New political economy of startup-led growth model: Taiwan and Korea

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p. 11). This reflects evolving political economies, but also illustrates how Taiwan and Korea are providing a fertile environment for R&D reflected by private sector R&D investments. Taiwan and Korea provide favorable environments for R&D indirectly via infrastructural support, e.g. in both countries labor force has extensive educational attainment (70% of new generations have university education) (TNS, 2018; KLEMS, 2018), but while the education supports innovation, the low levels of education in older age groups also hinders transition to new innovative industries (Jones & Lee, 2016).

6.2. New political economy of startup-led growth model: Taiwan and Korea

The empirical data from interviews, document analysis and industry statistics illustrates how the political economies and governance structures of Korea and Taiwan have evolved in recent years towards a startup-led growth model. The empirical findings presented in following chapters (6.2.1-6.2.2) illustrate the Taiwanese and Korean governments have by various policy measures adopted a new regulatory approach to leverage startups as the stimulus of economic and regulatory evolution. The empirical findings of government policies of Taiwan and Korea illustrate following points:

- Transition in 2013-2018 towards more startup-led economic growth models:

Government adopting a more indirect and reactionary governance model;

- New political economy of Taiwan and Korea: Governments provide open environment for innovation (subsidies, regulatory reforms) and leverage startups for regulatory evolution.

The empirical evidence from analyzing government policies of Taiwan and Korea illustrates both countries have transitioned to a new political economy of startup-led economic growth, where the new growth model requires government adopting a more infrastructural role to empower innovative startups to drive institutional and economic development (Jones & Lee, 2016; Jones & Kim, 2014a). Analysis also indicates the transition to a new startup-led political economy is not driven by interest groups or political ideologies, but the stimulus and demand for new dynamic governance structures comes endogenously from the dynamic startups. The traditional state-led growth model

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becomes dysfunctional as the market economy becomes more sophisticated and complex, which forces the governments to adapt a new model leveraging startups as the source of growth. Economic growth intensifies the nature of economic development as a complex social problem – how to organize complex cooperation patterns – which requires „nimble little fingers‟ of startups to act as the coordination mechanism to develop new cooperation governance patterns. Evidence of Taiwan and Korea illustrate that while the market economies by nature are open social systems allowing continuous experimentation (see Becker, 2007), both countries have in 2013 to 2018 aimed to amplify the openness by specific policy focus on regulatory reforms and adoption of negative list regulatory approach. The openness of the regulatory environment is largely ignored by earlier theories of capitalism (e.g. VoC) and the evidence illustrates how the openness ensures constant dynamism via startups. Without the openness of the regulatory environment, the endogenous institutional evolution could not occur. Taiwan and Korea have aimed to extend freedom for startups to innovate, which has been complemented by channeling of substantive resources (capital, supportive institutions) to alleviate market failures (especially underinvestment) plaguing the innovation of the startups.

The governments of Taiwan and Korea have also adopted more transparent governance model to gain ability leveraging cooperation with startups as guide for regulatory reforms and policy development as the interviews reflect innovation of startups moves faster than government, with governments aiming to create regulations to support innovation.

Evidence also illustrates the governments do intervene and their ambitions matter as Korea has focused on fintech development while Taiwan has focused on IoT and AI industries, which has crucial impact on industrial development of the market economies.

6.2.1. Korea: Creative Economy and 4^th Industrial Revolution

The historical growth model of Korea relied on state-led coordination, chaebols and export as the main drivers of economic growth, which led to rapid industrial transformation but in contemporary Korea the traditional state-centric growth model, with reliance on increasing physical inputs to increase economic output, has become a dysfunctional model to achieve economic growth (Jones & Kim, 2014b; KISA, 2015;

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Krugman, 1994). Increasing complexity of the economy, aging population and diminishing returns of increasing physical inputs has led to endogenous pressure to transform the Korean political economy, adopt a new growth model, with Korean government explicitly embracing innovative startups as the new source of economic growth and policy objectives focused on providing fertile environment for startups, innovation and creative destruction. Since 2013 Korean government has explicitly aimed to foster economic growth by „Creative Economy‟ and „4^th Industrial Revolution‟ plans leveraging startups as the fundamental driver of economic growth (MOSF, 2015a; KISA, 2015; FSC, 2013a)²⁵. The transition to new startup-led growth model begun with 2008 Bak Administration by regulatory reforms, policy initiatives and public resources being channeled to nurture a more dynamic private sector and startup economy (Cin, Kim &

Vonortas, 2017; MOSF, 2014b). New political economy requires entirely new regulatory approach as the traditional approach with direct intervention and chaebols suppresses innovation of startups (Jones & Lee, 2016, p. 11). The new startup-led growth model also indicates Korean government adopting competition and innovation as the fundamental principles of the regulatory reforms, which implies regulatory objective is to intensify competition, firm churn and creative destruction (FSC, 2015m; MOSF, 2015b; 2015c;

2016d; Jones & Lee, 2016). Korean government has explicitly communicated their commitment to new regulatory principle to increase competition and even suppress market power of chaebols (OECD, 2017, p. 133; FSC, 2014a), e.g. in 2013 the government announced commitment to “continuously identify and rectify regulations that prohibit productivity enhancement” (MOSF, 2013c).

However, the transition to a new startup-led economic growth model has been relatively slow despite of the explicit ambitions of the Korean government as empirical data illustrates Korea is one of the least dynamic OECD countries in terms of dynamic reallocation of resources (Jones & Kim, 2014a; 2014b; Andrews & Cingano, 2012).

Dynamism is important as the dynamic reallocation of resources rewards innovation and productivity while punishing stagnant entities – fostering creative destruction – but Korea

25 Conceptually „Creative Economy‟ and „4^th Industrial Revolution‟ are elusive, even popularized slogans that are not entirely supported with specific objectives and means. However, while the narratives are

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has been one of the least dynamic OECD countries (OECD, 2014; Jones & Kim, 2014a, p. 14). Dynamism is important by rewarding innovative startups, but the dynamism and startups also have indirect effects as the intensified competition by creative destruction removes inefficient firms and forces older organizations to improve their operations (Jones & Lee, 2016, p. 13). New startups are the main driver of economic growth, producing even 50% of total growth (Mullan, 2017, p. 156-157), but unfavorable environments suppress ability of the startups to nurture development. However, the lack of dynamism has been recognized by the Korean government, including Bak, Park and Moon Administrations from 2008 to 2018, as each administration has systematically implemented policies to boost competition with innovative startups as the main stimulus (e.g. Jones & Lee, 2016). More systematic transition to a startup-led economy begun in 2013 with the Park Administration‟s „Creative Economy‟ initiative which explicitly aimed creating economic growth via innovation and startups (Jones & Lee, 2016). The new „Creative Economy‟ approach is important as in contrast to historical directly interventionist approach of Korea, the new approach aims by indirect infrastructural policies to establish a favorable environment as “an ecosystem where creative ideas can thrive and convergence is encouraged” (MOSF, 2015a). The „Creative Economy‟ plan thus aims to transition away from the government-led model to new startup-led growth model, where economic transformation is driven by increasing investments into knowledge-based capital, innovation and intensified creative destruction by amplifying the constant churn of new innovative startups (MOSF, 2015a; Jones & Kim, 2015b, p. 6;

KISA, 2015). Startup economy does not imply liberalization but instead reflects transition to more infrastructural government approach to create a dynamic ecosystem for startups, especially as the increasing complexity of economic behavior requires more sophisticated government approach to alleviate market failures (see Oh, Phillips, Park &

Lee, 2016; Sussan, Kim, Chinta & Enriques, 2017). Korean authorities recognize this as for example FSC defines „Creative Economy‟ as “an economy in which the convergence of technology, culture and industries creates new opportunities for growth, markets, and job creation” (FSC, 2013a) and consistently from 2013 to 2018 Korea has communicated intention to become a more indirect, infrastructural „referee‟ than coach for the Korean economy (FSC, 2015m; MOSF, 2015b; 2015c; 2016d; Jones & Lee, 2016).

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Empirical analysis of Korean government policies illustrates following main points:

- Startup-friendly regulatory reforms by adopting negative list regulatory approach, - Subsidies and support for innovative startups to alleviate market failures,

- New more transparent and open governance model for the government.

Regulatory reforms to create a startup-driven economy: Negative list regulations The new startup driven political economy emphasized by „Creative Economy‟ and „4^th Industrial Revolution‟ plans of Korea reflects 2008 initiated on-going implementation of a new regulatory environment and approach to adopt a startup-led growth model (OECD, 2017). Period from 2008 to 2018, from Bak Administration to Moon Administration reflects continuous emphasis of the startups as the locomotive of economic development, which demands a new governance model as exemplified in the 2015 initiated innovation strategy „Government 3.0‟ envisioning a more transparent, more cooperative model focused on infrastructural role creating a favorable environment for innovation and competition (KISA, 2015). The regulatory evolution towards the startup-led growth model begun in 2008 but more concrete regulatory reforms occurred from 2013 to 2018 with „Creative Economy‟ and „4^th Industrial Revolution‟ policy initiatives aimed establishing a more dynamic environment to amplify creative destruction and competition by concrete shift away from traditional positive list regulatory approach towards a negative list regulatory approach (Jones & Kim, 2014a; FSC, 2012a; 2013a; 2013d;

2014b; 2014c; 2015g; 2016d). The adoption of negative list regulatory approach is the essential regulatory reform as moving away from positive list to negative list regulatory approach removes restrictions of economic behavior and eases entrance to market, which extends autonomy for private sector to experiment with economic behavior²⁶. Emphasis of negative list regulatory approach means, especially for the fintech industry, that Korean regulators focus on creating a favorable environment for private sector innovation while reducing government involvement directly guiding how private sector should organize their business models (Kim, 2016).

26 Positive list regulatory approach specifies set of allowed business models, strategies and practices while negative list regulatory approach only defines the set of prohibited activities, which by so allows more