Basic Report

This study attempts to find the relationship between local government’s behavior to attract corporate investment and the result, local finance. After restarting local self-government in 1995, all local governments in Korea have taken active interest in increasing local financial resource. They wanted to make virtuous circulation structure which starts from attracting investment of private corporations, and then continues to channel the profits made from the investment to increase local tax revenue, and then allows local governments to make more incentives to attract investment of private corporations with the increased local tax revenue. However from the central government’s point of view, these trials among local governments would be ended with the zero-sum game. If “A” local government can win the investment from “B” corporate, “C” local government and “D” local government which are located near to “A” will lose the possibility of getting investment from the “B” corporate. Therefore, the competition to win the investment from the “B” corporate among the “A”, “C”, and “D” local governments could be harmful for local finance. This study tested it with empirical economic modeling. The other problem is “outflow” of local benefit. Although “A” local government wins the investment from “B” corporate, if the employees of “B” corporate in “A” local government use their salary in “C” local government, the endeavor of the “A” local government to increase local financial resource or to develop local economy through corporate investment is useless.According to the statistical result of this study, the endeavor to attract corporate investment in local government could not increase local tax revenue enough. Moreover, the endeavor to attract corporate investment in local government could not develop local economy enough either. From this results, it would have been better for local government in Korea to rearrange or change their strategy for attracting corporate investment. Some suggestions from the finding of this study are as follows. For the central government, changing local tax system is needed to connect local government’s endeavor and local finance. Also for the local government, building cultural facilities is needed to decrease “outflow” effect.