Chapter 3 Korea
“Open innovation projects serve as activities of conglomerates to induce new ideas and then bring in talent and tech,” our interviewee at the Seoul Metropolitan Government explained when speaking about the embrace of open innovation in Korea. He added that “open innovation has been a slogan for us,” but over time, there has been increasing awareness that “startups want to work with large firms, too” (authors’ interview, Seoul, August 23, 2022). This vignette hints at the Mark II logic underpinning Korea’s version of startup capitalism. In Korea, large firms remain central actors, but now startups are construed as important resources for the oligopoly-run open innovation logics. The chaebol envisage startups as a means of enhancing their own innovation capacity.1
Congruent with this logic, there has been a visible increase in startup promotion. In 2017, Korea became the first country in the world to establish a ministry for SMEs and startups, and like Japan, it has launched high-profile initiatives that strive to create unicorn cohorts. As this chapter shows, Korea’s startup capitalism is consistent with its chaebol-led system. The chaebol act as corporate venture capitalists, and initiatives count chaebol licensing agreements and joint ventures as key performance indicators.
Korea is an interesting case because its antecedents are depicted as quintessential examples of a developmental state, which augurs for its starting point as one consistent with conventional Mark II logics. This is because the Korean developmental state depiction, like Japan’s, centers on the role of its large firms—the chaebol—which were essential employers, innovators, and contributors to economic growth and stability (Amsden 1989).2 As was done in Japan, the Korean developmental state rewarded its large incumbent firms with preferential access to credit and, in return, provided stable employment and technological upgrading. Closely aligned with Mark II, the chaebol had market knowledge and in-house R&D capacity (Kalinowski 2008).
The Korea chapter offers a nuanced insight into how startup capitalism can align with, rather than challenge, Mark II settings. In this sense, the antecedents of the Korean developmental state offer the opportunity to explore the extent to which startups have been positioned since the late 1990s as resources for incumbent firms. As an indication of the salience of this analysis, a policy maker at the Seoul Metropolitan Government shared with us that he worries that “every service is under chaebol control” and that perhaps startups should compete more with the long-established chaebol, like Lotte and Samsung, as well as new big firms such as Kakao and Naver (authors’ interview, online, August 30, 2022). For now, the trajectory of Korea’s startup capitalism mirrors that of an open innovation variety of Mark II as observed in the Japanese case.
Antecedents: Korea (1961–1997)
The depiction of the Korean developmental state centers on the chaebol as essential actors. From Park Chung-hee taking power in 1961 until the EAFC of 1997, its economic growth model had four main pillars: catch-up innovation; large, vertically, and/or horizontally integrated conglomerates; access to bank-based, long-term capital; and permanent employment (Amsden 1989). Korea followed an export-led growth model with ever-expanding chaebol favored by the government at the center (Cha and Pacheco Pardo 2023). Finance came from the mobilization of domestic and foreign savings disbursed to the export-oriented conglomerates through state-owned banks (Kim 1988). The literature depicts the Korean state and chaebol as having a largely symbiotic relationship (Woo-Cumings 1999). Taking a page out of Japan’s playbook, the government encouraged savings that could be recycled to provide credit to the private sector, provided subsidies to companies operating in specific industries, enacted protectionist measures to weaken foreign competitors, and allowed chaebol to engage in oligopolistic behavior (Kim 1997).
For the most part, big conglomerates were the drivers behind Korea’s growth and innovation as well as job creation and social stability. The chaebol’s horizontal integration had the advantages of allowing diversification thanks to brand recognition, creating economies of scale and synergies across conglomerate units, facilitating long-term investment strategies, and reducing transaction costs (Jwa 2002). The chaebol also had relational power, meaning their size and centrality to the economy gave them access to the government, with all the benefits that come with it. Most notably, the Economic Planning Board (EPB) and other government agencies consulted industrial policy with the chaebol. The state prioritized the provision of financing to the chaebol that had a better chance at manufacturing the goods for export on which the economy relied. Furthermore, the chaebol provided high-quality, permanent employment that drove the improvement in the lives of Korean society while, crucially, during the years of dictatorship, dampening pressures stemming from job-related social unrest.
Long-term employment has been a key goal of the state dating back to the early post–Korean War years. Absent a strong welfare state, long-term employment and the associated corporate welfare were the preferred means for the government to promote social welfare indirectly. Both the chaebol and smaller firms offered corporate welfare packages, the former more generously (Fleckenstein and Lee 2017). These benefits were tied to seniority, as was pay; crucially, pensions were, too. Therefore, workers had an incentive to remain in their company throughout their career. In exchange for long-term employment, labor was expected to moderate its wage demands, refrain from challenging management decisions, and avoid industrial action (Kong 2013). Big conglomerates provided jobs and enterprise welfare, including pensions. In this context, entrepreneurship had limited appeal to the most qualified workers, especially top university graduates. The graduates from Korea’s three top-ranked universities—Seoul National University, Korea University, and Yonsei University, collectively referred to as SKY—pursued well-renumerated roles at the chaebol. They were attracted to the job stability, higher pay, and welfare benefits of employment—and the social status that came with those roles (Heo and Roehrig 2014).
The state dominated the provision of financing, emphasizing the distribution of credit rather than equity investments during the Park and Chun eras. Commercial banks recycled savers’ deposits to lend to corporations and invest in the economy. The government also monopolized foreign borrowing. Furthermore, the Korea Development Bank, set up in 1954, and the Export-Import Bank of Korea, established in 1976, became key providers of export financing and industry and infrastructure funding, respectively. The chaebol therefore became dependent on the state to finance their economic activities (Lee 2006). The bank-based financing model enabled the chaebol to access patient capital and, as a result, gave them the capacity for long-term planning in incremental innovation. Crucially, patient capital could be deployed by the government to foster the development of industries such as petrochemicals, shipbuilding, and steel in the 1970s, electronics and automobiles in the 1980s, and semiconductors from the mid-1980s (Yeung 2016). The chaebol often had no choice but to specialize in one or more of these and other industries according to governmental dictum (Woo 1991). In line with the state’s central role in finance provision in this era, the government even offered direct and indirect subsidies to VC firms.3
From the beginning of the developmental state period, General Park had ambitions for Korea to eventually compete at the frontier of innovation. He was aware of the need to slowly move up the value-added chain until firms were ready to develop innovative products. Thus, throughout the 1960s and 1970s, his policies focused on catch-up growth with an eye toward making firms more innovative. The government set up the Korea Institute of Science and Technology (KIST) in 1966, a Ministry of Science and Technology (MoST) in 1969, and the Korea Advanced Institute of Science (KAIS) in 1971, today known as the Korea Advanced Institute of Science and Technology (KAIST) (Kim and Leslie 1998). This made Korea one of the few developing countries with a technology-focused ministry and university. Innovation at the technological frontier was limited throughout the 1960s and 1970s; the MoST was relatively weak, and technological developments were largely the result of imports (Hahm and Plein 1995, 20). For the most part, the economy was competing on good-quality manufacturing at lower costs (Wade 1990). The government and the chaebol only started to compete at the technological frontier by the 1990s. This helps to explain why R&D as a percentage of GDP remained below 1 percent until the mid-1980s but shot up to almost 2.5 percent by the mid-1990s, one of the highest figures worldwide (OECD 2020). Chun Doo-hwan’s government (1980–1988) and the democratically elected governments of Roh Tae-woo (1988–1993) and Kim Young-sam (1993–1998) sought to promote capabilities at the technological frontier.
Korea’s economic policy making during the classic developmental state epoch entailed a combination of external and domestically oriented social purposes. Domestically, the government offered guidance, finance capital, and a protectionist environment; in exchange, the chaebol provided permanent employment, and labor remained disciplined and accepted low wages in exchange for employment (Hwang 1996; Hundt 2008). High job growth came with low levels of inequality, which was another key domestic driver of industrial policy. The advent of democratization in 1988 brought a more organized labor force seeking a larger share of the Korean economic pie (Kong 2013; Lie 1998). The system did not change dramatically in terms of the purpose, but state-chaebol links weakened, and SMEs and labor started to demand change.
No explanation of the social purpose underpinning Korea’s pursuit of catch-up economic growth and innovation policy would be complete without looking at the country’s external environment. In particular, the geostrategic alliance with the United States and the very direct threat from North Korea allowed the government to pursue its preferred economic policy (Heo and Roehrig 2014). It also served the government to discipline labor (Brazinsky 2007). In addition, Korea’s normalization of relations with Japan in 1965 and the war reparations and investment by Japanese firms that followed also provided capital and technology transfers (Woo 1991). Economic growth and the advance of technological capabilities contributed to Korea’s international stature and helped to address the North Korea threat.
Thematic Analysis
Firm Size
The EAFC served as a catalyst for the government to increase its backing for new entrants. To begin with, it resulted in some discrediting of the chaebol. This extended to their ability to innovate. There was a line of thought that posited that the chaebol were good at catch-up development, which had allowed them to thrive during the postwar years, but were unsuited for helping Korea compete at the cutting edge of innovation (Choung et al. 2014). As a result, on the eve of the EAFC, there was pressure for chaebol reform (Graham 2003). The chaebol were considered to be “at a crossroads,” as they needed “to change the way they do business or risk extinction” (Beck 1998, 1018). The Kim government also sought to distance itself from “corrupt” chaebol, at least initially. During these years, the Kim administration came to power in the middle of the dot-com bubble. Daum, today Korea’s second-largest search engine, had been launched in May 1997; Naver, Korea’s first portal with its own search engine and today the country’s leading internet firm, followed in June 1999. In other words, by the time the Kim government started to encourage startups in earnest and published Vision 2025 in September 1999, there were already examples of startups innovating in the new digital economy.
In this context, the Korean state established a policy of developing an entrepreneurial ecosystem embedded alongside the chaebol. Roh’s Innovate Korea approach and the national innovation system concepts were designed to promote the creation of a chaebol-startup symbiotic setting (Seong and Song 2008, 33). The 2005 Act on the Promotion of Collaborative Cooperation between Large Enterprises and Small-Medium Enterprises symbolized this new approach. The Roh government sought to facilitate the integration of startups into the chaebol production and sales channels, which would inject the chaebol with renewed innovation capacity. This could be done by incorporating startups as suppliers or through acquisition, providing the chaebol with the startups’ talent and technology. Without directly funding the chaebol, which would have attracted criticism, the government could ensure that large conglomerates continued to be competitive through cooperation with more innovative startups.
Like his predecessors, Myung-bak Lee assisted the chaebol. The chaebol could benefit from the work of startups and develop their own programs to nurture innovation by nonemployees. For example, SK Telecom, the largest mobile service carrier, launched programs to train IT experts and mobile app developers (SK Telecom 2011). And Samsung launched an in-house idea and startup incubator, C-Lab (Creative Lab), in 2012 (Samsung 2018). But these were not government-led or even underwritten programs. Rather, it was the chaebol seeking to promote innovation to increase their product range and talent pool.
Following from the approach pioneered in the aftermath of the EAFC, the state refrained from providing direct largesse to the chaebol. The distribution of government money to the chaebol was a nonstarter, considering the public’s opposition to state-chaebol ties. This was the result of a string of scandals affecting the conglomerates, their leaders, and their family members. A consistent majority of Koreans came to see the chaebol as part of an elite group creating more inequality (whether perceived or real) and playing by a different set of rules. In this context, it would have been difficult for any Korean president to provide direct help to the chaebol.
Embracing the aims of engaging startups but avoiding publicly supporting the chaebol, the Park and Moon governments deployed efforts to develop startups as essential resources in chaebol-startup innovation systems.4 They even did so using the language of open innovation that had been coined by Henry Chesbrough in 2003. Most notably, starting in 2014, the Park government launched nineteen CCEIs across the country’s different provinces and main cities. Each had a specific sectoral focus related to the province or city and the partner chaebol; for example, automobiles in Gwangju Province (Hyundai), games and fintech in Gyeonggi Province (KT), and aviation and logistics in the city of Incheon (Hanjin) (CCEI 2019). At the CCEIs, startups receive direct assistance from the government, but the chaebol are essential to developing an entrepreneurial ecosystem around their industrial focus (authors’ interview, Seoul, June 2017). As the quote that we opened the book with suggests, the aim of the CCEIs is not only to advance the capabilities of the startups that are receiving the mentorship and subsidized office space but also to help inject innovative DNA into the chaebol.
Another example of startup initiatives that embed the chaebol is the K-Startup Grand Challenge, which was launched in 2016 to bring foreign entrepreneurs to Korea. The K-Startup Grand Challenge offers foreign entrepreneurs funding, office space, and an accelerator program: 5,725 teams applied between 2016 and 2018, with 85 of them receiving the full set of services offered by the program (K-Startup 2018). An indication of its orientation toward involving and benefiting large incumbents, rather than purely focusing on startup capacity, is one of the program’s objectives. The aim was for participating startups to secure licensing agreements or partnerships with a chaebol (authors’ interview, Seoul, June 2017). So, K-Startup success was at least partially predicated on startups securing agreements with the chaebol.
In a similar vein, the MSS set up an SME Policy Deliberation Committee involving government officials, startups, and the chaebol (MSS 2019b). Chaebol were therefore directly involved in the design of startup initiatives. The incumbent aims are also reflected in the performance metrics of government divisions. For the Seoul Metropolitan Government’s startup promotion division, for instance, key performance indicators include “joint ventures” between startups and large firms (authors’ interview, Seoul, August 23, 2022).
Both the Park and Moon governments spoke of startup policies as aiming to deliver mutual benefit for the chaebol and startups. Therefore, startup efforts have the underlying goal of bolstering the innovation capacity of the chaebol. Otherwise, they could suffer the fate of big firms elsewhere that declined due to an inability to innovate and become stuck with outdated products. As the Seoul CCEI manager put it, “The government wants the conglomerates to gain innovative DNA by working with startups and the young generation. In the relationship, the chaebol get startups’ DNA. Government wanted to involve the chaebol as they are dinosaurs. . . . It’s a win-win for the chaebol and startups” (authors’ interview, Seoul, June 20, 2017). Both the Park and Moon governments made a concerted effort to connect the chaebol and startups (Hsieh 2018). The logic was that the former could provide mentoring, funding, or even an exit strategy to the latter. Thus, the Park government launched nineteen CCEIs across the country to aid startups, with one of the chaebol serving as a corporate partner in each of them (CCEI 2019). Furthermore, the government involved the chaebol in the design of startup initiatives and the entrepreneurial ecosystem to facilitate the successful integration of startups into the Korean economy. And when Moon came to power, he included mutually beneficial cooperation in his five-year plan. The government was openly indicating that it wanted startups to work together with the chaebol.
The nature of the chaebol-startup relationship is not necessarily symbiotic. For instance, Park Jae-hyun, the CEO of Ant Institute in Seoul, noted that “because start-ups with a good item in the market have no choice but to accept big investments from major corporations, bigger companies take what they need from start-ups” and sell them (Lee 2019). Technologies and their emerging markets are said to be advanced by startups who are then gobbled up prematurely by the chaebol. Despite concerns about early acquisitions by Korea’s dominant firms, startup policies continue to involve the chaebol in planning committees and implementation partners. For instance, in July 2023, the government announced that the Ministry of Trade, Industry, and Energy was leading “a corporate venture capital alliance consisting of 42 corporate venture investors including Posco Capital, CJ Investment, GS Ventures and Hyundai Venture Investment” that would “band together to create an 8 trillion won ($6.2 billion) venture fund for local startups by 2025” (Shin 2023).
Employment
“In Korea, to be an entrepreneur, you have to kill two women: your mother and future wife”—your mother by virtue of the shame you will bring the family by becoming an entrepreneur, and your future wife because of the lost income and shame your high-risk career threatens (authors’ interview, Seoul, June 24, 2017). This was our interviewee’s retort to questions about the aim of startup policies vis-à-vis shifting employment norms. Others made similar points. For instance, instead of entrepreneurial experience, the “aim is to work for Samsung, banks, or to get a government job” (authors’ interview, Seoul, August 23, 2022). David Lee (2019) similarly quipped that “becoming a civil servant—such as a police officer or a town hall employee—is one of the most coveted jobs” in South Korea because, in addition to the honor, it “ensures a steady payroll, pension and social recognition.” He noted that startups, “with their built-in risk and uncertain future,” are the complete opposites. Policy makers work to overcome the entrenched expectations that the pursuit of an entrepreneurial career would cause such destruction socially and fatally harm one’s family.
The labor market became more flexible as a result of the EAFC, which caused a spike in unemployment in Korea. Higher youth unemployment hovered around 10 percent throughout the early 2000s. Some chaebol had gone bankrupt. Those remaining sought to mitigate job losses among their existing workers by limiting firings and relying on natural attrition to reduce their headcounts (Lee 2006). At the same time, China’s entry into the World Trade Organization (WTO) in 2001 resulted in the outsourcing of parts of the production process by Korean manufacturing firms, including the chaebol, to their lower-cost neighbor (Chang 2003, 261). The chaebol, therefore, could not sufficiently provide jobs for young Koreans joining the workforce.
In this context, the encouragement of more flexible employment, including as entrepreneurs and by joining startups, became a job creation tool. The decrease in the chaebol employment opportunities, the increase in governmental support for startups, and the availability of nonpermanent job contracts helped facilitate an increase in the number of high-tech startups. According to our interviews with entrepreneurship center managers and a Seoul government official responsible for startup policy, younger Koreans who in the past might have joined one of the chaebol or remained there throughout their career decided to launch their own firm instead (authors’ interviews, Seoul, August 30, 2016 and August 23, 2017). A case in point is Lee Hae-jin, who left his job at Samsung in 1999 to launch Naver. This sort of career move became more common throughout the 2000s.
To make employment more fluid, the government introduced pension portability in December 2005 with the Individual Retirement Account (Korean Law Information Center 2008). This allowed employees to take (a portion of) their pensions to another firm and, if launching their own startups, to their newly established company. Together with defined contribution and defined benefits pension accounts, this became one of the three types of private pension funds available to workers (Ministry of Labor and Employment 2013). Importantly, the introduction of individual retirement accounts also allowed entrepreneurs to return to work for a chaebol or another private-sector firm if their startup failed without losing all the pension benefits accrued prior to launching the company.
Job creation was a top priority of the Lee government, particularly as the GFC threatened to result in huge layoffs, as had been the case during the EAFC. To begin with, KVIC and the Korea Finance Corporation launched a KRW120 billion Job Creation Fund in 2010, with a second KRW107 billion fund the next year. The specific goal of these funds was to invest in VC firms backing startups with high job-creation potential. The Korean state was therefore providing direct largesse to startups holding the promise to create jobs, including in so-called Next Generation Growth Engine industries (KVIC 2024f). By making explicit the goal of job creation, the government was also sending the message that funding would be forthcoming to firms helping to reduce youth unemployment.
In addition, and directly related to job creation for younger Koreans, the Young Entrepreneurs Startup Academy was set up in 2011 (KOSME 2017). This agency was launched not only to provide funds to would-be young entrepreneurs—meaning those under thirty-nine years old—but also to offer office space, training, and mentoring. The largest barrier to prospective entrepreneurs is a lack of managerial, legal, and other skills necessary for people who essentially become CEOs and, oftentimes, CFOs once they launch their business (Schoof 2006). The academy was designed to address this issue.
More fluid labor markets were also fostered in 2011, as the Act on the Fostering of Self-Employed Creative Enterprises was passed. Self-employed individuals or business entities comprising fewer than five nonregular workers were allowed to continue to operate self-employed firms for three years after they had expanded beyond five workers. This gave them tax and other advantages, thus reducing labor costs. Furthermore, these firms received assistance from the government, including, potentially, funding. The act addressed the concern that the creative industries, a potential source of new jobs, were hindered by employment costs being higher than they could absorb.
The Park and Moon governments saw startups as job creation tools. As an interviewee at the Seoul CCEI put it: “It’s all about job creation. Startups are about jobs, not exits or changing the world like in Silicon Valley” (authors’ interview Seoul, June 20, 2017). As the MSS pointed out, one of the key metrics to determine the success of its fund-of-fund program was the number of jobs it had created (MSS 2019a). To this end, both governments actively pursued startup job creation programs. They continued Lee’s Young Entrepreneurs Startup Academy, rebranded as the Youth Startup Academy, to ensure that poor managerial skills did not prevent the continuing operation of successful startups (KOSME 2018). The theme of good jobs was important for the Moon government, which stressed the need for startups to create high-quality jobs.
Focusing on the education system, initiatives strove to increase the entrepreneurial talent available within the Korean ecosystem. The Park government continued the BK21 program first established by Kim. Rebranded as BrainKorea21Plus, this education program again provided financing for universities and students, with a focus on funding for students and infrastructure. The Moon government continued the program (National Research Foundation of Korea 2017). This orientation toward upskilling entrepreneurial talent also manifested at the regional government level. Notably, in April 2019, the Seoul Metropolitan Government announced its Global TOP 5 Start-up City Seoul initiative, which included its aim of nurturing “10,000 innovative talents who lead the technology startup” as well as increasing the stock of startup office space and enabling infrastructure (Seoul Metropolitan Government 2019).
The Park and Moon governments have also worked to attract foreign talent, underpinned by the belief that highly skilled foreigners could be attracted to Korea. Seoul launched an entrepreneur visa for foreigners willing to launch a startup in Korea. These policies continued under the Yoon government, with his team vowing to encourage startups in an effort to create jobs (Choi 2022) and the president drawing a direct link between startups and job creation in his 2023 New Year address.5
While more flexible labor markets could indicate a shift toward Mark I, we note that attention has been given to how Korea’s more creative, risk-taking labor can serve the chaebol. For instance, an interviewee remarked that “the chaebol now hire experienced employees rather than rookies or fresh [straight out of university] graduates. As a result, graduates do startups as a means of getting experience” (authors’ interview, Seoul, August 23, 2022). While this sparks new questions about the intensity or value of the startup activities that young Koreans engage in, it suggests some reduction in the linear career path in which graduates of top universities join chaebol straight out of their degree program. The chaebol have come to value the experience that their employees gained at startups.
Finance
The EAFC served as a critical juncture to the financing of innovation in the economy. Korea’s domestic banking sector suffered heavily from the EAFC and was in a very different shape once the effects of the crisis were over (Jeon and Miller 2005, 149). In this context, policy makers moved in two directions. To begin with, the state sought to further develop domestic capital markets, including VC markets. The government launched its own VC funds and created a program to provide matching funds for VC LPs. Particularly significant was the launch of KVIC by the Roh government in 2005. KVIC underwrites the VC market through the thirty-year Korea Fund of Funds (FoF), an investment vehicle in private VC funds. The FoF was not directly picking winning firms (or sectors). Instead, it was investing in private VC firms that then made their own investments into high-growth startups (Thurbon 2016). KVIC fostered private investment by promoting participation by institutional investors and pension funds while working to boost the number of angel investors (KVIC 2024d).
The Korean government used financing to address one of the perceived weaknesses of startups: their failure to commercialize innovative products. The Ministry of Information and Communication established business incubators, called iParks, in eight locations across the world, including Silicon Valley and other innovation centers. These incubators provided startups with free office space and mentoring and enabled the establishment of partnerships with local commercial entities (Thurbon and Weiss 2006). In a similar vein, the Kim government launched Korea BioValley in San Diego, California, in 2002. The focus was on biotech innovation, with the government building the infrastructure and providing below market rate or free leases to companies in this sector (Niiler 2002).
In addition, in 2012, the National Assembly passed an amendment to the Korea Technology Finance Corporation Act. The amendment allowed the Korea Technology Finance Corporation—founded in 1989 as the Korea Technology Credit Guarantee Fund—to provide equity investment to early-stage venture businesses. This was a significant change insofar as the government had previously provided loans or credit guarantees to startups or to firms financing them, such as VC firms. But the government could now have a direct equity stake in startups.
Equity funding for startups substantially increased under the Park and Moon governments. KVIC continued to be a main source. It took a more nuanced approach, with the launch of three new funds to provide more targeted largesse.6 Seeking to tap into private funding, KVIC also launched two joint funds under the Park and Moon governments, respectively. The KEPCO FoF was launched in 2015. With a fund size of KRW52.5 billion by the end of 2018, its focus was to boost the power and energy sectors as well as ICT startups in both Gwangju and South Jeolla Province. Meanwhile, the KRW110 billion KEBHana-KVIC Unicorns Fund of Funds was formed in 2018 to foster startups in the innovation ecosystem and, relatedly, to nurture unicorns through indirect investments (KVIC 2019, 8). In addition, the Korean government’s long-standing financial institutions ramped up their investments in startup. The Financial Services Commission pledged KRW7 trillion (US$5.9 billion) for startup investments, and the Korea Development Bank and K-Growth committed allocations of KRW8 trillion between 2018 and 2020 (Lee 2019).
In the spirit of encouraging Silicon Valley–styled financing for innovation, the Park government set up several equity-based investment mechanisms. Managed by K-Growth from 2016, the Ladder Growth Fund was divided into separate funds specializing in the seed, growth, and later stages of a startup’s life cycle (K-Growth 2020). KONEX was created as a stock exchange for startups prior to them being capable of listing on KOSDAQ. In other words, it was created as a vehicle to provide an exit strategy to startups not yet ready to be accepted for listing on KOSDAQ (KONEX 2020). To further foster financing of Korea’s growing startup ecosystem, Moon announced a so-called Second Venture Boom in March 2019.7 The focus was to help startups to scale up as well as to prevent them from going bust due to a lack of funding at the crucial point of working to achieve product-market fit. Building on this commitment to boost the availability of early-stage VC, the National Pension Service (NPS) committed US$127.2 million to four Seoul-headquartered venture capital funds: SL Investment Co., DSC Investment Inc., Stonebridge Ventures Inc., and Mirae Asset Venture Investment Co. (Kim 2021).
The Moon government also launched the K-Unicorn program in 2020 to attract private capital—including foreign capital—to select startups with the potential to become unicorns. Korea Institute of Startup & Entrepreneurship Development (KISED) identified innovative “baby unicorns” (defined as having a corporate value less than KRW100 billion) that could graduate to “preliminary unicorns” (value over KRW100 billion but less than KRW1 trillion) and then become “unicorns” (value more than KRW1 trillion) in their own right (KISED 2021). As of 2023, fifty South Korean open innovation ecosystem players, including accelerators, banks, chaebol, government agencies, VC funds, and unicorns themselves, had provided funding, mentoring, training, and internationalization assistance for these growing startups (KVIC 2023).
While the chaebol had been involved in startup financing in tangential ways, Korea’s big businesses explicitly entered the country’s growing startup-oriented equity markets, as a regulatory change in 2020 allowed them to run corporate VC funds in Korea. The corporate VC regulatory change enabled their equity-based investments, as “it strictly prohibits expanding into lending among other financial service businesses” (Lee 2020). Speaking to the open innovation orientation, an interviewee remarked that the change means that “startups have a good opportunity to network with the chaebol as investors” (authors’ interview, Seoul, August 23, 2022). The government announcement emphasized the mutual benefit for startups and chaebol, with the assertion that “large conglomerates will be able to seek greater business opportunities and startups will be able to share corporate growth strategies including technological development and overall management from the capital provider” (Lee 2020). In addition to domestic regulations allowing Korean corporate VC, the chaebol continued to operate as VCs internationally. For instance, Lotte, a large chaebol, announced its plan to open a Silicon Valley VC unit in May 2023. A press release noted that “the group established Lotte Ventures Japan Co. last year [2022] with an aim to invest in local startups in cooperation with Mizuho Bank, one of the country’s three megabanks” (Bae 2023). This is a telling example of the involvement of the chaebol in Korea’s VC industry.
The Yoon government furthered this trend toward the chaebol providing financial assistance for startups. The minister of Trade, Industry, and Energy, Lee Chang-yang, announced in July 2023 an initiative to fund a corporate venture capital alliance with several chaebol to invest more than US$6 billion in Korea startups by 2025 (Shin 2023). Also in 2023, the government announced a KRW10.5 trillion investment plan to mitigate the global startup investment crunch (Pulse News 2023). Part of this decisive action has been in close collaboration with the chaebol, which, in the case of the corporate venture alliance, provided most of the money (KRW8 trillion), while the government itself commits to a more modest amount (KRW1 trillion).
Innovation
As Korea sought to find new sources of growth in the aftermath of the crisis, startup-fueled innovation became one of the areas prioritized by the government (Choung et al. 2014). Nimbler, in need of new products, and unhindered by internal bureaucratic hurdles, startups were considered to have a competitive advantage over their larger peers when it came to the R&D of new technologies (authors’ interview, Seoul, June 20, 2017). For the first time, Korea conducted technology assessments of nano-bio-info and radio-frequency identification technologies (Seong and Song 2008, 38–39). The goal was to harness the expertise of groups with different knowledge and skills, which could boost frontier innovation. Thus, as Korean startups moved into internet technologies, Korea Trade-Investment Promotion Agency (KOTRA) began launching themed programs in Silicon Valley, including Invest KOREA Online in 2003. The iPark Silicon Valley, established with government funding in 2000, was the first of the government’s incubators to open globally, which underscored the primacy of efforts to develop close relations with Silicon Valley and thus advance national capacity toward the technological frontier (Thurbon and Weiss 2006, 12).
The Korean state felt that the national education system might be inadequate to develop the necessary human resources to promote innovation at the technological frontier. In 1999, the Ministry of Education and Human Resources Development launched Brain Korea 21. This was a US$21 billion, seven-year education project aimed at supporting and developing graduate schools that could produce creative knowledge. All areas of knowledge received funding, but the emphasis was on natural and applied sciences. Most of the funding went to students and infrastructure to ensure that it reached its intended beneficiaries (Moon and Kim 2001, 99). Brain Korea 21 was subsequently renewed by the Roh government and survived until 2012.
Dating back to the 1980s and especially in the 1990s, Korea feared that it would be sandwiched between “high-tech” Japan and “low-cost” China, leading to both a lack of competitiveness and the hollowing out of its industry. This was the economic iteration of the centuries-old “shrimp among whales” syndrome (Pacheco Pardo 2022), whereby Koreans feel that their well-being is not in their hands but instead depends on the actions of bigger countries in the region. In the aftermath of the GFC, and with China attracting an ever-growing number of manufacturing jobs and moving up the value-added chain, this fear intensified. The feeling was that Korea was in dire need of upgrading its innovation capacity, and entrepreneurial thinking was construed as an important element for making this shift.
From the Lee government’s perspective, boosting Korea’s basic research capabilities was necessary if it was going to compete at the technological frontier. The Ministry of Education, Science, and Technology (MEST) was entrusted with this task. Already from the 1980s onward, it was clear that the chaebol were leading Korea’s innovation through their internal R&D units rather than in cooperation with public bodies (Mok 2013). By bringing together education and S&T under the same ministry, the government was seeking to strengthen the links among the country’s school education policy, basic research conducted by universities, and competitiveness in new technologies fostered by the chaebol and startups. This included an education policy fostering basic skills and creativity. This was coupled with an S&T approach based on greater funding for such high-risk, high-return areas as biotechnology, brain research, and nanotechnology.
The ongoing need to compete at the frontier stage continued to be a driver of the Park and Moon administrations’ startup policies. Park established the Ministry of Science, ICT, and Future Planning upon starting her term in office. This so called super-ministry had control over all government R&D funding as well as all S&T policies (Larson and Park 2014). When Moon took office in 2017, it was succeeded by the Ministry of Science and ICT, which retained broadly the same competencies, as his government focused on the Fourth Industrial Revolution. Within this wider setting, the Park and Moon governments targeted startups for the purpose of boosting national innovation capacity, especially those in the services sector (OECD 2014, 36). A key reason behind the focus on startups was the belief that the chaebol might find it more difficult to innovate in new areas due to their strength in existing sectors. Since the chaebol were stronger in manufacturing, the government could see startup-centric innovation in services to compensate for the chaebol weaknesses.
The Yoon government then introduced a regulatory change to spark innovation new to Korea and still relatively rare across Asia: negative regulation. For the first time, startups establishing operations in ten innovation special zones across the country would be allowed to innovate in an environment in which almost everything (except what was explicitly prohibited by law) was permitted (Im 2023). The aim was to promote radical innovation by removing regulatory constraints on new ideas, products, and services. In addition, the Yoon government formally announced in March 2023 that it would launch K-BIO Lab Hub. Modeled on Boston’s LabCentral, this was to become a hub for the government, chaebol, and startups to collaborate in the biotech sector (Hwang 2023). Plus, the Seoul Metropolitan Government announced the establishment of the Seoul Unicorn Startup Hub, which it claimed would be one of the biggest such hubs across Asia once opened (Lee 2023).
In sum, the aim of startup capitalism in Korea has been to foster the country’s ability to achieve its increasingly radical innovation aims. Initiatives have often striven to leverage the relative strengths of the chaebol and startups by fostering chaebol-startup collaboration in an increasingly open innovation context. An interviewee who mentors startups at the CCEI in Seoul explained that the expectation today is increasingly that “ideas need to be globally innovative; not just copying what is happening elsewhere, and translating it to the Korea context” (authors’ interview, Seoul, August 24, 2022). Fomenting Korea’s collective ability to innovate at the frontier has involved the incorporation of Mark I radical innovation aims, but this has been done in the context of the chaebol delivering these evolutionary (manufacturing-based) advances with input from startups and an increasingly entrepreneurial society.
Social Purpose
Domestic issues—particularly job creation—have been central to the social purpose motivating Korea’s startup capitalism. To begin with, the EAFC was blamed for the developmental state model itself (Chang 2003; Hundt 2005). In particular, close links between government and the chaebol, and between the chaebol themselves, were said to have entrenched corrupt practices that were preventing the Korean economy from competing with other developed countries.8 Several chaebol had gone bankrupt, and many others laid off staff. This served to further erode trust in the chaebol, which were seen as not keeping their side of the bargain by providing stable employment. The social contract underpinning socioeconomic relations for decades was thus undermined (Wang 2007). At the same time, democracy was in the process of consolidation, and 1997 brought the peaceful transition of power to a liberal president—Kim Dae-jung—for the first time in Korean history. A growing number of Koreans expected the welfare state to become stronger and the government to become more interventionist in support of the general population.
The Kim government therefore came to power with the need to look for a new economic model. Given Kim’s own life trajectory—namely, his decades-old position as a prominent liberal opposed to previous dictatorial governments—he was already predisposed to reduce dependence on the chaebol as a source of economic growth (Kim 2019). Elected in the middle of the dot-com bubble, Kim saw entrepreneurship as a means to spark economic growth, create jobs, promote innovation, and diversify the economy. The Kim government thus launched an array of plans, regulatory changes, and other initiatives designed to make startups more central to innovation and economic growth in Korea. Roh Moo-hyun, his liberal successor, would follow suit, seeing startups as unhindered by the bureaucratic impediments that rendered innovation more difficult for the chaebol (authors’ interview, Seoul, June 20, 2017). Therefore, the Kim and Roh governments believed that startups could become a source of high-quality jobs along with the chaebol (Klingler-Vidra and Pacheco Pardo 2019).
Lee Myung-bak became the first conservative president in ten years when he took office in 2008. The former CEO of a Hyundai unit, he campaigned on a platform calling for deregulation and less state interventionism.9 The Lee government continued to support innovative startups. The main social purpose of Lee’s startup policy was job creation (Klingler-Vidra and Pacheco Pardo 2020). This was a continuation of his liberal predecessors’ aim of boosting high-quality employment through innovative startups. In particular, the government wanted to increase the number of jobs available to younger Koreans who otherwise might find it difficult to find high-quality positions. Thus, in March 2010, the Ministry of Knowledge Economy announced plans to help talented Koreans become “the next Steve Jobs or Bill Gates in the software industry” by backing ten would-be entrepreneurs to set up their own company (Bae 2011). Indeed, in his 2012 New Year address, Lee mentioned the case of a young Korean entrepreneur who had launched a startup and “hired 20 young workers in just one year.”10 This epitomized the emphasis on startup capitalism’s ability to deliver job creation.
The social purpose of encouraging a more creative, risk-taking society came to the fore when Park Geun-hye made the “creative economy” one of the centerpieces of her inaugural address in February 2013, after mentioning the topic during her campaign.11 Her government unveiled a Creative Economy Action Plan shortly after, in June.12 Continuing along the same lines, Moon put the Fourth Industrial Revolution at the center of his economic policy in one of his first major economic speeches in June 2018;13 this was barely a month after his inauguration and followed repeated discussion of the issue during his campaign. In October, the Moon government launched the Presidential Committee on the Fourth Industrial Revolution, tasked with making Korea a world leader in areas such as ICT and AI (Sohn 2017). This signaled that the Korean state thought that innovation and startups were not optional but rather major elements of the present and future of the Korean economy, as both Park and Moon sought to develop sustainable entrepreneurial ecosystems.
As an official working for the MSS put it, startups are seen as an engine for quality employment, especially in acknowledgment that the chaebol cannot always provide the number of high-quality jobs that the market demands (authors’ interview, Daejeon, August 25, 2017). Park and Moon encouraged entrepreneurship through media appearances and visits to startups. They sought to change the mentality of the population so that failure in one startup did not result in loss of respect or financial ostracism.
From the beginning of the Moon administration, social inclusion has been named as a driver of startup largesse. To this end, the government launched the 2019 Master Plan for Promoting Women’s Entrepreneurship Activities. The master plan included several funding lines and guarantee programs to bolster female entrepreneurship (MSS 2019b). Considering that the female labor force participation rate historically lagged the male rate and stood at 53 percent in 2018 (World Bank 2020c), the master plan was a means to create jobs for an underrepresented segment of the population. According to entrepreneurs we interviewed, women feel that startups provide more flexibility and a better work-life balance compared to the chaebol (authors’ interview, Seoul, August 30, 2016). It therefore made sense to boost job creation through efforts to encourage female entrepreneurs. As a reflection of this, already in 2016, the country’s startup ecosystem had a higher ratio of female employees compared to Silicon Valley and other ecosystems (Korean Startup Ecosystem Forum 2016).
In line with the aim of boosting female inclusion in employment, the MSS announced a US$465 million package as part of the 2019 Master Plan for Promoting Women’s Entrepreneurship Activities, along with a US$7.85 billion public procurement program to purchase products from women-led startups. The objective was to promote women-led startups through the provision of special guarantees, R&D assistance, and purchases (MSS 2019c). The explicit encouragement for female entrepreneurship also continued during the Yoon government via the MSS (Kim 2023). In March 2023, for instance, the MSS launched a new women’s venture-fostering project that targets “female startups with less than 7 years of entrepreneurship” and provides “a comprehensive support system such as customized education and mentoring, commercialization fund support, and cooperative networks” (Dave 2023).
Thus, despite the wider imperative of technological innovation as a means of bolstering national security vis-à-vis North Korea, much of the social purpose underpinning Korea’s startup capitalism is domestic-oriented. Job creation and social inclusion are the rationales often given when startup policies are launched.
Continuity and Change in Korea
Korea’s first big wave of help for startups took place following the EAFC. With the chaebol criticized for their alleged role before and during the crisis, and inspired by the ongoing dot-com bubble, the government championed startups as the center of its economic policy. There was a degree of continuity with the approach taken prior to the crisis, but there was a rapid increase in the provision of equity investment, a move toward radical innovation and more fluidity in the labor market. However, these shifts have happened in the context of a continued focus on large firms, with startups contributing to their open innovation systems. Figure 3.1 summarizes the evolution of firm size, employment, finance, innovation, and social purpose in Korea’s startup capitalism.
Throughout its different phases, the institutional foundations of the Korean developmental state have evolved, though the chaebol remain central to the innovation system. The social purpose has not changed significantly and remains centered on job creation, though the external security threat is an important motivator for economic and technological performance. Employment, financing, and innovation have all moved in the direction of Mark I logics, becoming more fluid, equity-based, and radical, respectively. While those three institutional areas move toward scores of 3, the size of firm central to innovation remains, on balance, closer to the Mark II end of the continuum (with a score of 2 in fig. 3.1). This reflects the fact that while direct state support for the chaebol has become less politically salable, startup capitalism is oriented toward indirect help for the chaebol and encouraging cooperation between startups and the conglomerates.
FIGURE 3.1.Analyzing Korea’s institutional evolution: antecedents to startup capitalism
Thus, figure 3.1 portrays the relatively modest movement, over time, toward startups as important contributors to innovation. The starting point for firm size in figure 3.1 illustrates that the chaebol were the main beneficiaries of government efforts to drive innovation up to the 1997 EAFC. Korean governments throughout the catch-up growth state involved the chaebol leaders in the decision-making and implementation processes. The situation has evolved slightly post-EAFC, as largesse for innovation has often been directly linked to support for startups. However, startups have been portrayed as fueling chaebol-led open innovation systems. The chaebol are involved in initiatives that intend for them to achieve mutual benefit through their interaction with startups. In this sense, startups have not been construed as disruptors. While startups now play more of a role, the center of gravity of Korea’s startup capitalism with respect to firm size remains focused on oligopolistic competition, and thus the illustration of firm size in figure 3.1 remains closer to the Mark II variety of startup capitalism.
Korea’s labor market has become more fluid over time, moving close to—but not achieving—a score of 3 in figure 3.1. The antecedent period is illustrated as close to a permanent employment ideal, consistent with Mark II. This is because, throughout the catch-up growth period, employment in Korea was defined by the chaebol-based permanent employment model, whereby workers could expect steady income and benefits as they climbed up the corporate ladder. Certainly, the benefits associated with employment in the chaebol have continued, including higher salaries and generous pensions. But at the same time, this implicit social contract broke down. This began with the EAFC and the relatively high youth unemployment it brought. Startups were increasingly seen as a socially acceptable source of employment. This was reinforced through policies that encouraged fluidity, including pension portability, education programs, and funding for entrepreneurial ventures. While flexibility has advanced and many graduates now seek startup experience, such undertakings are often assumed to lead to the procurement of long-term employment with a chaebol.
The financing for innovation has also seen a shift in the direction of a Mark I setting but, again, not convergence on this Silicon Valley type. Figure 3.1 shows a score of 3, reflecting the proliferation of equity-based financing, especially in the post-EAFC context. In the classic developmental state setting, state provision of credit to (large) firms was core, and as such, Korea’s antecedent score for financing was 1. Korea’s financing has evolved from that bank-based characteristic, as equity-based financing activities have proliferated. Successive governments have launched VC funds, startup-friendly stock exchanges, and more. In line with the persistence of the chaebol as central to Korea’s innovation system, since 2020, the government has enabled the oligopolistic firms—including long-established chaebol like Samsung and new ones like Naver—to operate as important equity investors in Korea’s startups.
In a similar way, there has been a shift—like the one seen in Japan, but about a decade later—from catch-up toward the technological frontier. As a result, Korea’s antecedent period’s innovation was scored as 1 in figure 3.1, reflecting the incremental nature of its innovation. Innovation from the 1960s to the 1990s was based on a catch-up approach. Korea was trying to climb up the innovation ladder by making use of government investment and cheap labor to compete with more advanced countries. A shift started in the 1980s, with the government and several of the chaebol seeking to compete at the frontier. Since Korea achieved developed country status in the 1990s, there has been a concerted shift toward innovation at the technological frontier. In this context, the Korean government has seen startups as the solution to the potential problem of the chaebol not being able to compete at the frontier stage. Startups could be partnered with the chaebol to complement and boost their ability to deliver novel technological innovation. Thus, Korea’s startup capitalism’s innovation orientation is scored as a 3, reflecting this movement toward radical innovation.
There has been persistence in the social purposes motivating startup efforts. Job creation and an injection of innovative ideas and talent into the chaebol underpin initiatives. In line with other East Asian cases, these domestic social purposes and the desire to compete at the technological frontier as a means of engendering economic competitiveness and national security have been consistent. As a result, figure 3.1 illustrates this with both the antecedent and startup capitalism epochs having the same score of 3, a combination of domestic and external social purposes.