Where Has All the Money Gone?

Korea is primed for startling growth in the small and medium enterprise (SME) sector. Korean SMEs account for 99.9 percent of all enterprises, 87.5 percent of all employees and 49.4 percent of production, according to numbers from the Korean Small and Medium Business Administration. However, right now, SMEs are not generally growing at a rate that can positively impact the economy. They are missing a few essential ingredients. These ingredients make up the differences between second-string economies based around copying good ideas from outside sources and first-string economies, which are centers of true innovation and new ways to make money. While enumerating all of the missing ingredients is beyond even the best expert, some can be identified. And the most acutely missed ingredient is the "angel" investors.

Angels in the Sky

The angel investor is a legendary figure in such innovation centers as Silicon Valley in the United States. They are responsible for the entire idea of an innovation center, and roll previous generations of successful profits into new generations. Anonymous, whimsical and unpredictable, these faceless benevolent rich guys seem to buy into the Next Big Thing all the time. However, in Korea, they are noticeably absent. And their absence hinders the growth of a successful SME sector, especially in the technology market.

The path of technological success in Silicon Valley follows a predictable pattern. Small companies start out with a good idea or skilled people. Two or three gifted guys work in a garage or a basement, working on their idea. Because of their location, they eventually run into the right people who give them the venture capital that they need to hire more staff and develop their idea further. There are several rounds of investment, each time upgrading the office space and personnel of the company. Eventually, the company either burns out or begins turning a profit, and all the investors of the previous rounds breathe a little easier. The burn out vs. turning a profit rate is actually very low, something like 10 or 15 percent, and yet the 85-90 percent of companies who are not successful still get some investment capital they need to develop their idea.

Where do these angel investors come from? Most of them are from the previous generation of Silicon Valley success. The area has been the center of technological innovation for approximately 100 years, from radio tech to silicon transistors - from which the valley gets its name - to Ethernet, to the dot-com bubble, to the Web 2.0 era. Many of the successful businessmen who made it big in the dot-com era, for example, have the capital around to serve as angel investors for the Web 2.0 era. This self-perpetuating ecosystem of innovation has been changing the way we live for the past 100 years, and may continue to do so for the next 100 as well. Korea has nothing like that yet.

Conglomerates Everywhere

There are, of course, several other missing factors affecting the growth of SMEs in Korea. One of these other factors is customers. Most Korean SMEs have only one customer with which they do business. Usually it is Samsung or LG, or some other Korean conglomerate (chaebol). Most Korean SMEs are locked into a relationship with their chaebol, who almost acts as a patron. Its a good gig if you can get it, as you always have a dependable buyer for goods. However, this limited customer base cripples the SME in the areas of marketing and sales. When the company wants to expand its customer base, it has no idea how to go about doing that. And if your chaebol client discovers one of your inevitable competitors, they will drop you in an instant for the faster, cheaper alternative. Then you're down to zero customers.

This one-customer problem is a symptom of a self-limiting thought process in Korean entrepreneurs - they think locally and act locally. The axiom in other business circles is think globally and act locally. Everyone and their brother who starts up a business is hoping to become an international powerhouse some day. Well, everyone outside of Korea that is. However, inside Korea, it seems as though becoming a reputed local supplier to a chaebol is the highest dream to which most companies aspire. Unfortunately, the dream is high-risk, even if it is successful, for the reasons mentioned above.

Giant, Clumsy Hands

A third missing piece of the puzzle is a fertile ground for innovation. Korea has several areas set up to match the archetype of innovation - Silicon Valley. These areas, such as Daedeok Innopolis in Daejeon and Guro Digital Complex in Seoul, do have collections of small and medium businesses put together in parks. They also have many of the best graduates in Korea working for those small companies. They have government programs set up to aid deserving companies, and those programs do help some small amount of companies per year. However, this government reliance can actually harm more than good. Many businessmen realize that even the benevolent hand of a government is large, clumsy, and can easily and carelessly destroy whatever it touches. Government bureaucracy is a frightening thing.

The national government in Korea shows an unprecedented interest in the private IT sector and offers substantial programs, awards and incentives in order to encourage SME growth. However, the value of these programs is dubious. As an example, the Korean government offers research grants to SMEs to research technologies it favors, such as augmented reality, robotics, and ubiquitous devices. However, the details of the research criteria, lack of expectation for adequate results and evaluation procedures for proposed plans are sub-par. This has created a bubble of parasitic SMEs that exist only to create and present unrealistic research proposals to the Korean government in order to get free government money, which they then squander, without creating any worthwhile results.

Other Options

Some might think of foreign investment to get the sector off the ground. In fact, Silicon Valley itself could come to Daejeon and transform the place. However, Korea has some serious problems with foreign investment, despite the amount of ink used to talk about it in any Korean IT magazine or newspaper, including this one. Foreign investment can become a small part of the Korean SME scene, but cultural and political factors will most likely prevent it from becoming more than a small part.

Others might look to the chaebol to increase SME ventures. But while Samsung and LG are always happy to sub-contract out their work to affordable alternatives, they are also always happy to keep those affordable companies close to the vest. A docile stable of SME companies that follow an economic giant only benefits said economic giant, and not the SMEs.

Still others think that government-led ventures, government-sponsored technology parks, and government-hosted trade shows and expos are the way out. However, centralized, bureaucracy-managed programs, while they can have some good points, also have limitations that must be understood. The government's hands are tied by its very nature, and it can only be counted on for a small portion of what is necessary.

So while the Korean government does inject some cash into the system, it can never inject enough to create a self-sustaining SME ecosystem. And while chaebol such as LG and Samsung also serve as an excellent first customer for growing companies, they will not help a company to move past the one-customer barrier. Foreign investment can work for some companies, but not enough. Only by creating a self-sustaining domestic venture capital market can Korea create the next Silicon Valley. And only through a multitude of customers, domestic venture capital, and a minimum of government interference can it be made. When it happens, I recommend it be called Silicon Han.