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Korea’s struggle to create its own Silicon Valley

Gov’t efforts to promote youth entrepreneurship fail to match reality

Han Min-jin, a 26-year-old engineering student at a local college in Seoul, is living his dream. He founded a small business named Byit last year offering services for community sports events.

“Starting a business was a dream come true after a mundane internship with a local accounting firm,” Han said in an interview last week.

Han is among the thousands of Koreans in their 20s and 30s who founded their own companies in the ongoing South Korean start-up boom of the 2010s.

They are the Korean millennials refusing to follow in the footsteps of an earlier generation, who considered it a family honor to get a job at one of the country’s top conglomerates such as Samsung Electronics or Hyundai Motors.

But these inexperienced entrepreneurs must fight an uphill battle to even dream of reaching the levels of start-up success achieved by Steve Jobs, Jeff Bezos or Mark Zuckerberg.

Not only do they face the typical start-up problems -- money, for instance -- they also must overcome a conservative consumer culture, while fighting a virtually impossible battle against the likes of big conglomerates.

“If (smartphone) app-makers create a pay-walled smartphone app, consumers are likely to avoid the app. They’re bound to think paying for the apps is something wrong,” Han said.




Pledging to break down such barriers, President Park Geun-hye came up with her proposed panacea of “creative economy.” She promised to spawn a start-up-friendly environment and eventually replace Korea’s current conglomerate-based growth model in the long run.

Two years in, the creative economy has achieved some success.

The Growth Ladder Fund, a government-funded program dedicated to linking new businesses with venture capital and other financial buttresses, has produced 2.6 trillion won ($2.3 billion) in investment since its inception in May 2013.

The fund will strive to boost an extra 2 trillion won this year, said Seo Jong-gun, head of the fund’s secretariat.

The Youth Startup Fund, another public money scheme for start-ups here, has lent 250 billion won to up to 3,200 businesses since 2012. The fund restricts its loans to business starters under age 40 and is operated by the government’s Small and Medium Business Administration.

“Most loans are functioning,” said a SMBA spokesperson who spoke on the condition of anonymity. “The initial repayments are not due until earlier this year with most of the loans not being excessively burdensome in amount,” the spokesperson added.

Some local start-ups also reported impressive milestones under the Park administration, such as the 4-year-old smartphone app-maker Channelbreeze, which reportedly attracted up to 21 billion won ($18.5 million) from venture capitalists earlier this month.

“The high-tech start-up environment is certainly better than it was in the 1990s,” said Kim Wonshik, professor of economics at Konkuk University. “The IT atmosphere is much more developed than 20 years ago when the technology was still in its developing stages.”

President Park Geun-hye talks with young filmmakers at the opening ceremony of the Busan Center for Creative Economy & Innovation last week. (Yonhap)
President Park Geun-hye talks with young filmmakers at the opening ceremony of the Busan Center for Creative Economy & Innovation last week. (Yonhap)


A darker reality


But the reported achievements mask a darker reality that most start-ups face, according to some business founders.

Han is one of those arguing that Park’s policy has been more of a show than a reality.

“To secure a 100 million won loan from the SMBA’s Youth Startup Fund, I have to go through hours of mandatory classes at a government start-up education institute, spend another hundred hours writing proposals to civil officials, and stack up receipts for every penny we spend.”

Such administrative burden takes away precious hours that should be spent on developing trial products to test on the market, he said.

“Every time we go to a product exhibition, we’re surprised at how many of our competitors are developing their products,” Han said.

“Timing and speed is key to a high-tech start-up like us,” said Kim Jae-woong, a college student working with Han.

Government programs are helpful, but they sometimes create more problems than they solve, Han and Kim said.

There are also start-up pirates who abuse the government’s lenient lending programs, they claimed.

“I’ve seen guys set up four to five ghost companies that they use to gain extra loans from the government,” Han said.

Public lending programs usually limit loans to one per start-up. But such loan pirates bypass the rules by setting up their shadow companies.

The funds gained by the loan-hogging practices are used to support the pirates’ original start-ups. The abuse soaks up government money that should have been used to give opportunities to other potential start-up founders, Han said.

And then there are the unfair competition practices of Korea’s billion-dollar family-run conglomerates, according to Rep. Hong Jong-haak, member of the main opposition New Politics Alliance for Democracy.

“Generally speaking, large U.S. companies give start-ups an exit plan by purchasing small companies for their talent, or products,” the lawmaker said.

“But here, when large companies see promising markets, they steal ideas and start their own businesses, and crowd the start-ups out. They also steal talent from smaller companies. How can you expect a start-up to survive in such conditions?” the former activist added.

Han Min-jin (left) and his team hold a meeting in Byit's office. (Byit)
Han Min-jin (left) and his team hold a meeting in Byit's office. (Byit)


‘Uncreative’ economy



The main problem of Park’s creative economy is its failure to address the strongest barrier against starting businesses here -- excessive loan regulations to entrepreneurs -- according to Hong, the economist-turned-lawmaker.

“Korean loan rules force entrepreneurs to risk everything,” Hong said in an interview with The Korea Herald last week. Hong supports Park’s idea of fostering start-ups, but charges that the policy is far from perfect.

“If first-time start-ups fail -- something more than likely for most -- banking rules force entrepreneurs to give up their salaries, their homes, their cars to repay business debts -- things considered essential to a basic livelihood,” he said.

These strict rules, in turn, scare away potential entrepreneurs from ever founding a business, Hong added. Hong is preparing amendments that will ease credit rules, although officials at the Financial Services Commission have already expressed opposition to his ideas.

Officials at the state-run Korea Guarantee Fund and the Korea Technology Finance Corporation, and the FSC, the country’s top financial regulatory body, say Hong’s proposals would spark excessive moral hazard, citing already-worrisome amounts of unpaid loans.

Outstanding loans dealt out by the KTFC alone stand at 8.9 trillion won ($7.8 billion) as of late last year. The count is a rise from a much smaller 192.2 billion won in July last year.

Hong, however, said that the government’s thinking is anachronistic.

“The burden of figuring out if a potential borrower is someone likely to commit moral hazard is solely on the lenders,” he said. That burden should not be offloaded by creating conservative lending regulations, Hong argues.



A step toward Korea’s Silicon Valley



Nonetheless, Park’s critics acknowledged that the creative economy is a step in the right direction.

“Our current conglomerate-centered economy poses dangerous systemic risks that could bring on something resembling the Great Depression,” Hong said, taking the world’s worst economic depression of the 20th century as an example.

“Amazon, Facebook, Google and Apple are all companies that are 20, 30 years old.”

“We need something that will trigger an outpouring of new businesses to compete with the existing big companies,” Hong said.

Konkuk University’s professor Kim agreed the creative economy was a necessity.

“The economy needs more start-ups to grow. New businesses mean new jobs. Korea’s start-up atmosphere has been depressed since the IMF crisis,” Kim said, mentioning the 1997 Asian financial crisis.

“The results of Park’s policy are going to show up years later,” the economist added.

Until then, Han and other 20-something business starters say drastic changes are needed.

Han suggested government programs facilitating crowdfunding, an investment ploy aggregating small amounts of money from modest investors to form a larger fund.

“When I heard of Kickstarter, I became very envious of my counterparts in the U.S.,” Han said, referring to the online crowdfunding site launched in 2009.

The site allows entrepreneurs to access cheap capital in a relatively quick time frame. Kickstarter has raised close to $1.6 billion and has funded more than 80,000 projects, according to its website.

It is available for start-ups in the U.S., the U.K., and Canada among other countries, but not here.

“There are some similar schemes here, but South Korea’s conservative culture is likely to stifle such programs anyway,” Han said.

A bill aiming to facilitate crowdfunding has been pending in the National Assembly since June 2013. President Park has been urging the lawmakers to pass it.

Revisions propose easing online stock trading rules and setting up regulations to make online investments more transparent.

Known by legal texts as amendments to the Financial Investment Services and Capital Markets Act, the law remains largely ignored, with the main political parties blaming each other for the delay.

The bill will likely remain ignored in next month’s extraordinary session at the Assembly, as the rival parties remain engrossed in political wrangling over such issues as public pensions reform and remapping of parliamentary voting districts ahead of next year’s general elections.

By Jeong Hunny (hj257@heraldcorp.com)
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