Korea as a Knowledge Economy - ISBN: 9780821372012

72 Korea as a Knowledge Economy
business opportunities by developments in the IT industry, the start of the KOS-
DAQ market, and the Korean government’s policies, which nurtured venture businesses
during the years of restructuring after the financial crisis.
The financial crisis was a painful disaster, but the crisis became a turning point
for the venture business industry. In fact, venture businesses, as well as large
firms, had a lot of difficulties as a result of the overall economic restructuring and
depression following the financial crisis. However, in late 1998, as soon as interest
rates and exchange rates went down and were more stable and the real sector
started to recover, many funds in the market flowed into the stock markets with
the expectation of rapid economic recovery. Attracted by new technology–based
industries, many investors traded on the KOSDAQ market rather than the KSE,
which was oriented to the traditional industries in which the restructuring
process has continued.
Adjustment of the Venture Boom
A dark outlook for venture businesses loomed in 2000. With the crash in NAS-
DAQ, the stock prices of venture businesses in KOSDAQ also began to fall
steadily. To make matters worse, the illegal activities of some venture businesses’
chief executives and venture capitalists, along with unfair trading practices in
KOSDAQ, led to the KOSDAQ index falling drastically. The market for initial
public offerings was depressed, and many venture businesses had difficulty getting
financing through the stock market. Furthermore, this depressed venture
capital market constrained the additional financing of venture businesses in need.
This drastic depression was fundamentally due to the excessive valuation
and myopic overinvestment in venture businesses. The excessive inflow of
funds and high expectations held by investors (without systematic consideration
of the businesses’ profitability) pushed the stock market into a bubble. The
Korean government’s excessive intervention also made it more serious.
Although the new market and technological opportunities had emerged from
the rapid IT development, the competence of the venture businesses and venture
capital firms did not improve significantly within that short time. Thus,
investments in the stock market expanded too quickly for the promising new
technology–based venture businesses to grow. However, even though many
had warned about the risks involved in the venture investment fund, the government’s
excessive intervention in the markets helped expand the bubble.
After the bubble burst in 2000, Korea’s venture industry underwent an adjustment
period, as shown in table 4.5. Since 2001, the number of firms decreased or
stabilized, operating income stagnated, and total liabilities decreased and then
slightly increased. However, since 2003, the mood of the markets related to venture
businesses has become more optimistic. The required investigation of listings
in KOSDAQ was enforced, and investments were made only in businesses
based on concrete profit models.
Generally, fluctuation in the stock market can be viewed as a natural phenomenon.
The adjustment process is therefore a stage during which the market restores
its original function. In the long run, this adjustment will get rid of obstacles to the
development of venture-related markets (venture business market, venture capital