- South Korea is now at a critical inflection point. The country has succeeded in becoming an economic powerhouse with a technological edge, especially through big conglomerations manufacturing software and hardware.
- The scene is starting to change. Startups are increasing in number and furthering their influence and impact on the market.
- Mindsets, cultural differences and the language are hurdles that foreigners face when entering the South Korean market, though many more factors make it an attractive one.
BTS, Squid Game, Samsung, Mukbang, Skincare…
When you see these words, what comes to mind? Most people easily think of South Korea. Although these words represent essential aspects of the country, it is so much more.
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Building an economic powerhouse
Once one of the poorest countries following the Korean War in the 1950s, South Korea has rebuilt its economy from scratch. With barely any natural resources available, the only asset that Korea has had to rely on is its people, who have acted as a cornerstone of the extraordinary economic growth known as the Miracle on the Han River. The country’s number one focus was to elevate education, and within just 10 years following the Korean War, illiteracy plummeted from 78% to 4%.
In parallel, the country put all its efforts into maximizing export products, starting with simple items such as garments, fibre and footwear. As exports picked up, the government focused on building more sophisticated hardware-based products for heavy manufacturing industries such as automotive, TVs, steel, mobile devices and semiconductors. At the same time, the government has strengthened its collaborative ties to support a select number of front runners in these industries, which led to the creation of Chaeobols – family led large industrial conglomerates.
While highly successful, this choice has had side effects including the uneven distribution of wealth and power and the creation of classes among the population. Economically speaking, South Korea has risen to become the 11th largest economy and the fifth largest exporter of goods and services globally. Samsung and LG have become the top display makers worldwide; Hyundai and Kia combined are third in vehicle production numbers. In July 2021, the United Nations Conference on Trade and Development (UNCTAD) upgraded Korea’s status to a developed economy.
A balancing act
South Korea is now at a critical inflection point. The country has succeeded in becoming an economic powerhouse, with a technological edge in manufacturing and hardware-based industries primarily led by large corporations. However, in the era of the Fourth Industrial Revolution, where innovative disrupters could overthrow strong incumbents, the country has been striving to use startups to foster such disruptive innovation; making the balance between industrial conglomerates and startups ever more crucial.
Korea hasn’t always been known as a startup friendly country. This recent development only occurred in the last few years thanks to government support schemes for startups like TIPS (Tech Incubator Program for Startups), a state led incubation programme that discovers and nurtures promising startups by selectively matching them with government funding. In 2017, South Korea established the Ministry of SMEs and Startups to systematically oversee various startup support schemes to continue and reinforce the momentum. Venture investments have also poured into Korean startups and have grown 78% year-on-year in 2021, surpassing 7.7 trillion won ($6.4 billion). The number of new jobs created by startups in 2021 surpassed the number of jobs created by the four largest conglomerates combined.
Startups are not only excelling within the boundaries of the Korean peninsula. Many have had success internationally. Various webtoon platforms, education brand Pinkfong – better known by their famous song ‘Baby Shark ’ – are just a few examples. A well-known K-pop entertainment venue, Hybe, has been known to house the world-famous K-pop superstar BTS.
Lim Jungwook, Partner at TBT Partners, reveals that: “the majority of Korean VC funds used to depend mostly on public capital, known as a fund of funds. However, it has diversified significantly over the years. Large investments are now coming from entities like corporates, banks and pension funds, which will continue to positively fuel the startup ecosystem.”
Shift of mindset is making startups more attractive
Startups do not necessarily see conglomerates as a threat: they are an opportunity to create synergies, further enhancing impact.
Andre Yoon, Chief Executive Officer and Cofounder of MakinaRocks, says: “Active participation from major corporates to look inside and out to nurture and collaborate with startups is pivotal. For example, three of the four founding members of MakinaRocks were from SK Telecom (a conglomerate) and funded by the same company. The paradigm is clearly shifting towards a startup ecosystem where corporates are opening doors to entrepreneurs to leverage their own technologies that would otherwise have been limited in terms of their usage.”
Having witnessed successful return on investing in startups over the years, Corporate Venture Capitals (CVCs) now have emerged as one of major actors in the investing scene. Unlike traditional venture capitals acting mainly as a financial vehicle, CVC investments are favoured by startups who are keen to leverage corporates to successfully scale their businesses. Corporate strategic investments and acquisitions have become very attractive alternative option for founders.
The shift of mindset towards embracing risks in the workforce is also playing a significant role. Recent survey studying the profiles of successful entrepreneurs show that nearly a third of startup founders left their stable jobs working for conglomerates like Samsung, LG and Hyundai. This shift is more visible in the younger generation.
In the past, becoming a medical doctor or practising law was the key to success and university graduates would primarily aim for jobs with large corporations. However, the Gen-Z mindset is significantly different. They value individual happiness over organizational efficiency and are more open to joining a startup, which tends to be more flexible, less hierarchical, and a place where it is easier to find meaning in work compared to corporate counterparts. Moreover, as the startup ecosystem has proliferated, the remuneration gap between corporations and startups has lessened over the years.
DoBrain Chief Executive Officer Choi Yejin believes that: “the overall mindset of the workforces has changed significantly over the years. Not only are passionate Gen-Z workers joining the company, but very experienced colleagues from corporations like Samsung, Microsoft, KT are joining to devote themselves to something that really keeps their hearts pounding. This shift of workforces from large corporations was seen significantly less often even a few years ago.”
More diversity needed to drive creativity and resilience
Although this news is uplifting, South Korea has not yet achieved a spot in the top tier of the global startup ecosystem – unlike its peers Israel and Singapore. Korea is largely a homogenous country and is hesitant to embrace foreigners; as such, it lacks diversity, a known impetus in driving creativity and resilience. Most startup support programmes focus on outbound challenges, aiming to help domestic startups go global. Inbound programmes such as NIPA’s K-Startup Grand Challenge require further scaling to allow more foreign companies to enter Korea. Although visa programmes such as Oasis and F2 VISA exist, the process could be easier and friendlier for foreign talent.
Due to the COVID-19 pandemic, the government further tightened its visa evaluation measures for applicants to obtain and maintain their status. Mindsets, cultural differences and the language are also hurdles, though many more factors make it an attractive market.
Jordan Monnet of NR2 agrees that: “There are clearly cultural and language barriers which a foreigner needs to make a conscious investment to overcome. Despite these challenges, South Korea offers numerous benefits. It’s a tremendously fast-moving market with people eager to try new services and who share immediate reactions. It’s also geographically a great hub for the North Asian market, with easy access to South East Asia as the country has a positive relationship with the region.”
With more open-mindedness and diversity in place, South Korea will be able to evolve into a leading innovation hub globally, poised to deliver the next world leading startups and achieve the next Miracle on the Han River.