South Korea is the quintessential East Asian tiger economy. It launched itself from the humble packaging of computer chips in the 1960s and 1970s, to the domestic design and manufacture of memory chips in the 1990s, to cornering the global market – alongside Taiwan – for the most advanced chips today.
South Korea owes this meteoric rise in no small part to government support, and Korean chip policies reveal one of the country’s most deep-seated partisan divides: left-wing distaste for and right-wing attachment to chaebols. These large, family-run industrial conglomerates account for nearly 60 percent of the South Korean economy and hold immense sway in Korean society. Whether to divert government chip funds to startups or nontraditional areas is not only technically challenging but also a partisan third rail.
South Korea’s Chipmaking Industry
Most foreign observers only recall one top-line fact about South Korea’s semiconductor industry: that all of the world’s most advanced logic chip manufacturing capacity is located in South Korea and Taiwan. This oversimplification conceals supply chain weaknesses of great concern to South Korean policymakers.
South Korea’s semiconductor industry first made a name for itself through memory chips. Korea manufactures a staggering 44 percent of these chips that computers use for internal storage. Since then, the country has advanced in other chip segments as well. Notably, South Korea accounts for 8 percent of global sub-10 nanometer (the most advanced) logic chipmaking, with only Taiwan competing with South Korea in that space.
Beyond memory and advanced logic, South Korea’s share of other chip industry segments is scattershot. At less advanced logic nodes, Korea’s manufacturing share oscillates between 5 percent and 10 percent. South Korea only accounts for 5 percent of discrete and analog chips, which manufacturers of cars and energy infrastructure need, and it contributes a negligible amount to core chip IP and design software.
Critically, Samsung and SK hynix account for nearly all of South Korea’s chip manufacturing capacity, and both are integrated device manufacturers (IDMs) that both design and manufacture chips. Most of their chipmaking capacity, therefore, goes to internal production needs. Though IDMs like Samsung do offer foundry services to produce chips for third parties, external chip designers typically prefer to partner with pure-play foundries like Taiwan’s TSMC, which do not also compete with their customers.
The weaknesses of South Korea’s chip industry were on full display in the aftermath of a diplomatic spat with Japan in 2019.
That year, a South Korean court ruling demanded restitution for Japan’s use of Koreans as forced laborers during World War II, claims that Japan contends were settled in a 1965 treaty. Then-Japanese Prime Minister Abe Shinzo’s government reacted by removing South Korea from a whitelist of countries exempt from export controls for national security-critical products, including critical chipmaking chemical inputs like hydrogen fluoride, EUV photoresists, and fluorinated polyimides.
Although these Japanese inputs only amounted to $400 million annually, they risked hamstringing South Korea’s over $80 billion in annual semiconductor exports.
Though Japan began regularly approving Korean exports of these products after tensions cooled in 2020, South Korea has taken significant short-term actions to reduce its reliance on Japanese imports. The proportion of South Korea’s polyimide imports originating in Japan fell from 18.3 percent in 2018 to 15.9 percent in 2021 according to South Korea government estimates. (Note: This statistic does not differentiate fluorinated and non-fluorinated polyimides due to imprecise customs reporting categories.)
Longer term, the Korean government has accelerated development of government supported research projects seeking to provide domestic alternatives to Japanese chemical and semiconductor manufacturing equipment imports. It also aims to subsidize the weaker parts of South Korea’s supply chain. However, domestic politics leads to fascinating differences in different administrations’ industrial policies.
South Korean Chip Incentives Born and Reborn
South Korea’s left-wing and right-wing governments agree over the need to “secure supply stability of key items.” The left-wing Moon Jae-in administration (in office from 2017 to 2022) insisted on framing industrial policies as seeking to ease supply and demand uncertainties “rather than reducing dependence on Japan.” The incumbent right-wing Yoon Suk-yeol administration (in office since May 2022) has similarly avoided directly provoking Japan in its economic agenda, while stressing that “a homegrown supply for [chipmaking] materials is necessary.”
The two parties differ, however, in the mechanics of their subsidies.
Conservatives tend to focus government support on South Korea’s national champions, the chaebols, an approach that indirectly bolsters existing technology clusters in the Seoul metropolitan area. Three of Samsung’s four main Korean fabs are located near Seoul in Yongin, Hwaseong, and Pyeongtaek, with only the Asan location located in the southeast. SK hynix’s fabs are similarly concentrated in the Seoul area.
Meanwhile, politicians from former President Moon’s Democratic Party criticized the Yoon government’s latest chip subsidies as “preferential treatment for large corporations.” Liberals try more consciously than conservatives to spread subsidies beyond chaebols and beyond Seoul, but South Korea’s enormous reliance on its national champions limits their success.
A central tenant of Moon’s marquee chip policy was to spur the creation of new semiconductor clusters beyond Seoul. In 2019, Moon launched the “K Semiconductor Belt” project (K Belt). His administration envisioned a series of specialized hubs focused on research, fabless design, manufacturing, and packaging in cities across South Korea.
Announced in Pyeongtaek, the site of Samsung’s chip production, the K Belt emphasized greater regional integration. With northwestern Seoul-area axial points (Pangyo, Hwasong, and Yongin) extending to Cheonan in the South, Icheon in the Northeast, and Cheongju in the Southeast, the K-shaped belt sought to diversify South Korea’s existing industry map.
As the government’s key contribution to the K Belt, the Moon administration vowed tax credits of up to 40-50 percent for R&D spending and 10-20 percent for facility investments, alongside a 1 trillion won investment fund. These policies aimed at incentivizing over 510 trillion won ($385 billion) in private investments by 2030.
To help companies expand in areas without existing chip clusters, the government also provided pioneering infrastructure support. This included a 10-year water supply for factories in Yongin and Pyeongtaek and coverage of up to 50 percent of electricity costs by the government and South Korea’s largest power utility, KEPCO. Though many of these government guarantees did not survive the change in administration, the incumbent Yoon administration has continued some aspects of the K Belt vision.
Just before leaving office, the Moon administration also passed the Special Measures Act on Strengthening and Protecting Competitiveness of National High-Tech Strategic Industry (a.k.a. the National High-Tech Strategic Industry Act). This law grants tax deductions and expedited regulatory approval to businesses engaged in what South Korea’s Ministry of Trade, Industry and Energy (MOTIE) defines as “strategic high-tech industries.” Additionally, the act allows MOTIE to designate specific cities and areas as “specialized complexes” in consultation with central and local governments. The president can subsequently “partially or fully” cover the costs of research infrastructure development in specialized complexes using government funds.
Though the law technically applies broadly to “strategic high-tech industries,” Korean lawmakers primarily intended for it to support the chip industry. The act empowers MOTIE to define “strategic high-tech industry” based on several criteria, and this discretion has spurred controversies where MOTIE officials expanded the definition of “strategic high-tech industry” beyond chips. The Yoon administration’s more narrowly crafted chip policies are partially responses to MOTIE’s overstepping under Moon.
After the Yoon administration came to office in 2022, it passed the K Chips Act, raising existing tax credits for small-to-medium enterprises from 16 percent to 25 percent and for medium-to-large enterprises from 8 percent to 15 percent. For 2023 alone, chipmakers could claim a temporary additional 10 percent tax credit on any investments made in the past three years.
The K Chips Act makes South Korea’s tax rate for semiconductor investment more competitive than most of its rivals. The tax credit for facility investments rises to 25-35 percent, while its credit for R&D expenses jumps to 30-50 percent. This compares to 5 percent and 25 percent credits for facility investments in Taiwan and the United States, respectively. Regarding R&D investment, Taiwan provides a 25 percent credit, the U.S. a 20 percent credit, and Japan a 6-12 percent credit.
Critically, the national strategic technologies that qualify for K Chips Act benefits are narrowly defined as the following:
- 15nm or lower DRAM design and manufacturing technology;
- 170-layer or higher NAND flash design and manufacturing technology;
- System on Chip (SoC) foundries manufacturing technology at 7nm or less; and
- Vehicle, power, and energy efficiency improvement chip designs and manufacturing technology.
This narrow definition serves to focus government support on semiconductor technology. However, the high technology bar set by the node standards means that few entities other than Samsung and SK hynix, South Korea’s two chip chaebols, will qualify for these funds. Given that both companies’ existing facilities are centered around the Seoul region, it is less likely that the Yoon administration’s chip incentives will expand the industry beyond well-established clusters.
Partisan or Bipartisan, Not All Dreams Are Attainable
Policymakers naturally hope to make the most out of their industrial policy. Under the ugly visage of partisan politics, Korean leaders are engaged in a reasonable debate over how to leverage public dollars to both promote economic competitiveness and lift up underdeveloped regions.
Economies around the world have passed major semiconductor incentive regimes, and all grapple with this two-pronged goal of industrial policy. American companies bicker over whether to centralize or spread out the U.S. CHIPS and Science Act’s research programs; Chinese Communist Party officials bemoan the fact that provincial governments’ chip subsidies lack coordination with central priorities; and European Union officials struggle to coordinate member states’ subsidies.
Compared to the United States, China, and EU, South Korea is unique in that its centralization debate falls along partisan lines. Certainly, both parties had to moderate their goals as reality set in. The Moon administration anchored the K Belt in existing tech clusters for efficiency purposes, and the Yoon administration has not abandoned Moon’s effort to spur new clusters. Whether South Korea’s experience informs any of the other governments that have now passed their own semiconductor incentives, its chip policies shine a distinctly tinted light on the politics of the nation.