S. Korea bets on semiconductors, AI to hit 3% growth potential — sovereign wealth fund to expand, regional incentives introduced

The government is pushing to achieve a 3% potential growth rate, led by three "mega projects" centered on semiconductors and AI, alongside ultra-innovation economy initiatives in areas such as sensors and actuators.

The plan calls for building a southwestern semiconductor cluster requiring 800 trillion won ($532 billion) in investment and a 550 trillion won AI data center network, while expanding the Korea Investment Corporation into a comprehensive sovereign wealth fund to lay the groundwork for long-term investment in future growth industries. The government also intends to cultivate regional economies as new growth engines — and encourage companies and talent to relocate outside the capital — through a "5-pole, 3-special" regional growth strategy, a three-part preferential tax package for regional areas and the introduction of a regional preference index.

Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol presented the "Second-Half 2026 Economic Growth Strategy" to the Cabinet on Tuesday, identifying "nurturing globally dominant growth engines" and "strengthening region-led growth" as the two pillars of the push toward a 3% potential growth rate.

The strategy aims to sharpen the country's industrial competitiveness in semiconductors and AI while spreading growth momentum nationwide by developing regional areas into new economic hubs.

At the core are three mega projects focused on semiconductors, AI data centers and physical AI. The government plans to complete the Yongin-Pyeongtaek semiconductor cluster ahead of schedule, doubling Greater Seoul's memory chip production capacity within five years, while pouring 800 trillion won into the southwestern region to build a second major semiconductor production base.

The Chungcheong region is to be developed into a 156 trillion won HBM advanced packaging hub, while the Yeongnam region will focus on power semiconductors and materials and components. The government will also pursue AI semiconductor R&D, train 100,000 semiconductor specialists, establish a special account to strengthen semiconductor industry competitiveness, expand policy financing, designate power semiconductors as a national strategic technology and provide full-cycle support for next-generation power semiconductors.

For defense semiconductors, which remain heavily dependent on foreign supply, the government plans to establish an industry ecosystem strategy in the third quarter, building a full-cycle support framework spanning technology development, demonstration and mass production.

In AI, the government will invest 550 trillion won to build an AI data center network with a combined capacity of 8.4 gigawatts, with construction set to begin in the first half of 2028 and phased operations starting in 2029. The plan includes securing 50,000 GPU units and expanding AI infrastructure around a national AI computing center and the sixth national supercomputer, while attracting a multilateral development bank AI cooperation center and building a national data platform to establish South Korea as a global AI hub.

In physical AI, the government will focus on seven leading sectors — factories, robots, automobiles, ships, home appliances, drones and semiconductors — and pursue large-scale demonstration projects in manufacturing, logistics, care services and agriculture. The goal is to commercialize industry-specific AI robots by 2028 and break into the top three globally in AI robotics, while accelerating AI adoption across industry and public administration through homegrown AI model development, a public-sector AI transformation fast track and AI livelihood projects.

Ultra-innovation economy initiatives covering sensors, actuators and secondary batteries for humanoid robots will also move into full swing. The government will develop an AI drug development roadmap and a biotech-specialized AI model to support a push into the global top five in biotechnology, and in the defense industry will establish a Korean equivalent of In-Q-Tel and expand rapid pilot programs to pursue a top-four ranking in global defense exports.

The R&D and investment framework will also be overhauled. The government plans to build an "R&D commercialization highway" linking basic research through to commercialization, financing and public procurement, while expanding challenge-oriented R&D in strategic technology sectors.

To channel large-scale, long-term capital into advanced technology, the government will create a strategic investment account within the Korea Investment Corporation and restructure it into a comprehensive sovereign wealth fund. Funding will come from government contributions, donations and investment returns, with proceeds used only for reinvestment, dividends and transfers to the national treasury. Investment targets will include the three mega projects and other strategic industries, as well as foundational sectors such as finance and infrastructure, overseas supply chains and other industries tied to national competitiveness and economic security — with co-investment alongside foreign sovereign wealth funds also to be expanded. The existing foreign reserve management account and the new strategic investment account will be kept strictly separate.

The government will also raise an additional 600 billion won for the public-participation National Growth Fund in the third quarter, supplying more than 15 trillion won in the second half of the year. An ultra-innovation economy fund will be created within the fund's indirect investment arm to channel public and private capital quickly into ultra-innovative companies, and a financial support framework will be established to share the risks of commercializing advanced technologies.

The region-led growth strategy will also shift into high gear. The government will develop strategic industries in each region under the "5-pole, 3-special" framework and activate a "3-axis, 7-package" system linking fiscal, financial, tax, regulatory, technology, talent and infrastructure support.

At least 40 percent of National Growth Fund investment will be allocated to regional areas, and a 2 trillion won regional growth fund will be established to supply venture capital to innovative local companies and new industries. Mega special zones and wide-area linked regulatory-free special zones will be created, and the regional startup ecosystem will be expanded around four designated startup cities and startup parks.

A three-part preferential regional tax package will also be introduced. The government is reviewing a full overhaul of tax incentives for productive corporate investment, applying a regional multiplier to the base investment tax credit rate. Income tax relief for employees at small and medium-sized enterprises in regional areas will be expanded, and relocation support payments made by companies moving outside the greater Seoul area to their workers will be exempt from tax up to 500,000 won per month.

Tax support for small and medium-sized enterprise startups will also be restructured to favor regional areas, and the government will draw up detailed implementation plans for a national procurement system that includes preferential price evaluations for companies in population-declining areas and measures to promote purchases of products from regional small and medium-sized enterprises. The number of preferential regional programs will be significantly expanded from seven this year, and a regional preference index will be developed to help ministries identify new programs — building an integrated regional preference framework linking tax, fiscal and public procurement policy.

In addition, the government will expand mixed-use redevelopment of public agency buildings using procurement funds to bolster regional construction activity, and will draw up a second round of public institution relocation plans in the second half of this year, with leading institutions set to begin moving next year. The government is also reviewing a scheme to convert credit card points into local currency to stimulate community spending, while promoting a "tourism saemaul movement" in which residents directly develop and operate local tourism content to strengthen regional tourism competitiveness.