Deregulation crucial for Korea to foster innovative startups: McKinsey

Published : Jul 13, 2017 - 16:30 Updated : Jul 13, 2017 - 17:13

Despite the emphasis on startups’ role as the country’s future, South Korea’s startup ecosystem currently lags behind the global competition, as it is weighed down by overregulation, according to a new report by McKinsey & Company on Thursday.

Excessive regulations make it difficult for startups to introduce new tech-driven services and products to the market, according to the “Startup Korea!” report by McKinsey Korea, commissioned by Google Campus Seoul and the Asan Nanum Foundation. The report suggests that Korea must adopt a more open regulatory system to foster an environment where innovative startups can emerge.

Right now, Korea enforces the same regulations initially designed for traditional offline businesses to incoming firms. This makes it hard for startups looking to upturn old-fashioned business models or introduce entirely new services to commercialize their innovations.

According to the McKinsey report, 70 percent of the world’s top 100 startups that raised the most investment in the past year, including sharing economy-based service providers Uber and Airbnb as well as fintech firm Ant Financial, would find their business models illegal or noncompliant with Korea’s local regulations.

Panelists discuss the Korean startup ecosystem during an event to present McKinsey Korea's "Startup Korea!" report at the Korea Chamber of Commerce & Industry headquarters in Seoul, Thursday. (Google Korea)

“From a regulatory perspective, it’s essentially impossible for an entrepreneur to start developing an innovative idea, product or service in Korea,” said McKinsey Korea partner Kim Su-ho, showcasing the report’s key findings in Seoul.

“Most innovation today is driven by data and involves the merging of differing industries. However, it’s very hard for firms on this front to meet the conditions necessary for market entry as the existing laws were meant for brick-and-mortar businesses,” Kim said.

The country’s outdated regulatory system has meant fewer startups recognized in the global space. Only one Korean startup, Lunit, was included in the world’s 100 startups in the fast-growing field of artificial intelligence, selected by US-based research firm CB Insights.

Qualitative growth is also another task the Korean startup ecosystem must aim for. According to McKinsey, the number of new startups in Korea jumped from 65,000 in 2011 to 96,000 in 2016, marking meaningful quantitative growth.

However, Korea ranked 27th in the 2017 Global Entrepreneurship Monitor Index, which measures the level of entrepreneurship occuring in a country based on the maturity of its startup ecosystem, legal and social infrastructure and culture.

To improve Korea’s startup ecosystem and foster an environment that encourages innovation, McKinsey called for the government’s adoption of a “negative regulation” system.

Korea’s current “positive regulation” system acts like a whitelist, laying out what it permits, and in theory banning anything not covered. A negative system, on the other hand, acts like a blacklist, banning certain items. Using this approach, new businesses or services are considered legal as long as they are not expressly banned.

Adopted by countries like the US, the negative system is touted as a more open regulatory framework that offers more freedom to businesses in developing and introducing entirely new technologies and services currently unavailable in the market.

The global consulting company also suggested Korea expand private sector investment, as the government currently accounts for more than 40 percent of the country’s venture capital market.

Korea should also adopt regulations that encourage mergers and acquisitions as the main exit method for venture capital funds that invest in startups, McKinsey said. Right now, Korean startups largely depend on initial public offerings -- which on average take around 13 years to reach -- while M&As are more active in other countries.

To revitalize M&As, the government must incentivize big businesses to invest more in startups in the form of corporate venture capital, according to the consulting firm.

Moreover, startups should be able to easily access and make use of good data, a core asset of the information and communication technology sector. Privacy regulations should also be relaxed to increase data accessibility, it said.

By Sohn Ji-young (jys@heraldcorp.com)