South Korea to create second sovereign wealth fund for startups

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The South Korean government is pushing to create a second sovereign wealth fund that focuses on startups and venture companies in a bid to discover new growth engines, moving away from the semiconductor and automobile-centered industrial structure.

This move is expected to bring vitality to the domestic venture business market, which recently saw investment fall significantly amid a global economic slowdown and high interest rates. The Ministry of Trade, Industry and Energy will announce an industrial transformation plan as early as May, according to a government source on Sunday.

“The conservative investment culture that does not want to lose money is holding back the growth of startups,” a high-ranking government official said. “Separately from Korea Investment Corp. (KIC), we are considering creating a so-called KIC II to invest in growth capital.”

The ministry recently held its first trade industry forum in January to boost the country’s potential growth. The forum consisted of six divisions: investment, manpower, productivity, corporate environment, global strategy and new business. The investment division, which is the core of the forum, is responsible for dividing the high-tech investment sector by industry, designating each competitor country and specifying a plan to guarantee each industry incentives are higher than that of its competitor country.

It is discussing establishing a national investment holding company called Korea Temasek, modeled after Singapore’s state investment company Temasek Holdings Pte, to beef up the fundamental strength of the Korean economy. It is also discussing introducing an industrial impact assessment system so that excessive corporate regulations do not hamper growth in each industry.

According to an analysis by the Maeil Business Newspaper of long-term economic projection data from the Organization for Economic Cooperation and Development, Korea’s annual average potential growth rate is expected to slow to 0.69 percent in 2030-2040 from 3.09 percent in 2010-2020. From 2050 to 2060, the economy is expected to shrink 0.03 percent. Compared with the potential growth rate of 5.1 percent between 2001 and 2005, the country’s potential growth has halved over the past 20 years.

[Photo by MK DB]

The main reason for this fall is that the number of workers declined due to the country’s low birth rates and aging population. Even if the government injected capital, it would not help boost corporate efficiency and innovation. The potential gross domestic product is made up of potential total factor productivity growth plus the weighted sum of the growth in potential employment and the capital stock.

According to the Bank of Korea, the potential growth rate between 2021 and 2022 is estimated at 2.0 percent, with total factor productivity stagnant within 1 percentage point since the 2008 financial crisis. In other words, even if the government pours in money and labor resources, it fails to boost technological and management innovation at companies, cutting the nation’s potential growth rate.

“Preliminary regulations on companies are preventing innovation in the private sector,” said You Jong-il, dean of the Graduate School of Public Policy and Management at the Korea Development Institute. “We need a system that allows innovation in companies while imposing a strong punishment on those which do wrong.” In fact, except for some high-tech industries such as semiconductors and batteries, Korea’s technological level is below that of the U.S., China and Japan.

According to an analysis by the Korea Institute of Science & Technology Evaluation and Planning comparing artificial intelligence technology in China, Japan and Korea, China scored 91.8, Japan 88.2, and Korea 87.4 on a scale of 100.

In this situation, the venture capital market, which has served as growth capital in the country, is rapidly cooling due to the recent economic slowdown and high interest rates. According to the Ministry of SMEs and Startups, venture investment last year amounted to 6.76 trillion won, down 11.9 percent from the previous year. Attention is now focused on whether the envisioned K-Temasek will become a new breakthrough in revitalizing the domestic investment market for startups and venture companies.