UPDATE 1-S.Korea eyes $3.9 bln fund for corp investment

SEOUL, July 2 - South Korea on Thursday said it would help launch a 5 trillion won ($3.93 billion) fund aimed at providing financial support for investments by companies as part of plans to encourage expanded corporate spending.

"If investments remain sluggish in the longer term, there could be an impact on growth potential in the medium to long term ... Investment expansion is the most efficient way to create jobs, improve living standards and build a sustainable economic growth structure," the finance ministry said in a statement.

The Ministry of Strategy and Finance said the government and two state-run banks would contribute 2 trillion won to the proposed fund, while seeking investment from the state-run pension agency and other institutional investors.

The fund would invest in companies by buying shares or bonds to help finance their investment plans, while the two government-run banks -- Korea Development Bank and Industrial Bank of Korea -- would lend an additional 5 trillion won to companies receiving investment from the fund, it said.

The ministry said in a statement that it aimed to eventually double the scheme to 20 trillion won, including loans, but did not provide a time period for the plan.

The announcement came a day after President Lee Myung-bak called for aggressive and pre-emptive capital investment in the corporate sector.

Capital investment by South Korean companies is expected to fall by 18 percent to 75.6 trillion won this year from 92.2 trillion won in 2008, the Bank of Korea said, as the global economy had yet to show clear signs of recovery.

That compared with earlier data showing foreign direct investment plans for the second quarter jumped 62 percent from a year earlier, the fastest rate in more than a year as investors displayed more confidence in an economic turnaround. [ID:nSEO210467]

With business confidence strong for the coming months, the latest data on Tuesday showed that the nation's capital investment index rose a seasonally adjusted 16.7 percent in May from April, marking the fastest gain in nearly 13 years.

It is critical for economic recovery for the corporate sector to expand investments as the effect of fiscal policy on the country's economy is expected to be weaker after the government front-loaded 60 percent of this year's budget during the first half, the economy ministry said.

The government will support companies that plan pre-emptive investments to meet higher demand when the global economy recovers, research and development of new technologies for improved competitiveness, and new growth sectors.

The government also plans to increase tax deduction rates on R&D costs to 20 percent from 3-6 percent, and to expand fiscal investment in R&D to an annual average 10.5 percent in the next five years.

It plans to ease regulations on corporate fundraising, including the removal of a ceiling on the size of corporate bond issuance. Currently, a company is allowed to sell corporate bonds worth up to four times its net assets in South Korea.

Meanwhile, business sentiment among the country's retailers for the third quarter hit a six-quarter high as recent data showed an improvement in the economy, a private survey showed. [ID:nSEO357123] ($1=1271.9 Won)