C.

Roles of tourism policy organizations

The tourism organizations and their roles in researching, planning and
Implementing tourism polices in the Republic of Korea are the Tourism
Policy Council, the Ministry of Culture and Tourism, the Korea National
Tourism Organization, the Korea Tourism Research Institute, local selfgoverning bodies And industry associations. These organizations play
critical roles in achieving Efficient integration among domestic and
foreign tourists, local residents and Associated businesses as well as
attracting foreign tourists and encouraging Koreans to travel (Ministry of
Culture and Tourism, 1999a). The Tourism Policy Council, established
on 19 March 1965 to mediate conflicting opinions on tourism policies
among the governmental departments concerned, is responsible for
formulating annual and long-term tourism promotion plans. The Council
also publishes annual reports on tourism promotion policies and trends,
which are submitted to Parliament, and it plans significant policies
concerning tourism resource development. The Minister of Culture
and Tourism heads the Council, with vice-ministers of related
departments as council members. The Council has established
several ubcommittees, headed by vice-ministers and with tourism
experts and directors of related departments as members, to assist
in planning implementation. They include the Tourism Promotion
Working Committee, the Working Committee on Tourism
Resource Development, and the Working Committee on Tourism
Public Relations Coordination. The Ministry of Culture and
Tourism plays a vital role in planning, implementing and
monitoring tourism polices. Formerly known as the Ministry of
Culture and Sports, it was renamed in February 1998 in line with
the reform
of government organizations. The new name reflects the
importance of the tourism industry as a high value-added, core
industry for the new millennium. It also reflects the governments
commitment to supporting the culture-tourism industry, which can

maximize the synergy effect through integration between culture

and tourism. Accordingly, in order to increase the importance of
the tourism industry, the Bureau has the following policy goals: (a)
To contribute to the economic development of the country through
steady increases in the number of foreign tourist arrivals and
tourist revenue, as well as through the promotion of foreign
investment capital to the tourism industry; (b) To achieve a welfare
state through the balanced development of domestic tourism.
As a semi-governmental body, the Korea National Tourism
Organization (KNTO) plays a critical role as the driving force
behind the tourism industry. KNTO makes a dedicated effort to
enhance the quality of lifestyle for Koreans by encouraging them
to travel and by promoting the country to increase foreign
tourist numbers. The main activities of KNTO are:
(a) The development of an international tourism market;
(b) The promotion of, and support for, international conferences;
(c) The implementation of marketing support activities;
6
(d) The intensification of partnerships with self-governing bodies
and
the private sector in the region;
(e) Conducting surveys and compiling relevant data;
(f) The provision of tourist information and guide services;
(g) Training of qualified tourism personnel;
(h) The development of tourist resort complexes;
(i) Other profit-oriented activities, including the operation of dutyfreeshops. The Korea Tourism Research Institute (KTRI), which
was established on 3 April 1996 as a non-profit research
organization, conducts research into effective policies for
supporting the development of the tourism industry as well
as government tourism policies. The main functions of KTRI are:
(a) To conduct basic research;
(b) To carry out commissioned research projects;

(c) To operate Tourism I&I 2000, which is an information service

to assist in policy decision-making activities of the government
and the tourism industry;
(d) To establish tourist information databases;
(e) Other activities such as conducting seminars on sensitive policy
issues, producing publications, and participating in training and
information exchange with other organizations, both at home and
abroad.

D. Legal and institutional framework

1. Basic laws governing foreign direct investment
These laws include:
(a) The Foreign Investment Promotion Act;
(b) The Enforcement Decrees of the Foreign Investment Promotion Act;
(c) The Working Rules for the implementation of the Foreign Investment
Promotion Act; and
(d) Regulations on Foreign Direct Investment.
2. Purpose
The purpose of the Act is to contribute to the sound development of the
national economy through effective inducement of foreign direct investment by
means of support and facilitation.
3. Basic directions
Foreign direct investment policies have been restructured to support foreign investment from the perspective of
the foreign investor, and an investment environment has been established based on competitive inducement of
FDI by local government.

4. Relationships between the Foreign Investment

Promotion Act and other laws
Foreign investment is defined as FDI that satisfies foreign capital
requirements in accordance with the Foreign Investment Promotion Act and
relevant laws. Matters concerning foreign exchange and overseas transactions
follow the regulations of the Foreign Exchange Management Law, except for
special regulations stipulated in the Foreign Investment Promotion Act. Even
when FDI companies have completed the procedures stipulated in the Foreign
Investment Promotion Act, those companies will still need to follow the regulations
applied to pure domestic companies under other individual domestic laws. They
will also have to obtain permits or approval in accordance with the respective
laws, in order to operate their intended businesses, since FDI companies are
considered to be domestic companies.
48
5. Major policies on promoting foreign investment
These policies include:
(a) The introduction of market mechanisms;
(b) The opening of previously closed business sectors;
(c) Full liberalization of cross-border M&As;
(d) Capital market liberalization; and
(e) The implementation of the new Foreign Investment Promotion Act.
These measures for opening the capital market and lowering barriers to
foreign investment are critical steps in improving the investment environment.
Thus, the restructuring process now taking place in the Republic of Korea is
indicative of the governments commitment to international investment partnership.
The old system of regulating and administering foreign investment has
been replaced with a new policy paradigm. The new paradigm is embodied in
the new Foreign Investment Promotion Act, which has been streamlined and
reorganized for the convenience of investors, and gives greater autonomy to local
governments.
6. Two major principles of the new foreign direct investment regime
The two major principles of the current FDI regime are:
(a) Formulating policies to design the most supportive and convenient
FDI system possible for foreign investment from the perspective
of foreign investors; and
(b) Establishing an FDI system in which local government, in efforts
to advance regional development, play a central role in competitively
courting FDI.
To that end, the new Act was developed in order to (a) create a more
transparent and liberalized system, (b) abolish the cumbersome regulations and
augment incentives, and (c) provide a one-stop service through the Korea
Investment Service Centre by incorporating seven major objectives.
7. Seven major objectives of the Foreign Investment Promotion Act
The seven major objectives of the Act are:
(a) The liberalization and protection of FDI;
49

(b) The augmentation of tax incentives;

(c) The enhancement of property incentives and subsidies;
(d) The simplification of procedures;
(e) The provision of a one-stop service;
(f) The establishment of Foreign Investment Zones; and
(g) The establishment of the Commission on Foreign Direct Investment
Policy.
To enhance both ready access to, and exit from, the market as well as
facilitate its external regulation, the government has fully liberalized mergers
and acquisitions initiated by foreign corporations in regard to their Korean
counterparts. Foreign investors are allowed to purchase 100 per cent of the target
companys outstanding stock without the consent of its board of directors.
Previously, any investor who wished to purchase 25 per cent or more of a
publicly-traded companys shares was obliged to make a tender offer bid for
purchasing more than 50 per cent of the companys shares. This regulation has
since been abolished. In addition, the government recently expanded the opening of its capital
market to attract more foreign capital. The ceilings on aggregate foreign-held
equity ownership and individual foreign ownership were eliminated. All limits
on foreign investment into the government, corporate and special bond markets
have been lifted. Foreign purchases of short-term financial products issued by
corporations and financial institutions have been fully liberalized.
According to the new initiative, foreigners can invest without limit in
various types of bonds available: governmental, government agency and corporate.
Foreigners are also allowed to invest, without limit, not only in corporate-issued,
short-term financing products such as corporate paper, commercial paper and
trade bills, but also CDs, repurchase agreements, notes and cover bills by financial
institutions.

E. Incentives for investment

The government has implemented several programmes that promote
foreign investment in accordance with related laws and guarantees equal treatment
for foreign investors as domestic entities, thus offering investment incentives for
foreign investors that are more advantageous than for Korean enterprises.
50
All investment projects are immediately processed when reported to
foreign exchange banks, without going through any government institutions.
Foreign investment, by means of M&A, is also allowed to enable foreigners to
make direct investments in promising Korean enterprises.
Incentives for foreign investment, as stipulated in the new Foreign
Investment Promotion Act, are summarized below.
Opportunities for tax reduction or exemption have largely been expanded
(table 25). A foreigner investing in tourism businesses (as well as, for example,
advanced technology industries that support the competitiveness of domestic
industry), is eligible for a 100 per cent tax exemption for an initial seven years,
and a 50 per cent reduction thereafter for three more years. The period for tax
benefits begins in the first year that positive earnings are shown, reflecting the
fact that during the initial stages of investment, earnings tend to be negative.
Accordingly, in the case where a foreign invested enterprise (FIE) pays
dividends to its parent company abroad, the withholding tax on the dividends
will be reduced by 100 per cent for the first seven years and 50 per cent for the
following three years. Local taxes, including aggregate land tax, property tax,
acquisition tax and registration tax on properties owned by FIEs for business

purposes will be reduced or waived for 8 to 15 years by 50-100 per cent. In

addition, customs duties, value added tax, and special excise tax on imported
capital goods will be waived for the above businesses.
Foreign investors investing in other businesses are also eligible for the
same tax benefits, once designated as a Foreign Investment Zone, depending on
the investment amount and the job creation effects, such as FDI amounts exceeding
US$ 100 million.
A second feature of the new Foreign Investment Promotion Act is the
inclusion of opportunities for rental fee reduction or exemption. Central and
local government properties are open to foreign investors for rent for up to
50 years, allowing FIEs to use necessary tourist sites for a maximum of 50 years,
free of charge.
Third, subsidies for various purposes, such as employment and job
training, are provided to foreign investors by local government in partnership
with the central government. The Act also requires the central government to
fund local governments in support of their FDI inducement activities, as detailed
at the website http://www.kcci.or.kr/08/dbk1/ifdi.htm.
51
Table 25. Tax incentives for foreign invested enterprises
Type of tax Reduction and exemption
Corporate tax Full exemption for the first seven years
Income tax A reduction of 50 per cent for the next three years
Corporate tax on dividends Full exemption for the first seven years
Income tax on dividends A reduction of 50 per cent for the next three years
Local taxes
Acquisition tax Local tax incentives can be granted from
Property tax 8 to 15 years
Aggregate land tax The minimum required by law is full exemption
Registration tax for the first five years and 50 per cent reduction
for the next three years
Registration tax is newly-included
Customs duty
Special excise tax Full exemption on imported capital goods
Value-added tax for 3 years from the date of notification of FDI
Source: Data supplied by the Korean Tourism Research Institute.

Under the new Act, a tax reduction or exemption checking system has
been introduced. Foreign investors or foreign invested tourism enterprises may
check if their businesses are eligible for tax reduction or exemption incentives
prior to deciding to invest. The government will recognize the check as a binding
agreement with the investor, and no further application for tax reduction/exemption
will be required if the business has not been changed since the check was made.

F. Establishment of Foreign Investment Zones

The government will develop Foreign Investment Zones in which foreign
enterprises will receive a range of subsidies. Prior to the new Act, the government
designated and established the location of industrial parks in special areas. Under
the new Act, to support large-scale FDI projects, Foreign Investment Zones will
be those areas that foreign investors choose in cooperation with a local government,
and approved and designated as such by the Commission on Foreign Direct
Investment Policy.

Several criteria have been set for the designation of Foreign Investment
Zones. The main condition is based on the establishment of new manufacturing
facilities. Additional conditions exist, which must be satisfied by one of following:
(a) An FDI amount exceeding US$ 100 million;
52
(b) Foreign shareholding exceeding 50 per cent and new permanent
employment exceeding 1,000 persons;
(c) An FDI amount exceeding US$ 50 million and new permanent
employment exceeding 500 persons; or
(d) In the case of partially or fully designated existing national or local
industrial parks as Foreign Investment Zones, an FDI amount
exceeding US$ 30 million and new permanent employment
exceeding 300 persons (Lee, S.B. and Lee, H.K., 1998).
The case of the tourism industry, however, is an exception. New facilities
for the following businesses must be established, with an FDI amount exceeding
US$ 30 million:
(a) Tourist hotels;
(b) International conference centres; and
(c) General resort complexes in Cheju province or other designated
areas, with a minimum FDI of not less than US$ 50 million.

IV. OPPORTUNITIES AND CHALLENGES FOR

TOURISM INVESTMENT: INDIA
Kopil Dev Tripathi
Director
Ministry of Tourism
New Delhi
A. Overview of the present situation in tourism development
Tourism is currently one of the major segments of Indian economy. It
is fast emerging as the industry of the twenty-first century, with its substantial
contributions to sustainable human development, including poverty alleviation,
employment generation, environmental regeneration and advancement of women.
Tourism has also become an instrument for the promotion of handicrafts, arts
and the cultural heritage of country.
Direct employment in the tourism sector during 1997-1998 was estimated
to have been about 13.8 million, while total employment including indirect
employment due to tourism amounted to 32.57 million. A large percentage of
that figure was generated in backward and remote areas. The employment
generation capacity of tourism industries per unit of investment is also one of
the highest in the country.
International tourist arrivals during 1999 totaled 2.48 million. Foreign
exchange earnings from tourism during 1999 was estimated to have been $US
2,916.79 million.

Recognizing the importance of tourism as a socio-economic activity and

a major contributor to the national economy, the development of the sector is
being given high priority. The government has formulated a new National Tourism
Policy that emphasizes the roles of the public and private sectors in tourism
development. The policy also recognizes the importance of creating awareness
and the participation of grass-roots level institutions in tourism development.
Keeping in view the required level of sustainability to be achieved in
the development of tourism, particularly in ecologically fragile areas, the
government has also introduced a comprehensive policy and guidelines for the
development of ecotourism in the country.
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The tourism industry at present is handicapped by inadequacies in the
basic infrastructural facilities as well as a lack of adequate incentives for investment
in the sector. These issues are being addressed in a selective manner by taking
up integrated tourism development projects. Tourism is expected to become the
top foreign exchange earner and the most important industry in terms of
employment generation.
B. Review and analysis of the present status of economic
benefits of tourism
Tourism in India has been projected as the biggest industry of the future.
Tourism creates income and employment. It also develops backward regions,
revives traditional handicrafts and art, while contributing to national integration
and international understanding.
Although tourism is very important, national governments by and large
do not include it in economic development planning. It is not even a priority
item in sectoral budget allocations in many countries. In India, in the budgeting
process, tourism earnings are grouped under the heading of invisible.
The impact of tourism is invisible because too many activities form links
in the chain and a system does not exist for properly identifying those links. The
World Travel and Tourism Council (WTTC) has identified more than 30 sectors
as the core of the tourism business. It is of crucial importance, therefore, to
have a common definition for measuring the impact. It should include all the
ripple effects and should provide the means of devising a comparable yardstick.
Tourism Satellite Accounts (TSA) has been used by many countries to
focus on the economic importance of tourism. The 1991 Ottawa Declaration,
followed by the United Nations conference in 1993 on the subject, pointed attention
towards the importance of the issues involved. France began using TSA in 1988,
and Canada, the United States, Singapore, Poland, among others, have made
substantial progress in the meantime. The Organization for Economic Cooperation
and Development (OECD) also developed guidelines for TSAs. The World
Tourism Organization has also supported preliminary activities towards this end
in other countries.
WTTC recently conducted a pilot study in India that foresaw tourism in
providing 6 per cent to GDP in 10 years compared with the current 1.8 per cent.
Since Indias GDP is large, that increase will make a great difference. The World
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Tourism Organization needs to collate these experiences and cull the salient points
in order to formulate a common yardstick for all to follow.
A set of statistics based on international comparability is needed that will
allow a uniform international comparison. A single consistently defined format
needs to be developed.
Credible numbers are required so that a hard economic case can be made
for facilitating political decision-making and providing due place for tourism in

the public policy process. Precise definitions and classifications are necessary
because tourism is multidimensional and covers diverse elements.
Once the conceptual framework has been finalized, implementing it will
require state policy to play a role. All organizational and system changes will
need to be carefully managed.
Most functionaries under a particular system are resistant to changes.
Therefore, motivation will be necessary. To avoid resistance, the new system
will have to be built around the existing one. The World Tourism Organization
Action Plan must give priority to training, the development of uniform manuals
and training guides, and regional and national seminars and workshops. The
public and private sectors must be involved in the process.
C. Review and analysis of the present status of investment
in tourism infrastructure and policy directions
Tourism consists of a range of products and services consumed by visitors.
These are provided by a multitude of establishments and agencies functioning
at various levels. The infrastructure for tourism consists not only of on-site
facilities such as hotels, restaurants, entertainment facilities, etc., but also includes
all forms of transport and communication infrastructure and basic amenities. The
provision of an integrated system of physical infrastructure, including air, rail
and road services, water supply, drainage and solid waste disposal systems is
thus a prerequisite for the development of tourism. All departments and agencies
involved in tourism infrastructure development must, therefore, adopt a joint
approach and establish synergy in such efforts.
The Ministry of Tourism is in the process of formulating a new tourism
policy aimed at achieving necessary linkages and synergies in the policies and
programmes of concerned departments and agencies by establishing effective
110
coordination mechanisms at the central, state and district levels. The focus of
the policy will be to develop tourism as a common endeavour by all the agencies
directly concerned at the central and state levels, for both public and private sector
undertakings. The specific activities envisaged for the various agencies involved
are detailed below.
1. International air-sea capacity
This involves two main objectives:
Assessing air seat capacity and load factors in terms of both sector
and seasonal requirements, and augmenting capacity in the critical
sectors.
Improving accessibility and promoting arrivals at destinations of
interest by opening up airports at important tourist centers for charter
flights.
2. Airports
In the case of airports, two main objectives are envisaged:
Conversion of more and more airports to international status and
standard.
Modernizing and improving arrival and departure lounges at the
countrys international airports.
3. Domestic air services
This aspect involves making better use of domestic air services by:
Improving accessibility to more tourist centers by introducing
services of small aircraft and helicopters.
Converting Guwahati Airport into a regional hub and introducing
services using small aircraft to all the tourist centers in the
north-eastern region of India.

111
4. Rail service
The improvement of the rail service will include:
Developing comprehensive rail circuits connecting important tourist
destinations.
Extending the railway network to connect important tourist centres.
Improving hygiene, the environment and passenger facilities in and
around the railway stations serving important tourist centres.
5. Road network
Three main objectives are envisaged in the effort to better utilize the road
network:
Providing modern wayside amenities on the highways connecting
important tourist centres.
Providing standard signage on roads leading to tourist spots.
Ensuring uninterrupted inter-state movement of tourist coaches and
vehicles through the rationalization of taxes.
6. Maintenance of Heritage Sites and improvement
of tourist facilities
This aspect will include:
Ensuring proper maintenance and professional site management of
important tourist attractions and monuments.
Involving local authorities, trusts, etc., in the restoration and
preservation of tourist attractions and the maintenance of their
surroundings.
7. Product development
Under product development, four main objectives are envisaged:
Giving guidance and financial assistance to State/Union Territory
governments in preparing tourism master plans, identifying tourism
resources, and setting priorities for development activities and
projects.
112
Involving the town and country planning agencies in the integration
of area development plans with tourism development.
Focusing on the development of ecotourism in the north-east and
the Himalayan States as well as various islands.
Developing places of pilgrimage by providing the requisite
infrastructural facilities in order to promote domestic and
international pilgrimage tourism.

D. Incentives for private sector investment

in the tourism industry
As a consequence of economic restructuring and liberalization of policies,
the tourism industry of India has been declared a priority sector for foreign
investment. The horizons for foreign investment in the tourism sector were
widened and it has been eligible for automatic approval of foreign direct investment
up to 51 per cent of the equity since July 1991. Higher foreign equity participation
in specific cases is also allowed on a case-by-case basis. Non-resident India
investment of up to 100 per cent is allowed. Automatic approvals are given for
foreign technology agreements and management contracts within specified
parameters.

Tourism is the second largest net foreign exchange earner by way of

invisible exports. Tourism creates more jobs for every rupee invested than any
other sector. It also creates jobs at the local level, dispensing with the need for
migration to distant areas of the country in order to find a livelihood. In fact,
tourism plays a major role in promoting large-scale employment opportunities.
Keeping in view all these factors, the government has accorded export house
status to the tourism industry. All hotels, travel agents, tour operators and tourist
transport operators are now entitled to recognition as an export house, trading
house, star trading house or super star trading house. Earning foreign exchange
entitles them to certain benefits. This approach will go a long way in assisting
the promotion of, and attracting investment in, tourism.
The aim of the government is to achieve sustained growth of tourist
facilities in the private sector and to ensure high standards of quality are maintained
in the delivery of services. Tourism has therefore been given the status of an
industry and several incentives have been made available, both by the central
and state governments. The incentives provided by the central government include:
An interest subsidy of 3 per cent on loans from financial institutions
is available for hotel projects in the one-star to three-star categories
of hotel projects outside metropolitan cities. A subsidy of 5 per
cent is available for such hotel projects if they are located within
the travel circuits and destinations identified for intensive
development under the National Action Plan for Tourism. Heritage
Hotel projects are eligible for a 5 per cent interest subsidy.
As a fiscal incentive, 50 per cent of the foreign exchange profits
derived by hotels, travel agents and tour operators are exempt from
income tax. The balance in foreign exchange is also exempt provided
it is reinvested in tourism projects.
Hotels located in rural areas, hilly areas and places of pilgrimage
are allowed an income tax exemption of 50 per cent on their profits.
Hotels located in other areas are allowed a 30 per cent exemption.
This privilege is not, however, applicable to hotels located in
metropolitan cities.
Imports of special items for the hotel industry are permitted, subject
to import entitlement. Concessional customs duty rates are charged
for imports of specified goods required in the initial setting up or
substantial expansion of hotels.
An Export Promotion Capital Goods Scheme has been introduced
for the service sector. The scheme includes hotels and restaurants,
travel agents and tour operators. Under the scheme, capital goods
can be imported at a concessional duty rate of 10 per cent, subject
to the fulfillment of an expert obligation over a period of time.
113