South Korea bets on state-driven venture capital to stay ahead

Building on its experience with government-led industrial development, South Korea uses direct government funds to nurture venture capital investments, local researchers and stakeholders told Euractiv.

At first sight, private companies reign supreme in South Korea. Fancy brands advertise themselves on enormous, flashy billboards in the streets of Seoul, and visitors cannot turn their heads without seeing a building owned by either Hyundai or another one of the large South Korean corporations known as chaebols.

Even many of the country’s top sports teams are directly owned by the corporations. For example, consumer electronics producer LG won the Korean baseball championships just last week.

But the prevalence of private corporations in Korean public life belies the active role of the state in Korea’s economic and industrial development.

State-driven industrial development

Since the 1960s, when the Korean government started developing the industry through five-year plans, many of which were developed during the 24-year-long military dictatorship, the state pushed economic development forward.

“The government funded all the chaebol companies,” Eric Kim, associate professor at Keio Business School and founder and CEO of a data management company, told Euractiv.

Yong Jun Baek, a researcher at the Korean National Institute of Green Technology, summarised the situation for journalists this past week in Seoul: “Korean development is very, very state-driven,”

“It was for the government to set the milestones, set the strategies and support the companies to follow that strategy,” he said. “That’s how our country developed, and I guess the historical path is just continuing.”

According to Eric Kim, the reasons for this strong government involvement lie in history.

“There was a need for the government to support the industry and drive economic growth primarily because we had to develop our country, but of course, the competition between South and North helped,” he said.

“There was a need for proving that we’re a better system.”

State-driven venture capital

Now, this state-driven model is also used in the country’s fostering of young, innovative firms. Kim says venture capital (VC) is “really big” in Korea, with high valuations and large VC funds.

“But the fundamental growth engine of the VC and startup scene of Korea was a government-backed fund,” he said.

For example, the Korean government established the Korea Venture Investment Corporation (KVIC). The KVIC manages two major funds: a fund of funds equipped with several billion USD worth of public money to invest into VC funds and a government matching fund, allowing KVIC to invest directly into startups that government-approved VC funds have invested in, thus increasing the overall investment into the startup.

“Personally, I think the role of the government is to fund the market if it does not exist yet,” Kim told Euractiv, recalling that the large industrial conglomerates of Korea were initially financed through generous government loans.

“The government has a key role in establishing the market. Once the market is established, the private sector can run in,” he said.

Success and challenges

Historically, the strategy seems to have brought the country quite far. South Korea is proud of its development from a war-torn and hunger-ridden country to the 13th-largest economy in the world, and it wants people to know about its success.

For example, South Korea wants to host the 2030 Expo in Busan with a large focus on technological innovation, and it invites international media (like, in this case, Euractiv) to prove itself worthy of showing off on the international stage.

But there are clouds over the South Korean development model. Relying on the US for its security and on China for its prosperity, the country is at risk of being one of the great losers of a superpower conflict between the two.

Moreover, until recently, its development model was based on ‘catching up’ with other more industrialised nations.

Can a “fast follower” become a leader?

“We use a ‘fast follower’ model,” Kim told Euractiv. “For example, US companies or Japanese companies build the technological standards, but our competency was to catch up really, really fast. That’s a very unique capability.”

But as the Korean industry edges ever closer towards technological leadership in some areas, such as semiconductors, a “fast follower” model might not be enough anymore. This makes its focus on home-grown innovative companies all the more important.

According to Kim, Korea follows a strategy of “select and concentrate” to focus on some industries it deems important for the future. At the same time, it is not afraid of making investments with a high likelihood of going bust.

While state aid rules and cumbersome red tape in Europe make it difficult for startups to access government funding, Korea seems less risk-averse.

“I think Korea is more relaxed in that domain,” Kim told Euractiv, saying that Korea only expected very few of its investments to be very successful.

If South Korea places 999 unsuccessful bets, but one of the investments helps create a new technological powerhouse like Samsung, the public money was probably well-spent.

[Edited by Alice Taylor]

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