Help for venture firms misguided

In September 2001, to cope with a bursting “venture bubble,” the Millennium Democratic Party and the Ministry of Finance and Economy came up with a clever and extraordinary idea. Their plan was a system in which the government compensates a portion of the losses investors suffer from putting money into venture firms. After meeting strong resistance, the initial proposal of compensating 80 percent of investors’ losses was lowered to 50 percent. People argued that the system conflicted with market principles in which investors take responsibility for the risks that follow their investments. Unfortunately, in November 2001, the system never happened. The example epitomizes the mentality the government has attempted to use to fix the venture situation. The government tried to handle the delicate venture sector, weakened by being government-led, once again with a system completely contrary to market principles. Many people attribute the currently abysmal venture situation to the government’s policy of trying to lead the sector’s development rather than leaving it alone. The Kim Dae-jung administration in its early stages eyed venture development as a way of recovering from the foreign currency crisis the country was suffering at the time. Supporting venture firms was the administration’s alternative to the jaebeol model, which many people blamed for the country’s financial difficulties. However, market principles were neglected. In 1997, the government began selective support of venture companies by making a venture firm certification system. Government certified venture firms were granted 50 percent abatements of corporate and income tax, exemptions from a number of other taxes and various benefits including export support and exemption of military service for male workers. When examined for listing on the Kosdaq, these companies were exempt from the capital and debt rate requirements other companies had to satisfy, making it much easier for them to be listed. The system gave many companies the perception that once certified by the government, they could make big money easily by being listed on the Kosdaq. Some venture start-ups began focusing more on the Kosdaq and money games than technology development. As a result the Kosdaq’s market capitalization of 7.8 trillion won ($6.5 billion) in 1998, exploded into 98.7 trillion won the next year. The bubble eventually burst and the market ended last year around the 37 trillion won level. Dr. Lee In-chan, a researcher of information and communication policy, said, “The market lost its function to distinguish healthy ventures from the weak ones, and the bubble further inflated as more speculators took the places of venturing entrepreneurs.” He added that the Lee Yong-ho and Chin Seung-hyun scandals were both results of the situation in the sector. Lee Jae-woong, chief executive of Daum Communications Corp., said, “Venture companies lacking competitiveness should have been left to close down, but the government saved them, making things even worse.” In May 2001 the government started saving ventures that were dying from the breaking bubble. The government tried to attract investors by having the Korea Technology Credit Guarantee Fund 100 percent guarantee primary collateralized bond obligations issued from venture firms. Nine hundred seventy-three firms were supported a total of 1.92 trillion won in the process. The plan resulted however in the delay of restructuring in the venture sector. Firms that should have closed down stayed alive by receiving more grants out of false revenue reports and some of the promising firms became insolvent, not provided necessary financial support. In February 2002, the government began closing down weak firms and setting measures to revitalize the sector. But the damage had already been done. by Kim Jong-yoon