In 2020, South Korea (hereafter Korea) managed to contain economic damage from the COVID-19 crisis to a 1% decline in GDP; second only to China. Nevertheless, the fallout from the coronavirus outbreak has exacerbated social inequalities and vulnerabilities connected to the country’s demographic deficit. In November 2019, Korea’s population declined naturally for the first time since the beginning of statistical reporting in 1981. The government currently estimates that the total population may have peaked already. As Korea has the highest rate of relative elderly in the OECD, its welfare provisions have largely been insufficient considering that, as of 2017, 44% of Koreans aged 65 or over lived on less than half the median income. The decline in the working-age population, which began in 2016, has contributed to the country’s shrinking economic growth potential.
Against this backdrop, policymakers have realized that they cannot rely solely on large conglomerates (chaebol) to improve growth rates, especially since their role has been increasingly contested by the domestic public due to the chaebol's concentration of economic power. At the end of 2019, sixty-four conglomerates represented 84.3% of the country’s nominal GDP, though their contribution to employment amounted to only 11.4% of all jobs created domestically. In fact, over 90% of Korea’s workforce is employed by small and medium-sized enterprises (SMEs). Following the 1997-98 Asian Financial Crisis (AFC) that shattered Korea’s export-led model, the legitimacy of the chaebol as wealth and job providers was severely undermined. Since then, they have been regarded as the main culprits behind growing income inequality on top of being regularly accused of monopolising opportunities and preventing innovation. Moreover, recurring embezzlement scandals involving the chaebol-controlling families and state officials have unnerved citizens and motivated the Candlelight Protests (2016-2017) that led to the impeachment of former president Park Geun-hye.
Faced with long-simmering dissatisfaction and rising unemployment, policymakers have turned their eyes to domestic SMEs and start-ups to transform them into new engines of competitiveness. At the same time, the AFC and the burst of the IT bubble in the early 2000s had a negative impact on domestic entrepreneurs' risk-taking propensity. Aside from an early, yet limited, interest by Kim Dae-jung’s government in venture capital and technology start-ups, it was Park’s 2013 “Creative Economy” strategy that provided entrepreneurship with major public backing. In a changing business ecosystem, her successor Moon Jae-in shifted his focus to an “income-led growth” paradigm. Despite very limited results in terms of job creation and equitable distribution, Moon has doubled down on the government’s commitment to promoting entrepreneurship under a new national strategy for the Fourth Industrial Revolution by pledging to nurture an ecosystem for innovative start-ups. Consequently, his administration has poured 3.4 tn won (3.04 billion USD) into a venture capital fund for start-ups and has enhanced cooperation with the private sector to launch incubators and accelerators (e.g. the Startup Alliance Korea) and foster synergies between domestic and foreign start-ups (e.g. K-Startup Grand Challenge). As a result, the country boasts the world’s highest number of start-ups per inhabitant and is behind Israel alone in terms of R&D spending (4.2% of Korea’s GDP). Within Korea’s mushrooming start-up scene, there are eleven ‘unicorns’ that constitute the world’s fifth largest flock, with the highest concentration in the retail and wholesale industries along with restaurant franchises and the accommodation sector.
The pandemic has heightened Korea’s drive towards becoming a start-up hub to boost innovation while easing its dependence on chaebol. Indeed, the digital pillar of Moon’s Keynesian recovery plan, dubbed the “Korean New Deal”, further reinforces the administration's efforts to invest in digitalisation under the “I-Korea 4.0” Initiative, which aims to diffuse cutting-edge technologies, including AI and 5G, to revamp Korea’s economic competitiveness in the post-pandemic period. This is expected to reduce the overall gap between SMEs, which have somewhat been overshadowed by the government’s overt focus on start-ups, and conglomerates, due to the former’s very limited access to advanced technologies and skilled workers. In a similar vein, as of 2015 technology start-ups only represented 14.5% of start-ups in the country, a relatively low ratio considering Korea’s overall R&D spending.
Though the chaebol-led growth model has been accused of hindering productivity by restricting the flow of capital and talent to smaller companies, corporate venture has remained central in efforts to build an accommodative ecosystem for entrepreneurship. As argued by Klingler-Vidra and Pacheco Pardo, chaebol have been “embedded" in the central government’s strategy. This can be clearly seen in its approach to foster start-ups’ dissemination across the country through the Centers for Creative Economy and Innovation (CCEI) initiated under the Park administration. Compared to other countries, Korea’s nineteen CCEIs are peculiar types of public-supported start-up facilities because, in each region, they are based on a trilateral business model wherein the local and central government partner up with a national conglomerate that is tasked with facilitating access to entrepreneurs.
While the Bloomberg Innovation Index ranks Korea as the world’s most innovative country, the start-up industry is a long way from catching up with the share of conglomerates in the national economy. For instance, in 2019, the start-ups’ total flow of venture capital was slightly over half of Samsung Electronics’ Q4 profit. In addition, chaebol are some of the world’s most vertically integrated entities and they set up their own affiliates to compete against start-ups, whereas their counterparts in the U.S. and China integrate rising start-ups through active M&A. Unsurprisingly, Korean start-ups do not have much longevity, with a little over 15% of them alone surviving their first five years . On the other side, the existing subsidies scheme has often propped up low-productivity and innovative SMEs. Therefore, in the absence of proper calibration, the government’s systematic approach risks going against the overall aim of bolstering productivity. Added to these barriers, the policymakers’ over-indebtedness with the chaebol has hindered major regulatory reforms, solely introducing cosmetic changes that have not notched their core privileges. However, some positive signs came last December when the National Assembly, in which the ruling party controls a solid majority, passed the most significant bills to date to rein in corporate governance through stricter control over conglomerates’ financial affiliates and a revision of the voting rights of chaebol’s major shareholders.
Korea’s experience in steering partnerships between major conglomerates and smaller firms clearly emerged during its COVID-19 response. As anticipated, the pandemic provided many opportunities to forge collaborations, the most recent of which resulted in the domestically-produced low-dead space syringe said to improve the efficiency of vaccines by 20% by minimising residues left in needles. Over the last eight years, the role of start-ups and SMEs has further integrated within Korea’s rather limited business model tradition and society has gotten arguably accustomed to this type of entrepreneurial venture. Still, amid a slowly changing cultural mindset, the social status associated with a prestigious conglomerate job for life remains too deeply entrenched. As President Moon’s end of term approaches, recent developments have indicated that conditions might be ripe to tame in Korea’s corporate governance in spite of many failed attempts. But the needs of the pandemic recovery could once again limit the government’s ability to harness chaebol’s power in a context where Koreans might well continue to see SMEs and start-ups as less reliable economic actors within a highly uncertain economic environment.