Technical Tuesdays

Can Korean startups save the country’s innovation-driven economy?

Can Korean startups save the country’s innovation-driven economy?

South Korea built its world-class economy on the strength of a few chosen, state-sponsored tech and manufacturing companies.

But recently, these giant corporations have run into trouble.

From Samsung’s smartphone recall to bankruptcy at Hanjin Shipping and a strike at Hyundai Motors, South Korea’s production reign is waning.

Korea has relied too heavily for too long on its corporate “national champions”.

Without some serious reinvention this Asian manufacturing beast cannot expect to remain on top of the international game.
Entrepreneurs to the rescue?
In an effort to save its own skin, the government has started shifting attention away from large companies and focusing instead on supporting start-ups.

…The only problem is that, for a long time, South Korea’s business environment has been hostile to entrepreneurs.

The root of Korea’s lackluster startup scene comes from a high price of failure.

Traditionally, South Korea’s small and medium sized companies got around 99 percent of their capital through loans.

So failure meant bankruptcy and a lifetime of debt. Not exactly the recipe for fostering creativity…

On top of that, domestic commercial banks were uneager to loan to young Korean businesses.

And this had a big impact on little Korean startups. Many shut their doors within three years due to the hardships of finding financing.

As you can see above, Korean startups have a low survival rate relative to their peers.

So what’s the solution?

Well, a healthy amount of FDI could certainly spur Korean innovation.

But, of course, Korea’s corporate giants grew up in a state sheltered from foreign competition.

So the country will need to do a lot to lure in FDI after so many years of estrangement.
A “creative” state plan
Recently, Korea’s government has been making solid efforts to encourage entrepreneurship and enhance its startup market by supporting a “creative economy”.

And since this bold move, Korea has become the second highest research and development (R&D) spender, relative to its GDP.

The country’s startup funding has gone from US$27.0 million to over US$1.16 billion in 2015.

This increase in funding is largely due to state-directed funds and government subsidies.

With the new startup-friendly, government-backed measurements, capital will be more readily available for South Korean entrepreneurs and the risk of failure will be sliced.

Better yet, even Korea’s biggest companies are jumping on board with the new development plan.

Samsung, among others, has started funding employee projects which will eventually become twenty independent companies.

So the days of Korea’s haphazard startup scene are coming to a close.

It looks like this sleeping giant has woken up. Now it’s putting all its energy to reimagining its production and staying relevant.

Expect amazing, innovative companies in Korea’s not-so-distant-future.