South Korea is the land of foldable phones, K-pop and beauty creams. But somehow its best and brightest are missing out on the hottest innovation trends.

Take a look around. Where is Korea’s Uber Technologies Inc.? And there’s nothing close to China’s Ant Financial, the fintech giant backed by Alibaba Group Holding Ltd., which spans mobile payments to asset management. The few unicorns the country has birthed are baby-sized. Even Indonesia’s fledgling venture-capital scene, which Korean funds enthusiastically bought into, has churned out bigger startups.

In that light, it’s little surprise that President Moon Jae-in is pushing for Korea’s second venture boom in the past two decades, vowing to infuse $12 billion over the next three years. Before billions are deployed, however, it’s worth asking why we’re here in the first place. In a word: regulation.

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Unicorns often operate in legal grey zones. Ride-hailing firms from Manila to Paris and San Francisco have battled entrenched local interests. There’s a big distinction in South Korea, however, because executives can be personally liable in labor disputes. Last month, prosecutors indicted Lee Jae-woong, a serial entrepreneur and founder of Korea’s answer to Uber, for operating a taxi service without a license — just when Moon was talking up innovation.

Pinched by two trade wars and the highest level of youth unemployment in decades, you’d think Moon’s administration would be eager to slash the red tape that hinders its budding gig economy. In Indonesia, for example, taxi startup Go-Jek has become the nation’s largest private-sector employer. But while the government has voiced regret over Lee’s indictment, it remains resistant to change.

Consider, too, the hurdles faced by digital banks, which bear excessive capital requirements for such a nascent industry. In May, regulators rejected Viva Republica Ltd.’s bid for the nation’s third online banking license, questioning the startup’s ability to raise sufficient capital. Five months later, the unicorn is giving it another try — this time with powerful partners like KEB Hana Bank, one of the country’s biggest lenders — and will lower its stake to 34% from 60.8%.

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No doubt, capital is a critical factor that allows online banks to thrive. Kakao Corp.’s digital lender, for instance, is gaining users faster than smaller competitor KT Corp.-run K bank, after raising 1.8 trillion won ($1.6 billion) of capital within the first two years of operation. But in the banking world, it’s the capital ratio, not the absolute level, that should concern regulators. Startups should be able to grow assets at their own pace as long as their exposure to risky assets is in line with traditional commercial banks. So why not open the floor to competition?

Meanwhile, there’s a sense that chaebol reform, which ushered Moon to office in 2017, has stalled. Rather than overhauling its sprawling family-run conglomerates, the administration has come crawling back to the likes of Samsung Electronics Co. for jobs and capital investment as the economy slows. Joh Sung-wook, who replaced “chaebol sniper” Kim Sang-jo at the helm of Korea’s antitrust watchdog in September, is instead setting her sights on data monopolies and tech giants such as Alphabet Inc. and Facebook Inc.

This is bad news. Thanks to their exclusive contracts, chaebol can squeeze profits along the supply chain, which strains Korea Inc.’s will and ability to innovate, says Sangin Park, professor of economics at Seoul National University. By now, he sees no policy difference between this government and that of its predecessor, Park Geun-hye, who wound up getting impeached after investigations into her cozy relationships with chaebol, Samsung chief among them.

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South Korea’s secret sauce used to be process innovation, as Samsung made semiconductors better and quicker than international rivals and Hyundai Motor Co. streamlined auto manufacturing. Times have changed. These days, we want all the trappings of a sharing economy, complete with connected cars and technology-driven financing. Stiff regulation and rigid chaebol supply chains are cages that stifle unicorns. So President Moon, set them free.

To contact the author of this story: Shuli Ren at sren38@bloomberg.net

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron’s, following a career as an investment banker, and is a CFA charterholder.

©2019 Bloomberg L.P.

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