"Revitalizing Local Venture Finance to Address Low Birthrate"

Hankyung Research Institute, 'Measures to Revitalize Regional Venture Finance' Report
About 80% of Venture Investment in the Capital Area... Revitalizing Regional Venture Finance

To address the issues of low growth and low birth rates, it has been suggested that regional venture finance should be revitalized to create regional innovative companies.

On the 3rd, the Korea Economic Research Institute announced this through a report titled "Measures to Revitalize Regional Venture Finance for Fostering Regional Innovative Companies," commissioned to Oh Jeong-geun, president of the Korea Financial ICT Convergence Society.

The root problem is the lack of high-wage jobs outside the metropolitan area. According to the Statistics Korea's data on net migration of youth (ages 19-34) by metropolitan local governments, Seoul's net youth inflow increased about twofold from 24,941 in 2018 to 46,198 last year. Gyeonggi-do had the second highest net youth inflow with 16,829 last year, following Seoul. In contrast, most regions outside the metropolitan area, except Sejong and Daejeon, experienced a decrease in youth net migration last year.

The report argued that as youth concentrate in the metropolitan area, problems such as employment difficulties, rising housing prices, and traffic congestion arise, delaying youth marriage and childbirth, which leads to low birth rates. As of last year, Seoul's total fertility rate was 0.59, lower than the national average of 0.78. Low birth rates lead to a decrease in the labor force and slow down economic growth in the mid to long term. Using 2021 data from the Organisation for Economic Co-operation and Development (OECD), the Korea Economic Research Institute examined the impact of fertility rates and aging on economic growth rates. It was analyzed that a decrease of 0.25 in the total fertility rate results in a 0.9 percentage point reduction in growth rate.

To reduce youth concentration in the metropolitan area, the report emphasized the need to create a regional innovation ecosystem that generates quality jobs. Innovation universities, research institutes, innovative companies, and venture finance must harmonize. Above all, the role of venture investment is crucial. According to the Ministry of SMEs and Startups, 79.7% of domestic venture investments last year were concentrated in the metropolitan area. Even the five major metropolitan cities accounted for only 11.4%. The provinces accounted for 8.9%.

The report proposed policy tasks such as establishing systems for regional private venture finance, revitalizing the investor fund recovery market, and fostering corporate venture capital (CVC). Since regional private venture finance tends to involve high risk and high investment, it is necessary to introduce multifaceted support policies including financial and tax support, deregulation, and improving living conditions for workers.

To activate investment in high-risk venture companies, the report stated that the investor fund recovery market, such as mergers and acquisitions (M&A), should be revitalized like Silicon Valley in the United States. In Korea, M&A cases are few, and there is a high dependence on initial public offerings (IPO), which take a long time to recover funds. The report argued that M&A procedures should be simplified, and regulations on the separation of banking and commerce as well as prohibitions on transactions between affiliates should be relaxed.

The report also emphasized the need to revitalize the CVC market. President Oh said, "Recently, the government allowed the establishment of CVCs and recognized exceptions to the principle of separation of banking and commerce, which prohibits general holding companies from owning financial companies." He noted that CVCs differ from traditional venture capital (VC) investments in that they can achieve various synergies through strategic objectives.

It was stated that follow-up measures should be prepared to stabilize the CVC market and activate venture investments. When corporate venture finance acquires venture companies and makes them affiliates, transactions between the parent company and affiliates are defined as private profit appropriation, which weakens the incentive for CVCs to acquire venture companies. The report said, "It is necessary to correct this." President Oh said, "Fostering regional innovative companies to resolve the concentration of regional youth in the metropolitan area is the shortcut to solving low birth rates and low growth and expanding growth engines."

This content was produced with the assistance of AI translation services.