-scale residential districts such as Sangye,
Junggye, Godeok, and Gaepo districts.
In 1985, the urban population ratio in Korea scored 77.2% which brought greater necessity
to increase housing supply for the employees who lived in Seoul and the adjacent regions.
The President Taewoo Noh’s administration, launched in 1988, introduced the “2 Million
Housing Construction Plan” and designated many proposed residential site development
districts throughout cities in order to satisfy the increasing demand of urban settlement.
Large-scale residential development projects were conducted by the central government and
public development agencies.
By 1989, the government began to construct five new cities around Seoul with three
locational criteria that emphasized accessibility, convenience and affordability. First, the five
new cities needed to be located in areas where people could commute to Seoul within one
hour. Second, the development area needed to be easy to connect to existing urban
infrastructure systems. Third, the area had to be economically affordable and reflect
environmentally friendly features.
As centers of the Southeast (Bundang) and the Northwest (Ilsan), Bundang and Ilsan new
2 2
cities were developed with the areas ranging from 15km to 20km . Pyoungchon, Sanbon,
2
and Jundong new cities were built with smaller areas, from 4km to 6km, as they were spatially
connected with existing urban areas.
Those five new city development projects were initiated by using the public development
scheme in the Residential Site Development Promotion Act. Designation of proposed residential
site development districts started between February and June, 1989 as the first development
phase; it took only four to nine months to get development approvals from the government.
Construction of the new cities began between November 1989 (Bundang New City) and July
1990 (Ilsan New City). In November 1989, residential units (apartments) were sold to the public
in the Bundang New City, and people started moving in from September 1991. As of 2008,
moving and infrastructure construction in the new cities were completed.
37
Figure 17 Location of New Cities that Surround the Metropolis (Seoul)
Source: Ministry of Land, Transport and Maritime Affairs (www.molit.go.kr/), LH (www.lh.or.kr)
38
At that time, the first development phase of new cities was aimed at preventing population
inflow into the metropolitan area by means of urban planning techniques as well as creating
a comfortable living environment within the area. In particular, it aimed to present a model
of Korean new city development, where the objectives were to provide a self-sufficient city
that considers proximity, to carry out step-by-step stages in the development projects that
are based on demand and supply forecasts, and to utilize the private sector to maximize
creativity and efficiency. In terms of urban planning, the establishment of the road network
and the formation of an urban axis that conforms to the natural terrain as well as the connection
to the surrounding area, setting the function of the city, and the basic direction of the housing
plan are essential in order to secure flexibility that caters for the increase in demand.
The specifics of plan differed for each area. Bundang City, which was one of the initial
attempts ever made, is regarded as a representative example of Korea's new city planning.
This is because it created a wide-area arterial road network and green axis. Then the
living/residential zone was planned and designed to surround the road network and green
space. Using this as the focal point, commercial area was created and specialized. Especially,
it is perceived to be meaningful in the sense that it was developed against the notions of
modernism which was an urban planning method of centering the city on the super block
which had dominated during the past 1900s. Instead, it arranged basic units of blocks that
were suitable for the small sized living area. To be specific, through overcoming the limitations
of previously planned new towns such as Banwol, Sanbon and Changwon, the plan strived
to improve the urban environment and the quality of life.
Most importantly, the new cities of the first development phase share a common
characteristic of population dispersion of the metropolitan area and improved connectivity
between adjacent areas. In the case of Bundang new city mentioned above, though it is a
residential city, some functions of public institutions related to high-tech industry were partially
included. This was mainly to pursue accessibility to the Gangnam area in Seoul where business,
commerce, knowledge and financial industry are concentrated. Private enterprises have also
moved to the area, and by separating and expanding the function of the business together
with the function of the residence, it has emerged as a self-sufficient city.
39
4. Policies for Industrial Complex Planning System
4.1. Designation of Industrial Complex
4.1.1. Geographical Condition and Location Quotient
The location and development policies for Korean industrial complexes have considered both
the CNTP and the economic development plan. National territorial management has been
involved in heavy chemical industry growth of the 1970-1980s, balanced national territorial
development of the 1980-1990s, and introduction of new industries or promotion of
knowledge-based industries of the 1990-2000s.
Korea’s industry location policies take the limited national territory into account and pursue
maximized land use and efficiency. It is a policy that aims for effective provision of land,
reasonable allocation of the industry, balanced national territorial development, and harmony
of industry and environment.
The development of the Korean industrial complex consists of selecting site, establishing
plan, achieving permit or license, granting land and compensation, and establishing businesses
and selling permits. The most important step in the early stage of industrial complex
development is the selection of location. The step includes balanced development according
to the upper plan, distribution of industrial functions in each region, and verification of industrial
function.
At the stage of selecting the detailed location and verifying the feasibility of the industrial
complex, the distribution of the industry in each city or region was led by the government.
In particular, the Korean government continues to analyze the status and trends of specialized
local industries based on its four national comprehensive plans. In the field of policy
development and research for diversification of industry, the status of local industries has been
analyzed through the location quotient (LQ). The analysis has been the basis for the
development of specialized industries.
40
Table 10 Changes in Industrial Location Policy and Related Institutions
1960s 1970s 1980s 1990s 2000s

- Increase in
- Industrial
individual - Knowledge
concentration
Subject of - Attempt to - Greater regional locations based industrial
within the
the policy develop LQ imbalance - Demand for location demand
metropolitan
high-tech supply
area
industries
- Innovation
- Improvement of
- Suppression of - Variety of cluster
industrial
the metropolitan location types promotion
- Export oriented complex
Mainstream area - Deregulation of - Specialized
light industry - Development of
of policy - Construction of location district
(location) agricultural and
large industrial - Promotion of - Establishment of
industrial
complex restructuring small industrial
complex
complex
- Act on
Comprehensive
Plans for
Construction in
- Industrial sites
the National
- Seoul and
Territory
Metropolitan development Act
- Act on Export
Area - Revised Act on - Revised
and Industry
Readjustment placement of Industrial sites
- Promotion of
- Act on the Planning Act Industry and
Distribution
Development of - Small and - Revised Act on development Act
Complex
Rural Industry Medium the Utilization - Promotion of
Development
Related - Industrial Enterprises and Cultural Industry
Act
laws Complex Promotion Act Management of - National Land
- Machinery
Promotion Law - Agricultural and the National Planning and
Industry
- Act on placement Fishing villages Territory (`93, Utilization Act
Promotion Law
of Industry Income `95) - Revised Act on
- Act on the
Promotion Act - Act on Special Integration of
Establishment of
- Industrial Cases Industry
Industrial and
Development concerning
Energy
Act Support for
Technology
Technoparks
Foundation
- Electronics
Industry
Promotion Law
- Local Industrial
- Urban high-tech
Development
- Establishment of industrial
Encouragement - Name change of
a large industrial complex
District industrial
complex in the - Cultural
(encouraged/su complex
southwestern Industrial
- Ulsan Industrial pported zone) - Simplification of
region Complex
Center - Establishment of development
Explanatory - Development of - Software
- Development of large scale procedures
note agricultural and Promotion
export industrial industrial - Increase in
industrial Complex
complex complex in individual
complex - Regeneration of
Southeast locations
- Establishment of industrial
Region - Composition of
apartment type complex and
- Development of Techno Park
factory improvement of
Export Free
structure
Zone
Source: Ministry of Land Transportation (2011)
41
Site Selection and Validation Procedure for Industrial

Table 11
Complex Development
Procedure Details
Analysis of project conditions including location, transportation

Analysis of location condition
and surrounding environment
Review of development possibility of industrial complex through

Survey of location demand
survey of location demand
General analysis of location demand, profitability and ripple

Feasibility study effect including economic feasibility study through project cost
estimation
Selection of business types to Reflecting the level of supplied price, forecasting sales prospect,
be invited and preparation of set-up of business types to be attracted and consumer needs
basic plan based on the location demand of the enterprises
Decision of project promotion Development decision based on location condition, demand,

feasibility feasibility, business types to be attracted and basic program
Source: Industrial Complex Development in Korean Economy (KICC, 2011)
LQ is an index that measures specialization of the regions by comparing the proportion

occupied by a specific industry within the region to that of the whole country. The change
of specialized industry for each region can reflect a certain pattern. Based on this, it is possible
to measure the weight and the level of specialization for each specialized industry as well
as the level of specialization for each city's manufacturing industry. These measurements and
results can be used to establish or change the policy of industrial location in order to foster
specialized industries for different regions.
42
Figure 18 Examples of Specific Industries (LQ) by Specific Regions
Seoul Daegu
Ulsan Chungbuk
Source: Industrial location policy to foster localized industries (Ministry of Land Transport and Transportation, 2013)
Based on such methods, the government and related governmental bodies have proposed
a framework for managing local industries by dividing the regional industrial support projects
into two broad categories. These are six metropolitan economic regions (belts) and specialized
regions (cities and provinces within the metropolitan economic regions). Based on this
categorization the government is encouraging the participation of industries that can contribute
to creating jobs and boosting local economy and that can be fostered and developed at the
city or provincial level.
43
In particular, Korea is actively reflecting the current status of regional manufacturing/

specialized industries, regional changes in the trends of the industrial land uses, and demand
forecast on the national industrial development roadmap. Moreover, Korea is establishing
various policies to reflect the present and future of the region through building specialized
industrial complexes and selecting businesses for the complexes. In terms of the methods for
development and management of the industries, Korea is developing the industrial complex
with respect to the laws of industrial location and on the public initiative. This refers to the
public development method that is being led by the public. During these processes, LQ
influences the trend of the changes in industrial weight for each region, the distribution of
industrial functions, and the designation of location.
In this study, we introduce the Osong Bioscience Complex (Osong Life Science Park) and
Iksan National Food Cluster, which are considered to be representative examples of the
selection and support of specific industrial sites that are formed through the cooperative bonds
between major ministries in Korea.
1) Formation and Urbanization Strategy of Osong Bioscience Complex

(Osong Life Science Park)
Chungbuk province used to have high proportion of manufacturing of electronic components,

computers, video, sound and communication equipment. The transfer of the administrative
capital allowed location advantage and, in 1997 and 2008, it was designated by the Ministry
of Health, Labor and Welfare as a national industrial complex and a high-tech medical complex
in order to specialize in research within the field of medicine. Currently, the degree of
manufacturing medicinal goods is 3.3, which is an extremely high figure.
In particular, the Osong Biotechnology Complex is one of Korea's leading national growth
initiatives designed to cope with the changes in the industrial structure. It is actively supported
by the Ministry of Health and Welfare, and designated by the Ministry of Land and
Transportation as the national industrial complex. The complex is meaningful in the sense
that the integration of public institution and research facilities within the complex have
collectively established industry-academic-research clusters.
As shown in the figure below, the key areas were divided into areas such as healthcare
administration area and the area that is connected with the high-speed railway, so that
collaboration of research, education, and industry could be achieved. Ranging from land use,
residential, commercial to green space, the plan was fundamentally designed to allow
multidimensional industries to coexist.
44
Table 12 Osong BioHealth Science Technopolis Support Centerfacilities and areas
Medical device field Food Related Pharmaceutical field Total

Category No. of Site area No. of Site area No. of Site area No. of Site area
2 2 2 2
firms (m ) firms (m ) firms (m ) firms (m )
In operation 13 153,545.5 3 112,324.6 17 545,935.2 33 811,805.3
Under
5 62,747.4 1 18,216.6 13 242,077.7 19 323,039.7
construction
Preparing 2 22,172.8 - - 6 163,693.6 8 185,866.4
Total 20 238,465.37 4 130,539.2 36 951,706.5 60 1,320,711.4
Source: Industrial location policy to foster localized industries (Ministry of Land Transport and Transportation, 2013)
Osong BioHealth Science Technopolis District Unit

Figure 19
Planning and the Aerial View
Source: Ministry of Land, Infrastructure and Transport (http://korealand.tistory.com/940)
45
2) Formation and Urbanization Strategy of Iksan National Food Cluster
Since 2008, the Iksan National Food Cluster was collectively managed by the Ministry of
Agriculture, Food and Rural Affairs, Jeollabuk-do (province), Iksan-si (Iksan city) and the
Ministry of Land, Infrastructure and Transport for the development of specialized industrial
clusters. The percentage of employees in the manufacturing industry for food and drinks were
18.8% with LQ of 2.4 (food) and 2.9 (drinks), which reflected high proportion of industrial
weight. The evaluation of the preliminary feasibility of the formation of this cluster took place
in 2008, the proposal for the summarized business plan by the Ministry of Agriculture, Food
and Rural Affairs was completed in 2012.
ksan National Food Cluster District unit planning

Figure 20
and the aerial view
Source: Iksan National Food Cluster (http://www.iksan.go.kr/food/index.iksan)
According to the plan for the National Food Cluster, Food Polis is created with the integration
of businesses, research institutes and manufacturing facilities as well as the surrounding
facilities of the residential areas and educational facilities. The planned area is 3.48 million
m2withfood-specializedcomplexesoccupying2.32millionm2and1.26millionm2forthesurrounding
cities.
Korea’s overall plan for the formation and operation of the industrial complexes under the
name of ‘cluster’ had intertwined the industry-academic-research bond through integrating
46
industries, residential, commercial, greenery and cultural space, including the example (case
study) of Osong Biotechnology Complex mentioned previously. The analysis of the industrial
site through the use of LQ, the prospects of the upper plan and the consideration of the regional
trade activity, export, production and consumption gave greater meaning to the plan.
4.1.2. Integrated Methodology of Urbanization and Industrialization
Table 13 Stages of Development of Industrial Complexes
Stages Context
Establishment of overall schedule and survey for project promotion
Development Plan Establishment of development plan including development area,
method and land use
Preliminary Examination Review of location feasibility and matching with surrounding
(Environmental Analysis) environment
Assessment of impact over environment, transportation, disaster and
Impact Assessment
population caused by creation of industrial complex
Establishment of plans for land use, infrastructure, supporting facility,
Land use & Facility Plan
and hinterland development
In general, the land use planning is completed via a series of steps which involve the selection
of site with the consideration of the locational factors, analysis and prediction of demand
(infrastructure and planned scale), location-allocation planning and implementation plan.
Depending on the type of business, different goals and objectives are set and then locational
factors determine the site. Through predicting the type and size of appropriate facilities based
on the population and economic activity, the scale is determined.
The demand in land use refers to the expectation of the land requirement based on four
different types of land use. The four types are the residential, commercial, industrial and green
area. The demand for each type of land use can be analyzed in three stages where stage
one involves the prediction of economic activity and population; stage two involves setting
the density of the land use for each purpose and finally; stage three involves the calculation
of the demand for land use for each purpose.
Depending on what the purpose is, there are different ways of estimating the demand. For
instance, determining the demand for commercial area requires calculation of the commercial
area ratio which is the total commercial area divided by the floor area. As a mathematical
47
formula, this can be shown as an equation; “total commercial area ÷ [N ∙ r ∙ (1-e)]”, where
N is the number of floors, r is the building coverage ratio (%) and e is the ratio of public
land.
Table 14 Land use planning procedures
1. Main 3. Estimate 4. Location 5. Execution and

2. Site selection
direction demand distribution implementation
Business Use district and
Selecting candidate Predict facilities Spatial structure
prospect zoning
Setting Finalize the planning Interconnecting Urban development

Predict scale/size
objectives area/district system projects
Paradigm General analysis of Marketing Locational analysis Policies/regulations

analysis the site analysis for each land use and inducement
Trend Basic unit/Metric Setting alternatives Development

SWOT analysis
analysis model method and evaluate projects
Source: Korea Planners Association “Urban Development”, bosungak (2008)
Table 15 Estimating demand for commercial area
Method 1 Method 2 Method 3

Total commercial area
Number of employees ×
Stage 1 Population × Total Sales × Total commercial
Total commercial area
commercial area basic unit area basic unit per amount
basic unit per employee
per person (ha/person) of sales (ha/won)
(ha/person)
The floor area ratio (%) The floor area ratio (%) The floor area ratio (%)
N: the number of floors N: the number of floors N: the number of floors
Stage 2 r: the building coverage r: the building coverage r: the building coverage
ratio (%) ratio (%) ratio (%)
e: the ratio of public land e: the ratio of public land e: the ratio of public land
Total commercial area ÷ The floor area ratio

Stage 3
Total commercial area ÷ [N ∙ r ∙ (1-e)]
Source: Korea Planners Association ““Urban Development”, bosungak (2008)
48
In determining the demand for the industrial areas, the size of the economic activity of the
site, especially secondary industries such as manufacturing industries, are taken into account.
The land use pattern of industrial areas tends to be two-dimensional. Thus three-dimensional
calculations will not be very significant. The demand for industrial areas are predicted through
the scale of economic activity, density and the industrial land/area. The anticipation of the
scale of economic activity can be approached by using the number of employees/staff or the
amount of production. When calculating density in the second stage, the average employment
rate (density) or the amount of production per area of the industrial facility (KRW per unit)
can be used to predict and estimate demand. The third stage involves the prediction of the
area (size) of industrial use. This can be estimated by the number of employees or the value
of employed population divided by the employment density or through the value achieved
by dividing amount of production and by industrial land (per unit). The ratio of public land
can also be used to increase accuracy of the prediction.
Table 16 Estimating demand for industrial area
Method 1 Method 2
Employment population Amount of sales
Stage 1
Estimate the employment population for Estimate the amount of sales for the
the target year target year
Employment density Industrial area base unit
Stage 2 Average employment density or

Industrial area base unit (won/ha) per
Employment density for each sector
average amount of sales
(person/ha)
Employment population÷Employment Amount of sales÷Industrial area base

Stage 3
density unit
It is arguable that the demand for industrial area has two-dimensional characteristics in
terms of land use. However, the estimation for the recent apartment type factories and urban
industrial areas are growingly using three-dimensional density indexes for deriving calculations
such as the floor area ratio. The density index for industrial areas/lands must account for
the characteristics of the industry. That is, the labor-intensive industry, capital-intensive
industry, urban type industry, high-tech industry. Alternatively, the density index for industrial
areas/lands can also undertake density analysis for different sectors or fields, depending on
whether the industrial areas are located in the preexisting lands or newly built industrial areas.
49
Table 17 Standards for green space
Rate of
Category Standards for installing Width
green area
Areas that demand

quietness such as the
residential-only zone, At least 50% At least 10m
education and research
facilities
Protection
from pollution
Refuge in the event of
(e.g. factories) At least 70% At least 10m
Buffer natural disaster
green area
Security, restricted access,
control contradicting land At least 80% At least 10m
use
Protection from all sorts of pollution from

transportation facilities such as railways and At least 80% At least 10m
expressways
Preservation of the natural Within the area required for

environment within the preservation of the natural
Expand and urban area (city) environment
Landscape
improve urban
green area
landscape Allow pleasant experience
Within the area required for the
and safety in the daily lives
installation of landscape facilities
of the residents
Green network and

eco-corridor along the
rivers, streams and
relatively large-sized
forests
Connecting Consideration
Network that links to At least 70% At least 10m
green area of functions
residential areas, industrial
areas, schools and other
public facilities
Small sized street parks for

walking and relaxing
Source: Article 18 of the Act on Urban Parks, Greenbelts, Etc
50
Estimating the demand for green areas depends on the function as well as the frequency
of use. For instance, the green areas that are fundamentally designed for the protection or
preservation of the ecosystem do not need to have demand estimated, instead, it is more
of an issue of how to protect and preserve the green space. Meanwhile, the parks in the
urban areas are built for urban citizens to interact with the nature in the city. Hence, population
analysis needs to be conducted as the first step for urban parks.
The residential lands are subject to many different aspects such as proximity to a commercial
facility, public facilities like schools, streets and public parks. The density of the residents can
be estimated by not only including the residence itself, but also the commercial facility,
educational facility, roads, parks, and many more that are closely located to the residence
so that more accurate estimation can be made.
4.2. Land Use and Infrastructure Plan
4.2.1. Land Pooling (Land Readjustment)
Land pooling and readjustment are methods that pursue pleasant urban environment. They
adjust blocks for the areas that have high density of non-rectangular lots so that followings
can be achieved: the dispersion of population and/or the distribution of the function of the
city, and the effective supply of infrastructure.
Korea utilized land pooling and readjustment techniques in order to recover from the Korean
War of 1950. These techniques are still frequently used today in the field of urban planning
and management such as the land use planning and district planning.
The method of land pooling and readjustment are often adopted during the designation
and the formation of industrial areas or complexes. The procedure for the selection and the
creation of industrial complexes are specified in [Table 18].
The formation of industrial complexes begins off with the division of large areas/regions
due to land use planning. This is because the lands that are owned by private sector must
undergo consultation and expropriation compensation procedures prior to land use planning.
In the past, Korea initiated land readjustment projects where the association of land owners
were able to substitute land for the provision of detached housing. However, this was
suspended due to the privatization of profits accrued from development, increase in land price
and demand for apartment housing.
51
Table 18 Land Pooling/Readjustment Index
Direction Description
The lower the development pressure
The better the cooperation of the landlord
The more legitimate is the occupation of the land by the slum dwellers
The earlier the stage in the eviction process
The stronger the community leadership
The stronger the support from outside agencies
The lower the existing residential density
The smaller the existing size of houses
The lower the value of existing houses
The higher the ability to pay for housing
The better the access to sources of housing finance
Source: http://web.mit.edu/urbanplanning/upgrading
However, these methods required relatively low budget in general. Therefore, it is

recommended that such methods should be considered and examined in the selection and
creation of industrial complexes and residential areas in the surrounding environment.
Currently, Korea’s policies regarding industrial/distribution complexes do not focus on
producing maximum output (efficiency) from minimum input (investment). Rather, it is tailored
to drawing solutions for lack of infrastructure, especially in areas with poor locational
conditions. By supplying or providing higher quality infrastructure, Korea aims to improve the
geographic locational conditions and to attract businesses and firms in order to promote
national industrialization and achieve regional balance.
Moreover, the surrounding areas of the industrial complexes must meet the satisfactory
environmental standards since those areas are critical in dealing with increasing population
due to the growth and development of the industries. In the theoretical view, the following
land pooling/readjustment index should be adopted.
52
4.2.2. Infrastructural Facilities Planning
Figure 21 Infrastructure Planning (diagram)
Source: Korea Industrial Complex Corporation, “Industrial Park Development in Korean Economy”, 2011 (translated)
For sustainable industrial ecosystem, the geographic locational characteristics generally

suggest that industrial clusters be formed between cities. Each industrial complex and city
supports the cluster through supporting the policy, special economic zones, and contributes
to maintaining regional characteristic and sharing infrastructures in order to achieve a balanced
development strategy. The sustainable industrial ecosystem should also reflect the case studies
of the spatial structure plan for the industrial complexes and the new cities, and also the plans
for living environments, streets, parks and green areas.
In terms of the transportation facilities, the estimated demand for transportation for industrial
complexes is derived from the analysis of the amount of shipped goods (cargo), the raw
materials from the factory, the workers (staff) as well as the residents and/or passengers
from the surrounding/hinterland facilities. A regional traffic network expansion plan should
be established by reflecting traffic increases caused by new construction and expansion of
expressways, national highways, local roads, access roads, ports, airports and railways, after
verifying whether increases of the passenger traffic volume and the cargo traffic volume caused
by industrial complex development would be handled successfully. For efficient handling of
the cargo traffic volume, a comprehensive traffic network should be established, linked with
roads, ports, railways and airports.
53
Table 19 Considerations for Supply Planning
Category for Planning Context
- A regional traffic network expansion plan should be established and

road should be widened for medium to large size autovehicles such
as trailers
Transportation
- For efficient handling of the cargo traffic volume, a comprehensive
traffic network should be established, linked with roads, ports,
railways and airports.
- Volume of industrial water to be used, water treatment (purification

facility)
Industrial Water Supply
- The location of the industrial water source and the applicability of
the related facilities
- The method of treatment and the location are selected considering

the convenient expansion, conditions of the areas of water discharge
Sewage Treatment and environmental and hygienic conditions
- Consideration of flooding and minimization of impacts such as air
pollution and noise on the surrounding areas are necessary
- Demand for energy such as gas and electricity needs to be estimated

for each industry
Energy Supply
- The location of gas supply facility should consider safety and the
land use plan of the surrounding areas
- Consideration of the connection of the industrial facility to the

Wastes Treatment residential facility, the supply of water, various environmental
Facility problems including air and water pollutions and wind direction are
necessary
- Installation of green buffer is necessary for the connection between

the residential and the industrial functions
Park and Green Area
- Size, area, location of the green space should consider the most
optimistic experience within the region
54
4.2.3. Smart Management and The Other Related Planning Systems

and Methodologies
Figure 22 Smart Management (diagram)
Although the concept of smart city and its development plans have not yet been fully
established at present, it is necessary to raise the performance of each city urban functions
and to improve the connectivity between cities. In the future, environment and industrial
problems are expected to be solved through utilizing information and communications
technology.
Smart cities, which are beginning to be introduced in developing countries and countries
with emerging economies, have followed strategic point based development methods until
present. In the long term, it creates the suitable indicators for each country or city through
the evaluation of the techniques and skills each country or city has.
- Within the field of transport, roads (traffic volume, car accidents, traffic information),
railways (management, traffic information, condition of the train) and parking (parking
location, fees, condition) can be subdivisions. Also, through using the integrated control
center, it is possible to establish a system to exchange information via use of data and
network as well as to obtain and provide traffic information regarding traffic congestion
in metropolitan areas, car-only roads and for each section of the expressways.
- In the area of water resources management, the state of comprehensive facilities such
as power generation, safety, and operation of dams and beams, and the status of water
55
level, water quality and water quality of the river, ground and underground water are
collected and transferred to the control towers in each region. Moreover, the smart city
planning method can be implemented for the related organizations to share and utilize
information such as the water level, water quality and monitor water quality according
to seasonal variations and other natural conditions of ground water and river. Also, smart
city techniques allow real time updates on the location of each water supply and the
sewerage system, as well as to share information on the quality of water supply with
the integrated control center. The above information can be collected and transferred
to the integrated control center and visualized so that the relevant situation can be
monitored in real time and an active system such as a public information service
(disaster/natural hazard alert service) can be established.
- In the field of architecture and complexes, the use and management of heat gird,
temperature-supply and management status, the introduction of BEMs, which are
intelligent building managers that collect and integrate internal information of the
buildings and information related to energy use within buildings, including the installation
of renewable energy, electricity management and the transactions for excess energy.
- In terms of planning and efficient management of land, information and computerization

of each land using GIS technique can greatly reduce the social cost of land surveying
and responding to land related complaints. Also, it is possible to reduce costs and expenses
for the development of the small and large projects. Through connection to GIS data and
related information, it is also possible to implement a system that predicts and responds
to various problems that may occur in the national territory and/or the city.
56
5. Frameworks for Urbanization and Regional Planning
5.1. Urban, Land, and Complex Planning Strategy
5.1.1. Designation of (Special) Planning Zones
Figure 23 Decision-making Processes in Industrial Area Designation
Source: Korea Industrial Complex Cprporation, “Industrial Park Development in Korean Economy”, 2011 (translated)
1) Analysis of Location Condition
Selection of location directly affects the sales price of an industrial complex (area/zone)
as well as the possibility and easiness of industrial complex development. Therefore, the
location is considered as a primary factor by enterprises when they select industrial complex
to move to. In order to select an adequate location, a comprehensive review should be carried
out, which includes analysis on general social/economic conditions such as physical conditions,
easy securing of lands, R&D facilities and transportation facilities; analysis on factors disturbing
development including limitations on development; and other development plans applicable
to the industrial complex. Industrial complex development affects development of the region
significantly, so it is crucial to select the location to drive the most effective regional
development.
57
2) Survey of Location Demand
The location demand survey is intended to predict sales possibility of an industrial complex.
It is an important factor to consider when determining the development of an industrial
complex, however, a conservative analysis on the survey result is deemed essential, because
high interests of the enterprises shown at the point of the demand survey are not always
translated into successful sales results. The demand survey at times reflects the
cause-and-effect relationship with the selection of business types which are determined
through a demand survey at some planned industrial locations, or happens in the backward
order where it is selected first and then the demand survey for the target businesses is carried
out. The results of the demand survey can be referred during the discussion of the elements
like the sales prices, outlook for sales, business types and the size of a park, and users'
requirements can be identified through the process of the survey.
3) Feasibility Study
Analysis of development necessity: When analyzing development necessity of an industrial

complex or area, the necessity to supply a new industrial location and the possibility of sufficient
location demand should be reviewed first. When developing an industrial complex with goals
to provide a regional development base, actual effects on regional development should be
assessed. When an industrial complex is built and new enterprises are placed, the region will
have the following benefits: creation of jobs, ripple effects of relevant industries, stimulation
of the local construction market and expansion of the urban infrastructure.
Analysis of feasibility: The economic feasibility of the project itself as well as the future
economic ripple effects from the industrial complex development should be reviewed. The
economic feasibility analysis comprehensively assesses location demand and ripple effects, and
the scope of analysis includes profitability analysis based on project cost analysis. Regarding
the estimated costs of industrial complex development and the sales price, the difference
between the time of expenditure and the time of profit generation should be considered for
estimation of profitability. Profitability should be estimated as the current value or the future
value.
4) Selection of Business Types to be Invited and Preparation of Basic

Plan
Business types to be invited are selected considering the geographical characteristics,

social/economic factors, applicable master plans or local development plans, and the characteristics
58
of each business type. Growth potentials are included to the selection criteria as well. Attracting
the business types with high growth potentials is crucial in the long term even if their production
output and job creation effects are currently low since they will enable long-term development
of the regions. As the awareness on the environment is improved, the environmental effect
of each business type can be a critical factor for the selection of business types. Enterprises
prioritize economic factors such as labor force, land price, market condition, transportation
condition and growth possibility of the business types when they decide to move to an industrial
complex. This is the reason for the gaps between the view of enterprises and the decisions
made by local authorities. The demand for enterprises and industrial and environmental ripple
effects on the region should be considered thoroughly.
5) Decision of Project Promotion Feasibility
The feasibility of an industrial complex development plan is reviewed considering diverse

aspects, but in general, the most important factors are firstly, the necessity to supply a new
industrial land at the national or regional level and secondly, the possibility to secure sufficient
location demand. In particular, the demand of enterprises should be evaluated in a conservative
manner when conducting the location demand survey for decision-making. Many enterprises
do not have long-term location plans, so the location demand surveyed is highly likely to
change. The decision to implement the project should be made by comprehensively considering
profitability of the project, the demand of enterprises, the location condition and the ripple
effect.
5.1.2. Procedure and Management of Masterplans
Procedures and management of comprehensive plans can be broadly categorized into criteria
and procedures for planning industrial complexes, spatial arrangements for industrial and
residential areas, and case studies on industrial and residential new towns. When the decision
is made according to the function, the type of space for industrial complexes can be divided
into major industrial areas: support facilities, R&D facilities, residential areas, and green areas.
The main industrial area is the space where the main production and related activities take
place, and the supporting facilities indicate the facilities that perform functions such as
commercial, financial, medical and welfare supporting. R&D includes research facilities and
information centers, and residential areas include housing, education, and amenities. Lastly,
green areas refer to parks or development restricted areas.
59
Table 20 Spatial Use Assessment Criteria by Items/Functions
Items Functions Arrangement Criteria

- Convenience of future expansion
Main industrial Main production and - Expansion of manufacturing function
area related area - Pursuit of cooperative, integrated system
- Separation with the residential area
- Convenience of use/ internal and external

Supportive Business, financing, accessibility
facilities medical, welfare, etc. - Placement of the supporting facilities at the center
of the park
- Low-density allocation in a pleasant environment

Research institute,
R&D - Accessibility to production, residential and
information center, etc.
educational functions
Residence, convenience - A pleasant environment for living

Residential area facilities, educational - Accessibility to dormitory, company housing and
facilities, etc. labor camp
- Inclusion and extension of green areas of the

surrounding area into the park
Park, green bumper, - Building of the main open space in the park and
Green area
etc. convenience of use
- Buffering contradicting functions of production
spaces and residential space
When establishing the industrial complex development plan, allocation of space and land
use plans should reflect correlation and conflicts among functions. The key contents of the
development plan are divided into plans for spatial arrangement, land use, infrastructure,
supporting facilities and urban hinterland development.
The spatial arrangement and land use plans of an industrial complex should reflect
cooperation and conflicts among functions, and the environmental damages caused by
industrial complex development should be minimized by utilizing external spaces of the
complex.
Each functional space should be arranged considering the production processes, partnerships
between R&D and production, and partnerships between main businesses and related
businesses. If possible, any conflicting sectors in terms of land use should be separated. But
if unavoidable, negative impacts caused by conflicting land use should be minimized by
60
installing a green buffer (green are used as buffer space) separating conflicting functions.
In addition, in order to create production supporting functions and a pleasant environment
for residential spaces, some areas should be separated or a buffer zone should be installed.
Green areas can improve complex environment, and provide a buffer between production areas
or roads and residential spaces.
6. Future Policy Recommendation foEnhancing Sri Lanka

Urbanization
6.1. Management of the National Regional Plan
Korea 's economic growth and its direct and indirect impacts on the country's land related
policies have attracted huge attention from many different entities such as development banks
like ADB, international organizations, and developing countries like Sri Lanka, who is the direct
beneficiary of this analysis report. Many research institutes in Korea, besides the ones involved
in this research, have shared implications through modularization studies on Korea's economic
development.
Previous studies have devoted to Korea's national and regional planning in terms of
economical and industrial aspects. However, there are only a few cases that analyzed and
investigated Korea's national policy on land and urban planning. In this section, we sought
to provide an outline, history, methodologies, and policies of Korea's national land plan and
industrial complex for the establishment of Economic Corridor Development (ECD) in Sri Lanka.
Since it was established, the first CNTP has been driving force for Korea’s economic growth
for the last 50 years. The CNTP was the plan that established and expanded the nation’s
key industries. At the same time, it directly and indirectly affected domestic cities, regions,
environment, politics, economy, society and culture by responding to the changes in population,
social structure and domestic and international affairs.
Indeed, the implementation of the local self-governmental system reduced the level of
impact the CNTP had on the whole country. However, Korea's CNTP that built industrial and
economic infrastructures under government-led projects is still considered as one of the best
practices for the developing countries.
Over the years CNTP has responded to various domestic and international events and
changes such as oil shocks, transformations in industrial structure, eco-friendliness, sustainability,
61
and the fourth industrial revolution. This implies that the policy will continue to play a central
role in reinforcing the sustainability in Korean territory.
However, political controversy in Korea's national land plan still persists today. It is often
challenged by a number of problems. These include balancing development between rural
areas and metropolitan areas, meeting the social consensus regarding the changes in the
mega-regional economic zones, and selecting locations for the distribution of important
governmental and national functions. This remains as a long-term problem that needs to be
solved through participation of experts and the public.
This implies that successful realization of the ECD linking Colombo and Trincomalee in Sri
Lanka requires active policy formulation and implementation as well as consensus among
countries and regions. In particular, the problems of hidden urbanization, messy urbanization,
and air pollution, which have a direct impact and almost always negative consequences on
the citizen’s health, have been influenced by the economic growth as well as the dispersion
of metropolitan functions. Through the improvement of the environment in which the citizens
live, along with establishing the legal basis for the formation and implementation of the
organization at the government-wide level, it is possible to realize that sustainable national
territory and urban space could be created and developed.
From this perspective, the factors that contributed to stable and successful settlement of
Korea's CNTP and the implications for the policies regarding the national territorial planning
and the city planning are as follows.
6.1.1. Establishment and the status of the national territory management

policy
The CNTP is a top-level plan that forms the basis of the laws and regulations on the
planning and use of the Korean land. This means it takes priority regarding decisions that
are made about the use of the national territory. The plan also serves as a basis for each
city-county comprehensive plan including the capital city of Seoul. In brief, the CNTP proposes
guidelines for the development, use, and conservation of land resources; it also forms the
foundation of all national territorial related policies. Therefore, this plan will include the
management and maintenance of the land to deal with the future economic and social changes
of the country, and the following long-term policy directions.
62
Figure 24 The System and Hierarchy of the National Territory Plan
Source: National Environment Information Network System (neins.go.kr)
This basic guideline encompasses the overall content for the establishment and
implementation of each regional plan and sectoral plan, enabling the management of the
country to suit to the national development paradigm. Additionally, the plan is enforced through
the consultation and management of the governmental organizations and public enterprises
such as the central government, the Land and Housing Corporation, the Korea Housing
Corporation, the Water Resource Corporation, the Energy Management Corporation, and other
resource related corporations. Thus, its main advantage is enhanced feasibility of businesses
and increased transparency in the management processes.
63
In the long term policy management, Korea’s CNTP should follow the directions shown in
Table 21. Sri Lanka should also refer to the following guideline to effectively respond to the
economic and cultural changes in the future.
Table 21 The Basic Guideline
Contents
- Status and the change in the situations in the country

- Basic ideology of land development and establishment of a positive future
- Improvement of the spatial structure and the sharing of function for different regions
- Measures balanced development of the country and fosters growth of local industries
- Expansion of national infrastructural facilities to enhance national competitiveness
- Efficient use and management of land resources such as land, water, forest and marine
resources
- Improving the quality of life and living conditions such as housing, water and sewage
- Prevention of floods, and other natural hazards and/or disasters
- Reasonable use and management of underground space
- Conservation and improvement of land and environment for sustainable national territorial
development
6.1.2. Provision of economic growth base through infrastructural

expansion
Detailed status or conditions vary depending on the country, but one of the major tasks
of developing countries in the emerging economies is the expansion of SOC at times of adverse
economic and social conditions.
From a similar point of view, the planning and establishment of Korea's first and second
CNTP were aimed at the expansion of SOC, the development of resources for efficient economic
growth, and the development of large industrial complexes. To be specific, the 1st CNTP
adopted the method of region-based development. It has the characteristics of improving
transportation and communication network to connect the center of the heavy chemical
industrial belt in the east to the south coast region. Most importantly, the communication
network helped solve the city-rural information gap. For instance, by creating a large-scale
industrial complex in Ulsan and Pohang, we achieved balanced development based on the
64
promotion of industrial dispersal in large cities and the industrialization in small and medium
cities. This is a technique that Trincomalee region of Sri Lanka can refer to.
In addition, the infrastructure that directly affected the growth of the development method
mentioned above is the Gyeongbu Expressway. The Gyeongbu Expressway was a nation-wide
project that accounted for 23.6% of the national budget at the time. This had a direct impact
on people’s daily lives and their living environment as well as the location of various industrial
complexes.
Even if the industrial belt of the southeast region and the Gyeongbu Expressway have had
a positive impact on the general economic growth and the daily living environment, there is
also a concern that the regional development and growth centered on the areas adjacent to
the southeast and Gyeongbu expressways have increased regional disparities. Hence, since
the 2nd, 3rd and 4th CNTP, the plan has consistently emphasized four key ideas; the balance
between regions, the distribution of the industrial functions, the expansion of the infrastructure,
and the population dispersion of the metropolitan area. A more efficient plan should be
suggested.
6.1.3. Improvement in the flexibility of the system that reflects internal

and external conditions
If the 1st CNTP is a policy that can be introduced to current developing countries, the 2nd
CNTP is a plan that must be considered for industrialization and long-term comprehensive
development of a country. Korea has established a plan for balanced development and rapid
industrialization that induced environmental pollution, damage to the natural environment,
transfer of factories beyond the limits of pollution sources that degraded the living environment.
nd
In particular, the 2 CNTP, which established the basis for attracting industrial complexes to
cities and rural areas, can achieve balanced development when applied in the initial
development stage of industrial complexes. This comprehensive plan incorporates the
improvement of the living environment and the expansion of traffic-related and communication
facilities.
High population density in large cities and related problems that many developing countries
are experiencing are the same problems that the developed countries, including Korea,
experienced in the past. To prevent such problems, the national territorial planning should
be a multi nuclei structure, not a single nucleus structure. That is, factors such as growth
inhibition and management, expansion of SOC in each provincial city, promotion of backward
regional development, and prevention of overdevelopment should be dealt with.
65
The rapidly changing domestic and foreign situations and circumstances are variables that
affect the management of the territory for the countries including Korea. Especially, the climate
change, environmental problems, demand for economic growth, and industrial structure are
one of the many variables that can impact national territory and industrial performance. Many
countries must cope with these problems. Korea’s case, which is known as a relatively
successful case, can provide useful implications.
In particular, if the past international circumstances and the paradigm of national planning
have developed with the goal of quantitative growth, they now face the challenges of
qualitative growth and environmental problems. Therefore, the management of conflicts in
society and the introduction of social consensus and technology in solving environmental
problems are becoming important factors for the national territorial management.
6.2. Masterplan for Industrial New Town
Industrial complexes play a pivotal role in the national economy. Korea has developed
industrial geographic location strategies and policies regarding industrial complexes that
facilitated many industries through the first CNTP and the economic development plan. There
is a need to evaluate and recognize the significance of not only the industrial complexes but
also its surrounding cities as the surrounding cities develop along with the industrial complexes
for the population dispersion of the metropolitan area/city. From this point of view, the
implications and characteristics of the plans of the Korea’s Industrial Complex and New Town
that emerging economies and developing countries should refer to are as follows.
First is the establishment of policies that are based on the function of the industrial complex.
Currently, types of industrial complexes in Korea are divided into national industrial complexes,
general (local industrial complexes), urban high-tech industrial complexes, and agricultural
complexes. Many specialist groups agree to the necessity of classifying the industrial complexes
in accordance to their functions rather than the designation center. Korea's territorial and
industrial policies were flexible and have changed according to the external and internal
situations. Industrial complexes of various types and sizes have been designated according
th
to the labor population decrease, the aging society and the 4 industrial revolution. The
functions of the complexes are also becoming more diversified, such as IT, high-tech,
bio-industry, and entrepreneurial valley. The complexes are also transforming into a new
economic, cultural, and social growth engine; they are no longer limited to an industrial complex
of the past that only functioned to maximize output and production.
66
Second is the consideration of the surrounding facilities of the industrial complex. According
to the study conducted by the Ministry of Land, Transport and Maritime Affairs (2015), there
are six purposes of the development of the Korean industrial complexes: first, improvement
of labor environment and increase in income; second, leading industrialization; third, supply
of key elements for industrial activities; fourth, reduction of problems due to efficiency-oriented
industrial activities; fifth, balanced regional development and efficient management of the
country; and finally, need for the key base of the national strategic industry.
Among these, balancing regional development and reducing problems for industrial activities
suggest the challenges for Korea's territory development that have not yet been solved by
industrial complexes and urbanization.
Industrial activities tend to move into large cities for the purpose of maximizing profits and
enhancing the efficiency, and this tendency can increase the demand for its surrounding areas,
causing shortage of housing supplies and traffic congestion. Ultimately, this can obstruct the
balanced national development. Therefore, recent industrial complexes including those of Korea
are planning supply of residential housing, public facilities and supporting facilities in advance
to accommodate the industrial complex residents.
According to the land use status of the industrial complex below, Korea’s industrial complex
has a large area for supporting facilities and residential facilities, and a relatively low proportion
of industrial facilities. In general, for the industrial complexes, there is a difference in the area
depending on the type of industry, location, and industrial activity per area. However, many
recently proposed industrial complexes have dealt with such problems through the introduction
of residential facilities in urban areas and industrial complexes. Therefore, in order to solve
various urban problems among local industrialized areas, predictable or anticipated urban
problems should be solved through analyzing the type and location of industrial complexes
and the provision of infrastructure through expected number of attracted population.
67
Figure 25 Land Use Pattern for Different Types of Industrial Complexes
Source: Korean Industrial Complex `location of industry’ (2015)
Third, the consideration of the surrounding cities and the satellite cities must take place.
As aforementioned, it is necessary to consider the surrounding facilities among the industrial
complex plans in order to simultaneously challenge the development of the industry and the
68
balanced development of the land. However, the state-led middle-large industrial complex
plans, the balanced development of the land and dispersal of population, and urban problems
that rise from the development of industrial complexes indicate the necessity for the provision
of a comfortable living environment through the isolation of the industrial facilities and its
surrounding facilities. In the case of Korea, the urban planning of Ansan and Changwon
separates industrial and residential facilities. Through the satellite cities like Bundang, Ilsan,
Pangyo, and Dongtan, the population of the metropolitan area is efficiently relocated, and
at the same time, the industrial employees are able to find housing nearby.
However, in the case of satellite cities, there are still problems. For instance, the problems
of land and sale speculation, the threat of the primary industry due to the destruction of
agricultural land, and the social conflicts caused by the resistance of existing landowners and
residents are some of the many problems that arise. There is also a need to find a solution
for lack of social mix and community activity in urban and residential complexes. Furthermore,
the increase in land prices due to development can lead to a new environmental problems
and ineffective use of land due to the increase of the low income population in the city.
Therefore, the related plans need to consider the industrial, housing and social problems from
the long-term perspective. It is also necessary to aim for maximized land use and efficiency
in the planning of limited national territorial area.
Figure 26 An Example of Division between Industrial Area and the Urban
(The color purple refers to industrial complexes)

Source: Changwon-si, Ansan-si
69
6.3. Smart City as an anchor project
The industries that are directly connected to economic growth are challenged by international
demand as well as domestic demand, which affects the land and urban planning. From a global
perspective, India, which is adjacent to Sri Lanka, announced plans to build 500 smart cities
while Sri Lanka plants to build 100. In the private sector, global companies such as IBM and
CISCO are expanding into Asia and are becoming the starters of smart city demands. India
has been investing Rupees 10 billion each in 100 cities for the purpose of mitigating adverse
impacts caused by urbanization led by the Ministry of Urban Development (MoUD). Smart
City encompasses six distinguishable areas like waste management, energy, transportation,
e-governance and many more as well as 21 indicators of the plan are being selected and
announced.
The Sri Lankan government has also invested about $40 billion over the 15-year period
in Colombo, an important hub for ECD projects with Siemens. These investments are to monitor
climate change and natural disasters, respond to energy problems and improve the urban
environment. According to the plan, city planning should be made in accordance with the
international standards and requirements by setting the foundation of smart city and the
potential economic corridor. It is necessary to actively review smart city planning techniques
as well as various factors. These factors include environmental pollution including air pollution,
vulnerability to natural disasters due to urban development, and current situation of Sri Lanka
that shows increasing trend in IT industry. The smart city plan is needed for disaster
management, energy and power management and traffic system improvement. In the
long-term perspective, social costs incurred from the development of urban and industrial
complexes should be reduced through the computerization of land (intellectual) information
and land registration system.
However, given the fact that specific planning indicators are different for the smart cities
internationally, the initial input costs for urbanization may be subject to increase. At the same
time, as there is no national consensus on the smart cities, it is expected that localization
of technology and planning techniques should be prepared from a long-term perspective by
examining the efficiency of technologies and technologies that can be introduced later in the
regional unit through a test bed (experiment project) and through anchor points between
regional economic corridor development.
70
Figure 27 Diagram for Achieving Smart City Principles
71
Ⅲ. Improving Trade Facilitation: Implementation

of Single Window System
1. Customs Procedure in Sri Lanka
1.1. Sri Lanka Port Logistics Industry
Sri Lanka, a country that connects Europe, Asia, and Africa, holds numerous geographical
advantages as logistics hub in South Asia. Sri Lanka’s container port traffic expanded at an
annual rate of 8.6% between the years of 2003 to 20142). According to the 2013 statistics
from World Shipping Council, Sri Lanka’s largest port, Port of Colombo, handles approximately
4.31 million TEUs, exceeding India’s largest port, Jawaharlal Nehru port (which handles 4.12
million) by 0.09 million TEUs.
Currently, Sri Lanka actively invests in enhancing the nation’s port logistics capacity in order
to better utilize its locational advantage. The Colombo Port Expansion Project (CPEP) plans
to add three additional terminals to the three terminals that Colombo Port already holds. The
construction for the South Container Terminal and East Container Terminal are already finished.
If the West Container Terminal’s construction finishes, Colombo Port’s yearly port traffic is
expected to expand from approximately 4 million TEU to 12 million TEU.
As transshipment cargo passing Sri Lanka has continued to increase, foreign investments
into the Port Logistics industry has expanded considerably. Already, Hong Kong’s Kerry
Logistics and Orient Overseas Container Line (OOCL) have entered Sri Lanka’s Port Logistics
business and other logistics companies have shown interest in Sri Lanka’s expanding Logistics
service.
2) HKTDC Research. ‘Sri Lanka: An Emerging Logistics Hub in South Asia’ 2 June 2015
72
Ⅲ. Improving Trade Facilitation: Implementation of Single Window System
1.2. Inefficiency of the Customs Procedure
Although Sri Lanka has heavily invested in their logistic hub’s infrastructure for several years,
they still lack heavily in the industry’s intangible factors. The existence of a port acts as a
necessary tangible factor in a logistics industry. However, Sri Lanka’s ports lack system and
experience (professionals) to effectively utilize and expand their logistics industry.
According to the World Bank’s 2014 Logistic Performance Indicator (LPI), out of 160
countries, Sri Lanka is ranked 89th. This is low compared to countries like Thailand, Vietnam,
Indonesia, and other Southeast Asian countries who partake in the competition to secure a
place in the logistics industry with Sri Lanka. Also, compared to countries within the same
region such as India, Pakistan, and Malibu, Sri Lanka shows low scores in the logistics category.
Table 22 LPI Country Comparison
Sri
ㅤ Thailand Vietnam Indonesia India Pakistan Malibu
Lanka
Score 3.43 3.15 3.08 3.08 2.83 2.75 2.7
Total LPI
Rank 35 48 53 54 72 82 89
Score 3.21 2.81 2.87 2.72 2.84 2.95 2.56

Customs
Rank 36 61 55 65 58 49 84
Score 3.4 3.11 2.92 2.88 2.67 2.56 2.23

Infra-structure
Rank 30 44 56 58 69 82 126
Score 3.3 3.22 2.87 3.2 3.08 2.92 2.56

International
Transportation
Rank 39 42 74 44 56 72 115
Cate-
gory
Score 3.29 3.09 3.21 3.03 2.79 2.79 2.91
Logistics
Competitiveness
Rank 38 49 41 52 75 74 66
Score 3.45 3.19 3.11 3.11 2.73 2.7 2.76

Tracking/Tracing
Rank 33 48 58 57 86 92 85
Score 3.96 3.49 3.53 3.51 2.79 2.51 3.12

Timelines
Rank 29 56 50 51 123 148 85
Note: LPI Scores are distributed from 1-5, with 5 being the best quality
Source: World Bank Logistic Performance Indicator, http://lpi.worldbank.org/international/scorecard/radar/254/C/LKA/
2014#chartarea (Searched: Feb. 12, 2016)
73
Customs and Infrastructure received the lowest feedback and are considered as Sri Lanka’s
Logistics Industry’s weak points. In the case of infrastructure, as the above mentioned Colombo
Port Expansion Project (CCEP) was not taken into account during the 2014 LPI, large
improvements in infrastructure can be seen to have taken place. On the other hand, Sri Lanka’s
customs holds an index score of 2.56, which is relatively low compared to its competitors.
Figure 28 Comparison of Sri Lanka’s LPI by category: 2014
Source: World Bank Logistic Performance Indicator 2014, http://lpi.worldbank.org/international/scorecard/radar/254/C/

LKA/2014#chartarea (Searched: Feb. 12, 2017)
De Mel et. Al (2011) also pointed out the excessive documents, time, and cost involved
in Sri Lanka’s customs process during their research on Sri Lanka’s customs procedures. The
study points out that if Sri Lanka were to export tea, one of their key export items to Japan,
24 documents and 9 separate agencies had to be visited. Similarly, if Sri Lanka were to import
used cars from Japan, 18 documents and 5 separate agencies must be visited. These numbers
indicate that the customs procedure’s roles are split amongst several agencies, and this disunity
places an excessive burden on those related to trade.
74
Documents and Agencies Needed for Imports and

Table 23
Exports against Japan in Sri Lanka: Case Study
ㅤ ㅤ Numbers List
(1)Proforma Invoice, (2)Purchase Order, (3)Commercial Invoice,
(4)Tea Export Permit, (5)Blend Sheet, (6) Fumigation Request
Form, (7)Fumigation Certificate, (8)Phytosanitary Request Form,
(9)Phytosanitary Certificate, (10)GSP form, (11)Shipping Note,
Documents 24 (12)Release Order, (13)Customs Declaration, (14)Bill of Lading
(15)Packing List, (16)Insurance, (17)Cargo Dispatch Note,
Exports (18)Certificate of Origin, (19)Delivery Order, (20)Assessment
(Tea) Note, (21)SLPA Payment Form, (22)SLPA Payment Receipt,
(23)Gate Pass, (24)Panel Examination Request Form
(1)Bank, (2)Tea Board, (3)Shipping Agent, (4)Insurance

Agencies
Company, (5)Sri Lanka Customs, (6)Sri Lanka Ports Authority,
needed to 9
(7)Fumigation Company, (8)Department of Agriculture,
be visited
(9)Department of Commerce or Ceylon Chamber of Commerce
(1)Profoma Invoice, (2)Application for the L?C, (3)Letter of

Credit, (4)Customs Declaration, (5)Commercial Invoice,
(6)Original Cancellation of Registration Certificate, (7)English
Translation of the Cancellation Certificate, (8)Pre-shipment
Documents 18 Inspection Certificate(JAAI Certificate), (9)Declaration of Value by
Imports the Agent, (10)Declaration of Valuation of Accessories,
(Used (11)Working Sheet, (12)Assessment Note, (13)Bill of Lading,
Cars) (14)Insurance, (15)Delivery Order, (16)Gate Pass, (17)SLPA
Payment Form, (18)SLPA Receipt
Agencies
(1)Local Vehicle Agent, (2)Bank, (3)Shipping Agent, (4)Sri Lanka
Needed to 5
Customs, (5)Sri Lanka Ports Authority
be visited
Source: de Mel et. al (2011), cited from p.24, p.30
75
1.3. Summary of Sri Lanka’s Customs Procedure
1.3.1. Export Procedure
The very first step of exporting goods is to register as an exporter in following institutions.
ⅰ. Sri Lanka Export Development Board (EDB)-EDB Registration Number

ⅱ. Inland Revenue DepartmentTax Identification No. (TIN Number/Value Added Tax Number)
ⅲ. Sri Lanka Customs
To register with the above institutions, the exporter is required to produce the original
Business Registration Certificate or Certificate of Incorporation and other related documents
along with duly completed application forms. Application forms are available at the above
institutions. In addition to registering in above mentioned institutions, the exporter is required
to obtain following certificates as well.
Certificate of Origin (GSP Certificate)
This certificate is issued by Department of Commerce, Sri Lanka clarifying the origin of the
export as it is required to obtain certain tax or duty concessions such as GSP or Free Trade
Agreement (FTA) duty concessions.
Certificate of Origin
This is also required by the customs of the importing country. It is issued by chambers,
i.e., Ceylon Chamber of Commerce or National Chamber Commerce.
Quality Certificate
The standards of the products exported need to be clarified by certified institution. In Sri
Lanka, quality certificate is issued by Sri Lanka Standard Institution. (SLSI) while private quality
certificates are issued by SGS Lanka (Pvt) Ltd.
Health Certificate
This certificate refers to (sanitary and phytosanitary or SPS measures) to test the quality
of agricultural products. Often, Health certificate is required by the Health Authorities of the
importing country, when meat, fish and live animal are being exported. It is issued by the
Department of animal Production & Health. With regard to food items, health certificates are
issued by the Food Control Administrative Division of the Ministry of Health.
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Phytosanitary Certificate
This certificate is required by the importing country, when exporting cut flowers and foliage
plants, fruits and vegetables etc. It is issued by the Plant Quarantine Service of the Department
of Agriculture
Fumigation Certificate
This certificate may be required by buyers/government for the import of Agricultural Products
such as cut flowers foliage plants, sesame seeds, cashew nuts, tea etc. and this certificate
is issued by the Ministry of Agriculture or agencies that has vested with powers by the ministry.
Once above certificates are obtained, certain applications need to be filled prior exporting.
These applications ask questions about quantity of exports, destination and etc.
Customs Goods Declaration (CUSDEC)
In par with international standards relating to international trade, custom good declaration
has to be made in exporting goods as well as importing goods. In Sri Lanka, the good
declaration is known as the CUSDEC and the Customs Ordinance, section 47 for imports and
section 57 for exports sates that declaration has to be made. The declaration is made at the
boarder point. (Sea Port or Airport). This form specifies the quantity of exports, destinations
and all major details.
Commercial Invoice
This invoice is prepared by the exporter stating all the particulars regarding the shipment
and filled along with the Goods Declaration at the time of processing it at the Export Office.
Packing List
A document specifies the contents of each individual package in the shipment.
Other Documents (if applicable)

• Any permits/license
• Tea blend sheets
• Material utilization sheets
Simplified process of export procedure in Sri Lanka is summarized in the following figure.
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Figure 29 Sri Lanka’s Export Procedure
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1.3.2. Import Procedure
To import goods to Sri Lanka, import licenses are required. An importer has to pay an amount
around 7 USD and obtain import license. Payments for import of goods can be made under
Letters of Credit (LC), Documentary collections (Documents against Payment, DP) or
Documents against Acceptance (DA), or Advance Payment (AP) terms. Goods can also be
imported to Sri Lanka on a consignment-account basis as well.
Basic documents required by commercial banks for imports include an invoice, insurance
certificate (if applicable), and transport documents. Depending on the product and the mode
of payment, documents such as certificates of origin, inspection certificates, and packing lists
may also be required.
All shipping documents in relation to imports made on DP or DA terms should be forwarded

by the supplier's bank or by the supplier to a commercial bank in Sri Lanka for release to
the importer of goods. In the event the original documents are not received on time, the
importer, at the discretion of the bank, may submit copies of those documents for certification
by the bank for clearance of the goods. The importer should arrange the original shipping
documents to be received by the bank concerned within 30 days from the date of certification
of the copies.
To clear goods through customs, the importer should submit relevant shipping documents
certified by a commercial bank and customs declaration forms to the Sri Lanka's Department
of Customs. In case of an import made on an AP basis, goods will be released on submission
of satisfactory proof of payment, such as bank confirmations. In the case of an import made
on a consignment-account basis, goods will be released by customs on the submission of
clearance documents.
Sri Lanka implemented the WTO Customs Valuation Agreement in January 2003 and follows
the transaction-value method to determine the cost, insurance, freight (CIF) value which has
been operating successfully.
Importing process in Sri Lanka is depicted in the following figure. Even though it seems
to follow only four steps to importing from abroad, each step involves additional complication
depending on importing products.
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Figure 30 Sri Lanka’s Import Procedure
1.3.3. Automation and Single Window
In recent past, Sri Lanka Customs took number of steps to make imports and exports easy
through automating the system. One major achievement was the introduction of DTI which
allow to submit applications through one system. Under this,
• It was allowed to receive the Customs Declaration Message (CusDec) through Direct
Trader Input
• Receive confirmation of updated manifest and payment of duties and other levies of
CusDec
• Issuing internal passes for removal of Full Container Load (FCL) containers from the yards
• Allowing clearance of Cargo FCL at container yards and Less Container Load (LCL) at
ware houses
The automation of process is now fully implemented through: “ASYCUDA World” which is
the online system to facilitate the importers to process the CusDec without delay. Importers
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and exporters are required to registered with the ASUCUDA World and using the system, they
can import and export goods.
ASUCUDA is a Single Window concept that facilitates electronic data exchange between
government agencies and all imports and exports. Sri Lanka custom commenced the electronic
data exchange between the tea board and custom. Therefore, tea board approval is
electronically provided to customs.
Figure 31 Tea Exporter with ASYCUDA World
Source: Sri Lanka Customs
However, Single Window system needs improvement. During interviews with custom senior
officials, it was noted that the electronic data exchange system needs to be used by other
institutions as well. Similar to tea, approval is required for many exports, such as coconut,
rubber, and apparel.
Given that most of the products that are exported requires various licenses and certificates,
full-implementation of Single Window would save time as well as money. Currently, the process
is cumbersome as the same document has to be submitted to various agencies and multiple
visits to agencies are required. Connecting these institutions would not only reduce time and
money, but also will encourage exporters and those who are interested in it.
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Box 1 Sri Lanka Single Window-Status (August 2017)
ELECTRONIC CUSDEC LODGEMENTS

•Electronic lodgment of Customs declarations covers all the areas of Customs since 2011,
which include imports, exports, industries and services, air cargo and Board of Investments
CARGO MANIFESTS
•Acceptance electronic inward sea manifest are covered 100%. Automated manifesting
however takes place on in the area of industries & Service Directorate, Motor Vehicles
Clearance. Manual manifesting is currently taking place in the other areas of imports.
Manifesting of BOI CUSDECs are also yet to be implemented, which is a matter of activation
as all the manifest data is available.
•Accepting air manifests is at testing stage
RISK BASED CARGO SELECTIVITY FOR EXAMINATION
•Customs ICT is technically ready for the full implementation of Automated Selectivity both
for imports and exports. What is already implemented is limited in scope, and to get the
maximum benefit of risk management, some changes should be done once certain
administrative procedures are finalized.
CONNECTIVITY & INTEGRATION
•ICT is capable of providing web services integrating ASYCUDA with any computer system
of any agency provided that such agency based on the widely used XML/HTTP architecture.
•ASYCUDA now sends release order message to terminal handlers electronically, eliminating
physical movement of Cargo Dispatch Note with passed for shipment orders to respective
port operators, thus further cutting down export clearance time.
•Sri Lanka Tea Board is connected with ASYCUDA for uploading tea blend sheets as
e-documents. Tea Board gives their approval for the blend sheet and it linked to the export
CUSDEC.
•Customs ICT has already implemented and made available a Web-Service for the Import
& Export Control department so that the licenses could be integrated with Customs
including data for debiting on imports/exports.
•Agriculture permits are capable of being integrated as a Web Service connecting the
Department of Agriculture together with automatic debiting capabilities. However, they
do not have required technical capabilities but ASYCUDA could be made available to them
as a terminal to input permit data for the time being.
•Web service is already developed and available for the integration of SLSI certification
procedures. However, certain differences in policies are to be settled.
•Registrar of Motor Vehicle is already given a web service so that information in relation
to vehicle imports could be obtained for vehicle registrations.
HARDWARE, SECURITY AND PERFORMANCE
•Currently computer hardware being upgraded with Oracle ExaData database platform with
140T storage with Disaster recovery and redundancy. The upgrade also includes system
security enhancements with firewalls, performance enhancements, scalability and
economies of scale with virtualization. The cost of the project is around 3 million USD
with ADB assistance.
PAPERLESS CUSTOMS
•With the recent capacity and performance augmentation, ICT is now technically capable
of implementing Digital signatures for authenticating electronic documents with any
Certification Authority.
•Customs ICT is planning to receive scanned copies of supporting documents for Customs
Declarations with a view to introduce paperless cargo clearance. This is in progress with
LANKA-SIGN of Lanka Clear as the Certification Authority.
Source: Sri Lanka Customs
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1.4. Need for Improving Sri Lanka’s Customs Procedure
Sri Lanka’s customs procedure must automate and computerize their system for
improvement. Within Sri Lanka’s Customs, only a part of the initial stages of Custom Declaration
(CusDec) is available for computer input. Thereafter, the person must take the printed copy
to the customs or the Board of Investment and must directly visit to receive essential admission
or signature. Due to these discomforts, many users continue to decide to write by hand. From
the perspective of the user, the lack of a computerized/automated customs procedure leads
to an increase in required time and cost, and possible problems for delays in customs clearance
for imports and exports. Thus, there is a high demand for improvement in this specific sector.
Furthermore, automation and computerization holds important meaning for efficient

implementation of trade agreements between countries. In order for Sri Lankan exporters to
export goods to India and receive the preferential tariff benefits of the South Asian Free Trade
Agreement (SAFTA) concluded between the two countries, a Certificate of Origin (COO) issued
by the exporting country must be submitted. However, while Sri Lankan-Indian shipments are
completed within 48 hours, the COO can only be issued in Sri Lanka after the goods have
been shipped (or shipment documents have been completed). Thus, because the person must
personally visit the agency to be issued a COO and there is no electronic version available
that will be acknowledged, the COO issuance is delayed and the exporter is faced with
additional cost from the delay in customs clearance when the shipment has arrived in India.
Due to these reasons, there have been cases where exporters have given up on utilizing the
SAFTA. As bilateral and regional trade agreements have been the global trend, the lack of
an automated and computerized customs procedure decreases the efficiency and effectiveness
of the agreement.
In this study, we plan to advise a general direction for improvement in Sri Lanka’s customs
procedures. We will be focusing on the Sri Lankan Trade Facilitation Improvement Project’s
urgent task, to automate and computerize the Sri Lankan customs procedure, to better facilitate
trade.
2. Development of Korean Customs Administration
2.1. Development of Korean Customs Administration
The Korean Customs Service was initially established to manage the order of imports and
exports into the country to secure national finances and protect domestic industries from crimes
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like smuggling. However, as time passed and the environment around global trade has
diversified greatly, the Korean Customs Service’s roles have likewise adapted to include a total
of seven branches each with a distinct aspect: to control the rising growth of imports and
exports and customs clearance of tourists, to secure national finances by imposing tariffs and
internal taxes on imported goods, to protect domestic industries through increasing smuggling
patrols, to protect national and societal safety through screening for drugs, firearms, and
harmful foods, to protect the environment through screening for hazardous chemicals and
rare animals or plants, to crackdown on false indication of origin for fair competition, and
to crackdown and prevent illegal foreign exchange transactions and money laundering.
Similar to these seven roles, the development of the Korean Customs Administration also
occurred through seven specific periods. While the history of the Korean Customs
Administration officially began on September 28, 1878 with the establishment of the Doomojin
Customs Office, South Korea’s Customs Service can be said to have begun its duties officially
from August 27, 1970 when the Korean Customs Service became independent from the Ministry
of Finance.
South Korea’s Customs Administration history can be largely separated into two general
periods: before establishment of the Korea Customs Service, and after the establishment of
the Korea Customs Service in 1970. While the former contains two specific periods between
1878-1947 and 1948-1970, the subsequent age contains five specific periods between
1970-1979, 1980-1989, 990-1994, 1995-1999, and 2000 onwards. Each period acts as a
reaction to the changing trade environments of globalization and South Korea striving to adjust
to the times.
2.2. Chronicle Development of Korean Customs Administration
2.2.1. Establishment of Korean Customs (~1970)
On August 15, 1948, Korea, after reconstructing its government post-Japanese control,
modified the central organization of its customs administration. Furthermore, on November
23, 1949, Korea created a new Customs Act to replace the Customs laws set during Japanese
control. The new Customs Act, unlike Japan’s pluralistic customs regulation, was a single tariff
law that integrated customs-related laws and regulations.
However, following the Korean war that occurred on June 25, 1950, the majority of
production infrastructure and industries were destroyed and Korea went through a period of
extreme inflation. In order to restore the destroyed production lines, massive fiscal spending
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was required during the mid-1950s and as a part of the financial securitization necessary to
operate the post-war economic system, the customs administration imposed various
regulations and/or taxes.
In 1957, Korea’s economy began to stabilize from the wounds of the Korean war. However,
as a result of both the corruption and incapability of the governments of the late 1950s and
early 1960s, society and politics were both extremely chaotic. Between 1957 to 1961, Korea’s
government decided to invest over $300,000 to enact the Customs Appraisal Office Modernization
Plan. In addition, as a result of modifications in the Customs Act in December of 1961, South
Korea changed its tariff and item classification method from the conventional natural science
method to the BTN (Brussels Tariff Nomenclature) method.
Beginning from the mid-1960s, after South Korea successfully completed its 5-year
economic development plan (which allowed its economic development to leap forward greatly),
South Korea adopted various systems for transition to an open economy. For instance, in March
of 1965 South Korea adopted the single floating exchange rate system, in April of 1967 South
Korea joined the General Agreement on Tariffs and Trade (GATT), and in October of 1968
South Korea joined the Customs Cooperation Council (CCC) and actively participated in
international economic organizations. Furthermore, beginning from the mid-1960s, South
Korea began actively creating measures to support export.
However, from the end of the Korean war, due to the extreme inflation and lack of supplies,
smuggling from China became rampant and increased the levels of economic chaos in society.
Not only was smuggling rampant from China, but also a handful of items in the market were
smuggled from the American Post Exchange (PX) and Japan. In response, South Korea created
a number of laws in 1961 including the Prohibition on the Sale of Certain Foreign Goods, Special
Act on Punishment of Specific Crime, and Temporary Special Act on Punishment of Specific
Crime in order to target smuggling. Under the order of the president, the military, police, navy,
and customs administration came together to create the Collaborative Smuggling Inspection
Team to strengthen screening and patrolling for smuggling. After many successful
accomplishments with catching large smugglers, the team was disbanded in 1969.
2.2.2. Improving Customs Management System for Export Promotion (1970~79)
Unlike the 1960s where global trade grew by over double and global economy was booming
under the US-led IMF-GATT system, in the 1970s, as the United States and several developed
countries entered into recession, the situation changed rapidly. While South Korea benefitted
greatly during the 1960s through its export-oriented economic policies, the decrease in exports
in the 1970s brought forward changes to its economic policies and direction as a country.
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South Korea decided to, while maintaining its export-oriented policies, invest greatly into the
development of the heavy chemical industry. Instances of the governmental support for heavy
chemical industry include laws such as the Petrochemical Industry Promotion Act (1970),
Nonferrous Metal Promotion Act (1971), and Textile Industry Modernization Promotion Act
(1969, 1979).
Following the 1960s, smuggling continued to be one of the greatest problems against
domestic industries. However, unlike items that were smuggled during the 1960s in which
the majority was composed of living supplies, the 1970s smuggled luxury items like electronic
devices, jewelry, and medical drugs. In order to strengthen measures against smuggling once
again, South Korea enforced its laws and created administrative formulation guidelines for
custom offences in 1973. Furthermore, the state council created comprehensive measures to
eradicate illegal foreign goods in 1974, which was immediately put into action nationally.
In the 1970s, export and import volume increased by over 30% yearly. Furthermore, the
return of soldiers from the Vietnam war in 1973 and the dispatch of workers to the Middle
East from 1975 increased the volume of travelers entering and leaving the country by 28%
each year. In order to manage the increasing levels of tourists and export and import levels,
several customs measures were enacted such as special customs procedures for soldiers and
dispatch workers, customs measures to separate locals and foreigners, and the ATA CARNET
convention (1978).
2.2.3. Strengthening of Customs Control System in Preparation of

Opening (1980~89)
The 1980s was a period of stabilization for the Korean economy, symbolized by autonomy,
competition, and openness. The unbalanced growth of Korea due to its forcefully developed
heavy chemical industry brought upon heavy reactions upon the Korean economy. Thus, the
government decided to switch direction to focus its economic policies on autonomy,
competition, and opening.
In order to facilitate competition within its economy, South Korea’s Customs Administration
changed its differential tariff system to a uniform tariff system and reduced the tariff levels
slowly. Furthermore, in order to adapt to the international trading environment, South Korea
implemented part of the new GATT Customs Evaluation Agreement in 1884 to reduce the
shock on the economy and later implemented the entirety in 1886.
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The 1980s was also the period in which South Korea brought large changes to its customs
system. Originally, the South Korean customs system relied on an Object Management System
for customs management, but with the increasing volumes of trade, limited human resources
could not effectively deal with the increasing work. Thus, South Korea’s customs management
system changed to that of a Large Enterprise Management System and selected 104 large
enterprises initially to manage. The specifics were revised and modified with time to make
more perfect.
The 1986 Asian games and the 1988 Seoul Olympics both brought great urgency to the
Korean Customs Administration. In order to manage both events successfully, great care was
put into quick and effective customs clearance while maintaining high levels of security. During
the periods of preparation for the events, 359 members of the customs employees were sent
to Japan to learn the customs clearance skills of developed countries. Furthermore, an
additional 1,165 security agents were trained by the army’s counter-terrorist specialists in
preparation for the events.
The 1980s was a time of preparation for future development of the customs administration
as well. For instance, in 1980, the introduction of the headquarters customs system,
establishment of the Central Analysis Center for Customs, and establishment of the customs
clearance counseling room took place. Furthermore, the first computerized customs clearance
systems (CCS) was created and was enacted in Gimpo and Seoul for air cargo in 1986.
2.2.4. Simplification of Customs Procedure (1990~94)
The early to mid-1990s was a time of change in the Customs process involving efficiency
and reduction in cost. In order to make this a reality, the Korean Customs Administration
computerized the customs process using the EDI process and reduced unnecessary steps,
allowing for customs clearance to occur faster. Furthermore, many of Korea’s policies on
exporting products were rid of and the amount surveyed during exporting was reduced from
10% to 5%. However, in order to prevent organizations from abusing the change, major cargo
screening tests were put into order as well.
At the same time, the UR agreement of the time made changes in the industry support
policies inevitable at the time. Many of Korea’s policies that dealt directly with the industries
had to be disposed, and new policies were set to indirectly affect the several industries.
Furthermore, there became a rise in necessity to protect domestic farmers from foreign
farmers, so tariff rates were adjusted 42 items in 1994.
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More than anything, the opening of the market and large increases in imported rice and
wheat from China brought rise to concerns for domestic agricultural products. As imported
Chinese wheat and rice were labeled falsely as Korean in the market, in 1994, several laws
and policies were made that strengthened trademark policies and origin indication violations.
2.2.5. Launching of WTO and Advancement of Customs

Administration (1995~99)
With the launching of the WTO, the period between 1995 to 1999 was about raising Korea’s
market competitiveness on the international level. With the development of information and
communication technology, the Customs Administration was able to create a computerized
system much faster than planned. Furthermore, in order to compete on the global level, several
trade restrictions were alleviated and screening for smuggling and unfair trade became even
stricter.
In order to compete on the global scale, Korea had to aim towards reducing the logistic
costs for companies. This was made possible through switching the system of exports and
imports from one of licensing to declaration in 1997 and 1998. By applying this system to
several of Korea’s major ports, by 1999, a yearly sum of 60 million USD worth of logistics
costs were successfully reduced.
The period between 1995 to 1999 was also a time of development for the computerized
structure of the Customs process. In 1998, the EDI system was further applied to imported
cargo and it continued to evolve step by step when in September 1999, Korea first began
its paperless Customs import system. This system was able to supply crucial information about
trade to those both inside and outside Korea, and acted as an important source of information
during the IMF crisis in 1997.
2.2.6. Implementing World-Class Customs Administration

(2000~Now)
After several changes in Korea’s Customs Administration system in the 1990s from outer
environmental factors such as the WTO, Inter-Korean summits, opening of international
markets, and changes in the demands for customs processes, Korea’s Customs Service went
through an unprecedented change on January of 2000.
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A management diagnosis into Korea’s Customs Service revealed that Korea’s Customs
Service lacked adaptability to changing international tides, cooperation between different
agencies, and cooperation within its own sectors. Thus, seeing an urgent need to change
things, the Customs Service went through a structural change in which it attempted to create
a process-oriented customs service to raise cooperation, raise efficiency in work by utilizing
risk management techniques, and raise worker loyalty and efficiency by issuing training
sessions and bonuses dependent on a performance evaluation system. Thus, through changing
the focus of the structure to process and increasing the efficiency of its sectors, the Customs
administration was able to improve its deficiencies of the past.
2.3. Significance of Korean Customs Administration Development
2.3.1. Quantitative Growth
In August of 1970, Korea’s export import volume was at a mere 2.8 billion USD, but by
1999, its export import volume stood at 263.5 billion USD, 94 times larger than before.
Furthermore, the number of tourists also rose from 2.45 million to over 90 million, 36-fold
increase. The tax revenue increased 310 times from 58 billion KRW to 18 trillion KRW and
the customs organization grew from 14 offices with 1,870 workers to 28 offices with 3,931
workers during the short lapse of time.
2.3.2. Qualitative Change
The qualitative changes in the Korean Customs Service are undeniable when looking at either
its accomplishments or history. In 1988, the administration changed from a full screening
process to a selected screening process and was able to build a fully paperless computerized
customs procedure by 1999 by continuing to develop its EDI system step by step. In 1996,
Korea’s Customs created its survey monitoring information system and it expanded its duties
from that of screening for smuggling to that of societal and national protection. Later in the
late 1990s and early 2000s, Customs changed its procedures to be from supplier-based to
consumer-based and created its One-stop service system. Now, Korea’s Customs
Administration continues to look for international cooperation and prioritizes bilateral customs
cooperation with foreign countries. As of 2000, Korea has now dispatched customs officials
to five countries including the United States, Japan, China, and Thailand.
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3. Implementation of Single Window System
3.1. Single Window Environment in Cross-Border Trade
The concept of Single Window is widely applicable in the structure of government, which
provides services to citizens and businesses. Single Window means that citizens and businesses
can use a single interface to receive government services. Transforming from traditional
structure of government to Single Window environment, service users can receive simplified
and transparent services, reducing time and cost involved in it.
In cross-border trade, there are many different government department and agencies which
have its own responsibility in cross-border trade process. Customs, food safety agencies,
border policing, transport related agencies/department and/or government agencies
responsible for sanitary and phytosanitary and technical barrier to trade have been present
at the border to manage their respective areas of competence. Single Window in cross-border
regulatory is to provide simplified and efficient procedures to users. It allows traders to use
IT-based single interface in cross-border trade activities, eliminating repetitive submission of
data. The United Nation Centre for Trade Facilitation & Electronic Business (UN/CEFACT)
viewed the Single Window environment in cross-border trade as the collaboration between
Customs and other government agencies. In UN/CEFACT Recommendation 33, it is explained
in terms of information flow between participants in trade and related government agencies.
According to the Recommendation 33, Single Window is defined as following;
“Within the context of this Recommendation, a Single Window is defined as a facility that
allows parties involved in trade and transport to lodge standardized information and documents
with a single entry point to fulfil all import, export and transit-related regulatory requirements.
If information is electronic, then individual data elements should only be submitted once”
This Recommendation 33 is generally accepted as the concept of Single Window in

cross-border trade and implementation of Single Window is judged by whether the norm
required by the Recommendation is satisfied.
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Figure 32 Flow of Cross-Border Trade before and after Single Window
<Before>
<After>
Source: Customs UNI-PASS International Agency (CUPIA) website. (http://www.unipass.or.kr/ds4_1.html)
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Depending on the degree of integration scope, Single Window system in cross-border trade
can be divided into customs Single Window, national Single Window and regional/global Single
Window environment. Customs Single Window implies the implementation of Single Window
system in infrastructure, logistics and clearance in cross-border activities so that declarers
can process customs administration procedures through a single entry, without having to visit
customs or other government agencies.
On the other hand, national Single Window widens the scope of integration to connect
trade-related stakeholders with other government agencies. While customs Single Window
handles customs administration procedures, connecting users with government agencies such
as Customs, Food and Drug Administration, and/or other related agencies, national Single
Window widens the applicant’s connection to other related agencies such as port/airport office
and immigration office.
Lastly, regional/global Single Window means connection of Single Window system among
countries. Based on an information sharing platform under regional/global Single Window
among participating countries, they can share information and provide efficient performance
in trade related regulatory policies such as risk analysis and/or trade statistics.
The higher level of integration scope in Single Window, the more efficient service provide
would be possible for users. However, the construction of Single Window environment in
cross-border trade should follow step-by-step approach. That is, it is not possible to jump
directly to regional Single Window system without having customs or national Single Window
environment. Considering that Sri Lanka is at the burgeoning period of adopting Single Window
system, we focus on customs Single Window environment in this study.
3.2. Construction of Customs Single Window Environment
Customs oriented Single Window is to improve customs procedure and enhancing trade
facilitation. Eliminating unnecessary tasks for customs procedure and integrating customs
approval results, it can facilitate cross-border trade. Also, standardization of trade related
information and efficient management of border should be key factors to successfully
implement Single Window environment at the border. Connectivity and interoperability
between government agencies and users are keys for customs-oriented Single Window
environment. For these, it requires to have infrastructure which connect users and relevant
government agencies and to set up Single Window system in logistics and clearance.
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Figure 33 Customs-Oriented Single Window
3.2.1. Single Window Infrastructure
To connect users with government agencies in cross-border trade, it has to attract users
to use customs Single Window system. Inciting users to Single Window framework can be
done by providing user friendly functions, such as ePayment service to pay tariffs and other
duties, simplified and reduced preparation time, and/or providing strong confidentiality and
security in the information which users submitted to the system.
Single Window infrastructure is to provide user convenient functions to connect users with
government agencies to operate Single Window in an integrated and secure manner.
Construction of internet-based e-Authentication, ePayment system, providing secure manner
of transmission of documents, and/or integrated management of information should be
included in Single Window infrastructure. In addition, it should make it possible to share the
information among government agencies and/or between government agencies and users.
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Figure 34 Single Window Infrastructure Model
3.2.2. Logistics Single Window
When aircrafts and vessels arrive at and/or leave ports, transporters are required to report
related information about their arrival and departure to various border agencies. Not only
Customs, but also other government agencies such as immigration office, quarantine office
and/or port authority are involve in this process. Without Single Window environment,
transporters have to provide the required information to each agency separately.
Logistics Single Window is to provide one-stop service for transporters; when integrated
eDocument is given to transporters, they fill up the information required once and it is
redistributed and shared by government agencies. The integrated eDocument includes
common field, manifest unique fields and arrival/departure report unique field, and this
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information will be redistributed to relevant government agencies, such as Customs, Maritime

authority and quarantine office.
Logistics Single Window provides cost and time savings for transporters; they do not need
to physically visit related authorities and due to information sharing, it increases transparency
and eliminates redundancy.
Figure 35 Logistics Single Window Model
3.2.3. Clearance Single Window
Clearance Single Window is another one-stop service in cross-border trade. It makes it

possible for importers/exporters to receive regulatory permit and to complete the Customs
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declaration through a single entry service. As it is based on electronic transmission of

information, there is no need to have physical visit of government agencies to clear
import/export procedure.
Clearance Single Window system collects information and it is allocated to related

government agencies. Integrated eDocument, containing common fields and unique fields,
redistribute information to each government agency, sending the necessary information to
the agency to determine approval. Each agency processes the approval using its own legacy
system, and reports its decision to the clearance Single Window. Having the decision reported,
the clearance Single Window send Customs declaration and approved permit to the Customs
for clearance approval, and the Customs notify results to the declarer.
Figure 36 Logistics Single Window Model
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3.3. UNI-PASS: Korea’s Single Window System
Now one of South Korea’s most prized developments in the customs sector, UNI-PASS has
become globally renowned for its capabilities. However, the system was never created with
such an intention in mind. Rather, UNI-PASS’s development was strictly limited to practicality
and need. In order to match the rising yearly trade volume, the Korean Customs Service felt
a need to increase its efficiency and the result of it was the UNI-PASS that is globally exported
now. A deeper analysis of its history allows us to better visualize the development that rose
out of need.
3.3.1. Development of UNI-PASS
The history of UNI-PASS begins from a software created in 1974 by the Korean Customs
Service for simple statistical purposes. However, the twenty years following UNI-PASS’s initial
development was filled with numerous complaints and inconveniences for those who utilized
Korea’s custom procedures. The largest of them were the long waiting periods and costs when
it came to Korea’s customs. Due to all customs procedures taking place in paper, users had
to visit the Korean Custom Service and the long waiting periods led to increased costs and
complaints. Furthermore, since all tasks were done on paper, Korean Customs did not have
the resources to analyze and maintain a risk management system. As trade volume steadily
increased by 15% yearly, the abilities of the Korean Customs Service was not able to follow
the development whether it be in technical efficiency or manpower due to its lack of a
computerized system. For instance, import customs clearance took over three days on average,
and monthly reports took over a week to write. In addition, the several government agencies
in charge of the data for import and export statistics, tax notices, tax calculations, and etc.
lacked a standardized system that connected each other. Thus, each system had their own
numbers and the same data had to be repeatedly inputted into the several agency’s individual
systems. As a result, those involved in trade were forced to submit over 120 documents in
order to receive items during the customs process and this procedure took on average 15
to 23 days, increasing costs heavily for trade3).
The development of the UNI-PASS system can largely be categorized into four phases or
generations: Simple Online Statistics, EDI Clearance System, Internet Clearance System, and
Smart Clearance System4) Separated between the years of 1974, 1992, 2005, and 2011
respectively, the UNI-PASS system was a constantly developed piece led by the Korean
government’s National Administration Network development in 1985.
3) Yoon Samuel (2012) p. 62

4) Customs UNI-PASS International Agency (Pamphlet) p. 5
97
1) EDI Clearance System
The EDI Clearance system was a phase in which from 1992, a basic plan for an Electronic
Data Interchange (EDI) automation plan was created and developed. In the following years
of 1994, 1996, 1997, 1998, and 1999, an export clearance system, import clearance system,
cargo system, P/L clearance system, and investigation and information system were created
and added respectively. This period was the first time in Korean history where government
agencies had created a completely automated system in which users could apply for export
customs clearance without any paper documents5).
Not only was the EDI Clearance System a development from no paper to an automated
system, but also the customs procedure was reduced greatly from 360 species to 180 species
and several intermediary steps such as procedures for exporting bonded transportation,
returning export bonded zones, and submission of documents confirming entry and exit zones
were abolished. In the case of export work, the procedure was drastically reduced from 8
steps to 4, and advanced customs clearance system was put into place that made the flow
of work smoother6)
2) Internet Clearance System
From 2004, a fully web-based UNI-PASS system was created where the existing EDI system
was transferred to a web format. While many additions were made during this third phase,
including but not limited to, duty collection (2005), drawback (2005), Performance
Management System (2005), RFID air cargo management (2007), Integrated Risk Management
System (2007), and AOE management system (2008)7), the largest and most impactful was
that of the Single Window system applied in 2005.
The Single Window project, recommended by the WCO and UN, was led by the presidency
in 2003 as part of the “Roadmap for Logistics Hub of Northeast Asia.” An idea to facilitate
trade by creating a single platform in which foreign and domestic traders could utilize to
complete customs clearance at a faster and easier rate and obtain information easier, the
Single Window system was developed and improved over a 4 phase period from 2004 to 20098).

8) So Young Yang (2011) p. 2
98
With a total of 5.7 billion KRW (approx. 6 million USD) invested, the Single Window system
met challenges both environmental and technical, but the results of it show a successful
development. From 2006 to 2010, the yearly use rate rose from 4.3% to 91.6% and connected
government agencies rose from 8 to 209). Furthermore, the time saved for users who needed
customs clearance by utilizing the Single Window system decreased by a full day, since the
need for an approval of import-requirement application step was completely unnecessary with
the Single Window system. Furthermore, the comprehensive saving of Korea’s firms’ costs
by reforming trade facilitation stood at 2,582 billion KRW (2.1 billion USD) saved10).
3) Smart Clearance System
Finally, Korea’s Smart Clearance System has been an ambition that the Korean government
has hoped to fulfill from 2011. This fourth generation UNI-PASS’s goal was to allow users
to utilize their mobile phones and create an Intelligent customs administration system11).
As of June of 2016, this “smart” clearance system was successfully launched for mobile
access and allows users to find customs information customized for their individual company
or taste. This new system also further heightens security and quickens the time needed for
foreign mail or goods to be processed and enter Korea12)
Figure 37 Logistics Single Window
Source: Korea Customs e-Clearance System: UNI-PASS, Customs UNI-PASS International Agency (CUPIA) website.
(http://www.unipass.or.kr)

10) Doing Business Report (2010)
12) Korean Culture and Information Service (Web)
99
3.3.2. Functions of UNI-PASS
South Korea, now placed seventh in yearly international trade volume, owes much of its
success in trade to the UNI-PASS program that allows custom clearance and trade to happen
without long delay and cost. However, the advantages that traders and Korea Customs service
receives from UNI-PASS aren’t limited to a simply fast and efficient system.
The long history and development period of UNI-PASS enables it to have several functions
included and added within it. These include a Single Window system, internet clearance portal,
information management system, clearance management system, cargo management system,
and administration system.
1) One-stop Service and Accessibility
As mentioned above, Korea’s implementation of a single-window system allows for

UNI-PASS to act as a one-stop service for all customs procedures. The single-window system
allows for data harmonization of all customs data, and the data are able to be standardized.
The Single Window system analyzes the 33 documents entered for customs and picks out
the final 237 common items, 118 unique items, and 187 unnecessary elements from the 542
data sets13).
One of the reasons the single-window system was able to become such a success was
due to the easy accessibility from the internet portal. The customs procedure can now be
approved online and this reduced the time necessary for customs approval, lowering storage
costs for firms.
2) Export and Import Customs Clearance and Cargo Management
The import customs clearance system in UNI-PASS is done completely online and begins
by collecting the necessary data from the importer. After the data are entered, the data are
sorted for errors and links to the corresponding cargo number, allowing users to see where
their items are in real-time. Whilst doing this, cargo items sometimes go through extra
document review, an inspection of actual goods, or a P/L screening14).
In the case of the export customs clearance system, likewise to the import system, the task
is done completely online. Furthermore, as an act to encourage exports, Korean exports policies
13) Yoon Samuel (2012) p. 69

14) Yoon Samuel (2012) p.71
100
have reduced, so that most exports procedures are automatically passed by the UNI-PASS
system. Only selected goods, such as those that are prohibited, are inspected during export.
Finally, cargo management is done on a much more particular level from beginning to end.
The cargo management procedure begins from the airline or forwarder’s admission of the
cargo. After the Master and House B/L is turned in, the MFCS (Manifest Consolidation System)
acts and with the MRN, a unique cargo reference number is created15). With this number,
the cargo can be tracked from beginning to end in real-time as well.
3) Tax Collection and Tax Refund
Both the tax collection and tax refund systems are supported by the UNI-PASS system.
By connecting with banks and customs laws, the system automatically puts into account taxes
on imports and exports through an electronic payment system. Furthermore, taxes are fully
returned in particular cases when certain laws and conditions are fulfilled, and these data are
saved in the system, where they are reviewed multiple times for accuracy.
4) Risk Management and Data Warehouse
The risk management system is an extremely important part of the UNI-PASS system. Since
there is a limit on the number of people the customs service hires while trade volume continues
to increase each year, the risk management system effectively utilizes the resources to their
highest efficiency in order to select and inspect for dangerous or prohibited items. The core
of this system is to raise the accuracy percentage with as low number of selections as well.
The risk management system also works as part of national security to prevent tax evasion
and illegal foreign exchange transactions as well16).
UNI-PASS also contains a data warehouse system called CDW that sorts out and analyzes
the over 2000 inner and outer data collected from the customs process. Certain data that
are needed for customs are also separated from the rest of the data sets and filed into separate
data marts of the particular government agencies. The data mart data are created in
3-dimensional cube shapes, so that visual analysis can be made easier17).
15) Yoon Samuel (2012) p. 73

16) Yoon Samuel (2012) p. 76
17) Yoon Samuel (2012) p. 81
101
3.3.3. Globalization of UNI-PASS
Korea’s UNI-PASS has been widely accepted as a successful case for a Single Window
customs system. The World Bank’s 2010 and 2011 Doing Business report acknowledged both
the UNI-PASS Single Window system and the UNI-PASS container cargo management system
as the Best Practice respectively and further reported that with the completely computerized
UNI-PASS system, Korea’s import and export customs procedure reduced by 3 and 2 days.
In addition, Korea’s UNI-PASS system earned the Intellectual Property Rights Award (WCO,
2006), E-Asia Award (AFACT, 2007), BSC Hall of Fame (Palladium Group, 2009), and Asian
MAKE Award (World Knowledge Forum, 2011), showcasing its excellence on the global stage.
When looking at particular case studies, Korea’s UNI-PASS began initiating export consulting
to Kazakhstan in 2005 and since then, ten countries have exported over $336.5 million in
ten countries by 2015. In 2011-2012, Korea’s exported model to Ecuador, ECUPASS, received
the World Customs Organization’s (WCO) Innovation Award in 2013. Furthermore, Ethiopia,
Colombia, Peru, and other countries are currently negotiating for an exported model of
UNI-PASS as well.
Table 24 Korea Customs Service UNI-PASS Exporting Log
Time of
Country Name of Business Cost
Contract
Kazakhstan Consulting for development of Customs System Oct. '05 420,000 USD
Kyrgyzstan Consulting for development of Customs System Mar. '08 470,000 USD
Dominica Electronic Customs System Development Business Apr. '08 28.5 million USD
Mongolia Electronic Customs System Development Business Mar. '09 5.54 million USD
Risk Management and Data Management System

Guatemala Dec. '09 3 million USD
Construction
Electronic Customs System Development Business Dec. '10 21.6 million USD
Ecuador
Single Window Development Business Sep. '11 15.8 million USD
Nepal Electronic Customs System Development Business Aug. '11 3.83 million USD
RM and Cargo Management Construction Aug. '11 2.66 million USD

Tanzania
New Customs System Development Business Aug. '12 19.6 million USD
Uzbekistan Single Window Development Business Dec. '12 4.12 million USD
Cameroon Electronic Customs System Development Business Sep. '15 23 million USD
Total 10 countries, 363.5 million USD

Source: Korea Customs press release (2015.09.07), ‘Government Opens the Export to Africa’, Korean Customs Information
Planning Department
102
3.4 Impact of Improving Customs Procedure: Korea’s Experience
3.4.1. Effect of Improving Customs Procedure: Korea’s

Experience
The implementation of UNI-PASS was revolutionary for the Korean customs process in terms
of efficiency. The time it takes for export clearance, import clearance, duty drawback, and
tax payment reduced from 1 day to 1.5 minutes, 2 days to 1.5 hours, 2 days to 5.2 minutes,
and 4 days to 10 minutes, respectively18). Considering that the United Nations Conference
on Trade and Development recommends a time of four hours, the total time it takes for all
four procedures utilizing UNI-PASS stands at only 106.7 minutes or 1 hour and 47 minutes.
Figure 38 Improvement of Customs Procedure after Implementation of UNI-PASS
Source: Korea Customs e-Clearance System: UNI-PASS, Customs UNI-PASS International Agency (CUPIA) website.
(http://www.unipass.or.kr)
The second most prominent benefit from the implementation of UNI-PASS is none other
than the transparency that it brought. Previously, without UNI-PASS, all inspections and plans
for screening were done by people, making customs extremely vulnerable to corruption.
However, these types of illegal acts have become meaningless in the face of UNI-PASS, as
UNI-PASS reduces human intervention to the utter most, so that the chances for corruption
can only decrease. In fact, after the implementation of UNI-PASS, the detection rate for illegal
or prohibited items has risen drastically19).
The second most prominent benefit from the implementation of UNI-PASS is none other
than the transparency that it brought. Previously, without UNI-PASS, all inspections and plans
18) Yoon Samuel (2012) p. 83

19) Yoon Samuel (2012) p. 84
103
for screening were done by people, making customs extremely vulnerable to corruption.
However, these types of illegal acts have become meaningless in the face of UNI-PASS, as
UNI-PASS reduces human intervention to the utter most, so that the chances for corruption
can only decrease. In fact, after the implementation of UNI-PASS, the detection rate for illegal
or prohibited items has risen drastically.
Increasing the efficiency of customs administration is pointed out as an important effect

of UNI-PASS adoption. Over the past 30 years, Korea's trade volume has exploded over 18
times, and the number of overseas travelers has increased significantly. However, the number
of Korean customs officials has doubled from 1973 to 1990 and has remained largely
unchanged over the period of 20 years from 1990 to 2009. The fact that the number of customs
officials has not changed since 1990, despite the rapid increase in trade and international
travelers, is due to the fact that the accuracy and efficiency of customs clearance has increased
with the introduction of UNI-PASS.
Changes in Trade Volume, the Number of Overseas

Figure 39
Travelers and Customs
Source: Korea Customs Service (www. customs .go.kr), Recited from Yoon (2010)
Reducing time and simplifying procedures through UNI-PASS could lead to cost savings.
The government report released in 2006 estimated that the introduction of UNI-PASS resulted
in a cost savings of approximately $ 3.5 billion. In addition, it is estimated that the improvement
of customs clearance procedures including UNI-PASS resulted in a reduction of logistics cost
of USD 4 million per year20).
20) Yoon Samuel (2012) p. 83
104
Table 25 Economic Impact of Implementation of UNI-PASS
Economic Benefit Amount

Reduction in work process 657 million US$
Increase in income by traders 1.1 billion US$
Reduction in logistics 750 million US$
Savings in infrastructure 281 million US$
Production increase in trade industry 750 million US$
Source: Final report on Accomplishment Measurement of Customs Modernization & Development of Accomplishment
Management Model by National Computerization Agency (2006). Recited from Customs UNI-PASS International
Agency (CUPIA) website. (http://www.unipass.or.kr/ds4_1.html)
In addition to the economic effect, the satisfaction of the customs clearance service system
is very high. According to a recent survey, the satisfaction rate of Korean customs clearance
system is very high, from 82.3% in 2009 to 85.1% in 2013, increasing by about 1% point
every year. The high level of satisfaction with the customs clearance system is due to the
introduction of UNI-PASS, which allows the user to carry out the customs procedure at any
time and place and to provide a simplified and unified service.
Figure 40 Survey Result regarding Satisfaction of Korea’s Customs Procedure
105
4. Policy Recommendation
4.1. Improving custom procedure in Sri Lanka
Computerization of customs procedures in Sri Lanka is still in its early stages of development.
Although ASYCUDA, computerization of customs procedure, has been established and has
played a role of enhancing the convenience for users, the service provided by ASYCUDA is
very limited and it does not provide a comprehensive service covering the procedure. Except
for some major export items, such as tea, it is not linked to other governmental agencies
that are related to import and export procedure, and thus the Single Window meeting
international standards is not realized. The following figure shows the relevant government
agencies required for Single Window construction, including banking services.
Figure 41 Connectivity through Single Window
Source: Summarized by author(s)
In 2016, the Korea Customs Service conducted a comprehensive evaluation of Sri Lankan
customs administration as part of its bilateral cooperation with Sri Lanka. While reviewing the
Sri Lankan customs procedure, the direction for improving the customs procedure in Sri Lanka
is presented. Most of the contents focus on computerization of customs procedures and
construction of a Single Window environment21).
21) The following is a summary of the results of the Sri Lanka consulting project in 2015 delivered by the Korea Customs
Service
106
In Sri Lanka, there is a computerized registration system in the import declaration and
inspection stage. However, it is needed to prepare customs declaration form and attach the
original documents and visit the customs office in order to file customs declaration. In case
of import declaration, it is pointed out that the receipt of the documents is confirmed manually
and individually. In addition, the declarers must stand by the customs office from the reception
to the completion of the procedure, and the customs officer must visit the relevant department
and receive the documents for each reporting procedure. The problem with the import
declaration is that only the customs declaration form is implemented and the related documents
must be accompanied by an original signed by the person in charge to proceed to the next
step.
Since the importation of air cargo is not electronically received from the importation by air
transportation, it is necessary to check the manifest details by hard copy of manual manifest
and manual report for each customs declaration. Especially, for flight with foreign nationality,
Sri Lankan cargo submits manifestation, which may include possession of legal issues in the
responsibility of submission. In addition, only 15 of the 25 government agencies involved in
the verification of the requirements for the import requirements are linked, and the fact that
the applicant handles the receipt and proceeding of documents related to the requirement
confirmation is a factor that lowers the effectiveness of the customs procedure.
In the case of export declaration, a relatively solid Single Window system has been
established for export declaration related to tea, which accounts for a high share of Sri Lanka’s
tax revenue. In the case of the remaining items, work efficiency through ASYCUDA is low.
It has been pointed out that it is urgent to expand the range of products which is covered
under the Single Window system.
To solve these problems, ASYCUDA system in Sri Lanka should be improved in order to
enable paperless procedure, processing of the entire customs clearance. Government agencies
involved in overall customs clearance should be included under a common umbrella called
Single Window and cooperation should be made in a way to improve customs efficiency through
mutual cooperation. At the same time, work should be done to change Sri Lanka 's domestic
laws and systems for the introduction of paperless customs clearance system, collection of
manifests, pre screening system, and separate operation of examination and inspection
system.
107
4.2. Implementation of Single Window Environment in Sri Lanka
4.2.1. Success Factors and Challenges in Implementation of UNI-PASS:

Korea’s Experience
There were several prominent challenges in the implementation of UNI-PASS and the Single
Window environment, ranging from environmental difficulties to technical difficulties. To
mention just a few, the first was the use rate by declarants. At the end of phase 1 of the
Single Window system in Korea, the use rate of the system by the declarants stood merely
at 1%. There were several reasons for this phenomenon such as the lack of training and
adjustment for workers to use the Single Window system, and lack of advertising to the
agencies and users. Thus, there was a need to train workers about the Single Window usage22).
The second issue that the implementation faced was more difficult in its search for a solution.
UNI-PASS and the Single Window system both rely upon data harmonization for them to
become successful. However, before the Single Window system, the coordination among
related agencies was extremely limited, and communication was minimal. In order to fix
this issue, strong political support behind the project was necessary and sufficient funding
a must23).
The last critical issue that the UNI-PASS and Single Window system faced was one of
technicality. While some government agencies had already had their own computerized
verification system, some others did not. Thus, there was a need to create another completely
new verification system to encompass all of these agencies and others that were to be added
in the future. This meant that, of course, extra budgeting would have to be planned out24).
The most crucial success factors allowing the implementation of UNI-PASS was none other
than the avid support of the government in terms of both politics and budgeting. UNI-PASS
was part of the major 6 national administration network development plans beginning from
the 1990s, and this influence allowed it to build up sufficient budget for creation and
improvement for UNI-PASS.
In addition, the Single Window system and UNI-PASS were in serious difficulties due to lack
of coordination among relevant ministries at the initial stage, but they succeeded in
demonstrating the support and leadership of the government innovation and decentralization

108
committee with the Korea Customs Service. Strong political will and leadership in projects
involving multiple institutions such as UNI-PASS served as an important factor in the
implementation of the project.
In particular, the training of computer-related specialists has become an important task in

computerization of customs clearance system and introduction and operation of UNI-PASS.
In the case of Korea, at the beginning of the computerization stage, 10 ~ 15 people were
selected and trained every year for the computerization process. The Korea Customs Service
has provided incentives of quick promotion opportunity for these specialists if they have work
for more than 3 years in computer related job position. This attracted excellent manpower
to be added to computer-related jobs in the situation that there was a shortage of computer
manpower in the KCS. These selected staffs cultivated in this course demonstrated their ability
as core manpower to promote customs administration informationization.
4.2.2. Approach to Implement Single Window Environment in Sri

Lanka
The Sri Lanka Customs Service was established in 1809 and is one of the oldest customs
offices in the world. Despite this long history, however, the current Sri Lankan customs
clearance process has hardware and software that are insufficient to operate bilateral trade
efficiently. In 1992, the Sri Lanka Customs Service established the ICT division and started
to improve the customs procedures based on ICT and introduced ASYCUDA. However,
ASYCUDA's fundamentals are limited in terms of the collection, management and education
of trade-related statistics, and it is not enough to provide one-stop-service in export and
import clearance by linking with Customs and other government departments.
However, the Government of Sri Lanka has continued its efforts to improve the efficiency
of the customs clearance process and to maintain its international competitiveness. Recently,
Sri Lanka Customs created online payment platform for Customs payments. Prior to this
platform, only the importers/exporters who maintained their bank accounts at the two state
banks, Bank of Ceylon and Peoples Bank, were able to make direct Customs payments online.
Implementation of LankaPay Online Payment Platform (LPOPP), the online payment platform
which facilitate online Customs payments from all commercial banks, has been designed to
connect Sri Lankan Custom’s ASYCUDA system with the participating Banks of LankaClear’s
Common Electronic Fund Transfer Switch (CEFTS). Due to the introduction of this new platform,
the customers can now directly connect to their respective bank via any channel connected
to CEFTS (Internet, Mobile, ATM or Over the Counter) to make the required payment to
Customs on a real time and 24/7 basis.
109
In order to introduce Sri Lanka's Single Window system in the future, many possibly
confronted problems must be solved. In a 2011 WCO survey of 56 countries around the world,
the ICT shortage was pointed out to be the most difficult factors that hinder the establishment
of an electronic linkage by other government agencies with Customs clearance system. 34%
of the respondents complained about these difficulties, followed by the budget and human
resource constraints (24%), inadequate legal framework (22%), and the difficulties of
inter-agency cooperation (12%). In order to overcome these difficulties and successfully
improve the efficiency of the customs administration, it is necessary to carry out the project
considering the following points.
Progressive Business Plan

Implementing a Single Window system is a project that the government should pursue
strategically with mid- to long-term goals. In the case of Korea, we could build an advanced
customs clearance system through the stages of EDI Clearance system in 1992, moving to
construction of Internet Clearance system and Smart Clearance system. Especially, in
developing the Single Window System, the work progressed in three steps. The first stage
targeted to link 8 government departments and customs administration with a total budget
of 2.16 million USD for eight months from May 2005. In the second and third stages, it increased
the range of government agencies and services participating in the system by paying 1.16
million USD and 1.4 million USD, respectively.
Figure 42 Gradual Construct8ion of Korea’s Single Window System
Source: Korea Customs Service, ‘Single Window: Korea Customs Service & World Customs Organizations Experiences’
(Cited from PowerPoint file on May 2011)
110
Building a Single Window system in Sri Lanka also requires mid- to long-term goals. In
the short-term, it is necessary to make an effort to establish the stage-by-stage goals by
dividing the urgent matters, the possible ones, and the parts requiring mid-term or long-term
improvement. We need to reflect on the errors and improvements that occurred during each
step in the next step so that the specificity of Sri Lanka can be reflected in the system.
Strong Willingness of Government Commitment and Harmonization among

Government Agencies
The construction of a Single Window system is the process of integrating the functions of
various government agencies related to customs administration. Therefore, it is the
government's willingness to do what is most important for integrating the work of various
government agencies that have different systems and operating methods. In the case of Korea,
UNI-PASS was part of the six national administrative network development initiatives that
began in the 1990s and was able to achieve coordination among the necessary budgets and
government departments based on the strong will of the government.
The problem in this process was whether or not the government will proceed with the
initiative. According to the 2011 WCO Report, 63% of the countries surveyed said that their
Customs Service is playing a leading role in providing services for the Single Window system.
17% of the respondents said that other government departments provide leading services,
while 17% said that they are private sector or semi-government agencies. Thus, in most
countries, the Customs play a key role in the construction and operation of the Single Window
system, and it is desirable that the Sri Lankan Customs Service, which has a professional role
in the customs clearance process, conducts its business in a leading role.
Figure 43 Single Window Service Provider
Source: WCO, ‘How to Build a Single Window Environment. Vol 2: The Professional Practice Guide, Cited from p.22.
111
In the process of introduction of the Single Window system, the arbitration committee is
established as a means to solve the conflicts between the ministries, and the problems of
the ministries are solved. If problems arise due to differences in standardization, there is a
need for a device to mitigate the conflicts between the government and the government by
establishing standardization and revising laws and systems so that the ministries and agencies
follow them.
User-Friendly System
According to the WCO report surveyed in 57 countries around the world, 57 countries all
have computer-based electronic customs clearance systems. Among them, on average, 92%
of import clearance, 91% of export customs clearance, and 95% of transit declaration were
electronic. However, this high utilization rate cannot be achieved from the early stage of system
introduction. In order for the Single Window system to be widely used among users, it is
necessary to build a system in consideration of user convenience. In particular, users are
concerned about the legitimacy of electronic documents. Therefore, in addition to introducing
Single Window, it is necessary to educate and promote users to provide credibility of new
methods such as electronic documents and to emphasize convenience. Especially, it is
necessary to continuously improve and adjust the system that reflects the opinions of the
users in the step-by-step process so as to provide the maximum convenience to the users.
112
Ⅳ. Strategies to Attract Foreign Investors
Ⅳ. Strategies to Attract
Foreign Investors
1. Current State of Sri Lanka
1.1. FDI of Sri Lanka
As shown in [Figure 44], FDI inflows in Sri Lanka jumped from $ 234.0 million USD in 2005
to $ 752.2 million USD in 2008, but it dropped due to the global financial crisis. After 2011,
it showed a steady level of FDI inflows in Sri Lanka, implying that the Sri Lankan government
needs to put more efforts in promoting FDI by establishing more business-friendly environment
and improving incentive programs to foreign investors.
Figure 44 FDI Inflows in Sri Lanka

($ million USD)
Note: excluding loans.

Source: Central Bank of Sri Lanka (http://www.cbsl.gov.lk/)
113
In terms of investment projects approved under Section 16 and 17 of the Board of Investment
(BOI) Law during 2005-2016, Malaysia was the top foreign investor, investing $ 1,452.0 million
USD in Sri Lanka, followed by Hong Kong ($ 1,145.4 million USD), China ($ 1,109.7 million
USD), UK ($ 1,000.6 million USD), and India ($ 991.0 million USD). Over sectors, infrastructure
(52% in total), including telecommunication network (29%), real estate (11%), and port
container terminal (6%), has been the top sector to receive FDI inflows during 2005-2016.
In manufacturing sectors (27% in total), textile and apparel (7%) and chemicals/rubber/plastics
(7%) have received more FDI inflows. In services (19% in total), hotels and restaurants (8%)
have been the top sector during the period.
1.2 Incentive program of Sri Lanka
The Sri Lankan government, mainly Board of Investment (BOI), has been improving the
incentive programs to attract foreign investors. As of July 2017, the tax incentives, provided
through Board of Investment (BOI), were not finalized as it is expected to come through Inland
Revenue Amendment Act to be presented to the parliament. The BOI provides duty free
facilitation and exchange control exemptions to projects that are approved under BOI Law.
Duty Free Facilitation
According to BOI25), companies signing an agreement with the BOI of Sri Lanka are entitled
to obtain duty free facilities under Sec. 17 of BOI Law No. 4 of 1978. Companies that export
more than 90% of products (60% for apparel & ceramic) or services (with 70% turnover in
convertible foreign currency) are entitled to be free of customs duty on capital goods and
raw materials. Non-export-oriented companies are entitled to import project-related capital
goods free of customs duty, during the project implementation period. Prior to signing an
agreement, the company should submit the list of items that are required to set up and operate
the project. These lists will be evaluated and approved by the sector groups.
Exemption from Exchange Control Regulation
Export-oriented projects will be exempt from exchange control regulations under Sec. 17
of BOI Law and Strategic Development Projects. An investment project will be considered as
an export-oriented project only if it exports 90% of goods produced (60% for apparel &
ceramic) or services (with 70% turnover in convertible foreign currency). These companies
25) BOI, Setting up: What incentives do I get? (http://www.investsrilanka.com/setting_up_in/what_introduction;

Accessed on July 3, 2017).
114
will be exempted from Parts I, IA, II, III, IV, V, & VI of the Exchange Control Act, and also
entitled to open and operate Foreign Currency Banking Unit (FCBU) account in any commercial
bank in Sri Lanka. In recent years, the Sri Lankan government has taken several initiatives
to promote investments. For example, the government removed the 15% tax on land leasing
for foreigner investors and reduced the approval period for FDI requests to 50 days,26) even
though it enacted ban on foreigners buying land in August 2015.
Budget 2017 proposals: Incentives proposed
Ministry of Finance (2016) proposed various incentive programs in its budget proposal in
2017, the so-called the Budget Speech 2017, by proposing trade-and-investment-based
reforms. These reforms cover various measures such as improvement of productivity, trade
facilitation, bilateral economic integration agreements, restructuring of the BOI, creation of
much needed institutions, and elimination of exchange controls [Ministry of Finance (2016,
4)]. More specifically, after identifying the long process of registering business in Sri Lanka,
the government aims to shorten this process from at least 8 steps now to 5 steps by 2020
[Ministry of Finance (2016, 30)]. The Budget Speech 2017 also proposed to introduce laws
that give Public Limited Companies the freehold right of land, and private companies with
majority foreign holdings will be allowed to lease land on a long-term basis. However, such
companies should have invested at least Rs. 250 million excluding the value of land providing
employment to at least 150 people, and have maintained this status quo for at least 3 years
[Ministry of Finance (2016, 31)].
The Budget Speech 2017 proposed to establish four more Free Trade Zones (FTZs), targeting
industries such as rubber-based products, pharmaceuticals, fabric manufacturing, mineral,
chemical engineering, and automotive industry, and so on, locating them in Kalutara
(Bandaragama), Rathnapura (Embilipitiya), Puttlam and Vavuniya. In order to harness the
benefits of specialization, the government will establish 15 export villages, on a PPP basis,
focusing mainly on the thrust industries, such as IT, robotics, fashion, high-end apparel, and
boat manufacturing [Ministry of Finance (2016, 40)].
1.3. Recent Development in Trade Agreements of Sri Lanka
Sri Lanka has two longstanding regional and two longstanding bilateral free trade
agreements, such as Asia-Pacific Trade Agreement (APTA), South Asian Free Trade Area
(SAFTA), Indo-Sri Lanka Free Trade Agreement, (ISFTA), and Pakistan-Sri Lanka Free Trade
26) Reuter, Sri Lanka removes land lease tax for foreigners, November 20, 2015 (http://www.reuters.com/
article/sri-lanka-budget-idUSD8N0ZV00420151120; Accessed on July 3, 2017).
115
Agreement (PSFTA). In addition, Sri Lanka started the negotiation of a bilateral FTA with China
since June 2016, in a more comprehensive way, including market access, services, investment,
customs cooperation, technical barriers to trade, sanitary and phytosanitary measures, and
safeguards. Moreover, Sri Lanka started to negotiate with India to deepen and widen economic
ties between two countries, aiming at a new Indo-Sri Lanka Economic and Technology
Cooperation Agreement.
As discussed before, the APTA, however, is notified to the WTO as Enabling Clause, with
a relatively low level of economic integration and trade liberalization. Under the SAFTA, member
countries have a right to have a list of sensitive products where no reduction of tariffs will
occur per an agreed schedule for LDCs and non-LDCs. Even though Sri Lanka reduced the
number of products on the sensitive lists by 20% in recent years, it still has a pretty wide
coverage of sensitive products, 1,765 tariff lines on the revised sensitive list for LDCs and
1,948 tariff lines on the revised sensitive list for non-LDCs [WTO (2016)]. Two bilateral FTAs
with India and Pakistan also have a pretty low level of economic integration and trade
liberalization.
Sri Lanka has bilateral investment treaties (BITs) with: 29 countries, including Australia
(2007), Belgium-Luxembourg (1984), China (1987), Czech Republic (2016), Denmark (1985),
Egypt (1998), Finland (1987), France (1982), Germany (1966), India (1998), Indonesia (1997),
Iran (signed but not enforced yet), Italy (1990), Japan (1982), Korea (1980), Kuwait (signed
but not enforced yet), Malaysia (1995), Netherlands (1985), Norway (1985), Pakistan (2000),
Romania (1982), Singapore (1982), Sweden (1982), Switzerland (1982), Thailand (1996),
United Kingdom (1980), USA (1993), and Vietnam (signed but not enforced yet). These BITs
include articles on scope and definition of investment, establishment, national treatment,
most-favored-nation treatment, fair and equitable treatment, expropriation and compensation,
transfers, and dispute settlement mechanism.
2. Korea’s FDI Policy
2.1. Recent Development of FDI Performance in Korea
2.1.1. Overall Trend of FDI Performance
According to the World Bank Group’s Doing Business 2017 Report, Korea has highly ranked
th
5 in 2017 and 4th in 2016 in overall terms of the ease of doing business. It ranked 11th in
terms of the ease of starting a business, up from 23rd in the 2016 report. Particularly, Korea
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ranked top in both getting electricity and enforcing contracts. Given this performance of Korea
in enhancing its environment of doing business, its FDI performance had two consecutive years
to have more than US$ 20 billion in 2015-16, even though there is a wide fluctuation of
investment projects over time, as shown in [Figure 45].
However, FDI inflows are lower than FDI outflows (ODI), showing roughly 40% of FDI
outflows, even though FDI inflows were greater than outflows right after the Asian financial
crisis of 1997-98. It implies that Korean multinational corporations (MNCs), such as Samsung,
LG, and Hyundai Motor, have been more actively investing in foreign countries in order to
establish their own global value chains.
FDI stocks as a percentage of the total GDP are quite low among OECD countries, showing
15-20% in Korea, but roughly 50% in the UK and around 80% in Ireland. According to OECD
(2016), the stock of FDI inflows as a share of GDP in Korea was the third-lowest in the OECD
countries, at 13% in 2014.
The so-called Korea Discount would be a reason for a relatively poor performance of FDI
inflows, including geopolitical risks with North Korea’s nuclear weapons in the Korean
peninsula, Korea’s reputation for labor militancy, and so on.27) Another reason would be
Korea’s manufacturing-based industrial structure because multinational corporations from
developed countries have been interested in services markets, including financial markets.
Figure 45 Korea’s FDI Performance

(Notification basis, thousand USD)
Source: Ministry of Trade, Industry and Energy (http://www.motie.go.kr/)
27) The Economist, “Minority reportThe Korea discountCorporate governance explains South Korea's low stock
market ratings,” February 11, 2012 (http://www.economist.com/node/21547255; Accessed on June 10, 2017).
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2.1.2. Key Characteristics of FDI Performance
Major foreign investors in Korea are mainly developed countries in the world, showing that
EU and the US have been top investors over time, having 34.7% and 18.2% of the share
to the total inflows respectively in 2016, followed by Singapore (11.0%), Hong Kong (9.9%),
and China (9.6%). FDI from China has been increased significantly in recent years. The main
reasons are including changes in the Chinese government’s policy to promote overseas
investment; and more favorable expectations on economic cooperation between Korea and
China, including Korea-China FTA.
Table 26 Share of the Total FDI Inflows over Sectors

(%)
2011 2012 2013 2014 2015 2016

Agriculture & Fishing 0.8 0.0 0.0 0.0 0.0 0.3
Manufacturing 39.3 37.4 31.9 40.2 21.8 24.1
Chemicals 17.2 7.9 6.0 16.7 8.2 6.8
Metal 7.1 3.6 0.4 0.8 0.4 1.0
Electrical & Electronic
7.4 8.0 3.6 3.2 5.7 5.0
Industry
Services 56.9 59.0 67.7 58.9 70.4 72.8
Wholesale/Retail 13.5 7.6 4.5 5.2 5.6 7.0
Hotels & Restaurants 1.7 5.6 6.4 3.9 3.1 3.8
Transport & Storage 1.0 0.4 0.7 2.3 3.5 1.9
Finance & Insurance 13.9 13.4 20.1 9.4 29.0 29.2
Real Estate & Renting 10.1 10.8 17.5 14.4 13.3 11.2
Business Services 10.0 19.1 17.3 21.9 9.7 17.4
In terms of sectorial division of FDI inflows in Korea, the share of manufacturing sectors
reduced significantly in recent years, whereas the share of services sectors has rapidly
increased to 72.8% in 2016, as shown in [Table 26]. In services sectors, foreign investors
concentrated their investment in the financial sector, business services, real estate and renting
services, and wholesale/retail trade. Among manufacturing sectors, the chemical industry,
followed by electrical and electronic industry, has been dominant over time. Interestingly, China
as a foreign investor, showed a new trend by diversifying its sectorial destinations, including
leisure and resorts, cultural contents, food, textiles, and so on, while in the past the real estate
market was the main sector of Chinese investment projects in Korea.
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In terms of types of FDI inflows in Korea, Greenfield investment, rather than M&A-type
(or brownfield) investment, has been dominant over time, even though its share dropped from
87.3% in 2011 to 70.5% in 2016, as shown in [Table 27]. It implies that in the context of
the regulatory regime regulations of starting a new business would presumably be lower barrier
than those of merging and purchasing local businesses in Korea.
Table 27 Share of the Total FDI Inflows over Teypse

(million USD)
2011 2012 2013 2014 2015 2016

771.6 3,748.7 4,978.7 7,980.9 6,804.1 6,273.9
M&A
(12.7%) (23.0%) (34.2%) (42.0%) (32.5%) (29.5%)
5,317.3 12,537.2 9,569.6 11,019.2 14,106.1 15,025.4

Greenfield
(87.3%) (77.0%) (65.8%) (58.0%) (67.5%) (70.5%)
Total 6,088.9 16,285.9 14,548.3 19,000.1 20,910.3 21,299.3
2.2. FDI Policy in Korea
2.2.1. Institutional Framework of FDI Promotion
Invest Korea (IK), Korea’s national investment promotion agency, was established in 2003,
after being re-launched from the Korea Investment Service Centre (KISC) established in 1998,
as part of the Korea Trade-Investment Promotion Agency (KOTRA) to support the entry and
establishment of foreign business in Korea. IK provides all-round services for foreign investors,
including consultations, administrative assistance with investment notification and corporate
establishment, support for business activities in Korea and grievance resolution. It also provides
various investment promotion activities abroad using its own overseas network.
While multiple agencies have been involved with FDI promotion, at the cabinet level, the
Ministry of Trade, Industry and Energy (MOTIE) is responsible for FDI-related policies, with
Foreign Investment Committee, which consists of representatives of various agencies and
ministries in the cabinet, for policy coordination. Invest Korea, under KOTRA, is mainly
responsible for policy implementations, and it is cooperating with local governments and free
economic zones. In addition, KOTRA has 126 overseas offices in the world, of which 36 of
them are overseas FDI offices devoted to attract foreign investment.
119
Invest Korea also plays a role of the one-stop service in supporting foreign investors for
FDI-related matters. This one-stop service covers all services related to mainly three areas:
(1) pre-investment consultation, (2) investment execution; and (3) post-investment
processes. In the stage of pre-investment consultation, Invest Korea conducts preliminary
information study by searching and providing information required for investment feasibility
study. And it also tries to find potential investors and arrange consultations by finding
investment partners. Invest Korea also provides consultations on specific sectors, including
incentives, legal affairs, accounting taxation, industrial sites, and etc.
Figure 46 Korea’s FDI Promotion Regime
In the second stage of investment execution, Invest Korea receives notifications of foreign
investment and issues certificates of foreign investment. After investment is received, Invest
Korea also issues registration certificates of foreign-invested company. It looks for optimal
factory sites for investors and provides relevant administrative services.
In the third stage of post-investment services, the Korean government, closely working with
KOTRA and Invest Korea, has established a one-stop solution system for resolving problems
that foreign-invested companies are facing at by operating regular roundtable discussions
chaired by the Minister of Trade, Investment and Energy. Foreign Investment Ombudsman
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resolves the grievances of foreign-invested companies. In addition, Invest Korea assists

administrative works related to alien registrations and extensions of visa. It also provides
various services to support livings of workers of foreign-invested companies and their families
settled in Korea, by searching for houses, foreign schools and surrounding living facilities.
Figure 47 Korea’s One-Stop Solution System
2.2.2. Incentive Programs to Attract FDI
The Korean government has been providing various incentive programs to attract FDI.
According to KOTRA (2015), the incentive programs in general include: (1) tax support, (2)
cash grants, and (3) industrial site support.
Tax Support
The Korean government provides various incentive programs for FDI, shown in [Table 28].
These incentive programs mainly focus on reductions of national taxes, including corporate
tax and income tax, as well as local taxes, such as acquisition tax and property tax. They
are provided for limited periods and on a non-discrimination basis over countries. Depending
on the local government regulations, the period of local tax reduction may be extended up
to 15 years, or the reduction ratio may be increased. As shown in [Table 28], minimum
investment requirements apply in some cases.
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Table 28 FDI Tax Support: Reductions of National and Local Taxes
Business Category Investment Amount Reduction Period and Details

Industry support services and high-degree tech businesses
Business in individual-type foreign investment zones (FIZ) Seven years in total according to the
Over $ 30 million USD following ration (amount multiplied
Manufacturing Over $ 20 million USD by the foreign investment ratio)
Tourism Over $ 10 million USD - 100% for five years after income
Logistics Over $ 2 million USD, with more than 10 creation
R&D employees with Master’s degree or - 50% for next two years
above
Businesses in free economic zones (FEZ), including Saemangeum Area Five years in total according to the
Manufacturing Over $ 10 million USD following ration (amount multiplied
Tourism Over $ 10 million USD by the foreign investment ratio)
Logistics Over $ 5 million USD - 100% for three years after income
Medical institutions Over $ 5 million USD creation
R&D Over $ 1 million USD - 50% for next two years
Developers in Free economic zones (FEZ), including Saemangeum Area

Over $ 30 million USD; over 50% of
foreign shares and $ 500 million USD on
business costs
Developers in Jeju investment promotion district
foreign shares and $ 100 million USD on
business costs
Businesses in complex-type foreign investment zones (FIZ)
Manufacturing Over $ 10 million USD
Logistics Over $ 5 million USD
Businesses in business city development zones
Manufacturing Over $ 10 million USD
Engineering; Additional
communication; Information
processing & other computer
operation-related businesses;
Science & technology services;
Tourism; Culture industry; Various
facilities; Renewable energy
generation
R&D Over $ 2 million USD
Logistics Over $ 5 million USD
Developers of business city
foreign shares and US$ 500 million on
business costs
Businesses in free trade zones (FTZs)
Source: KOTRA (2015) and WTO (2016)
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As tax incentive programs may contribute to inefficient allocation of resources due to the
distorting effects of tax supports, the Korean government has paid attention to ensure that
the financial and efficiency costs of these incentive programs do not exceed their stated
benefits, by setting the maximum amount of cumulative tax incentives to prevent excessive
tax exemptions and reductions and also publishing annual reports on tax expenditures to
improve transparency in the tax support programs.
Cash Grants
According to KOTRA (2015), the central and local governments in Korea provide cash grants
when foreign investment projects meet certain conditions. These conditions include whether
these projects incorporate advanced technology, the effects of technology dissemination, the
extent of job creation, and so on. To be eligible for cash grants, a foreign investor needs
to have at least 30% of the equity. The exact amount of the cash grant will be determined
through negotiations with the investor, and it will not exceed the actual amount of the
investment.
Figure 48 Application for Cash Grants
Source: KOTRA (2015)
Industrial Site Support
In accordance with the Foreign Investment Promotion Act, the Special Act on Designation
and Management of Free Trade Zones, and the Special Act on Designation and Management
of Free Economic Zones, the Korean government may designate foreign investment zones
(FIZs), free trade zones (FTZs), and free economic zones (FEZs) to attract FDI. As of 2017,
the Korean government designated 97 foreign investment zones, including 21 complex-types,
75 individual-types, and 1 service-type. In addition, it designated 13 free trade zones, including
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7 industrial-complex-types and 6 ports-and-airports-types. Also it operates 8 free economic

zones, including Busan-Jinhae, Gwangyang Bay Area, Incheon, Yellow Sea, Daegu-Gyeongbuk,
Saemangeum-Gunsan, East Coast, and Chungbuk.
Table 29 Free Economic Zones in Korea
Area Airport/ Implementa

Zone Targeted Business
(km2) Port tion Period
Incheon
IT, BT, R&D, aircraft, logistics, tourism,
Incheon 132.9 Airport, 2003-2022
finance, leisure, high-tech business
Incheon Port
Gimhae
Busan New Port-based logistics,
Airport,
Busan-Jinhae 52.9 2003-2022 high-tech parts & materials business,
Busan New
R&D, resort & leisure business
Port
Logistics, manufacturing, steel,

Gwangyang Gwangyang
77.7 2003-2022 machinery, assembly, metal, new &
Bay Area Port
renewable energy, tourism, leisure
High-tech transportation components,

Daegu-Gyeo
22.0 Daegu Airport 2008-2020 high-tech medical business, IT
ngbuk
convergent business
High-Tech parts, chemicals, auto

Gunsan parts, energy, MRO, industrial logistics,
Saemangeum
28.6 Gunjang New 2008-2020 high-tech knowledge-based business,
-Gunsan
Port R&D, international cooperation,
culture & tourism
Pyeongtaek Auto, electronics, parts and materials,

Yellow Sea 4.4 2008-2020
Dangjin Port chemicals, logistics
Advanced materials, logistics, medical

Yangyang or marine tourism, non-ferrous metal,
East Coast 8.3 Airport, 2013-2020 super light-weight advanced parts and
Donghae Port materials, housing, education, medical
and cultural facilities
BT, IT, medical research, clinical trial

drugs and medical equipment,
Chengju
Chungbuk 9.1 2013-2020 aviation, logistics, aircraft
Airport
maintenance, electric auto parts, new
and renewable energy
Source: KOTRA (2015)
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The foreign investment zones are designated by mayors or provincial governors. Under the
Foreign Investment Promotion Act, the foreign investment zones are designed to promote
foreign investment projects and to attract mainly large-scale foreign investment. They are
classified into three different categories: complex-type, individual-type and service-type. A
complex-type FIZ is designed to provide factory sites at a lower cost to promote foreign
investment of foreign companies that have advanced technology. An individual-type FIZ can
be customized for its foreign investor and the investor can choose and designate the investment
zone. And a service-type FIZ refers to areas designated for a lease or a transfer to
foreign-invested companies providing a service business, including R&D activities, finance,
knowledge-based services, cultural and tourism-related services [KOTRA, (2015)].
To attract manufacturing companies and logistics businesses, the Korean government

designates free trade zones in industrial complexes, airports, ports, distribution complexes,
freight terminals, and so on. As shown in [Table 29], national and local taxes will be reduced
or exempted in free trade zones, depending on the category of industries and the size of
investment projects.
Free economic zones are designed to promote systems and conditions that differ from other
areas, so that foreign investors in the zones actively do their own business and economic
activities. In addition to providing incentive programs, the Korean government has tried to
enhance living standards of foreign investors in the zones by providing international schools
and hospitals.
3. Determinants of FDI Location from Perspectives of

Korean MNCs
3.1. Case Study: Determinants of Samsung Electronics’ Decision to

Invest in Vietnam from Business Perspectives
ASEAN has become an important destination for Korea’s FDI outflows, particularly for
manufacturing, extractive and infrastructure-related activities, even though the share of ASEAN
to total amount of Korean investment abroad (14.6% in 2016) has been relatively small over
time. According to ASEAN and UNCTAD (2016), the share of Korea’s investment in ASEAN
during 2010-2015 was over 15% and three member states, Vietnam, Singapore, and Indonesia
(in that order), accounted for 63% out of the total amount in ASEAN, which has been up
to 78.7% in 2016.
125
Table 30 Korea’s Investment in Vietnam
Number of Number of New Investment

Amount Notified Number of
Year Cases Korean Amount
(US$ million) Transfers
Notified Subsidiaries (US$ million)
1991 3 1 0 1 0
1992 26 9 101 17 17
1993 71 19 153 41 38
1994 79 48 180 111 91
1995 83 44 234 151 201
1996 96 43 220 180 125
1997 75 29 198 171 164
1998 46 6 105 87 82
1999 48 22 82 88 63
2000 79 29 99 141 72
2001 132 60 105 266 62
2002 215 109 392 484 162
2003 228 101 723 573 170
2004 293 118 362 652 187
2005 445 205 407 1,030 344
2006 635 302 1,816 1,674 601
2007 944 454 2,814 2,376 1,315
2008 897 312 1,934 2,459 1,395
2009 703 174 970 1,715 621
2010 847 232 2,226 1,950 879
2011 793 196 1,523 1,815 1,055
2012 814 214 1,000 1,754 979
2013 1,109 333 1,476 2,084 1,153
2014 1,366 460 2,150 2,790 1,617
2015 1,702 543 2,920 3,367 1,599
2016 2,137 672 2,993 3,623 2,273
Total 13,866 4,735 25,182 29,600 15,266
Source: The Export-Import Bank of Korea
126
Vietnam has been the top destination of Korea’s investment among ASEAN member
countries. As shown in [Table 30], 4,735 Korean subsidiaries have operated in Vietnam since
1991, in a wide range of industries. The top 20 most globalized Korean multinational
corporations (MNCs) such as Samsung, LG, and Hyundai Motors all have a presence in Vietnam.
Large Korean companies and small- and medium-sized enterprises (SMEs) are expanding their
presence in Vietnam, with a rapidly rising number of micro, small- and medium-sized
enterprises (MSMEs). Since 2006, Korean investment in Vietnam has risen sharply, particularly
in manufacturing sectors, which become the largest source of investment in Vietnam, mainly
due to large-scale investment projects in recent years by Korean MNCs such as Samsung,
LG, and Kumho Tire.
Particularly, Samsung and LG continued to expand their presence with additional

manufacturing facilities and new plants, by transforming Vietnam into their major global hub
for production and export of mobile phones and some other consumer electronics. Samsung
has announced its plans for an investment expansion of $3 billion to establish facilities for
the production of display modules. LG Electronics, through its subsidiary LG Display Group,
is expanding its presence in Vietnam by building another plant of $1.5 billion to produce digital
displays. The plant is expected to start operation in 2017, while LG opened a plant of $1.5
billion to produce digital devices and electronics in Hai Phong in 2015.
Table 31 Stages and Characteristics of Korean Investment in ASEAN

(Units: $ million, %)
Cumulative FDI Share of Large or

Stage Characteristics Motives
Flows in ASEAN Small Firms
Stage 1: Initial Stage (Government-Led Large: 64%
109 Resource-Seeking
1982-87 Industrialization) SMEs: 35%
Resource-Seeking,
Stage 2: Growing Stage (Pre-Crisis Large: 26%
3,225 Market-Seeking (Export
1988-97 Liberalization) SMEs: 66%
Promotion)
Resource-Seeking,
Stage 3: Market-Seeking (Export
Restructuring Stage Large: 12%
1998- 4,387 Promotion, Local Market
(Post-Crisis Liberalization) SMEs: 56%
2005 Penetration),
Cost Reduction
Stage 4: Proactive Stage (Acceleration Large: 13%
36,422 GVC Integration
2006- of Globalization) SMEs: 54%
Source: Box Table 2.1.1. of ASEAN and UNCTAD (2016)
127
The pattern of Korean investment in Vietnam has been evolved. Resource-seeking activities
were dominant during early 1990s, focusing more on extractive industries, including mining.
However, the share of the manufacturing industries in Korean investment in Vietnam during
1991-2016 was 60.6%, followed by mining (14.4%), real estate (7.2%), finance and insurance
(4.4%), wholesale and retail sales (3.8%), and construction (3.1%).
Korean investment projects have been increasingly driven by a mixture of multiple factors,
which include global value chains (GVC)-related strategies of Korean MNCs. In particular, for
MSMEs, market-seeking factors include the need to follow customers or to operate close to
customers in Vietnam, as Vietnamese income levels are getting higher than before. Also Korean
MNCs have considered Vietnam as their export platforms, especially in electronics industries.
Large Korean MNCs dominate the list of foreign investors in Vietnam, including Samsung and
LG in electronics, POSCO in metals and infrastructure, and the Lotte Group in retails and
chemicals.
3.1.1 Samsung Electronics’ FDI Performance in Vietnam
Samsung has been the top foreign investor in Vietnam. To reduce the costs of parts or
inputs used in its mobile phones, Samsung has encouraged its Korean subsidiaries and
subcontractors in component manufacturing to invest in Vietnam, operating close to its
assembly plants. Samsung also procured parts and components by non-Korean FDI enterprises
from Japan, the United Kingdom, Germany, or other countries if they can meet the standards
for quality and price. In recent years, Samsung has increased its outsourcing to local
Vietnamese suppliers for lower input and logistics costs. Satellite firms affiliated with Samsung
are supplying components to Samsung’s operations in Vietnam. As shown in [Table 32],
Samsung is producing 50% of its mobile phones in Vietnam, while only 8% in Korea28).
Table 32 Samsung’s Capacity to Produce Mobile Phones over Plants in Countries
Country Vietnam China India Brazil Indonesia Korea Total

Production
240 million 150 million 50 million 12 million 8 million 40 million 500 million
Capacity
Source: Business Korea, “Samsung made in Vietnam: 50% of Samsung mobile phones made in Vietnam,” January 28,
2015.
28) Business Korea, “Samsung made in Vietnam: 50% of Samsung mobile phones made in Vietnam,” January
28, 2015 (http://www.businesskorea.co.kr/english/news/industry/8785-samsung-made-vietnam-50-samsung-
mobile-phones-made-vietnam; Accessed on June 6, 2017).
128
Table 33 Samsung Electronics’ Subsidiaries in Vietnam
Year of Ownership Asset (2015,

Name Major Business
Establishment Share (%) Won billions)
Samsung Electronics Production of Electronic
2009 100 6,553.6
Vietnam Devices
Samsung Electronics Communication System
2014 100 3,957.7
Vietnam Thai Nguyen Services
Samsung Vina Production and Sale of
1996 100 219.4
Electronics Co., Ltd Electronic Devices
Source: ASEAN and UNCTAD (2016)
3.1.2 Determinants from Business Perspectives
Dunning’s OLI Framework
Why do companies go multinational? This question is compatible with questions about the
motivation behind FDI because companies need to invest abroad to go multinational. If an
MNC is exactly identical to a local company in the host country, it will not find advantages
to enter the market of the host country, even facing the risk of doing business abroad. After
all, there are added costs of doing business abroad, including communications and transport
costs, higher costs of stationing personnel abroad, barriers due to language, customs, and
being excluded from the local business and government networks. Therefore, the MNC must
possess some special advantages such as superior technology or lower costs due to economies
of scale, whereas the foreign country, which is hosting the MNC, needs to provide certain
benefits to the MNC in order to attract its activities.
A traditional work to explain motivations of FDI was developed by Dunning (1977), and
has been named as the so-called OLI Framework. The OLI Framework stands for Ownership,
Location, and Internalization advantages. A firm’s Ownership Advantage could be a product
or a production process to which other firms do not have the access, such as a patent, blueprint,
or trade secret. Whatever its form, the ownership advantage confers some valuable market
power or cost advantage on the firm sufficiently to outweigh the disadvantages of doing
business abroad.
The foreign market must offer a Location Advantage so that MNCs make profitable to
produce the product in the foreign country rather than simply to produce the product at home
and export it to the foreign market. Although tariffs, quotas, transport costs, and cheap factor
prices are the most obvious sources of location advantages (tariff-jumping FDI,
129
efficiency-seeking FDI), factors such as access to customers (market-seeking FDI) are also
important. Many MNCs are in the service industries, and hotels, for example, in which on-site
provision of the services is an inherent part of the companies’ business.
The MNE must have an Internalization Advantage. Even though an MNC takes advantages
of ownerships and locations, it still needs the advantage to set up a foreign subsidiary directly
and to produce its own parts instead of offering local companies to produce the parts and
to pay royalties for the technology. Reasons for wishing to do business abroad are referred
to as internalization advantages: the product of process is exploited internally within the
firm than at arm’s length through markets. Internalization occurs because it is more profitable
to conduct transactions and production within a single organization than in separate
organizations.
OLI framework can explain why Samsung decided to invest in Vietnam. Samsung, a leading
company in sectors of mobile phones, home appliances, and IT products, has a substantial
specific ownership advantage that it exploits abroad with its advanced technologies, patents,
networks and other assets. However, in order to meet the objective of this paper, we focus
more on its Internalization Advantage because we need to understand what corporate
strategies determine their decision of FDI. Also the next subsection discusses Vietnam’s
Location Advantage to understand what incentive programs have been successful in attracting
Samsung’s FDI.
Efficiency-Seeking FDI
As identified in ASEAN and UNCTAD (2016), Lee and Jung (2015), and Lee and Slater (2007),
most Korean FDIs in the electronics industry in ASEAN have been driven by efficiency-seeking
motivations. The recent investment projects, done by Samsung in the electronics industry in
Vietnam are good examples. Samsung opened a US$2 billion facility in Thai Nguyen Province
in northern Vietnam in 2014 to produce smartphones, considering low labor costs as main
benefits. Samsung also expanded its operations in Vietnam with additional production capacity
and factories. As a consequence of subsequent investment and expansion projects, in 2013
the export revenue of mobile phones and accessories, which is about 20% of total exports,
overtook the export revenue of garments in Vietnam for the first time. Samsung’s exports
of electronics accounted for 23% of all Vietnamese exports in 2014 (Vietrade 2015).
In 2014, Samsung also invested US$1.4 billion in a complex of home appliance for R&D
and production of high-end televisions in Ho Chi Minh City. In addition, Samsung announced
its plans to invest in some other large-scale projects of energy, shipbuilding and airports, which
would be estimated as $20 billion USD (KITA 2015).
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Other Motivations for FDI
Other Korean MNCs, besides Samsung, have other motivations for FDI, shown in Lee and
Slater (2007). In terms of market-seeking FDI, we divide Korean MNCs into two different
groups. The first group involves traditional market-seeking investments in consumer goods.
For example, Lotte Group has made Greenfield investment and acquisitions in food retailing.
Lotte Mart first entered Vietnam in 2006 through a joint venture with a local partner, with
initial investment of $65 million USD. In 2012, Lotte Mart was approved from the Vietnamese
government to turn its joint venture into a 100% foreign-invested company, and now Lotte
Mart is also planning to boost its investment in Vietnam in order to expand its chains of 60
supermarkets nation widely by 2020 (ASEAN and UNCTAD, 2016).
The second group involves industrial MNCs such as POSCO, which has engaged in steel
production and metal processing, as well as infrastructure-related projects in the energy sector,
focusing more on business customers or the public sector in Vietnam. POSCO completed the
construction of a cold-rolled stainless steel factory near Ho Chi Minh City in 2012, substantially
expanding its production in Vietnam. POSCO holds about a 40% share of Vietnam’s stainless
steel market (ASEAN and UNCTAD, 2016).
In terms of Resource-Seeking FDI, Korean MNCs have been investing in other ASEAN
countries, such Indonesia and Myanmar, rather than Vietnam. A majority of Korean MNCs,
as resource-seeking FDI, operated in the forestry sector because Korea’s wood sufficiency
rate was very low recording only about 5% (ASEAN and UNCTAD, 2016).
In terms of Strategic-Asset-Seeking FDI in searching for resources such as technology, skilled

workers and assets, Korean MNCs have been investing in other ASEAN countries, such
Singapore, rather than Vietnam. For example, LG Chem established its subsidiary in Singapore
to access to the host country’s distinctive technology hub environment, including R&D
infrastructure and its technology ecosystem (ASEAN and UNCTAD, 2016).
Samsung’s Investment in Vietnam from a GVC Perspective
In the electronics sector, Samsung needs to have access to parts and components in order
to manufacture final commodities. However, due to the underdeveloped supply industry in
Vietnam, Samsung has sourced parts and components from non-Vietnamese firms. In addition,
Samsung has encouraged its Korean subsidiaries and subcontractors in part/component
manufacturing to invest in Vietnam, by operating close to its assembly plants. However, in
recent years, Samsung has increased its outsourcing to local Vietnamese suppliers to lower
input and logistics costs, including the cost of complying with local government requirements.
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As of September 2016, there were 12 Vietnamese firms that are Samsung’s tier-1 vendors,
along with 178 local tier-2 vendors, and hence 190 Vietnamese firms in total were a part
of Samsung’s supply chain, implying that this number has tripled, compared to 2015.29)
From Samsung’s business perspective, assembly in Vietnam plays an important role in its
mobile phone GVC, and Samsung is planning to expand production in Vietnam for its major
global manufacturing hub. The linkages that Samsung established with its suppliers from
Korean and Vietnamese local firms improved its supply chain networks. These intra- and
inter-firm linkages, including with local vendors in Vietnam, are critical strategies of Samsung’s
GVC operations (ASEAN and UNCTAD, 2016).
Summing Up
Corporate strategy, host country’s measures (will be discussed in Section 2) and cost
considerations, as well as complementary locational advantages in Vietnam have all influenced
Samsung’s decision to invest its FDI in Vietnam. Samsung’s efficiency-seeking FDI in electronics
created an electronics hub in Vietnam, where became a major global production role.
Moreover, many other ASEAN countries take a close look at the case of Samsung’s
efficiency-seeking FDI in Vietnam and Samsung’s model is now spread like a case study to
all other ASEAN countries.
As more Korean MNCs strengthen their foothold in Vietnam, they are also encouraging many
Korean MSMEs and their suppliers to invest in Vietnam. The prospects for a further rise in
Korean investment and Korean companies in Vietnam are promising. Greater linkages between
Korean MNCs and MSMEs of Vietnamese companies in the value chain activities are expected.
3.1.3. Impacts of Samsung Electronics’ FDI in Vietnam
Export Performance
Samsung Electronics Viet Nam (SEVN), Samsung’s subsidiary in Vietnam, recorded $46.3
billion USD in 2016 for its turnover, while its exports reached $39.9 billion USD. It implies
that Samsung accounted for 22.7% of the Vietnamese total export in 2016, while it was 20%
in 2015.30) As a consequence of this and subsequent investment projects, in 2013 mobile
29) Viet Nam News, “Samsung seek VN firms for supply chain,” September 10, 2016 (http://vietnamnews.vn/
economy/ 342546/samsung-seek-vn-firms-for-supply-chain.html#p73mhtr2fUzoziwu.97; Accessed on
June 8, 2017).
30) Viet Nam News, “Samsung contributes 22.7% to country’s exports,” January 11, 2017 (http://vietnamnews.
vn/economy/349485/samsung-contributes-227-to-countrys-exports.html# TSdPdiFseRg5V O3r.97; Accessed on
June 8, 2017).
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phones and accessories overtook garments in terms of export revenue in Vietnam for the first
time, earning about 20% of total exports in 2013, implying that Vietnam has been successful
in diversifying major exporting products and moving up its economic development ladder by
utilizing positive benefits from FDI.
Figure 49 Vietnam’s Exports over Ownership

($ million)
Note: The value of 2015 is an estimation.

Source: General Statistics Office of Vietnam (http://www.gso.gov.vn/; Accessed on June 8, 2017)
As shown in [Figure 49], the share of exports by foreign investors in Vietnam to the total
exports increased a lot from 27.0% in 1995 to 70.5% in 2015. This share was just over 50%
in 2003 and stayed at around 55% until 2011. However, since 2012, after Samsung expanded
its production facilities in Vietnam, the share of exports done by foreign investors has been
over 60%, recording 70.5% in 2015.
According to Lam (2013), FDI, including Samsung’s investment, contributed to develop

Vietnamese export structure from primary sectors, including mineral products, to
manufacturing sectors. In addition, FDI positively resulted in diversifying export destinations,
and the United States became the largest market of Vietnamese exports.
Job Creation
Samsung Electronics in Vietnam hires roughly 137,000 workers, and has a plan to expand
its jobs up to 150,000 by the end of 2017.31) More Korean MNCs, such as LG, POSCO, Hyosung,
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Lotte, and Orion, also hire a number of blue-collar workers, expected to be more than 700,000
workers in total.32) There are more than 6,000 Korean companies, which notified their
investment projects in Vietnam, and those have invested more than $ 50 billion USD so far
and hired more than 700,000 workers in Vietnam, as interviewed by Director of Vietnam Invest
Network, a Vietnamese government agency for FDI promotion.33)
The impact of FDI on the labor market in Vietnam can be explained in three ways. The
first way is the job creation, as explained above that foreign investors have created over 2
million jobs directly and roughly 3 to 4 million indirect workers, according to Lam (2013).
Secondly, foreign investors provided a well-organized and more efficient system to train
workers than local companies in Vietnam, enhancing human resources of workers, technicians,
and managers. Lastly, FDI also positively influenced the system of organizing industrial relations
with workers and labor unions in a more modernized and efficient way.
Participation of Local Firms in Supply Chains
As pointed out previously, there were 12 Vietnamese firms which are Samsung’s tier-1
vendors, along with 178 local tier-2 vendors, and hence 190 Vietnamese firms in total were
a part of Samsung’s supply chain in September 2016, implying that this number has tripled,
compared to 2015. Samsung, with the efforts of the Vietnamese government, has aimed to
continue seeking component vendors for Samsung and solutions to improve the
competitiveness of Vietnamese hi-tech component manufacturing firms. Vietnamese firms try
to seize this opportunity to join the global supply chain by connecting with FDI enterprises,
just like Samsung, operating in Vietnam. Samsung has proposed that any Vietnamese firm
to meet its criteria, including quality, due delivery, and price, has the opportunity to become
its vendor.34) In process of seizing this opportunity, Vietnamese firms have been asked to
develop technical human resources and product quality management to meet the criteria of
a global supplier.
31) Newsis, “Samsung Electronics accelerates its jobs and sales in Vietnam” (in Korean), May 10, 2017
(http://www.newsis.com/view/?id=NISX20170510_0014884663&cID=10402&pID=13000; Accessed on July
2, 2017).
32) Hankyung, “Over 6,000 Korean companies in Vietnam” (in Korean), November 14, 2016 (http://news.
hankyung.com/article/2016111465941?nv=o; Accessed on July 2, 2017).
33) Ibid.
34) Viet Nam News, “Samsung suppliers triple,” June 22, 2016 (http://vietnamnews.vn/economy/298462/
samsung-suppliers-triple.html#U5y2QEQvHQAZkGdf.97; Accessed on June 8, 2017).
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3.2. Case Study: Vietnam’s FDI Promotion from Host Countries’

Perspectives
3.2.1. Incentive Programs of Vietnam for Samsung Electronics
The Vietnamese government established National One-Stop Services and Investments

Organization (NSO), a one-stop agency, where investors are able to take care of matters
related to their investment in the host country. Basically, the Vietnamese government applies
a non-discrimination principle to investors, domestic and foreign.
However, the Vietnamese government sets certain regulations on the fields. The Investment
Law (no. 59/2005/QH-11) prohibits investment projects considered detrimental to national
defense and security, historical and cultural ethics, Vietnamese traditions and fine customs,
and the environment. Given this regulation, investment projects are conditional in (1) sectors
having an impact on national defense and security, social order and safety, and public health;
(2) banking and finance; (3) recreational services; (4) education and training; (5) real estate;
(6) culture, information, press, and publication; and (7) surveying, prospecting, exploration
and mining of natural resources [WTO (2013)].
Tax Incentives
Investors having projects within the categories stipulated in the legal documents shall be
entitled to preferential tax rates, the duration of entitlement to such rates and the duration
of exemption from and reduction of tax in accordance with the law on tax. Investors shall
be entitled to tax incentives on that portion of income from their capital contribution or
purchase of shareholding in an economic organization in accordance with the law on tax after
such organization has paid in full corporate income tax.
Investors shall be exempt from payments of import duty on equipment, materials, means
of transportation and other goods for implementation of investment projects in Vietnam in
accordance with the Law on Export and Import taxation. Incomes from activities of technology
transfer applicable to projects entitled to investment incentives shall be exempt from income
tax in accordance with the law on tax.
Carrying Forward Losses
If an investor suffers losses after completion of tax finalization with the tax office, it shall
be permitted to carry its losses forward to the following year, and the amount of such losses
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shall be set off against taxable income for the purposes of corporate income tax in accordance
with the law on corporate income tax. The period for carrying forward losses shall not exceed
five years.
Depreciation of Fixed Assets
Investment projects in investment incentive sectors and geographical areas and business
projects with high economic efficiency shall be subject to the accelerated depreciation of fixed
assets; the maximum rate of depreciation shall not be more than twice the level of depreciation
as stipulated by regulations on depreciation of fixed assets.
Incentives of Land Use
The term of land use of an investment project shall not exceed five years; however, if projects
are with a large amount of invested capital and a slow rate of capital recovery in areas with
difficult socio-economic conditions and in areas with difficult socio-economic conditions which
require a longer term, the term of allocation or lease of land shall not exceed seven years.
The competent state body would approve the extension of terms if law-abiding investors need
to extend their terms of land use at the expiry. Investors, who invest in investment incentive
sectors and geographical areas and followed the law on land and tax, shall be entitled to
an exemption from payment of or a reduction of land rent and land use fees.
3.2.2. Provision of Infrastructure in Vietnam
After its implementation of Doi Moi, the policy initiative of creating a socialist-oriented
market economy, in 1986, the Vietnamese government has tried to attract more foreign direct
investment by creating a more favorable infrastructure and legal environment to foreign
investors with Foreign Investment Law, enacted in 1988. The first export processing zone (EPZ)
in Vietnam was established in 1991, and then the Vietnamese government has been quite
successful in establishing a series of industrial, export processing, hi-tech and economic zones,
showing a great increase in FDI.35)
As stipulated in Investment Law 2005, an industrial zone is designed to specialize in

producing industrial goods and providing various services to companies in the zone. An export
processing zone is an area of an industrial zone which is specialized more in producing goods
to be exported and providing various services to companies in the zone. A hi-tech zone is
designed to focus more on R&D, application of hi-tech, bringing up hi-tech firms, training
35) Investment Gateway to Vietnam (http://investinvietnam.vn/; Accessed on June 4, 2017).
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hi-tech skilled workers, production and trade in hi-tech products. An economic zone is an
area designated by the Vietnamese government to provide more favorable investment and
trade environments for investors. Its area owns geographical boundaries of more than 10,000
hectares and can potentially become a hub of industrial production, services, trade and
residential area. An economic zone is convenient in terms of public infrastructure, including
ports, airports, and local and cross-border roads, so that companies in the zone can easily
do their business. The Vietnamese government has set a national program to provide more
efficient infrastructure to the zones in order to attract more foreign investors.
Companies in the zones, mentioned above, can enjoy preferential corporate income tax from
10% to 20%, compared to the normal 28%, for 10 to 15 years after starting their business.
These companies are also exempted from corporate income tax from 2 to 4 years since having
taxable income, and then the corporate income tax will be reduced by 50% in the next 3
to 9 years depending on characteristics and fields of their investment projects. In addition,
value-added tax will be exempted in case of exports of goods and services by companies
in export processing zones (EPZs); goods and services traded among companies in export
processing zones; and goods and services provided by foreign organizations and individuals
to these enterprises. Furthermore, companies in export processing zones do not have to pay
tariffs for goods imported from abroad for production and for export goods. As of July 2015,
there are 299 industrial zones in Vietnam with 212 zones in their operation.36) These zones
have a total area of almost 84,000 hectares, locating mainly in key economic zones in the
Northern, Central, and Southern regions.
Interestingly, UNIDO (2011) found that foreign-invested enterprises in industrial zones might
not be performing differently from those outside zones. According to its survey in UNIDO
(2011), the industrial zones in Vietnam have represented an efficient and productive way of
absorbing surplus labor and attracting FDI, but their ability to stimulate long-term economic
growth seems to be uncertain, mainly because they have relatively low contribution to
technology transfer and spillover effects. In this sense, policymakers are asked to consider
how to link incentive programs with technology transfer and spillover effects from FDI.
36) Vietnam Briefing (http://www.vietnam-briefing.com/news/the-guide-to-understanding-vietnams-industrial-

zones.html/; Accessed on June 4, 2017). However, JICA (2015) identified 347 industrial parks in Vietnam.
See Appendix 3 of JICA (2015) for the list of industrial parks in Vietnam.
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4. Korea’s Policies to Utilize Trade Agreements to Make

Korea Investor-Friendly
4.1. Recent Developments in Korea’s FTA Network
4.1.1. Korea’s FTAs in Force
As shown in [Table 34], Korea has 15 FTAs in force with 52 countries, as of July 2017,
including big countries, such as the United States, European Union, and China. These all FTA
partners have 72.7% of the world GDP in 2016,37) showing that Korea has been quite
successful in having an FTA with major countries in the world. When the FTA with central
American countries enters into force after having an approval from the National Assembly and
FTAs under negotiation successfully ends, this share will move up to 80.1% of the world GDP.
Furthermore, if three more FTAs in consideration will end up successfully, it will move further
up to 85.8%.38)
Table 34 FTAs in Korea
Status Countries
Chile (April. 2004); Singapore (March. 2006); EFTA (Sep. 2006); ASEAN
(Goods: June. 2007, Services: May 2009, Investment: Sep. 2009); and India
15 FTAs in Force
(Jan. 2010); EU (July. 2011); Peru (Aug. 2011); USA (March. 2012); Turkey
with 52 Countries*
(Goods: May 2013); Australia (Dec. 2014); China (Dec. 2015); New Zealand
(Dec. 2015); Vietnam (Dec. 2015); Colombia (July. 2016)
Talks Completed
Central America (Panama, Costa Rica, Guatemala, Honduras, El Salvador,
(one case with 6
Nicaragua; Signed in March. 2017)
countries)
Talks Ongoing China-Japan-Korea (since Nov. 2011); Regional Comprehensive Economic
(four cases with 17 Partnership (ASEAN+6, since May. 2013); Ecuador (since Jan. 2016); Israel
countries)* (since June. 2016)
Consideration MERCOSUR (Brazil, Argentina, Uruguay, Paraguay, Venezuela); Malaysia;
(3 cases with 11 Eurasian Economic Union (Russia, Belarus, Kazakhstan, Armenia, Kyrgyz
countries) Republic)
Note: * This report counts the number of countries, except countries overlapped.
Source: Official website of FTAs in Korea (http://fta.go.kr/main/)
37) Current value of US$. We used the value of GDP in 2014 for Liechtenstein, a member of the European
Free Trade Association (EFTA), because of the unavailability of the relevant data from the World Bank
(http://data.worldbank.org/; Accessed on July 3, 2017).
38) Current value of US$. We used the value of GDP in 2013 for Venezuela, a member of MERCOSUR, because of
the unavailability of the relevant data from the World Bank (http://data.worldbank.org/; Accessed on July 3, 2017).
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4.1.2. Korea’s FTAs under Negotiations and Consideration
As shown in [Table 34], Korea has four more FTAs under negotiation: one is China-
Japan-Korea Trilateral FTA, another is Regional Comprehensive Economic Partnership with 16
ASEAN countries including China, Japan, Australia, New Zealand, and India, and two bilateral
FTAs with Ecuador and Israel. Among these FTAs under negotiation, CJK Trilateral FTA and
RCEP would be important from Korea’s commercial and political perspectives.
The CJK Trilateral FTA started its negotiation in March 2013 after almost ten years of Joint
Study on the feasibility of the Trilateral FTA. As of April 2017, it has had 12 rounds of
negotiations, but the process has not been successfully so far due to the rival relationship
between China and Japan, conflicts created by differences in the perception of history among
these three countries, and so on.39) However, the Korean government set the goal of this
FTA negotiation to achieve a comprehensive and high quality of the integration level. 40)
The RCEP member countries announced their readiness of the FTA negotiation during the
summit meeting of the ASEAN+3 at Phnom Penh, Cambodia, in November 2012, but the first
round of the negotiation was held at Brunei in May 2013. As of May 2017, they had 18 rounds
of the negotiation and aim at successfully finishing their negotiation by the end of 2017.41)
However, since certain countries, including Japan, have been focusing more on other trade
talks, such as Trans-Pacific Partnership (TPP), it is quite uncertain to meet their goals in 2017.
The Korean government considers three more FTAs, which would be expected to start their
negotiations in the near future: one with MERCOSUR, another with Malaysia, and the other
with Eurasian Economic Union. MERCOSUR, composed by five members from Brazil, Argentina,
Paraguay, Uruguay, and Venezuela, is a potential partner of Korea’s FTAs because it has the
greatest economic integration in Latin America.
The Eurasian Economic Union, mainly led by Russia with countries like Belarus, Kazakhstan,
Armenia, and Kyrgyz Republic, was proposed to discuss a feasibility of a bilateral FTA with
Korea during a summit meeting between Korea and Russia in September 2015. It could be
a strategic partner in the field of energy cooperation from Korea’s perspective.
39) Newspim, “Getting no better in the negotiation of the CJK Trilateral FTA” (in Korean), April 9, 2017
(http://www.newspim.com/news/view/20170409000006; Accessed on July 3, 2017).
40) Official website of FTAs in Korea (http://fta.go.kr/).
41) Ibid.
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4.2. Vision and Strategies of Korea’s FTA Policy
4.2.1. Vision of Korea’s FTA Policy
In the late 1990s and early 2000s, most countries in the world tried to actively engage in
regional and bilateral trade talks by eliminating trade barriers and cooperating economic
activities in various fields among member countries. At that time, Korea had a fear of being
left out because Korea did not have any single FTA, except the so-called Bangkok Agreement.42)
Thus, the Korean government decided to change its policy focus to regionalism and then picked
up Chile as the first FTA partner. The Korean government, with a lack of experiences in
negotiations and with relatively passive minded, chose Chile for the first FTA partner with
two main reasons: how to minimize a potentially negative impact from FTAs and how to
accumulate experiences of negotiators. In those senses, Chile was picked up as a sparring
partner to Korea because Chile is geographically far from Korea so that the FTA would have
relatively little negative impacts, and Korea would learn more from Chile, which already had
experienced multiple FTAs
FTA with Chile, however, entered into force in April 2004 even though the negotiation started
in 1999 and ended in 2002, implying that it took a relatively long time to receive an approval
from the National Assembly. Since it was the first FTA for the Korean government, there had
been intense discussions about potential impacts of FTAs, focusing more on their negative
impacts on sensitive sectors, including agriculture. Therefore, the Korean government made
a ‘Roadmap in FTA negotiations’ in 2003, in process of its domestic approval from the National
Assembly, in order to systemize its process of starting and pursuing FTA negotiations more
efficiently.
The Korean government set major objectives of the Roadmap, as follows: (1) Securing
foreign markets by negotiating FTAs with its major trading countries; (2) playing a leading
role in discussing East Asian economic integration; and (3) Pursuing FTAs as a major pillar
of trade policy to open and reform the Korean economy. The first priority of FTA visions is
how to secure Korea’s commercial interests in foreign markets at a bilateral or regional level,
rather than multilateral level, so that Korean companies keep their competitiveness in the global
market. In addition, the Korean government wanted to play an important role when countries
in the East Asia, like other regions such as Europe and North America, started to discuss
regional economic integration. Given the rival relationship between China and Japan, the
42) The Bangkok Agreement was signed in 1975 and then renamed to the Asia-Pacific Trade Agreement (APTA)
in November 2005. It has 6 members such as Bangladesh, China, India, Lao PDR, Republic of Korea, and
Sri Lanka. However, it was notified to the WTO as Enabling Clause, and its scope of trade liberalization
is quite narrow, having more than 4,000 tariff lines for its tariff concessions.
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Korean government believed that it could play a bridging role between these two countries
when they discussed various ways of cooperating in the East Asia. Lastly, the Korean
government officially announced its policy shifted from the multilateral approach, focusing
more on the multilateral trade talks in the World Trade Organization (WTO), to regionalism,
also including bilateral FTAs.
4.2.2. Strategies of Korea’s FTA Policy
To achieve these visions, discussed above, the Korean government set four main strategies
in the Roadmap: (1) Setting a multi-track approach by initiating multiple FTA negotiations
with multiple FTA partners; (2) Aiming at comprehensive FTAs; (3) Improving transparency
in the procedure of FTA policy; and (4) Building consensus on trade liberalization. As discussed
before, Korea had a fear of being left out and was in needs to quickly catch up the global
trend of regionalism since most countries would be likely to announce no more FTAs in the
near future after having FTAs with major countries. Thus, the Korean government started to
pursue multiple FTA negotiations simultaneously in order to quickly catch up the global trend.
To maximize economic benefits of FTAs and to strengthen economic cooperation with FTA
partners, the Korean government tried to pursue FTAs in a comprehensive manner, covering
issues beyond borders, such as trade in services, investment, intellectual property rights,
competition policy, government procurement, and so on. Even though Korea keeps excluding
sensitive agricultural goods, such as rice, in its FTA negotiations, it tried to enhance
liberalization of trade and investment with its FTA partner countries for high-quality and
comprehensive FTAs.
Utilizing lessons from its first FTA with Chile, Korea needed to have more systemic process
to pursue FTA policy. Therefore, the Korean government was asked to have public hearings
when they started any new FTA negotiations, by cooperating with the National Assembly.
However, it is still uncertain how to balance between needs of transparency in negotiations
and needs not to disclose negotiation strategies. In order to persuade people in sensitive
industries, the Korean government needs to enhance transparency in negotiations. However,
it could disclose negotiation strategies, and hence the FTA partner would set contingency plans,
weakening Korea’s negotiation strategies.
Lastly, the Korean government needs to build consensus on trade liberalization, by listening
to various interest groups, establishing social safety nets, and providing information on FTA
negotiations to the public. For social safety nets, Korea has Trade Adjustment Assistance (TAA),
a compensatory and assistance program that aims to help reimburse domestic firms and
workers for their material loss or expected loss as the result of policies implemented toward
a freer trade regime, as explained in Heo (2007).
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Criteria to Select FTA Partners: Basis
Korea decided to select countries with large economies, such as the United States, EU, and
China, as candidates for FTA in the mid or long-term in 2003. This is because FTAs with
countries having larger markets may negatively impact the Korean economy.
Given this presumption, the Korean government set the criteria of selecting FTA partners
in the short run: (1) economic benefits; (2) geopolitics; (3) readiness; and (4) advantages
to launch FTAs with other countries with large economies. First of all, countries, which would
provide more economic benefits to Korea, would be the top candidates for its FTA partners.
Thus, the Korean government is required to conduct a statistical estimation study before
starting a new FTA negotiation and practically the Korea Institute for International Economic
Policy (KIEP), a government-funded research institution, does the empirical work by
cooperating with Ministry of Trade, Industry and Energy (MOTIE).
Non-economic factors are also in needs of consideration when the Korean government
proposes a potential country. To enhance Korea’s position in the diplomatic relations with
countries in the world, Korea can consider any potential country that can be helpful in meeting
this non-economic goal. In addition, Korea needs to consider partner countries’ interests, which
can be described as ‘mutual readiness’ so that both parties need to be ready to start FTA
negotiations, having mutual interests.
Lastly, any countries, which can be helpful in starting FTA negotiations with countries with
large economies, can be another potential one for Korea’s FTA partners. As discussed before,
Korea considered economically big countries as potential FTA partners in the mid- or long-run
because it was premature to start it. Thus Korea considered any countries, which are
geographically and economically close to those big countries and also would be helpful in
understanding economic and trade systems of those big countries. Later, Korea picked up
Singapore before ASEAN; EFTA before EU; and Canada and Mexico before the United States,
by using this criterion of selecting FTA partners.
4.3. Role of Korea’s FTA Network in Attracting Foreign Investors
4.3.1. Export Platform
As shown in [Table 34], Korea has a well-developed network of FTAs with major countries
in the world. It turns out that companies from FTA partners and non-partners of Korea try
to utilize this network of FTAs in Korea in order to enjoy preferential tariff concessions from
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the FTAs when they export their goods to Korea’s FTA partners.
A good example is Korea-China FTA. Due to the rise of China in recent years, companies
from Japan and European Union try to utilize Korea-China FTA by investing in Korea to establish
their production bases in Korea.43) Some local firms that produce consumer products
continuously popular in China have been also receiving investments from Chinese investors,
strengthening business relationship with those firms in Korea. This is the reason that FDI inflows
in Korea from China have been increased a lot from $ 1.2 billion USD in 2014 to $ 1.98 billion
USD in 2015 and $ 2.05 billion USD in 2016 when Korea-China FTA entered into force in
December 2015. Interestingly, most manufacturing facilities of foreign investors are located
in the west coast of Korea, which would be a strategic and geographical move because the
west coast is seen the best route for exports to China, implying that more foreign investors
review investing in Korea as an export platform to China.
Even though the European Union has a bilateral FTA with Korea, which entered in force
in July 2011, companies from the EU member countries are also interested in utilizing
Korea-China FTA by establishing their export platform in Korea to export their goods to the
Chinese market. FDI inflows from the EU to Korea rapidly increased from $ 2.5 billion USD
in 2015 to $ 7.4 billion USD in 2016 by roughly three times.
Toray Industries Inc., a leading textile producer, whose brand is Uniqlo, in Japan, announced
its plan to establish its new facility in the Saemangeum Industrial Complex and then to utilize
the facility in Korea as an export platform to enter the Chinese market by investing $ 262.1
million USD to expand its production site by 2018. It implies that companies from Korea’s
non-FTA partners, such as Japan, consider their business opportunity in Korea in order to
fully utilize Korea’s network of FTAs with major countries in the world.
4.3.2. Regional Value Chains in East Asia
Regional value chains in East Asia have been developed over time even though there has
been no institution-driven economic integration, such as a regional trade agreement, in East
Asia.44) Even though ADB (2016) pointed out that Asian multinationals tend to engage more
in GVC-FDI than those outside the region, those multinationals outside the East Asia have
also been strongly interested in their participation into this market-driven economic integration
in East Asia. Some of these countries, such as Canada, recognize Korea as a gateway to the
43) Maeil Business News Korea, “Foreign firms up investments in Korea to benefit from Korea-China FTA,” April
12, 2016 (http://pulsenews.co.kr/view.php?year=2016&no=267504; Accessed on July 5, 2017).
44) In this context, global or regional value chains can be called as ‘market-driven’ economic integration without
any institutional framework to strengthen value chains in East Asia. For more details, see Urata (2006).
143
wider Asia-Pacific region, including East Asia. The Canadian government expects that
Korea-Canada FTA will provide greater business opportunities to Canadian companies and
investors because Korea offers strategic access to regional and global value chains in East
Asia.45)
As shown in WTO (2017), it turns out that deep economic integration of a trade agreement
boosts GVC-related trade among member countries of the agreement.46) In that sense,
North-North and North-South regional trade agreements tend to have deeper economic
integration rather than South-South trade agreements. As discussed before, Korea has been
actively participating into FTAs with developed countries, such as the United States, EU, EFTA,
Canada, Australia, New Zealand, and so on. According to WTO (2017), FTAs of Korea have
a pretty higher level of depth in terms of economic integration than South-South trade
agreements, implying that Korea’s FTAs are very likely to boost the GVC-related trade among
member cuntries.
4.4. Key Contents of Investment Chapters in Selected FTAs
4.4.1. Korea-US FTA
Nowadays, it is a common practice for FTAs to have an independent investment chapter

to set rules on investment-related practices of member countries. For investment chapters,
it turns out that Korea-US FTA is more specific than Korea-EU FTA, because Korea-US FTA
has an independent chapter for investment, but Korea-EU FTA does not.47)
As shown in [Table 35], Korea-US FTA provides national treatment (Article 11.3) and
most-favored-nation treatment (Article 11.4) to investors of the other party and also regulates
that (e)ach party shall accord to covered investments treatment in accordance with customary
international law, including fair and equitable treatment and full protection and security (Article
11.5, Para. 1). In addition, it regulates expropriation and compensation by stating that (n)either
party may expropriate or nationalize a covered investment either directly or indirectly through
measures equivalent to expropriation or nationalization (expropriation), except: (a) for a public
45) Government of Canada, “Canada-Korea Free Trade Agreement (CKFTA),” (http://international.gc.ca/

trade-agreements -accords-commerciaux/agr-acc/korea-coree/overview-apercu.aspx?lang=eng; Accessed
on July 7, 2017).
46) This argument was theoretically shown by Antras and Staiger (2012) and empirically proved by Osnago,
Rocha and Ruta (2015).
47) This is because Korea-EU FTA was signed in October 2009, which was before the Treaty of Lisbon entered
into force in December 2009. The Treaty explicitly mentions ‘foreign direct investment’ as forming part of
the EU common commercial policy, including investment protection, implies that EU did not have a negotiating
authority from its member countries on investment before the Treaty of Lisbon.
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purpose; (b) in a non-discriminatory manner; (c) on payment of prompt, adequate, and

effective compensation; and (d) in accordance with due process of law (Article 11.6, Para. 1).
Korea-US FTA has a system of Investor-Dispute Settlement (ISD) to solve disputes between
an investor from a party and the government of the other party. After consultation and
negotiation cannot solve the dispute, the claimant may submit a claim to either one from:
International Centre for the Settlement of Investment Disputes (ICSID), United Nations
Commission on International Trade Law (UNCITRAL), or any other arbitration institution where
the claimant and respondent agree (Article 11.16, Para. 3).
Table 35 Investment Chapters in Selected FTAs in Korea
Korea-US Korea-EU Korea-Chin

FTA FTA a FTA
Cooperation Promotion of Investments ○
Definitions on Investment and
○ ○ ○
Investors
National Treatment ○ ○ ○
Protection Most-Favored Nation ○ ○ ○
Fair and Equitable Treatment ○ ○
Expropriation and Compensation ○ ○
Investor-State Dispute ○ ○
Transfers ○ ○
Liberalization
Performance Requirements ○ ○
Source: Author’s compilation from legal texts of these FTAs.
4.4.2. Korea-EU FTA
When Korea-EU FTA was negotiated and signed in October 2009, the EU commissioner
did not have a right to negotiate investment-related issues with other countries and rather
each member of the EU had autonomy to negotiate because it was before the Treaty of Lisbon,
which entered into force in December 2009. Instead, Korea has bilateral investment treaties
(BITs) with 23 individual EU member countries:48) Austria (1991), Belgium (1976), Bulgaria
(2006), Croatia (2006), Czech Republic (1995), Denmark (1988), Finland (1996), France
(1979), Germany (1967), Greece (1995), Hungary (1989), Italy (1992), Latvia (1997),
Lithuania (1993), Luxembourg (1976), Netherlands (1975), Poland (1990), Portugal (1996),
Romania (1994), Slovakia (2006), Spain (1994), Sweden (1997), and United Kingdom (1976).
48) Except Cyprus, Estonia, Ireland, Malta, and Slovenia from 28 member countries of the EU.
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In Korea-EU FTA, investment-related issues are partly regulated with Trade in Services,
Establishment and Electronic Commerce in Chapter Seven of the FTA. Even though national
treatment (Article 7.12) and most-favored-nation treatment (Article 7.14) for investors are
stated in the FTA, it does not include articles about protections on investors, such as
expropriation and compensation, and investor-state dispute (ISD) settlement. However, since
Korea has BITs with 23 individual member countries of the EU as mentioned above, investors
can be protected by these BITs.
4.4.3. Korea-China FTA
As shown in [Table 35], Korea-China FTA is quite similar to disciplines in Korea-US FTA,
providing national treatment (Article 12.3) and most-favored-nation treatment (Article 12.4)
to investors of the other party. It also adopted concepts of fair and equitable treatment and
full protection and security for investors (Article 12.5, Paras. 1-2). For expropriation and
compensation, and ISD, Korea-China FTA has identical rules with Korea-US FTA (Article 12.9
and Article 12.12).
However, Korea-China FTA, unlike Korea-US FTA, has more concerns about the future
cooperation and hence it designated contact points for improving investment environment,
Korea Trade-Investment Promotion Agency (KOTRA) for Korea and the Investment Promotion
Agency for China (Article 12.19). In addition, Korea-China FTA has an article for promotion
of investments by stating that (e)ach party shall encourage and create favorable conditions
for investors of the other Party to make investments in its territory (Article 12.2).
5. Policy Recommendation
5.1. FDI Policy
5.1.1. Policy Recommendation: Basic Direction
Taking a Strategic Approach by Linking with Industrial Development Plan
The reform and opening policies undertaken by the Sri Lankan government since 1990s
have substantially improved Sri Lanka’s investment climate, leading to a continuous increase
in FDI inflows into the country. The Sri Lankan government is also sincere to pursue rigorous
FDI promotion policies because FDI has a role as a key vehicle for transferring technologies
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and management knowhow that are desperately needed for Sri Lanka to expand the
international competitiveness of the industrial sector. In fact, Sri Lanka owns a number of
favorable economic and geopolitical advantages that can be utilized for attracting MNCs from
developed countries.
Having understood the situation in Sri Lanka, it is quite important for the Sri Lankan
government to understand what industries are needed to be developed further for the Sri
Lankan economic prosperity and development, and how benefits of FDI can be spread out
into every area of the country and inclusive of all sectors and people in the country. A strategic
approach to promote FDI must be taken to target and attract foreign investors in those
industries, which would help achieving the government’s national economic development goals.
When the government designs and implements FDI promotion policies, all kinds of FDI
promotion policies, such as targeting investment, setting up and strengthening an investment
promotion agency, designing incentive programs, developing investment zones and enhancing
investment environment, should be in line with the government’s economic objectives,
especially the industrial development goals.
5.1.2. Policy Recommendation: Institutional Perspectives
Build the BOI’s Overseas Network
Invest Korea (IK), an investment promotion agency under KOTRA, has its own overseas
network, with KOTRA’s 126 overseas offices, of which 36 of them are overseas FDI offices
devoted to attract FDI inflows into Korea. IK works in close consultation with its network of
overseas FDI offices to identify potential foreign investors who may be interested in doing
business in Korea. These offices have been active to advertise Korea as a destination of
investment, by having road shows, being an inquiry point of Korea, and providing information
on recent trends of global value chains, markets, and industries.
Definitely we do understand that it is not easy for the BOI to build its own overseas network
due to the budget constraints. However, the BOI can have an effective overseas network if
the Sri Lankan government tries to utilize its embassies. As a starting point, the BOI can send
personnel to Malaysia, Hong Kong, China, and India in order to build its own overseas network
using the Sri Lankan embassies because these four countries have been top four investors
to Sri Lanka. In addition, the BOI needs to establish its own criteria to select countries in the
network, by analyzing potential strategic industries and major investor countries. For example,
the Sri Lankan government can assign an FDI promotion task to Commercial Attaché in
embassies located in selected countries, which have great potentials to invest in Sri Lanka.
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Establish the Office of the Foreign Investment Ombudsman
From a longer-term perspective, Sri Lanka has been well advised to consider the introduction
of an Investment Ombudsman system, as an increasing number of investment disputes can
be expected concomitant with increasing FDI. The Investment Ombudsman will function as
a bridge between foreign investors in Sri Lanka and government agencies, such as BOI and
Ministry of Finance.
In the case of Korea, which introduced the FDI Ombudsman System in 1999, the office has
proactively dealt with grievances articulated by foreign investors, and effectively played a
bridging role. The Ombudsman handled (i) grievances of FDI firms due to potential regime
changes in Korea; (ii) conflicts of interest with Korean counterparts in the case of joint venture
companies; and (iii) issues arising during labor disputes, and so on.
Foreign investors in Sri Lanka could be also faced with various problems in different areas
when they actually invest and do business in Sri Lanka. It is necessary for the Sri Lankan
government to establish a special office to help foreign investors who faced with problems
in doing business, to solve their concerns in a more efficient way and to provide
recommendations to policy makers in Sri Lanka from actual cases and experiences of foreign
investors in Sri Lanka.
5.1.2. Policy Recommendation: Institutional Perspectives
Build the BOI’s Overseas Network
Invest Korea (IK), an investment promotion agency under KOTRA, has its own overseas
network, with KOTRA’s 126 overseas offices, of which 36 of them are overseas FDI offices
devoted to attract FDI inflows into Korea. IK works in close consultation with its network of
overseas FDI offices to identify potential foreign investors who may be interested in doing
business in Korea. These offices have been active to advertise Korea as a destination of
investment, by having road shows, being an inquiry point of Korea, and providing information
on recent trends of global value chains, markets, and industries.
Definitely we do understand that it is not easy for the BOI to build its own overseas network
due to the budget constraints. However, the BOI can have an effective overseas network if
the Sri Lankan government tries to utilize its embassies. As a starting point, the BOI can send
personnel to Malaysia, Hong Kong, China, and India in order to build its own overseas network
using the Sri Lankan embassies because these four countries have been top four investors
to Sri Lanka. In addition, the BOI needs to establish its own criteria to select countries in the
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network, by analyzing potential strategic industries and major investor countries. For example,
the Sri Lankan government can assign an FDI promotion task to Commercial Attaché in
embassies located in selected countries, which have great potentials to invest in Sri Lanka.
Establish the Office of the Foreign Investment Ombudsman
From a longer-term perspective, Sri Lanka has been well advised to consider the introduction
of an Investment Ombudsman system, as an increasing number of investment disputes can
be expected concomitant with increasing FDI. The Investment Ombudsman will function as
a bridge between foreign investors in Sri Lanka and government agencies, such as BOI and
Ministry of Finance.
In the case of Korea, which introduced the FDI Ombudsman System in 1999, the office has
proactively dealt with grievances articulated by foreign investors, and effectively played a
bridging role. The Ombudsman handled (i) grievances of FDI firms due to potential regime
changes in Korea; (ii) conflicts of interest with Korean counterparts in the case of joint venture
companies; and (iii) issues arising during labor disputes, and so on.
Foreign investors in Sri Lanka could be also faced with various problems in different areas
when they actually invest and do business in Sri Lanka. It is necessary for the Sri Lankan
government to establish a special office to help foreign investors who faced with problems
in doing business, to solve their concerns in a more efficient way and to provide
recommendations to policy makers in Sri Lanka from actual cases and experiences of foreign
investors in Sri Lanka.
5.1.3. Policy Recommendation: Incentive Programs
Introduce More Customized Incentive Programs to Foreign Investors
It is evaluated that Sri Lanka’s incentive programs to attract FDI has been relatively well
developed so far. However, as we discussed previously, most developing countries have been
eager to promote and attract more FDIs in recent years, by providing various incentive
programs. As a result, most developing countries are in a race to attract more FDIs. Sri Lanka’s
current incentive programs focus mainly on tax incentive programs, of which most developing
countries are actively operating in recent years. Therefore, the Sri Lankan government needs
to focus on how to diversify and differentiate incentive programs from rival countries in this
region. It could be useless to provide similar incentive programs to what rival countries in
this region are providing. The Sri Lankan government needs to take a more customized
approach to attract foreign investors, by providing more various and differentiated incentive
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programs. Without putting sincere efforts of diversifying and differentiating incentive programs,
no developing country will succeed to attract more FDIs.
Utilizing lessons from the Vietnamese case study, the Sri Lankan government needs to
respond to demand from MNCs who want to invest in Sri Lanka, by analyzing their motivation,
factors to determine their locational decision, and their industrial characteristics. In this process,
the Sri Lankan government can establish a more customized incentive program to an MNC,
which intends to invest in Sri Lanka.
In Korea, there are largely three kinds of incentive programs: tax incentives, cash grant,
and investment location support. Overall, Korea’s incentive programs have become more
aggressive simply due to China. As well known, China has become a super-massive black
hole of FDI from all over the world. Being a neighboring country to China, Korea has to be
more aggressive to provide incentive programs.
Link Incentive Programs with Positive Spillovers
As we discussed before, FDI itself should not be the ultimate goal. Rather, the Sri Lankan
government needs to use FDI as a tool of raising economic prosperity and development.
According various studies on FDI-related issues, it was found that host countries could have
positive economic effects of FDI only when there was a positive externality or knowledge
spillover from foreign investors to local economic agents. Therefore, without learning
something from foreign investors, developing countries are not able to have positive impacts.
In this context, the Sri Lankan government needs to link incentive programs with positive
spillovers from foreign investors.
In Korea, IK provides tax supports for foreign engineers when they transfer their knowledge
or technology to any Korean national. More specifically, a foreign engineer shall be entitled
to the 50% reduction of income tax on earned income derived from the offer of his/her services
to a Korean national within Korea. In addition, income tax shall be reduced to 50% for the
income paid to a foreign engineer who provides high technology under a technology
introduction contract. This is a good example of IK’s efforts to diversify and differentiate
incentive programs and also to link them with knowledge spillovers from foreign investors.
In addition to link incentive programs with knowledge spillovers, the Sri Lankan government
needs to consider a fact that local companies must achieve a certain technological
sophistication before they can absorb these spillovers. Without having companies achieving
a certain technological sophistication, this linking policy is useless.
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Establish Industrial Cluster Using EPZs and IPs
As shown in [Table 36], the BOI operates 11 Export Processing Zones (EPZs) and two
Industrial Parks (IPs). These EPZs and IPs have played an important role in developing industries
and attracting FDI. However, it is hard to see a strong linkage between these areas and
industrial development plans set by the Sri Lankan government.
Table 36 Export Processing Zones and Industrial Parks in Sri Lanka
Exports
Year Size Number of Number of
Region from Zone
Established (acre) Companies Employees
(Rs. Mn.)
Katunayake-EPZ 1978 531.54 84 37,762 200,542
Biyagama-EPZ 1986 450.68 57 25,007 57,026
Koggala-EPZ 1991 227 22 12,906 6,528
Horana-EPZ 1999 395.6 17 1,893 3,553
Mirigama-EPZ 1998 260.5 9 3,950 5,723
Polgahawela-EPZ 2000 65 5 4,199 8,948
Mawathagama-EPZ 2000 53.75 7 5,735 56
Wathupitiwela-EPZ 1999 123 18 9,394 13,214
Malwatta-EPZ 1998 33 6 1,800 597
Kandy-EPZ 1994 205 23 7,469 719
Seethawaka-EPZ 1999 431.3 27 21,734 39,169
Mirijjawila-IP 1999. 565 5 1,650 332
Wagawatha 2004 76.25 6 427 -
Source: Board of Investment of Sri Lanka (http://www.boi.lk/).
In this context, the Sri Lankan government needs to designate a specific zone or park to
a specific industry, considering the zone’s infrastructure, environment, demographic factors,
and industrial characteristics of the selected industry. In the process of doing so, the BOI is
able to establish industrial clusters, based on the Sri Lankan government’s industrial
development plan.
In general, an industry tends to cluster at a particular location. There are two different forces
to determine industrial clusters: centripetal and centrifugal forces. Centripetal forces are
encouraging firms to locate close to each other, while centrifugal ones to spread out. The
centripetal forces are usually classified in three groups: (1) knowledge spillovers or other
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beneficial technological externalities; (2) various labor market-pooling effects; and (3) linkages
between buyers and sellers. On the other hand, the centrifugal forces would be based on
congestion, pollution, and other negative externalities that might be associated with
concentrations of economic activities because they will lead to high rents and severe
competition for immobile factors. Therefore, the Sri Lankan government needs to consider
this fact that clustering or agglomeration typically arises from the interaction between
centripetal and centrifugal forces, when they try to establish industrial clusters using EPZs
and IPs.
5.2. Policy of Utilizing Trade Agreements in Sri Lanka
5.2.1. Policy Recommendation: BITs
According to ADB (2016), BITs have been important international policy tools in spurring
FDI. Despite the growing heterogeneity in the scope and depth of BITs, the treaties generally
help both greenfield FDI and M&As. Empirical findings, done by ADB (2016), suggest that
having investor-state dispute mechanisms (ISDMs) is most effective for BITs to attract FDI
-it can increase the number of FDI projects by 35.3%. Separately, nondiscrimination provisions
-such as national treatment and most-favored-nation clauses in regional trade agreement
investment chapters-are the most effective element in attracting FDI.
Expand the Network of BITs and Deepen the BITs with ISDM
In this context, the Sri Lankan government needs to enact more BITs with foreign countries
and to deepen the existing BITs in a more investor-friendly manner. Considering major
investors, it turns out that Sri Lanka does not have a BIT with Mauritius and UAE among top
ten foreign investors during 2005-2016. As empirically identified by ADB (2016), BITs can
strongly encourage greenfield and M&A investment projects, and the presence of an
investor-state-dispute mechanism (ISDM) is the only provision that appears to be significant
across various empirical models. It turns out that it has been important for developing countries
to provide international arbitration rights to foreign investors in attracting FDI.
5.2.2. Policy Recommendation: FTAs
Try to Have FTAs with Developed Countries from Perspectives of Rule-Based Systems
It turns out that regional trade agreements (RTAs) help attract north-south FDI because
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RTAs increase greenfield FDI from high-income to low-income economies, perhaps by helping
improve the business environment and cutting trade costs. However, its effect is negative for
greenfield FDI among developing economies because the so-called South-South RTAs is
particularly in manufacturing and services. It suggests that FDI among developing economies,
under a South-South RTA, might be driven more by tariff jumping and market seeking, rather
than the desire for an export platform for external trade. Nonetheless, the effect of longer-term
trade and investment promotion is expected to outweigh a more short-term substitution effect
(ADB 2016). Therefore, Sri Lanka needs to negotiate with developed countries to enact FTAs
because those FTAs with developed countries can send more favorable signals to foreign
investors in terms of implicitly verifying that Sri Lanka has a rule-based system to protect
foreign investors. Vietnam could be a good example because it has been actively participating
into the Trans-Pacific Partnership (TPP) negotiation, whose members include developed
countries, such as the United States, Japan, Canada, Australia, New Zealand, and so on. If
Sri Lanka thinks that it would be premature to start FTA negotiations with big developed
countries, then it can pick up relatively developed countries in East Asia, such as Japan,
Singapore, and Korea. This strategy comes from lessons from Korea, because Korea, in the
short run, selected potential countries that can be helpful in negotiating FTAs with big countries.
Start FTA Negotiations with ASEAN or Try to Participate into RCEP
In recent years, East Asia has been one of hot areas in the world in terms of trade,
investment, and global value chains.49) It implies that Sri Lanka needs to strengthen and deepen
economic relationships with countries in East Asia. In process of doing so, Sri Lanka needs
to strongly consider any type of economic cooperation with ASEAN. Definitely, a bilateral FTA
between Sri Lanka and ASEAN as whole would be a good target. If the bilateral approach
were not possible somehow; however, the SAFTA-ASEAN FTA would be another alternative
to be considered.
Currently, India is the only country from South Asia to participate into the RCEP negotiation,
which includes 10 ASEAN countries, China, Japan, Korea, Australia, New Zealand, and India.
To strengthen virtual economic cooperation among Northeast Asia, Southeast Asia, South Asia,
and Oceania, Sri Lanka, another country from South Asia, would be a good candidate to
participate into the RCEP. Since the RCEP negotiation is in almost the final stage, it would
be too late for RCEP countries to consider another partner country. If it is the case, Sri Lank
needs to participate into RCEP when RCEP considers its enlargement after it enters into force.
49) Europe, North America, and East Asia can be called a Triadintermsofinternationaltrade.
153
Aim at Comprehensive and High-Quality FTAs
One of key lessons from Korea’s experience in FTA negotiations is that the bilateral FTA
between the United States and Korea (KORUS FTA) was criticized due to less commitment
to open services markets. The services sector in Korea has been seen as a new growth engine,
transforming the Korean economy from a manufacturing-oriented to a knowledge-based
economy. In addition, key agricultural commodities, such as rice and some fruits, had been
permanently excluded from the FTA negotiations and tariff reductions were deferred on many
items. Given these lessons from previous FTA negotiations, Korea was asked to take a new
approach by pursuing comprehensive and high-quality FTAs.
Sri Lanka needs to pursue comprehensive and high-quality FTAs as well. This is because
seeking FTAs as comprehensive as possible will ensure that benefits accrue from substantial
liberalization in a WTO-Plus manner. ADB (2016) also showed that deep economic integration
of trade agreements boosts common economic prosperity with GVC-related trade. In addition,
Sri Lanka needs to take more active, rather than passive, approaches by focusing more on
how to maximize benefits of FTAs, rather than to minimize negative effects of FTAs. Therefore,
Sri Lank needs to put its efforts in improving the existing FTAs, for example, Indo-Sri Lanka
FTA.
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Ⅴ. Strengthening the competitiveness of Sri Lanka SMEs through participation in GVC
Ⅴ. Strengthening the competitiveness of Sri Lanka

SMEs through participation in GVC
1. Introduction
Improving the competitiveness of SMEs can be achieved through various methods. Internal
knowledge creation activities such as R&D and external knowledge creation through export
are representative ways of competitiveness enhancement activities by firms. SMEs can increase
their competitiveness through their own research and development (R&D) efforts. In addition,
SMEs can increase their competitiveness by imitation of advanced management techniques
such as foreign manufacturing process, labor management, marketing, and etc., by simply
participating in the export market. However, considering the characteristics of SMEs lacking
capital, it would be more useful to indirectly create competitiveness through participation in
the export market rather than creating direct competitiveness through R&D.
SMEs account for about 99.8% of the economy in Sri Lanka. On the other hand, Sri Lanka's
SMEs generate only about 30% of their output. Like many developing countries, Sri Lanka
is also concerned about how to strengthen the competitiveness of SMEs, which are the
backbone of the industry. While it is possible to increase the competitiveness of SMEs through
various methods such as inflow of FDI, securing of technological power, and strengthening
export competitiveness, in this study we aimed to enhance the competitiveness of SMEs by
participating in the global value chain (GVC) of SMEs in Sri Lanka.
Many countries are implementing various policies to foster SMEs. In particular, there are
many SMEs customized policies to increase exports of SMEs to enhance their productivity
through learning-by-doing process while SMEs are perceived as a kind of competitors with
domestic large corporations and global corporations. However, it is important to create a
win-win relationship with SMEs, large corporations and global corporations by allowing SMEs
to integrate into production networks of large corporations or global corporations.
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2. SME status and GVC participation in Sri Lanka
2.1. SME Competitiveness
Each country defines SMEs differently. Sri Lanka does not have a clear definition of a SME,
but it largely distinguishes SMEs according to their size and sales scale.
Recently NEDA, which governs the policies of Sri Lankan SMEs, presents a single definition
for SMEs as shown in the [Table 37] below. In the case of manufacturing, a firm that has
less than five employees is classified as micro firm, a firm that has 50 or less employees are
classified as small firm, and a firm that has 150 or less employees is classified as medium
firm.
Table 37 Sri Lanka Small Business Classification Standard
Firm Agriculture Manufacture Service

Employee 1~4 1~4 1~4
Micro
Sales ~200K Rs ~250K Rs ~200K Rs
Asset ~5M Rs ~10M Rs ~5M Rs
Employee 5~19 5~50 5~19
Small
Sales 200K~1M Rs ~10M Rs 200K~1M Rs
Employee 20~50 51~150 20~50
Medium
Sales 1~5M Rs ~25M Rs 1~5M Rs
Source: NEDA
In Sri Lanka's national economy, SMEs including micro-firms account for a large portion
of number of firms. However, Sri Lankan SMEs are largely underdeveloped and
non-competitive. In Sri Lanka, there are about 1 million SMEs (including micro-enterprises),
which represent about 99.8% of all Sri Lankan businesses and about 30% of Sri Lanka's GDP.
Micro-enterprises have a large portion of the total businesses. In other words, about 92%
of all enterprises are micro businesses, and their employment accounts for about 45% of the
total industry.
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Table 38 Sri Lanka's Business Statue
No. of Establishment Employees engaged

Number % Number %
Micro 935,736 91.8 1,338,675 44.6
Small 71,126 7.0 529,751 17.6
Medium 10,405 1.0 386,756 12.9
Large 2,414 0.2 747,937 24.9
Total 1,019,681 100.0 3,003,119 100.0
Source: Non-Agricultural Economic Activities in Sri Lanka Economic Census 2013/2014
In Sri Lanka, the industries with the highest output are food and beverages (ISIC 15), clothing
(18), rubber and plastic products (25), nonferrous metal products (26) and textiles (17) (see
Table 39).
Table 39 Status of Sri Lanka Production, Employment by Industry
Value of Output Value Added

ISIC2 Establishment Employees
(Rs.Billion) (Rs. Billion)
15 522.5 208.4 874 115,890
18 364.6 177.9 475 266,750
99 192.6 23.4 21 11,769
25 150.7 62.9 260 52,413
26 96.0 42.4 77 1,448
17 61.4 43.4 187 40,711
16 68.8 65.3 14 4,094
24 68.7 24.6 107 12,091
36 40.3 22.0 143 20,330
22 31.3 13.2 82 15,026
27 30.2 7.9 42 3,702
35 21.5 9.4 17 6,096
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In Sri Lanka, the 10 largest industries are processed food, clothing, tobacco, and rubber.
However, most of the added value is generated from food and beverages and clothing.(See
Figure 50)
In such an industrial structure, it is difficult to expect Sri Lanka's economic growth without
raising the competitiveness of SMEs. Effective policy of government to upgrade the
competitiveness of Sri Lankan SMEs is needed. In a situation where the domestic market is
narrow, it is effective for the Sri Lankan government to let SMEs participate in exporting in
order to increase industrial competitiveness. The Sri Lankan government has selected
promising export industries as shown in [Table 40] below, and it is necessary to create a
strategy to preferentially cultivate SMEs engaged in the industry.
Value Added Ratio of Foreigners Generated by

Figure 50
Exports by Industry in Korea in 2011
Unit: Rs. Billion
Source: Annual survey of industries, Department of Census and Statistics
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Table 40 Sri Lanka Export Promising Industry
Industry size
Big Small
Export World Export World
Industry Industry
ratio Rank ratio Rank
Fish 2.0 32
Textile 40.0 23
Coconut 2.1 10
Tea 15.6 1
p Petroleum 1.8 n/a
Rubber 6.6 30
r High Electronics 1.9 71
Jewel 5.4 45
o Publishing
Food & Beverage 2.2 n/a
s Boat construction
Spices 1.6 n/a
p Specialized Service
e Ceramic etc 1.0 103
c Fruit & Vegetable 0.6 n/a
t Chemical &
Low 1.5 93 Toys 0.5 53
Plastics
Shoe, leather 0.4 75
Pet fish 0.1 10
Source: Annual survey of industries, Department of Census and Statistics
The government of Sri Lanka has tried to strengthen the competitiveness of small and
medium-sized enterprises through the improvement of information accessibility, technology
development and transfer program, infrastructure development project, SME networking,
consulting services, and value chain as well as financial accessibility of SMEs for the
development of SMEs. The government of Sri Lanka has implemented various policies to
strengthen the competitiveness of SMEs with the recognition that SMEs form the economic
basis of almost all fields such as textiles, textiles and clothing, agriculture, food and beverage,
tourism, construction, trade, warehousing and transportation and other service industries.
2.2. GVC participation in Sri Lanka
Several studies have shown that the incorporation of the global value chain (GVC) creates
positive economic effects such as increased value-added in domestic production and
employment creation [Koopman et al., (2012, 2014); Kummritz, (2015); Timmer et al., (2016)].
Countries that have joined the global value chain experienced the growth in production, and
this positive effect is particularly pronounced in countries with high incomes [Kummritz,
(2015)]. Asian countries such as China and Vietnam have played an important role in the
global value chain. They have been importing high value-added intermediate goods from
advanced countries and producing and exporting final products. Korea has also been taking
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a strategy to produce and sell its export products directly overseas, using production facilities
in China and Vietnam, and other developing countries in order to take advantage of low
production cost.
Sri Lanka is participating in the GVC in the garment industry. Sri Lanka produces ODM of
intimate apparel, active wear, swimwear, and children's wear, and its main export destinations
are EU-15 (48%) and the United States (41%). Exports of Sri Lanka apparel products to Europe
have become more active as the EU has given preferential tariffs to Sri Lanka under GSP and
GSP Plus. In recent years, many apparel manufacturers in Sri Lanka joined GVCs in conjunction
with the textile industry in India and Bangladesh, as well as establishing factories in Africa
and Jordan (Kelegama and Wijaysiri, 2004).
Sri Lanka has been involved in the GVC since the 1980s in two phases. From the 1980s
to the 1990s, Sri Lanka participated in GVC with the form of GVC of Cut, Make and Trim
(CMT). At that time, East Asian and European clothing companies invested in Sri Lanka, and
Sri Lanka joined the global enterprise GVC by supplying simple labor at these factories. Sri
Lanka apparel companies MAS Holdings and Bradix have started as global supplier companies
and settled in GVC. These companies now have 45 factories in Sri Lanka and create about
70,000 jobs. These companies are supplying to a variety of global brands such as Nike,
Victoria’s Secret, and M & S. These companies move beyond the CMT phase and upgrade
to the more sophisticated GVC.
Since the 2000s, the Sri Lankan apparel industry has been producing more functionally
upgraded products. In other words, beyond the CMT stage, the Sri Lankan apparel industry
develops itself to the stage of designing and producing more elaborate clothing. This
development can be found in two factors. First, the Sri Lankan apparel industry has formed
a strong sense of solidarity with global companies such as Nike, Victoria’s Secret, M & S,
and Gap. Through strong solidarity with global apparel companies, the Sri Lankan apparel
industry has been able to move up to the higher level of GVC, and as a result, it has been
able to steadily increase exports in the GVC established by global corporations. Their exports
have grown to more than 50% of Sri Lanka's total apparel exports. Second, there was the
Sri Lankan government's efforts to globalize the Sri Lankan clothing industry. The Sri Lankan
government created the Joint Apparel Association Forum (JAAF) and supported the
development of the ODM phase at the CMT level, which allowed the garment industry to
provide more goods to the GVC.
Since Sri Lanka's education system is superior to other Southeast Asian countries, it is easy
to utilize well-trained manpower for GVC participation. Sri Lanka is establishing a training
system for human resources training in the field of textiles and apparel, so it is easy to acquire
160
excellent manpower compared to other industries. The fact that Sri Lanka is able to secure
relatively high skilled labor is becoming a great advantage of Sri Lanka’s GVC participation.
On the other hand, the majority of skilled and unskilled workers are women (about 80%),
which should be fixed for Sri Lanka to engage more GVCs in the future.
3. Competitiveness enhancement through Korean SME's

participation in GVC
As Korea is also proposing various policies to support companies that enter the export market
in order to overcome the limitations of the narrow domestic market, we can provide insights
into the successful entry of Sri Lankan SMEs' global production network.
3.1. Korea GVC Participation Status
Korea firms’ GVC participation is increasing rapidly. Korea's exports accounted for 3.3% of
total world exports in 2011, up from 2.7% in 1995, and the share of value-added exports
increased from 2.4% to 2.8% in the world. The share of Korea's imports in total world revenues
increased from 2.6% in 1995 to 3.0% in 2011, and the share of value-added imports also
increased from 2.0% to 2.3%. In this way, the proportions of total exports, imports and
value-added exports and imports are growing, which means that the share of GVC participation
in Korea is increasing [Jung, (2014)]. According to Kim (2016), the proportion of total
value-added exports to manufacturing has increased from 70.9% in 1995 to 79.6% in 2011.50)
In terms of the share of value-added exports in each industry, high-technology industries

such as electronic components, computers, and video equipment fell slightly from 30.4% in
1995 to 24.7% in 2011. But the absolute value added exports rose from about 32.5 billion
USD in 1995 to about 125.5 billion USD in 2011. On the other hand, the share of value-added
exports of textile, bag and footwear industries, which can be classified as low-tech industries,
dropped from 15.8% in 1995 to 2.7% in 2011, as well as from about 16.9 billion USD to about
13.3 billion USD respectively.
In Sri Lanka, GVC participation in textiles, apparel, bags and footwear is high, while South
Korea's GVC participation in those industries is decreasing. It is expected that Korea will be
able to provide implications for Sri Lanka through the experience of industry changes in the
GVC participation.
50) Europe, North America, and East Asia can be called a Triad in terms of international trade.
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Table 41 Change of Korea's Value-Added Exports
Industry 1995 2005 2010 2011

Total Value Added Export 150,706 330,857 528,689 622,265
Total Manufacturing 106,867 255,050 416,289 495,395
Food & Beverage 2,298 3,024 4,863 6,260
Textile, Shoe, Bag 16,892 10,026 11,383 13,234
Wood products 122 61 73 94
Pulp, Paper, Printing 1,294 2,800 3,258 3,777
Coke, Petroleum 3,136 16,664 34,916 54,515
Chemicals 6,287 24,564 40,729 53,262
Rubber, Plastics 6,539 5,762 8,925 10,957
Non-metal 594 1,192 1,551 1,777
Fabricated Metal 10,381 22,429 43,835 58,458
Machinery 6,028 19,368 34,718 42,528
Electronics 32,518 87,308 125,153 122,467
Other Electronics 1,678 6,013 13,422 16,122
Transport 16,783 53,774 92,492 111,723
Other Manuf. 2,317 2,065 971 1,222
Source: OECD
The ratio of value added created by foreign companies in export by industry is shown in
the figure below. Pulp and paper industries have the lowest foreign value added ratio (28.7%),
while the oil refining industry accounts for 80% of revenues. In other industries, the foreign
value added share of gross export is in the range of 30-40%, but the ratio of creating value
added by foreigners in the chemical industry (53%) and the metal industry (54%) exceeds
50%.
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Figure 51 Sri Lanka Top Ten Value Creation Industry
source: OECD TiVA database (Foreign Value Added share of gross export)
The share of value added by foreign companies in Korea's industry exports is steadily
increasing. The [Table 42] shows how the percentage of value added by foreign firms has
changed since 1995. It shows that the ratios have steadily increased in all industries in Korea.
In 1995, almost all industries showed about 20% share of foreign added value, but in 2011
almost all industries accounted for about 40%. It implies how many Korean companies depend
on foreign companies for their use of intermediates.
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The Change of Value Added Ratio of Foreigners Generated

Table 42
by Exports by Industry in Korea
(%)
Industry 1995 2000 2005 2008 2009 2010 2011

Food and beverage 16.5 18.9 22.1 31.6 30.3 31.3 35.6
Textile and Clothing 21.3 23.9 27.1 36.2 32.7 36.4 35.3
Wood products 19.7 21.6 25.2 33.9 29.6 32.5 35.1
Pulp, paper, and printing 16.6 21.8 23.3 30.1 26.7 32.3 28.7
Coke, and petroleum 59.6 76.8 75.8 83.8 79.8 78.1 80.8
Chemicals 27.0 36.1 41.4 53.1 47.2 50.8 53.1
Rubber, plastics 24.2 27.2 30.8 40.8 36.9 40.3 41.3
Other non-metal products 26.1 29.1 31.4 38.0 33.5 36.7 39.3
Basic metal 36.3 39.7 41.9 54.0 47.9 49.8 53.4
Fabricated metal 28.1 28.3 31.2 42.6 37.2 37.6 39.2
Machinery 31.2 31.8 33.5 42.2 38.3 39.7 40.9
Computer and optic 27.8 37.5 37.6 44.4 42.4 41.4 42.2
Electronics 28.8 26.9 33.0 39.8 36.7 37.2 38.3
Transport 24.6 28.8 31.5 39.0 35.0 36.3 37.7
Other Transport 29.8 29.3 33.5 40.3 36.7 37.2 38.3
Source: OECD TiVA database (Foreign Value Added share of gross export)
3.2. Korean Government Support
Kim (2016) introduces the policies of Korean government and government agencies to be
designed of supporting SMEs' participation in GVC in Korea. Using the nine criteria of APEC
(2014), such as product attributes, financial soundness, production capacity, standards and
certification system, flexibility, geopolitical position, level of information and communication
technology, talent and innovation ability, and intrinsic strength, it listed various programs
supported by Korea Small and Medium Business Administration (SMBA), Small Business
Corporation(SBC), Credit Guarantee Fund, Technology Guarantee Fund, Korea Export-Import
Bank, Korea Chamber of Commerce, Korea Trade Association and KOTRA.
However, it was noted that SME policies listed by Kim (2016) are not designed to participate
in GVC but common SME support programs. The following table summarizes the policy to
encourage SMEs to participate in GVC among polices listed by Kim (2016).
164
The Small and Medium Business Administration (SMBA) and KOTRA are supplying various
policies that promote SMEs' export capabilities and encourage their GVC participations. The
SMBA supports SMEs to participate in GVC through various methods such as overseas
marketing, R&D, and distribution. SMEs often develop innovative idea products, but their
products sometimes disappear because they cannot find the distribution network. In order to
overcome these difficulties, the SMBA is launching a 'creative innovation product discovery
& linkage system project' that helps SMEs to explore creative and innovative products and
link them with the existing distribution network. There is a project to carry out the ‘Technology
Development Project for Linking Foreign Demand’ to SMEs who are asked to develop
technology suitable for specific products, which have been recognized by overseas global
companies. The ‘Partner business to strengthen competitiveness of SME technology ' is a
system to establish a cooperative network between SMEs and medium-sized enterprise
partners, while strengthening global technological capabilities and establishing win-win and
cooperative models among them to support growth in the world market. There is also a policy
for SMEs to evolve from OEM to ODM. That is, the 'SME Brand Support Program' is a system
to support brand development and promotion expenses for these companies when 5 or more
SMEs jointly develop the trademark, perform marketing and PR. The 'Small but Strong Global
Enterprise Fostering Business' is a system to support the marketing and R&D assistance by
finding innovative SMEs so that they can grow into self-sustaining SMEs in the global market.
Finally, to support the difficulties of small and medium-sized enterprises, which have difficulties
in exploiting overseas markets, the ‘Support SME for advancement with large firms ' is a system
to support overseas markets by exploiting overseas networks owned by domestic large
corporations.
The Small and Medium Industry Promotion Corporation is carrying out a 'global buyer
purchase subsidy support project'. This is a business that receives inquiries from overseas
buyers and matches SMEs that can supply to the companies concerned. SMEs will have the
opportunity to demonstrate their skills through this project, which will enable them to form
partnerships with global companies.
The Large and Small Business Cooperation (SBC) is carrying out a Cost-saving Large-SME
joint business project'. This is a project that supports research and development expenses
when a consortium is formed between the first supplier or the second or third supplier of
a large company to carry out a cost reduction type task.
KOTRA also supports the globalization of SMEs through various programs. KOTRA has 127
foreign trade centers in 86 countries. KOTRA is actively helping SMEs to enter the overseas
market by utilizing its own extensive overseas network. KOTRA mainly provides SMEs with
information on overseas markets rather than financial support, or arranges meetings with
165
overseas buyers. Representative businesses providing overseas market information are trade,
investment, information portal operation business and foreign investment information portal
business. Through these businesses, KOTRA provides SMEs with information on their
customized overseas market entry by region and theme. It also provides opportunities for SMEs
to meet directly with overseas buyers through export conferences and trade missions. These
programs will give the competitive SMEs the opportunity to be incorporated into GVCs of global
companies overseas.
Table 43 Korea Small Business GVC Participation Support Program
Organization Program Contents

To find out innovative idea products of SMEs and to
Creative Innovation Product
support them to meet domestic and overseas distribution
Discovery / Linkage System
networks
Supports competitive product development expenses for
Technology Development Project
SMEs who are requested to develop new technology
for Linking Foreign Demand’
from overseas
Establish a cooperative network between SMEs and
Partner business to strengthen
mid-large sized business partners and build a mutual
competitiveness of SME
growth system by strengthening global technology
technology
capabilities
SMBA Support development and promotion expenses when 5
SME Brand Support or more SMEs work together joint brand development
and promotion
Small but Strong Global Enterprise Supporting overseas marketing and R & D support for
Fostering Business global markets by identifying excellent SMEs
Utilizing the overseas network and infrastructure of large
Support SME for advancement
corporations to support expansion of overseas market
with large firms
by SMEs
Business that finds and matches SMEs that can receive
SBC Global buyer subscription support
supply from overseas buyers
Large & Small
When a consortium is formed between the first supplier
Business Cost-saving Large-SME joint
or the second or third supplier of a large company to
Cooperation business
carry out a cost reduction type task,
Foundation
invite buyers who want to export Korean products and
Export Consultation arrange meeting with domestic companies to expand
sales channels
Organize an overseas delegation for overseas
Trade mission advancement and arrange a meeting with local buyers
from abroad
KOTRA Portal of Trade, Investment Provides overseas market information by region and
Information theme for Korean companies to enter overseas market
A portal for overseas investment information, which is
Portal of Outward Investment a one-stop comprehensive information on foreign
Information investment information provided by 24 foreign
investment related institutions
Source: Kim(2016). P. 118-126
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3.3. Examples of GVC participation by SMEs
ADB (2003) presents various directions for SMEs to enter the global market. The most
representative types are foreign direct investment through greenfileld or portfolio, joint venture
with local companies, custom branded product production, manufacturer design production,
and subcontracting.
In particular, Original Equipment Manufacturing (OEM) and Original Design Manufacturing

(ODM) are among the best strategic options for developing countries to enter the existing
GVC. SMEs in the early stage of entry into GVC will enter the global market through OEM
participation and develop into ODM later. After the stabilization of GVC, SMEs finally evolve
into Original Brand Manufacturing (OBM) that enables SMEs to design and manufacture their
own brands. SMEs must secure their own proprietary technologies in order to enter the OBM
phase; therefore, SMEs’ approach the global market by OEM method is the most suitable entry
strategy in order to enter the initial GVC.
The Korean SMEs participated in the GVC through five major approaches. First, it is a GVC
advancement through global conglomerates located overseas. In order to be included in the
global GVC system of large conglomerates, it is necessary to secure the competitiveness and
technical power of SMEs. Second, SMEs can participate in GVC through global companies
located in Korea. Although it initially acts as a supplier of parts and materials in the domestic
market by participating in the GVC of a global company that has entered the domestic market,
it can be incorporated into the global GVC of overseas companies by gradually acquiring
proprietary technologies and learning advanced management techniques. Third, it is the
method of incorporating GVC in domestic large corporations such as Samsung and LG. Many
SMEs have difficulties in getting global companies into GVCs. They are incorporated into the
value chain of Korean large corporations, and pursues a stable profit structure, thereby enabling
opportunities for technological development. It is a way for large companies to attract small
businesses and provide opportunities for SMEs to enter the global market in the future. Fourth,
SMEs will have an opportunity to participate in GVC based on its own technology. In addition
to serving as a supplier in a global or large enterprise GVC, SMEs can also have the opportunity
to incorporate other SMEs into their own GVC. The last way of GVC formation is a joint venture
between large corporations and SMEs. It is an effective way for large companies to provide
a platform for SMEs to enter overseas and utilize them by SMEs. The following are some
representative examples of SMEs participation in GVC through these five approaches.
167
3.3.1. Entering GVC through win-win partnership with global

conglomerates
In order to participate in GVCs through global conglomerates located overseas, SMEs must
have the technology in the field. Cosmax in Korea is a small and medium-sized cosmetics
manufacturing company that manufactures cosmetics and sells various cosmetics by OEM and
ODM method with global companies such as Loréal, Johnson & Johnson, Christian Dior,
Amorepacific, and LG House and Health Care Ltd. Cosmax, which originally supplied only the
domestic market, began to supply cosmetics to Loréal by way of OEM in 2000, and gradually
expanded its scope to other foreign buyers. Since then, it has established a factory in
Guangzhou in 2013 and Shanghai in 2014, and has been developing into a global company
by acquiring the Jakarta plant in Indonesia and the Solon plant in the United States, both
operated by Loréal. It is a representative example of development through the incorporation
of GVC, which is now moving toward ODM, as an OEM-based overseas production method.
Meanwhile, there are cases in which OEM and OBM are promoted at the same time. Lihom
Cuchen is manufacturing an electric rice cooker specializing in supplying its own brand products
and OEM rice cookers to China 's Lobahm Electric. It is a successful example of participating
in GVC of a representative small and medium-sized company, which is using the distribution
network of Shenyang Han Sung Woo Trading Co., Ltd., which has a wide distribution network
in China, as well as OEM and OBM.
3.3.2. Entry into GVC through global companies which have advanced to
Korean market
The second is the GVC participation plan through the global companies that have entered
the domestic market. The government should prioritize policies that facilitate the entry of global
companies into Korea for this plan. For example, when the government's incentives for foreign
direct investment and infrastructure construction are prioritized, foreign global companies will
enter the country. As a result, SMEs supported by global conglomerates can be successfully
created. Cuckoo Homesys and Cell Biotech are the leading examples of participating in GVC
through Amway, a global distributor. Cuckoo Homesys is a representative example of the rapid
growth of product sales using Amway's sales network through One for One program.51) Cell
Biotech is a small and medium-sized company producing lactic acid bacteria, and has
participated in export through Amway's distribution network. At present, it has grown from
OEM to ODM company which exports through its own brand.
51) Whenever one of Amway's products is launched, it distributes one of Korea's best SME products.
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3.3.3. Transferring to global GVCs of domestic large corporations
By selling intermediate products to large corporations in Korea, SMEs can be incorporated

into GVCs of large corporations. Not only can it serve as a primary vendor for large corporations
in Korea, it can also lead the internationalization of secondary and tertiary vendors who deal
with SMEs. PSK is a semiconductor device manufacturer and supplier to Samsung Electronics,
a global company. PSK is a successful example of a SME’s integration into Samsung Electronics'
GVC, which has greatly improved efficiency in the production process by reducing the number
of components in semiconductor equipment and shortening assembly time by Samsung
Electronics' support. In addition, it provides management know-how to 29 partner companies
and provides the opportunity for global GVCs to follow-up vendors.
3.3.4. GVC participation through own technology
It is significant that SMEs themselves build small GVCs and include other SMEs in their GVCs
to increase the participation rate of other SMEs in GVC. In order to continue participating in
GVC with this type, there may be a burden that companies need to acquire technology through
continuous R & D. Dasan Networks is a small and medium-sized company that produces
Linux-based routers for the first time in the world. It has entered to Japan and China markets,
and is attempting to localize equipment in cooperation with domestic large companies (LG),
and continues to globalize jointly with other KT affiliates.
3.3.5. Going overseas with large companies
Small and medium enterprises can utilize various global networks secured by large
companies to advance overseas together. SMEs are less likely to succeed if they enter overseas
independently because they are not well known overseas. Therefore, if the distribution network
of large conglomerates with high overseas recognition is used, it is easy to incorporate SMEs
into the global network when SMEs collaborate with large companies to go abroad. The case
of Lotte Mart and Nokchaone is an example of accompanying overseas advance between large
company and SME. Nokchaone, which has excellent products but does not have overseas sales
network and Lotte Mart, which has an overseas distribution network, have successfully entered
the overseas market together.
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4. Policy Suggestions
4.1. Quality improvement of GVC participation
In addition to quantitative growth such as the increase in participation rate of GVC in Sri
Lanka, quality improvement of GVC participation should be promoted together. Korean
companies initially joined GVC in the form of original equipment manufacturer (OEM), and
they have developed into a self-branded producer (OBM: Original Brand Manufacturer)
through the stages of manufacturer development and production (ODM: Original Design
Manufacturer). Sri Lanka is currently in the process of producing order consignors or is
attempting to incorporate into global GVCs. In order to be included in the GVC, it is necessary
to attempt to enter global networks of domestic and overseas global companies and domestic
large corporations. In addition, although SMEs themselves can establish a global network by
securing their own technology, it is a medium- and long-term plan to pursue rather than
proceeding immediately in light of the current situation in Sri Lanka, which lacks technological
capabilities. Finally, there is a plan to build a global network by using the recognition of Sri
Lankan conglomerates, but it is also a medium- to long-term strategy to be pursued in Sri
Lanka, where large enterprises are lacking in manufacturing. Most large companies in Sri Lanka
are domestic importers, so this plan can be effectively achieved when industrial policies that
can develop SMEs into medium-sized enterprises and further into large corporations are
accompanied.
Korea has participated in the GVC through the five routes listed above. Based on the Korea's
experience, Sri Lanka should improve the quality and quantity of GVC participation in the
medium to long term.
As textiles, apparel, leather, footwear, and other industries are expected to reduce
production cost the most in the global value chain, the government of Sri Lanka should prioritize
the development of various policies to increase the participation of companies belonging to
these industries in GVC. As Korea's industrial value added export has been gradually
decreasing, and industrial production movement of the industry has already started, Sri Lanka,
which is easier to secure skilled labor than other developing countries, is expected to have
a GVC advantage in the first place.
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4.2. Improve FDI environment
It is necessary to develop policies to improve the FDI environment, focusing on the industries
in which GVC participation is expected in Sri Lanka. Attracting foreign direct investment is
essential for GVC participation. Therefore, it should be examined the foreign direct investment
environment of Sri Lanka, and it is necessary to develop policies that provide additional
incentives for foreign direct investors to enable Sri Lanka SMEs to participate in the GVC. Sri
Lanka will actively attract comparative downturn industries in neighboring countries such as
Korea and Japan, and new value chains should be incorporated into SMEs' competitiveness.
Due to the low technological competitiveness of SMEs in Sri Lanka, it is not easy for them
to enter production networks already established overseas, therefore, it should be prioritized
to create a production environment in Sri Lanka through active foreign direct investment.
4.3. Entering GVC through FTA
We should try to enter global network through free trade agreement (FTA). In order for
Sri Lankan SMEs to function as members of the GVC, they need to take a step closer to the
global market. By eliminating unnecessary trade barriers through the FTA and improving the
investment environment of foreign companies, global companies can invest in Sri Lanka, which
will enable Sri Lankan SMEs to become more involved in GVCs. South Korea has so far signed
16 FTAs with 52 countries, while Sri Lanka has signed just two FTAs so far. In order to expand
GVC participation, the ability to supply manufacturing-related services as well as the
manufacturing capabilities of manufacturing industries is also an important factor. The
participation of Sri Lankan SMEs in GVCs can be extended when the quality of service at the
final stage of value added is improved through the establishment of a high-level FTA.
Activation of GVC through ‘virtual small-sized mini-cluster’ is required. SMEs are absolutely
inferior to information technology. Even if SMEs want to be part of the GVC, they do not know
which companies in the world want to be part of the GVC. Therefore, it is necessary for the
government to provide a virtual space where foreign large corporations and Sri Lankan SMEs
can meet online to provide SMEs with the opportunity to participate in overseas GVCs. SMEs
can meet other domestic SMEs in similar locations as well as overseas large companies, and
they can enhance their competitiveness by sharing R D activities, production and design
together.
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Ⅵ. Conclusions and Suggestions
Sri Lanka is located at the intersection among countries in Europe, Asia, and Africa, which
allows Sri Lanka to become the global hub for the distribution of goods. However, low Foreign
Direct Investment, lack of competitiveness within small and medium sized industries, and
inefficient customs clearance led to low export rate and formed economic imbalance throughout
the regions. To cope with this matter, the government of Sri Lanka with the ADB have launched
the Colombo-Trincomalee Economic Corridor (CTEC) project to form integrated social
infrastructural network in Sri Lanka. The development of CTEC along with the formation of
high value added industrial clusters and national strategy for an export based economy
altogether could contribute to further growth in Sri Lanka by extending economic opportunities
in the urban hinterlands and connecting small towns or village centers with the industrial
clusters. KSP-ADB joint consulting project [Support for Development of the
Colombo-Trincomalee Economic Corridor in Sri Lanka] deals with urbanization, Single Window
system, enhancing FDI, and facilitating trade of SMEs in Sri Lanka.
The Chapter One introduced successful examples of urbanization in Korea, and suggest
policy implications for urbanization in Sri Lanka along with the Colombo-Trincomalee Economic
Corridor. Considering Korean industrial clusters that reflected regional balance, we have
suggested ways to develop industrial complexes in Sri Lanka. Also, applicable Smart City
Indexes are examined and we have suggested functions, skills, and business models related
to smart city.
In the Chapter Two, we realized that one of the most urgent problems of custom system
in Sri Lanka is the lack of automation and computerization. To solve the problem, we introduced
the case study of Korean Single Window system in customs procedure, and explored ways
to facilitate trade in Sri Lanka. To implement Single Window system effectively in Sri Lanka,
the government should pursue strategically with mid- to long-term goals, and the government
should mitigate the conflicts between the various ministries and agencies by establishing
standardization and revising laws and systems. Also, it is necessary to continuously improve
and adjust the system that reflects the opinions of the users in the step-by-step process to
provide the maximum convenience to the users.
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Ⅵ. Conclusions and Suggestions
In Chapter Three, the project shared Korean experience of attracting Foreign Direct
Investment to give implications to Sri Lanka. The role of Invest Korea (IK), national investment
promotion agency, has been introduced, and other various incentives programs provided by
Korean government to attract FDI have been discussed. In this chapter, the case study of
Vietnam, the top destination of Korea’s investment among ASEAN member countries, has been
discussed to analyze the factors that attract FDI from Korea. To attract Foreign Direct
Investment to Sri Lanka effectively, the Sri Lankan government should understand what
industries are needed to be developed further for the Sri Lankan economic prosperity and
development, and how benefits of FDI can be spread out into every area of the country and
inclusive of all sectors and people in the country. Also, the Sri Lankan government needs to
focus on how to diversity and differentiate incentive programs from rival countries in this
region.
Chapter four investigates current status and problems of Sri Lanka’s small and medium sized
enterprises (SMEs), and analysis methods to strengthen competitiveness of the MNEs in Sri
Lanka and to increase Sri Lanka’s participation in the global value chain by considering Korea’s
cases. Based on Korea’s experience, policy implications for Sri Lanka is that it is necessary
for the government to provide a virtual space where foreign large corporations and Sri Lankan
SMEs can meet online. Also, as textiles, apparel, leather, footwear, and other industries are
expected to reduce production cost the most in the global value chain, the government of
Sri Lanka should prioritize the development of various policies to increase the participation
of companies belonging to these industries in GVC. In addition, as attracting FDI is essential
for GVC participation, it is necessary to develop policies that provide additional incentives for
foreign direct investors to enable Sri Lanka SMEs to participate in the GVC.
Competitions among countries and regions are getting fierce in the global market. The
economy of Sri Lanka as well as Southwest Asia are expected to grow by successfully following
various ways to facilitate trade, FDI, MNEs, and by benchmarking the experience of Korea
as mentioned in this project. Korea can be benefited from this project as well by getting closer
to Southwest Asian markets in advance. We expect this project contribute to the economic
growth in Sri Lanka and expect Sri Lank to be the global logistic hub.
173
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Support for Development of the Colombo-Trincomalee Economic Corridor in Sri Lanka

2016/17 KSP-ADB Joint Consulting Project :

Project Title Support for Development of the Colombo-Trincomalee Economic Corridor

Prepared by Korea University, Ajou University, Dongguk University

Financed by Ministry of Strategy and Finance, Republic of Korea

Supported by The Export-Import Bank of Korea (Korea Eximbank)

Asian Development Bank (ADB)

Prepared for Ministry of Land, Sri Lanka

Project Manager Hong Shik Lee, Korea University

Researchers Moon Sung Kang, Korea University

Ⅰ. Project Overview ·········································································································· 1

Ⅱ. Urbanization Strategy ································································································· 5

Ⅲ. Improving Trade Facilitation: Implementation of Single Window System: ··· 72

Ⅳ. Strategies to Attract Foreign Investors ···························································· 113

Ⅴ. Strengthening the Competitiveness of Sri Lanka SMEs through

Ⅵ. Conclusions and Suggestions ·············································································· 172

References ························································································································ 174

Table 1 Global Competitiveness Index, Infrastructure Rankings ·········································6

Table 33 Samsung Electronics’ Subsidiaries in Vietnam ····················································129

[Figure 34] Single Window Infrastructure Model ····································································94

ADB Asian Development Bank

OLOLI Ownership, Location, Internalization

To implement Single Window system effectively in Sri Lanka, it is important to consider

in order to increase industrial competitiveness.

1. Project Background and Objective

1.1. Project Background

2. Project Activities and Expected Results

2.1. Project Activities

and to facilitate trade activities.

2.2. Expected Results

Second, by sharing Korean successful experiences, we expect to establish strategies to

3. Project Implementation Plan

1. Current status and the future of the urbanization of Sri

1.1. General Information of the Site

The South Asian infrastructure (transportation/computer network) forms a medium and

Table 1 Global Competitiveness Index, Infrastructure Rankings

GCI ranks Infrastructure Rank Percent of Roads paved

Butan 󰀺 109 󰀺 87 38%

Bangladesh 󰀺 110 󰀺 132 under 3%

Nepal 󰀺 117 󰀺 144 5%

Pakistan 󰀺 133 󰀺 121 under 3%

Source: World Bank (2016)

Accordingly, Sri Lanka’s Colombo-Trincomalee Economic Corridor (CTEC), is an extensive

1.1.2. Current status of urbanization

Urbanization Pattern (New Delhi, 1999-2000)/Urbanization Pattern (Colombo, 1999-2000)

Table 2 Population Statistics and Population by Major Cities

Population distribution states Region Population(2008)

1.2. Methodologies and Vision

2. The Development of Korea’s National Regional Plan

2.1. The Characteristics of Korea’s National Regional Plan

Figure 2 The Paradigm Shift in Urban Planning and Development System

Source: Park (2004)

2.2. Transition of the CNTPs

2.2.1. The 1st CNTP (1972~1981)

Source: Korea Research Institute for Human Settlements (2012)

2.2.2. The 2nd CNTP (1982~1991)

Figure 4 The 2nd CNTP

Source: Korea Research Institute for Human Settlements (2012)

2.2.3. The 3rd CNTP (1992~2001)

Source: Korea Research Institute for Human Settlements (2012)

2.2.4. The 4th CNTP (2002~2020)

Figure 6 The 4th CNTP

Source: Korea Research Institute for Human Settlements (2012)