"Building a Corporate 'Growth Ladder' from Capital Sourcing to Long-Term Growth Requires Regulatory Easing"

Korea Economic Association Releases Policy Report Commissioned from Professor Kwak Kwanhun
Five Key Policy Tasks Proposed for Corporate Growth
Calls for Easing CVC Regulations and Corporate Group System
Reduction of Benefits as Companies Grow Also an Issue
"Incentives Should Be Provided to Growing Companies"

On September 24, the Korea Economic Association presented "Five Policy Tasks for Corporate Growth" and called for regulatory easing and policy support, based on a report titled "Policy Tasks for Building a Growth Ladder for Companies." The report was commissioned from Professor Kwak Kwanhun of Sunmoon University, who also serves as president of the Korea Association for Small and Medium Business Studies.

Korea Economic Association, Yeouido, Seoul. Photo by Kang Jinhyung aymsdream@

First, the report emphasized the need to ease regulations on corporate venture capital (CVC) in order to revitalize venture investment and help early-stage startups grow into unicorn companies.

CVC investment is significant not only because it helps investors secure new growth engines, but also because it provides vital resources for startups to grow. However, current regulations on CVC, such as the external funding limit (40%) and the overseas investment limit (20%), are acting as obstacles to the activation of venture investment. The report therefore proposed easing restrictions on external contributions to CVC, overseas investment limits, and investment regulations.

Regarding the domestic corporate group system, the report pointed out that the current focus remains on preventing the expansion of market dominance by large corporations. When the asset size of a corporate group increases, it is designated as a public disclosure-targeted corporate group or a cross-shareholding-restricted group, leading to various restrictions on management activities such as internal transactions, investments, and debt guarantees. The report noted that under the current system, which strengthens penalties rather than incentives as companies grow, there is a growing concern that the motivation for corporate growth is being undermined.

As a model case, the report cited Japan. Japan operates its corporate group system with an emphasis on the synergy of group management. After abolishing holding company regulations in the 1950s, Japan shifted corporate group regulation from antitrust law to corporate law, and in 2014, imposed an obligation on parent company directors to establish and manage an internal control system for the entire group. The report proposed that Korea should also shift from preemptive regulation of corporate groups to post-facto sanctions for illegal acts, and introduce an internal control system similar to Japan's.

The report also identified the reduction of benefits as companies grow as a factor that discourages voluntary growth. In reality, small and medium-sized enterprises (SMEs) receive a 25-50% tax credit for research and development (R&D), but this drops to 8-45% for mid-sized companies after the grace period ends. For employment increase, SMEs receive a tax deduction of 14.5 million won per person, while mid-sized companies receive only 8 million won, with no grace period. In addition, startups that incur losses in their early stages are not eligible for corporate tax reductions, reducing the effectiveness of tax support.

To address this, the report proposed that companies continuously investing in new growth, original, and national strategic technologies should continue to receive tax credits even after the sixth year as a mid-sized company, with the deduction rate gradually reduced. It also suggested that, similar to the R&D tax credit, the grace period for employment-related tax benefits should be gradually introduced and expanded.

The report also pointed out that in a rapidly changing industrial environment, entering new businesses and diversifying operations is essential for corporate growth, but the current Monopoly Regulation and Fair Trade Act serves as an obstacle. Equity investment, mergers and acquisitions (M&A), and joint ventures are regarded as effective means to diversify business operations by utilizing external resources. In particular, equity investment requires lower initial costs and allows for later business expansion through subsidiary formation. However, the Fair Trade Act requires holding companies to own at least 30% of the shares in listed subsidiaries and 50% in unlisted subsidiaries, making small-scale equity investments or joint ventures with external companies difficult.

Accordingly, the report recommended revising the current "Special Act on Corporate Vitalization" to exempt or defer the holding company shareholding requirements for equity investments or M&As aimed at business diversification that meet certain conditions. Furthermore, it stressed the urgent need to introduce a "stock payment system," as in Japan, so that even companies with limited capital can pursue M&As by offering shares as consideration.

The report also stated that an institutional foundation is needed to secure top talent and support long-term investment for sustainable corporate growth. Recently, demand for restricted stock units (RSUs), a performance-linked compensation system, has been increasing, but institutional limitations hinder their introduction and use. The report also highlighted the importance of fostering a long-term investment culture, noting that the domestic capital market is still heavily focused on short-term returns and that this needs to change. As an improvement to the performance-linked executive compensation system, the report suggested allowing free issuance of new shares for RSU grants or establishing exceptions to treasury stock acquisition regulations.

Lee Sangho, head of the Economic and Industrial Division at the Korea Economic Association, stated, "The biggest problem with our economy is that regulations accumulate at every stage of growth, making it difficult for companies to expect rewards for taking on challenges. It is now time to move away from a size-based, stepwise regulatory system and boldly shift policies toward providing incentives for growing companies."

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