[Op-Ed] Urgent Deregulation Needed to Revitalize Venture Businesses

While the number of unicorn companies worldwide increased 2.7-fold, the number of Korean unicorns rose only 1.4-fold

After the introduction of the “regulatory sandbox” system, more than half of firms expressed dissatisfaction

Regulatory reform is needed that allows in principle and prohibits only exceptionally

Startups are being prevented from spreading their wings because of regulation. Startups are critically important because they drive innovation, create jobs, and survive in global competition. From 2019 to 2023, while the number of unicorn companies worldwide increased 2.7-fold, the number of unicorns in Korea rose by only 1.4 times.

Korea is moving toward strengthening various regulations related to new businesses. The Korea Fair Trade Commission is tightening regulation of platform companies and pushing to legislate an online platform law. Because of regulations that obstruct progress, Korean companies are collapsing or relocating overseas. For example, as of 2023, among the businesses pursued by the world’s top 100 unicorn companies, 17 could not be introduced in Korea or could operate only in a limited way. In particular, businesses in areas such as home-sharing, telemedicine, and fintech are not feasible because of related regulations.

The United States pursued a startup support policy called “Startup America” and is supporting startups by establishing the U.S. Office of Innovation. It also created a fast-track patent processing system to shorten patent examinations and, at the same time, eased related regulations by providing visas to foreigners seeking to start startups.

India, through its “Startup India Hub” program, provides legal advice and helps resolve difficulties related to financing and regulation that startups face. Reflecting India’s distinctive startup trend, in which many entrepreneurs launch startups by pursuing technological development, it reimburses 50% to 80% of the fees required for administrative procedures such as patent and trademark applications.

To understand how regulation is preventing the growth of Korea’s startup sector, one must look at the factors restricting startup M&A. There are two ways for startups to recover investment funds: IPOs and M&A. M&A also serves as a driving force that encourages new business creation, helping a virtuous cycle in the startup ecosystem. Korea is excessively biased toward IPOs, so only 2.3% of startups recover investment funds through M&A. Compared with Germany’s 90%, that is a dismal figure.

At the same time that the Fair Trade Commission is pushing the “Online Platform Act,” it has also announced that it will make the standards for reviewing M&A involving platform companies even stricter. Through the Monopoly Regulation and Fair Trade Act, it is restricting investment by corporate venture capital (CVC) and reducing the means of recovering funds. CVC is often operated by large companies for M&A purposes and is viewed positively because, beyond financial support, startups can also expect support from investors. However, there are currently many restrictions on the establishment and operation of CVCs, resulting in a lack of liquidity across the venture market as a whole.

In 2019, the government introduced the “regulatory sandbox” system, creating a narrow opening for deregulation. A regulatory sandbox is a system that allows new products using new technologies to be launched and tested in the market by exempting or deferring existing regulations under certain conditions. However, it still has many shortcomings, to the point that more than half of companies have expressed dissatisfaction. In particular, the burden created by uncertainty over the time required and the evaluation criteria is substantial, and when relevant regulations are insufficient, long delays can occur.

The government should acknowledge the limitations of the regulatory sandbox approach and expand the shift to negative regulation from the perspective of innovative business through comprehensive regulatory relief. Regulatory reform should move away from the current approach, which prohibits in principle and allows only exceptionally, toward negative regulation that allows in principle and prohibits only exceptionally.

This is the time to sweep away outdated regulations and foster future growth engines. Through regulatory innovation, Korea must build a startup ecosystem so that startups can evolve into unicorns. As a country that must pursue constant innovation amid competing nations, Korea’s most urgent priority is to make every effort to ensure that startups can realize their potential.

Hyungjun Yoo, Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [칼럼] 벤처 활성화 위한 규제 완화가 시급하다

Author: Hyeong-jun Yoo

Date: 2024-09-26

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&idx=26884