Fostering innovative Firms in Korea

Transcription

1 Fostering innovative Firms in Korea Rhee, Chong Ook Professor, Department of Economics, Seoul Women s University Visiting Professor, Korea Institute of Small Business Visiting Professor, Korea institute of Finance Former President, Korean Association of Small and Medium Business Studies *This lecture is being prepared for presentation in Malaysia on Nov. 2010, with the assistance of Professor Jangwoo Lee, president of KASBS.

2 Contents Introduction 1. Korea s Concept of Innovative Business in SMEs Growth Path 2. Korea s Venture Policy for New Economic Growth 3. The Case of Guro Digital Complex 4. Korea s Policy to foster Innovative SMEs 5. Present state and evaluation to foster innovative firms 6. Global Innovative SMEs in Progress

3 1. Korea s Policy for Innovative firms in SMEs Growth Path

4 (1) The Growth Path of Innovative SMEs in Korean public policy General SMEs and Venture firms Technologybased innovative SMEs Global Innovative SMEs

5 , per capta GNI_Dollar Venture 1.0 Venture 2.0 From , , , August 2001 (Innobiz) 5,

6 SMEs Policies by Growth Stages Growth Stages Category technology manpower Financing And Guarantee Infrastructure Domestic and foreign marketing total Preliminary start-up Less than 3 year Less than 5 year Less than 7 year Unlimited ,463 Total ,516 Source: Small and Medium Business Special Committee (2005)

7 (2) Laws to Promote Korean SMEs Definition Background Law Implementatio n Date SME Venture Firm Technology-based Innovation SME SMEs Basic definition SMEs Fundamental Law venture financial institutions such as start-up investment firms invest, guarantee, and finance Special Measures for the Promotion of Venture Business Companies with growth potential or innovative future technology that can lead to growth SMEs Innovation Promotion Act Management-bas ed Innovation SME Firm that gains fr om various activi ties such as Hum an Resource Man agement, process innovation, knowl edge and informa tion management, marketing, etc SMEs Innovation Promotion Act Dec May 1998 August 2001 July 2006

8 2. Korea s Venture Policy for New Economic Growth

9 2.1 The Dawn of Korean Venture system Financial Institution as Government-supported Venture Capital : KTAC (Korea s initial venture capital), which is founded to commercialize t0he technology invented by National Research Institutes - Financial Business to Commercialize New Technology Act established in 1981 push to set up KTDC ( present KTB), KDIC, KTFC, etc which is supported by the government. Korea s first venture firm was Qunics in : Bit Computer, Mirae Corportation : Madison, YG One, Sambo Computer, CAS, etc Although many government-supported venture capitals are founded up to the early 1980s, the well-developed market to recover the venture investment fund does not exist.

10 2.2 The first stage of Korean venture policy Korea s main venture policy starts with establishing SMEs startup Assistance Act on April 1986 and Financial Assistance to Support New Technology Act on December Two acts become the stimulus to form about 50 Venture Capital firms in the short period up to The venture capital firms in the early stage do not play a real role of American style of venture capital, because there are few excellent venture firms, and non-existence market to recover investment fund. In the absence of recovery market of investment fund, the venture capital firms get low rate of return and hence almost bankrupt, and finally they ask the policy such as opening the third market for their survival.

11 Background of Venture Business in Korea Industry-Oriented Society Manufacturing Capital & Labor Management Limited Domestic Competition IMF Knowledge-Oriented Society R&D Knowledge & Information Inovation Global Competition Traditional Business Venture Business

12 Establishment of KOVA Established on Dec. 2, 1995 First Chairman: Min-hwa Lee Nurturing of competent medium and small-sized technology business Organizational turnover of traditional business Upbringing of new venture business Affiliated Business Venture Business Organizational Turnover

13 Number of Companies Venture Vision ,000 6,400 43,000 80, , ,000 Year Upbringing of venture business is the national competition strategy!

14 Venture Vision 2005 National Innovation System of Knowledge-Manufacturing Combination Capital Market Man Power Infrastructure Special Law for Venture Business

15 2.3 The First Moment of Korean Venture Policies and Korean Venture boom Korea s Venture Model in 1997 copies American Silicon Valley Model. - Three factors in Venture ecology are entrepreneurship, Venture Capital, Exit market.

16 (1) Establishment of KOSDAQ Establishment of KOSDAQ Market May 17, 1996 The KOSDAQ market has grown along with venture business as a new market based on knowledge-oriented innovative technology

17 category Korea USA Government -supported Venture Fund SMEs division Opening Retirement Funds Venture Investment Allowance year 1996 (KOSDAQ) 1997 (Venture Act) Source: S. Kim (2008). KOSBI 1971 (NASDAQ) 1979 (ERISA Act) 25-year 18-year

18 Development of KOSDAQ Number of Companies Total Market Capitalization (Unit: US$ Trillion) KOSDAQ Listed Companies Venture Companies

19 Stance of KOSDAQ in Worldwide Market Growth as a worldwide major stock market Number of Listed Companies Total Market Cap Accumulated Volume 1 Mumbai(4,730) 1 NYSE(11,428) 1 NYSE(6,778) 2 TSX Toronto(3,580) 2 Tokyo(3,205) 2 Nasdaq(5,131) 3 Nasdaq(3,252) 3 Nasdaq(2,719) 3 London(3,024) Kosdaq(881) KOSPI(672) KOSPI(285) Leaping as a global investment market Rapid increase of foreign capital Successful New Market - Grant Thornton (May 24, 2004) Kosdaq(23) KOSPI(296) Kosdaq(87) * According to data by World Exchange Federation, July % 10.5% 14.3% 20.3% Even amongst these, only NASDAQ, AIM, KOSDAQ, TSX-V,..OFEX, can be said to have added any real value to investors during 2003 KOSDAQ was the world s most liquid new market in KOSDAQ was the best performer with a growth in average listing of 55 during the year

20 A number of start-ups have entered high-tech industries very fast during the past 10 years Numbers of Governmentally-Enrolled Companies as High-Tech Ventures 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, ,000-4,000 cummulative annual cummulative 2,042 4,934 8,798 11,392 8,778 7,702 7,967 9,732 12,218 14,015 14,079 annual 2,042 2,892 3,864 2,594-2,614-1, ,765 2,486 1,797 64

21 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, ,000-4, cummulative 2,042 4,934 8,798 11,392 8,778 7,702 7,967 9,732 12,218 14,015 14,079 annual 2,042 2,892 3,864 2,594-2,614-1, ,765 2,486 1,797 64

22 The system of start-up investment union was changed into Investment by Fund of Funds in 2004 Type Start-up investment association Korea Venture Investment association Concrete conditions Investment association that specializ es in entrepreneur (less than 7 year longevity SME ) and Venture firms LLC type investment, off-shore investment Association, etc Exclusive Use for SME Firm Reorganization Technology sector Private equity investment Invests more than 60% of the total asset in SMEs

23 , per capta GNI_Dollar High-value added oriented policy Venture 1.0 Venture 2.0 From , , , ,

24 (2) Korean Venture system under the unique socio-economic system. A Korean Socio-economic System for Venture Industries Input Thruput Output high educated young and high level of need-for-achievement R&D experience high-tech sectors (IT, Bio etc.) high level of R&D intensity fast moving to the market innovation Job creation new market development Government Policy and Social Legitimacy aggressive policies with the formulation of special law culture approving the fast changing and favoring the risk-take

25 Korea chose an aggressive intervention of the government: the special law for promoting technological entrepreneurship U.S.: natural and spontaneous progress A natural evolution for 50 years, starting with Hewlett-Packard NASDAQ open in 1971 Korea Promoting Technological Entrepreneurship Natural and Gradual Growth by the Silicon Valley Model Of U.S.? OR Aggressive Governmental Intervention with Legislation of the Special Law Choice Intense growth

26 Establishment of Special Law for Venture Business Special Law for Venture Business legislated on May 12, 1997 Capital Aid in initial expenditure of business (Corporate finance for medium & small-sized business, R&D etc.) Inducing investment by venture capital, angel, institutional and foreign investors Special guarantee for venture business, useful for credit guarantee examination Man Power Allowing R&D man power to be exempted from obligatory military service to work in designated companies Stock options given to qualified man power Others Opening of business in lab (Allowing professors and researchers to establish factories in labs) Preferential privileges to venture business located in integrated facilities (Exemption from taxation) Support in knowledge complex ( venture building )

27 However, there exits a contradiction on the effectiveness of the government s intervention. (+) Positive The institutional theories (DiMaggio and Powell, 1983; Orru et al., 1991) The government support is crucial to organizational vitality and enhance the legitimacy of business actors. The legitimacy contributes them to obtaining critical resources from the external environment (-) Negative The strategy theorists (Hickson and McMillan, 1981; Donaldson, 1987; Miller, 1988; Zeffane, 1989) Strategic choice or adaptation to the changing market is more essential for firms to succeed

28 They have penetrated mainly into high-tech sectors. Distributions of Korean Venture Firms (2005 unit = %) Information Service 3.8 software 22.8 Others 9.1 Energy, Medical Equipments 15.3 IT&Components 8.9 Communication Equipments 9.9 Machnery& Autoparts 14.7 Foods&Textiles 15.4

29 (3) Korean venture firms have achieved many success cases in the global market. a leader in the global set-top box market a winner of MP3 player market a technological pioneer in camera phone a No.1 market-share in the digital video recoding market one of the world s best on-line game a pioneer in digital door lock

30 Successful venture firms have shown common characteristics. Some Results From My 10 years Research - Common Business Features of the Most Successful Venture Firms Who? (Entrepreneur): Highly-educated, High levels of need-for-achievement Where? (Environment): Penetrating into Very Turbulent Market What? (Strategy): Executing the Innovative Differentiation Strategy - Common Success Factors High Performances are correlated to at all growth stages of new ventures Innovative differentiation strategy time-to-market high-quality products

31 - Common Characteristics of the Most Successful Venture Firms Which Had Overcome the IMF Financial Crisis 1 Entrepreneurs with the high-level of need-for-achievement 2 focusing on the innovative differentiation strategy 3 utilizing the governmental support system

32 (4) KOSDAQ, the Korean capital market for technology -based firms, has also progressed toward the world level. Number of Listed Companies & Total Market Capitalization in KOSDAQ Number of Listed Companies Market Capitalization (KRW in trillion) 106(On 9.28) (On 10.1)

33 (5) However, they are facing new challenges these days. New Challenges 1) Saturation of sales growth rate in the market 2) Serious competition in the global market 3) Shifting of the economic structure from manufacturing to service-oriented

34 Summary of Development of Venture Business First Movement Building Foundation Coordination Leaping Year ~ ~ ~ ~ Theme Planting trees in desert Venture boom in Korea Corruption & confusion Motivation of new industry development Contents Birth of first generation venture business Establishment of private capital investment companies upon Capital Aid Act (1986) Lack of recovery market Low recognition of venture capital Formation of recovery market (KOSDAQ) Establishment of environmental systems for upbringing of venture business Appearance of star players New driving force of economic development after IMF crisis Migration of resources to venture business Criticism toward adverse effects of governmental aid Formation of anti-venture atmosphere Legal sanction against false venture business Post bubble effects Recovery of social trust in venture business Maturity of market infrastructure Building of economic order based on transparent & reliable management Formation of favorable circulation cycle of venture capital Role of Gov t Explorer Initiator Facilitator Supporter

35 2.4 The second moment of Korean Venture Policy Main objective Job creation of good quality promoting global competitive SMEs Main Principles create market-oriented venture ecology system restructure venture policies for demander-oriented support

36 Basic Direction of Policies (1) To create the vicious cycle of venture firms-venture capital market retrieval market -reshaping the certification system of venture firms -reinforcing the function of venture capital - Retrieval market: IPO, vitalization of M&A (2) To Create cyclical ecology system for knowledge creation among venture firms-university-large firms (3) To create mature infrastructure in the policy, culture and service to aid venture firms

37 They want to write the legendary stories continuously on the global market. from Venture 1.0 to Venture 2.0 (New Hardware) (New Service) definition Hardware + digital tech Service + digital tech contents intelligent hardware transferring the emotion main products competitive advantage mobile hand-set, semiconductor display, digital set-up box speed of product development u-health care service, digital equipment with emotional services, on-line service, mobile games imagination

38 per capta GNI_Dollar 25, Venture , , , ,

39 3. The Case of Guro Digital Complex

40 GURO Area: From Laborintensive Industrial Complex To Digital Complex (Past and Present)

41 Past ( 70, 80) - textiles -electronics assembly - metals - other traditional industries

42 GURO Digital Complex (Present)

43 Changes of Guro Digital Complex Number of employees Number of firms 120, ,000 98,261 85,269 80,000 60,000 54,180 40,000 32,958 36,564 20, ,343 3,375 6,197 7,

44 In 1997, the Korean government held a ground-breaking ceremony for building the Kicox center at the Guro area by showing of example The construction of the Kicox center was only investment from the government to transform this area toward a hightech intensive one.

45 --The Korean government made a designation program about the building construction for new ventures. * Real estate owners and investors can construct a building for the rental service for new ventures with a designation from the government as a facility accumulated by new ventures (called as venture building ). If they do, they receive tax reduction and exemption from the government. *This kind of support from the government also enhances their legitimacy and prestige. The enhanced legitimacy and prestige help them induce many potential ventures and increase the intensity of venture accumulation.

46 4. Korea s Policy to foster Innovative SMES

47 Position of Innovative SMEs in firm growth General SMEs and Venture firms innovative SMEs Global Innovative SMEs Minimum requirement for Innovative SMEs? To apply for innovative SMEs, they have to be more than 3 years old.

48 Why innovative firms have to be more than 3 years old? -There are SBA s small and medium fund and venture fund, and regional governments fund, for less than 3 years old.

49 Technology-driven SMEs - Oslo manual(1992, 1997, 2005)emphasize the innovative firms role as economic growth source - On August 2001, SMEs technology innovation Stimulus Act is established to support technologydriven SMEs

50 Items to evaluate INNOBIZ Items Technological innovation Technology industrialization Innovation management Technological innovation fruitage Details R&D activity index Systemic innovation Innovation Management Techology accumulation ability Technical analysis skills Commoditization of technology Production of Technology New marketing skills Industrial management technology Innovation capability Ability to respond to changes Marketing management Changes in technology and competitiveness Business Performance Technical performance

51 Conditions to be selected as INNOBIZ More than 3 years old Total score in certificate items evaluated by KIBO has to be more than 700 out of Scores applied to each item are different from industry to industry number of evaluation has been decreased from 110 items to 60

52 History of INNOBIZ Certification System introduced from Years Evaluation indicators -Manufacturing (more than 50 employees) -Manufacturing (less than 50 employees) - S/W -Manufacturing ( more than 50 employees) - Manufacturing ( less than 50 empl oyees) - S/W - Bio - Environment - Service (Design, Engineering servi ce) - Manufacturing - Non-manufactu ring -Construction -Bio -Environment -S/W -Design - Manufacturing -Non-manufactur ing -Construction -Bio -Environment -S/W -Design -Agriculture Target Industry Manufacturing Manufacturing All industry All industry No. of Evaluation Criteria Specified Semi-annually Quarterly Twice a month Occasional period Evaluation agencies KIBO KIBO KIBO KIBO, Korea Devel opment Bank, Ko rea Technology exchange * KIBO = Korea Technology Guarantee Fund

53 Management-driven innovation SMEs - On July 2006, SMEs Managementdriven innovation SMEs is inserted in SMEs technology-driven innovation stimulus Act established in 2001.

54 , per capta GNI_Dollar High-value added oriented policy Venture 1.0 Venture , , , August 2001 (Innobiz) 5,

55 5. Present state and evaluation to foster innovative firms

56 (1) INNOBIZ Trend Statistics of INNOBIZ new entrant cancel of innovative firm cumulative sum Overlap Problem of INNOBIZ and Venture firm Number of firms Number of Overlapped firms Overlap ratio (%) INNOBIZ 15,898 7, % Venture firm 18, %

57 Innobiz distribution by employee Less Than More Than 30 0 Total Number of firms 7,081 5,602 2, ,896 Ratio (%) Source: Innobiz Association (Aug., 2009) Innobiz distribution by longevity Less than 5 year 6-10 year year More than 20 Total Number of firms 734 6,975 6,128 2,059 15,896 Ratio(%) Source: Innobiz Association (Aug, 2009)

58 Innobiz distribution by industry construction machinery & metal bio service fiber food number of firms ratio electric. electronic information. communication chemical environment s/w other total Source: Innobiz Association (Aug., 2009)

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61 Innobiz by Region Seoul Busan and Ulsan Daegu and Kyungbuk Daejun and Chungnam Kwangju. Junnam Kyunggi Incheon number of firms ratio Kangwon Kyungnam Junbuk Chungbuk Jeju total The disparity of Innobiz distribution by region is clearly shown.

62 Distribution of Innobiz s Life time less than 5 years 6-10 years years more than 20 years total number of firms ratio Average life time of Hidden Champion in Germany:??

63 (2) Survey on INNOBIZ (2009) characteristics classification ratio(%) number of employment sales establishment Date less than more than less than 5billion billion billiion 26 more than 30 billion 42.7 prior to s after

64 Ratio of R&D employee to total employee less than 5% 5-10% 10-20% 20-30% 30-50% less than 50% total ratio R&D expenditures to Sales less than 1% 1-5% 5-10% 10-20% less than 20% total

65 Main buyers Domestic domestic consumer export other total large firms SMEs 45.70% 33.80% 6.00% 11.00% 3.50% 100% Impact of Innovation on the business performance classification response and ratio negative fair positive sales increase profit increase employment increase productivity increase

66 Characteristics of INNOBIZ classification Innovative firms (compared with general firms) INNOBIZ firms (compared with general firms) Main characteristics and problems. high registration rate of intellectual property.high proportion of firms with research center. high educational background and high ratio of technology invention employee.about 2 times (5.0%) of R&D investment more than general firms. intense investment for new product development. high level of technology. holding 2 times of patent more than average firms.firms holding patent of domestic or international first invention ar e 2 times more than general firms. the time required for technology invention is 3 months longer. success rate of technology invention is about 60%, and success r ate of commercialization after invention about 37%. high intensity of R&D is about 6%.R&D employee to total employment is about 30%. employee with MA and Ph D degree to total employment 13%. ratio of firms owning research center is 78.8% (general SME 39.2%, Venture 13.8%)

67 Situation of INNOBIZ firms. rapid increase of INNOBIZ from 2006, and almost 16,000 firms..about 60% INNOBIZ located around Seoul.ratio of manufacturing is about 73.5%.machinery and electric. Electronic is about 46%.half of INNOBIZ has the life time of less than 10 years..the ratio of firms with less than 50 employees is about 80%.the ratio of export to sales in most firms with export is less than 20%. average points of capacity evaluation is the range of 700 to 750(perfect score: 1000), and ratio of these firms is about 70%.

68 (3) Main Policy support financing Balanced competitiveness market organization

69 Business area R&D support Financial support Personal support Main Contents. additional 2 points in the evaluation on technology innovation development, technology transfer, technology development conditional on the purchase, the cooperative technology development with firms, technology development of start-up firms.cooperative development of firms and academic institutes, project performed by research centers within universities and colleges, information technology related with production. additional 2 points on projects to check unlawful outflow of technology. 5 points with firms to accept coupon business consulting. 5 points on the acquisition of foreign well-known certification. support on small group of SMEs technology innovation (only on firms with INNOBIZ certification).partial guarantee or total guarantee. increasing the limit of per firm guarantee in implementation, export and import financing, structure and facilities, etc) : 5billion won (general firms 3 billion won). the decrease of guarantee fee: 0.2% ( the maximum 0.4% on firms to get excellent credit rating).firms qualifiedc.o.rhee, to employ SWU, Korea, persons 2010 (with professional research, or professional skill )to exempt from army duty

70 Marketing support (including export). priority on the evaluation of qualification to participate in official procurement (additional 2 to 3 points in evaluation of reputation area). additional 1.5 points in the evaluation of contract implementation capacity in the competition among SMEs. the increase of 10 % more than general firms in the assistance ratio in the participation on the project to use private oversea assistance center. mitigating the qualification evaluation to participate in global brand project : more than 200 million dollar for export (5 million dollar for general firms).priority in excellent product selected by Agency of Public Procurement Other supports.priority evaluation in applying patent

71 5. Vision of Global Innovative SMEs in Progress

72 (1) Reshuffling Policies for Innovative SMEs focus on the technology improvement and market expansion Rationale for Innovative SMEs support Market failure in the resource allocation To Gain the competitiveness Job creation

73 Selective Policy support financing (Type A) INNOBIZ s lack of technology financing market market organization organization (Type A) INNOBIZ s lack of financing financing market organization

74 Reshuffling the certification of Innovative firms Innovative firms Technology and Growth Capacity for Venture firms Support A evaluation Existing INNOBIZ evaluation INNOBIZ s drop maintenance graduation Technology + maintenance drop capacity Support B and evaluation Marketability drop graduation Support C evaluation graduation maintenance drop

75 (2) Patterns of Foreign Global SMES German SMEs German Hidden Champion Japan SMEs Japanese long-lived firms Koyto type of firms

76 (3) How Korean Government can foster long-lived SMEs General SMEs and Venture firms innovative SMEs Global Innovative SMEs Small Giants?

77 (4) Lessons From Korean Experience The governmental intervention and social legitimacy seem to enhance technological entrepreneurship Legitimacy is a global or summary belief among stakeholders that on organization is good or has a right to continue operating (Bedeian, 1989) Governmental Support (reduce the potentially harmful effects that Are common during the early stage of a new venture) (enable the young firm to obtain scarce and critical resources from the external environment) Overcoming Lack of Resource Enhance the Legitimacy Boosting Technologica Entrepreneurship

78 However, the effectiveness of the governmental intervention were different according to the countries More Effective Less Effective Korea, Israel, Taiwan, Ireland Japan, European Countries (common characteristics) small follower crisis (war, scare resource) Dynamism Flexibility Risk-taking Which factors determine the effectiveness of the government policy for promoting technological entrepreneurship?

79 Korea and Malaysia need to cooperate intimately in order to exploit the global market together in a digital economy. Korea technology venturing spirit Malaysia resource south Asia network

80 We wish Malaysia can achieve big economic growth through SMEs entrepreneurship Thank you for your attention.