South Korea Pressured to Shift from Tax Credits to Direct Chip Subsidies
Industry experts warn the 'K-Chips Act' is insufficient to counter aggressive spending by the U.S. and Japan.
South Korea is intensifying efforts to protect its semiconductor leadership through the 'K-Chips Act,' but industry leaders warn that tax incentives alone are no longer sufficient. As global rivals pivot toward massive direct cash grants, Seoul faces a critical decision: abandon its tradition of fiscal restraint or risk a permanent loss of market share.
Under the K-Chips Act, the government provides tax credits for investments in domestic facilities for semiconductor enterprises and other national strategic technologies. While the act originally offered an 8% tax credit for large corporations, this has since increased to 15%, with small and medium-sized enterprises (SMEs) eligible for up to 25%. Alongside these credits, the government provides loan support and assistance for smaller suppliers of materials, parts, and equipment.
The Global Subsidy War
This policy tension arrives as South Korea's dominance in the memory sector faces a measurable decline. Korea's market share in the memory semiconductor export market fell from 29% in 2018 to 19% in 2022, causing the country to drop to second place behind China.
This erosion occurs against a backdrop of unprecedented state spending in competing nations. Japan has emerged as a particularly aggressive actor; over the last three years, Japan's semiconductor subsidies reached 3.9 trillion yen (approximately $25 billion). This spending represents 0.71% of Japan's GDP, a figure significantly higher than the subsidies provided by Germany (0.41%) and the U.S. (0.21%).
Risks to National Security
The disparity in support models—tax breaks versus direct grants—creates a strategic vulnerability for Korean giants like Samsung and SK hynix. If South Korea cannot match the scale of direct subsidies provided by rivals, it risks losing further dominance in the memory sector, particularly as competitors like Micron expand their production footprints in the U.S.
Because semiconductors serve as a primary export and a pillar of national security, maintaining a robust domestic ecosystem is essential for Korea's economic stability. An Ki-hyeon, executive director of the Korea Semiconductor Industry Association, noted that while the key to competitiveness is excelling in established areas, global competition is intensifying in a way not seen in the past.
The Path to 2030
Industry experts are now urging the government to move beyond fiscal soundness and adopt a more aggressive funding model. Jeong Hyeong-gon, a senior research fellow at KIEP, stated that investment incentives and subsidies must be raised to the world's highest level to remain competitive.
Whether the South Korean government will pivot to direct cash injections remains the primary question for the industry. To maintain a technological lead beyond 2030, the government must balance its commitment to fiscal discipline against a global landscape where semiconductor production is now treated as a matter of state survival.