Is Equity-Financing Always Optimal for Innovative SMEs? --How ...

第 25 期I. IntroductionFacing the recent global financial crisis in 2009 stemmed from U.S. sub-primemortgages, many governments in the world increased“credit guarantee”to SMEs tocushion the shock.For about a decade prior to the crisis, credit guarantee institutions (CGIs) in Korea wereat the center of a controversy that Credit Guarantee Scheme (CGS) for SME support is anarchaic scheme normally employed by emerging countries and should be reducedsignificantly.Some insisted so based on the fact that commercial banks do not take the risk they aresupposed to. They argued that high guarantee coverage ratio for SME lending - ranging from85% bottom-line up to 100% occasionally - led commercial banks in Korea, which areaccustomed only to collateral-based lending, to chronically rely on CGIs and neglect effortsfor skill development necessary to make reasonable decisions on their own and to properlydeal with associated risks.Also, IMF consistently advised the Korean government to reduce credit guarantee by1% of GDP every year. The reasoning was simple: extensive financial support to SMEsaggravates fiscal account and will eventually lead to degradation of creditworthiness ofsovereign Korea.Others negated CGS with an argument that debt is not an adequate tool to financevarious innovation practices of SMEs including R&D projects and early-stage businessdevelopment. The most often mentioned alternative by the proponents of this view wasEquity Funding primarily through Venture Capitals (VCs).The argument has often been extended to criticisms mounted on CGIs. Many argued140

Is Equity-Financing Always Optimal for Innovative SMEs?--How about Credit Guarantee?pp. 139-180that CGIs in Korea rather disturb the soundness of SME ecosystem by advocating andprolonging life of troubled SMEs either in declining industries which failed to addresstransition in time or without pertinent business caliber. Because weak companies are notproperly unveiled by the market principle of “Survival of the Fittest,” the zombie SMEs arepoised as obstacles for strong SMEs to grow stronger.In the meantime, the idea that the market has the most efficient mechanism to alignresources on the optimal frontier has widely prevailed. This trend in combination withaforementioned arguments frequently posed CGIs in Korea to hold the short end of the stick.Thanks to the recent crisis, the Korean government relied, to a considerable degree, onCGS for emergency credit line extension to SMEs, and CGIs in Korea seem to havetentatively retrieved their raison d’etat. However, CGIs, I believe, are still likely to beexposed to political economic cycles 2in addition to economic cycles.Unlike other public institutions that essentially function like monopolies, CGIs andmany other SME supporting institutions in Korea are destined to be continually exposed tonew challenges. In particular, Korea Technology Finance Corporation (KOTEC), which wasoften regarded as another mere CGI even in the distant past, has been on turbulent paths forthe last eight years or so.As a result, the institution has desperately tried to identify edges and niches to secure itsown distinct area of specialty. Standing on the brink of precipice, the organization demandedits professionals to stretch their limits with distinguished pioneer spirit and creativeness.Indeed, such circumstance was a blessing in disguise for KOTEC and also for me in person.I could sharpen, deepen, and broaden my perspectives through the years.2 For more detail please see on “Political-Economic Cycles,” Robert J. Franzese, Jr. and Karen Long Jusko, 2Feburary 2005, Oxford Handbook of Political Economy.141

第 25 期The argument of the paper mostly comes from my personal insights accumulated fromself-sought answers to countless “Why” questions during such turbulent period, and thispaper does not necessarily reflect the official perspective of KOTEC. However, Iexemplified some of KOTEC’s practices to support my argument and included somesummary tables regarding its operation in appendix for those who seek brief information onKOTEC.This paper firstly begins by examining a popular idea that equity financing is almostalways optimal for funding the growth of “innovative SMEs.” To contradict this view, I usereal cases of ventures in Korea to imply that the concept of “innovative SME” is muchbroader than it is often thought to be. Hence, VCs may only be able to optimize a small subsectorin the segment.Second, it illustrates the reasons for complexity embedded in SME policy area in Koreaand also attempts to explain reasons behind frequent failures of benchmarked policies fromforeign countries.Finally, this paper concludes that the solution will be found not from a few newgroundbreaking schemes, but from highly sophisticated coordination. Exquisite policytuning and policy mix will enable both public institutions and private sector investors toconcentrate on unique strengths and merits of each, and thus policy purposes will be betterserved.In this end, I would like to thank Professor Cho, Yoon-Jae, from Sogang GraduateSchool of International Studies for cultivating my habitual deep thought about the Koreaneconomy and for stimulating explicit expression of my ideas. I also appreciate numeroussenior professionals at KOTEC who generously have provided feedback on my half-bakedideas for the past years up until now.142

Is Equity-Financing Always Optimal for Innovative SMEs?--How about Credit Guarantee?pp. 139-180II. Is Equity-Financing Always Optimal for Innovative SMEs?1.BackgroundCultivating competitive companies that would become the driving engine for futureeconomic development is a critical dimension of SME innovation policy. This holds trueeven in mature economies like U.S. and major ones in E.U.I begin with this topic because I noticed that surprisingly many researchers, scholars,and significant others with influences on policymaking seem to conceptually dichotomizethe conventional issue of improving access to credit for SMEs in general and the issue offinancing for innovative SMEs.Many argue that equity is the most suitable source of financing for innovative SMEs.They mention that eighty percent of technology financing in Korea is practiced through CGS,which is not desirable.Such argument is backed up by simple reasoning. Firstly, innovative projects orbusiness plans should be verified and carefully selected by market-based investors becauseno other parties are more efficient than the ones trying to maximize their profit by investingin such risky projects.Second, once promising projects or businesses are selected by market-based investors,they should be financed not by debt, but by equity because the practice does not shake outcash for interest payment during the stage of hyper-growth when cash demand is frequentlyhigher than what they earn for the same period.Third, if risky business is financed with equity investment, entrepreneurs will be freefrom “surety issue,” which tags life-long stigma to their credit record in case they fail to pay143

第 25 期back. Thus, equity financing enables them to have a second chance to do better with lessonslearnt from previous failure. The reasoning is very sound at a glimpse, but it is in fact from alimited perspective.2.The performance of Venture Capitals in KoreaHaving said that VC funding is an important source for financing SMEs with highgrowth potential especially at their early stage, it is worth looking at the performance dataregarding VCs in Korea.The idea that existing public institutions are mostly inefficient and lingering remnantsof the past period in which government could, but no longer, command and control theoverall industrial development was reinforced through myopic reliance on market.In this circumstance, some VCs in Korea raised their voice that KOTEC had beencrowding them out by dominating opportunities for financing innovative ventures. Thisvoice was heard by fiscal policymakers and resonated with their mission of reducinggovernment spending. As a result, fiscal policymakers, while being well aware of theimportance of cultivating competitive SMEs, began to seek cheaper market alternatives tofund critical strategic ventures from VCs.The VC funding had hit its peak in 2000 during the heyday of venture bubble reachingtotal supply of 2.2 trillion Korean Won. The size of newly established funds in the same yearwas 1.4 trillion Korean Won. The total size of newly established fund was dramaticallyreduced to 0.79 trillion Korean Won in 2001 after the bubble burst. This number has beencontinuously stagnant until 2008, and the number of VCs has also decreased from 170 in144

Is Equity-Financing Always Optimal for Innovative SMEs?--How about Credit Guarantee?pp. 139-1802000 and 98 in 2008.By 2009, the number bounced back to be 115 according to data released by KoreaVenture Capital Association. Also, the total amount of newly established fund by the end of2009 was 1.4 trillion Korean Won, the same amount as in 2000.Behind this increase both in number of VCs and total fund available in the market is theincreased capital provision from the Korean government. Benchmarking the German KfW in2009, the government encouraged some public institutions, such as National Pension Fundand Korea Finance Corporation (KoFC), to establish “fund of funds” scheme.The practice of KoFC was “project funding,” not “blind funding,” which means KoFCdirects VCs to finance specific policy target segments by tagging the theme to each fund itprovides. The themes were designed to be consistent with areas highlighted by policypriority such as funds to SMEs with significant job creation potential, to early-stage start-ups,to green growth SMEs, etc. The assumption behind such measure is clear: once governmentavails capital sufficiently, VCs, the market players, will take desired risks most efficiently.In case of KoFC, the incentives were well aligned to motivate VCs to quickly exhaustgiven funds to get a favorable evaluation for the next round of application. However,exhaustion rate for funds firstly provided to VCs in 2010 was a little over 60% and for thoserendered in 2011 was somewhere around 20% according to statistics from a news articlewritten on July 12, 2012. 3Diagram 1 below shows the trend of VC investment made to early, mid, and late stagein terms of percentage of the invested amount.3 [thebell] Venture Investment became shaky after two years, July 12, 2012, MoneyToday.145

第 25 期Source : Korea Venture Capital AssociationDiagram 1 Trend of VC Investment by YearSome may still argue that KOTEC provides financing more easily and swiftly than VCsto promising start-ups through standardized technology appraisal process, often by bundlingVenture certification or InnoBiz certification. 4For them, KOTEC’s robust operation may beinterpreted as snatching VCs’ investment candidates.Please note that I do not intend to illustrate the pitfalls of fund of funds scheme. In fact,the early-stage funding practice has increased from 26.9% in 2006, to 40.8% in 2008, and to43.0% in 2012 by the number of funding practices. This is surely a meaningful increase,largely thanks to such new schemes.However, most of the early-stage investments were made with “redeemable preferred4 Ventures that belong to certain designated category of New Economy are certified as “Venture,” andinnovative SMEs with visible competitiveness is certified as “Inno-biz” by the government to give specialincentives such as tax benefit, and KOTEC does most evaluations for the certification.146

Is Equity-Financing Always Optimal for Innovative SMEs?--How about Credit Guarantee?pp. 139-180stock,” 5which IFRS classifies as liability. The scheme is a sensible tool, but it also haslimits. The scheme would lead VCs to be more disciplined in the desired sectors only to amarginal extent because VCs do not shift up their basic risk appetite. The next chapter willexplain this more precisely.Source: Korea Venture Capital AssociationDiagram 2 Trend of VC Investment by Year3.Reasons that VCs are not investing enough: are they risk averse?A possible explanation for the lagging performance of VCs in Korea would be that thereis no large enough critical mass of qualified ventures for VC funding in the policy targetsegments. The other explanation would be that VCs in Korea are not capable enough to deal5 Also known as callable preferred stock, refers to a type of stock or share that is subject to being returned tothe issuing organization on or after a specific date at a certain price and retire it. Due to the risk that theissuing company must repurchase the stock, redeemable preferred stock is generally issued with a higherinterest rate than other types. Some areas of authority do not allow the redemption if it jeopardizes thefinancial heath of the company that issued the stock.147

第 25 期with risks associated with such segments.Although it is too early to determine, I believe that the increasing of such fund of fundsto simply avail more financial resources alone would not create conditions sufficient for VCsto become the main figure in innovation financing as capable as Silicon Valley VCs.Silicon Valley is an unprecedented special area in which business ventures of specifictypes are crowded. Sufficient capital, diverse VCs with different sector-specific expertise,and plentiful supply of talented entrepreneurs are making self-reinforcing virtuous cyclepromoting U.S. as innovation leader. In that excellent ecosystem, talented people tend togather for the common purpose of great exit.The example of the Valley has been roman for many SME policymakers in Korea andfiscal policymakers as well. In Korea, there are many valleys named after it such as TeheranValley, where I first started my career at KOTEC, Guro Digital Valley, Daeduk Valley, etc.Even admitting that it is an ideal subject to pursue, we should not overlook the differentcondition, culture, and context. Silicon Valley has a long history of having both “abundantmoney-flow, large fractions from global savings glut 6transferred to U.S.” and “astronomicalexit value potential” for highly talented or lucky entrepreneurs.It is possible for VCs in Menlo Park to take higher risk for more start-ups because onesuccessful investment such as in CISCO or in Google would avail funds to be invested in“thousands” of other start-ups. By contrast, one successful investment would cover less thanten other risky investments in Korea. This is the reason that just increasing funding to VCs6 Global saving glut is a term coined by Ben Bernanke in 2005. The term describes a situation in which thereare worldwide too many savings with much less investment opportunities in the region where savings weregenerated. Thus, money flows into U.S. where more investment opportunities with diverse risk appetitesexist thanks to low currency risk of dollar, the seigniorage, high freedom and transparency.148

Is Equity-Financing Always Optimal for Innovative SMEs?--How about Credit Guarantee?pp. 139-180would not be as effective as expected, the fact that policymakers should not overlook.Of course, change is not an event but a painstaking process. Korea cannot build anequivalent system to that of Silicon Valley within a few decades. In this circumstance, ifpolicymakers think that financing VCs would help replace the role of existing publicfinancing regarding SMEs, eventually contributing to significant saving of fiscal resources,they are failing to see the big picture. Here is why.Venture Capitals look for businesses with significant scalability. For a venture to befunded by VC’s risk capital, three conditions must be met:(i) The business model should be adequate to be on the “high risk, high return” profile,(ii) The management should have the willingness to grow their business to be scalable,and(iii) The management should prove convincing exit plan and capability to do so.Assuming the statement above makes sense, the next question would be whether theinnovative SMEs that are competitive but lack in one or all of above mentioned conditionhave no value to be supported with regard to national economy.In this regard, we should first not confuse the scope of the policy segment forinnovative SMEs. To my eyes, many policymakers in Korea seem lured by the twilight ofbig success stories from Silicon Valley like Cisco, Google, or Facebook. As a result, theytend to regard such ventures as typical representatives of the segment.However, the segment is composed of a much larger ecosystem than those a few bigstar companies. Especially, fostering Korean SMEs to be highly competitive in terms of149

第 25 期innovation capability does not necessarily mean these businesses should all be scalable andwilling to realize huge exit values. To justify my argument, I introduce three examples in thefollowing section.4.Case StudiesCase A. YEIL ELECTRONICS 7Co., Ltd.: High TechThe company manufactures and supplies electronic components such as “York and Pin”battery for mobile devices, and also manufactures “Plate Assembly parts of Li-ion battery forelectric vehicles.” It applied for technology valuation in 2010 to KOTEC. I, along with twotechnology business evaluators with doctoral engineering degrees, took a half-day duediligenceincluding in-depth interview with the CEO, Mr. Kang.He was a down-to-earth, self-made person who entered into business world right aftergraduating from an engineering high school. Working through years at a company in asimilar field and running his own business for more than 15 years, he further educatedhimself while maintaining a high level of self-discipline at work.Until now, he has patented three of his own ideas in and out of Korea. In terms of EVA,the company’s supply to Samsung Electronics and BMW takes only a small fraction.However, thanks to an extremely distinguished method of assembly, he came up with amethod that enables mobile batteries to be smaller and thinner. The company was enjoyingway higher margin than industry average. Also, his company was only recently doubled insize after 13 years of operation thanks to the rise in demand for electric vehicles.7 Please see http://www.yeilelec.com/en/index.htm for the reference150

Is Equity-Financing Always Optimal for Innovative SMEs?--How about Credit Guarantee?pp. 139-180Upon the question whether he had a plan for IPO, he resolutely responded, “Mybusiness is not for IPO. I aim to grow it as a incrementally improving organic company,practice of which is well developed in Japan and Taiwan. I am dreaming of a workplacewhere our engineers can feel pride and joy. My company is too small for that with only 13million dollars of annual revenue, and going public is not in my interest. This is just like myson, my life.”He said he needs financing to invest more in R&D to stay ahead in his small niche. Thecompany is not attractive to VCs, even though it is an important part of the Korean mobilevalue chain. He also revealed his vision of encouraging his engineers to try hard andcomplete their idea to be patented. Because we certified the company as Venture in the past,the company can place patents as capital up to the technology value KOTEC assesses. Mr.Kang said, “Letting engineers with new ideas have ownership in this company is enough forme.” I saw Mr. Kang recently in a newspaper: he lately donated quite a big sum of money tosupport teenagers from poor family to continue their education.Case B. AMON., Inc. 8 : High ConceptThe company, established in February 2009, manufactures Black Boxes for automobile.The company was the early mover in the field and successfully transferred the item from“good-to-have” to “must-have” for middle-class drivers in Korea. As a result, it took themarket leader’s position realizing 442% of CAGR in terms of revenue growth in the highlyfragmented market.The firm received technology guarantee from KOTEC twice: one in June 2010 tofinance their share growth in black box market and the other in March 2011 to finance their8 http://www.siv.co.kr/151

第 25 期development of the second item, Action Camcorder targeted for outdoor sports mania. I,together with a staff with engineering degree and a CPA, did the valuation to fund the plan.Mr. Lim had an intensive experience in marketing and overseas business developmentthrough 9 years of his career in MPO, Inc., previously Korea’s second largest MP3 companynext to I-River. Shedding distinct marketer’s charisma, he said, “We sell more than we make.We do not aim to hold difficult technology. Instead, we attempt to carve out lucrative nicheswhere conglomerates are too big to be interested. By creatively exploiting existing ITstrength of Korea in which we can attain almost all necessary components immediately, wecome up with a“high-concept”product faster than potential competitors. We get in early,and we skim once we find that Chinese firms start to reach the same quality. We think anitem will prosper only for 3 to 4 years, then at the peak of the growth curve, we create thesecond product. To do so, we need to continuously stay intact and agile.”At the question whether he has an intention for IPO, he mentioned that he hopes so, buthis venture is not proper for IPO with reasons explained above. The company was onceequity-invested by another partner company by giving up significant shares; however, it wasmore of “strategic investment” to create win-win structure between the partnering firms.Case C. Tangram Design Lab, Inc. 9 : High TouchThe company is a specialized one in the field of industrial design. Established in 2008,it has achieved high growth realizing CAGR of 335% from 2008 to 2011. Under closepartnerships with global companies, it provides operation system, advanced software, userinterface, and mobile application for the latest technology products. It has also successfullylaunched its own brand, “TANGRAM” in and out of Korea to produce idea goods in thefield of UX (User eXperience Design). The company has also attained many awards in and9 http:///tangram.kr152

Is Equity-Financing Always Optimal for Innovative SMEs?--How about Credit Guarantee?pp. 139-180out of Korea including iF Design Award from Germany.The management is composed of an internationally recognized industrial artist and ashrewd planner in the field of design and advertisement. For the last three years, thecompany has continually achieved operating profit above 20%.In an interview with the co-president, Ms. Ahn mentioned, “Our business is basicallypeople business that needs many highly creative people; however, it becomes difficult tocontrol quality of work when we have too many employees. Through trials and errors, wefound that 40 to 50 employees realizing the annual revenue of USD20 million would be aceiling for us.”The company had hardship in financing early-stage operation due to lack of past trackrecord and credit history. Also, there were not many financial experts in the market whoknew the distinct quality of their design. She mentioned, “Without KOTEC and Seoul citygovernment, we could not even go into operation. It was quite a surprise to see a KOTECvaluation team composed of one with management background and the other with a degreein industrial design.”5.Other reasons that financing through debt would make sense(a) Some high growth SMEs may not choose IPO: Pecking-order theory 10There are companies whose business models are scalable. However, they prefer loanfinancing to equity financing to fund their growth because the management is discreteenough to know equity is an expensive source of capital especially at the early stage. They10 For more detail, please see “How the Pecking-Order Theory Explain Capital Structure,” Li-Ju Chen andShun-Yu Chen, Chang Jun Christian University, Taiwan153

第 25 期tend to get equity funding intentionally at the later stage when they proved their businesspotential to a visible degree, and thus have stronger bargaining power.Pecking-order theory, first suggested by Donaldson in 1961, supports this idea. It statesthat companies prioritize their sources of financing from internal financing to debt financing,and lastly to equity financing in accordance with the principle of least effort and of leastresistance, preferring equity as a financing means of last resort.Also, many strong companies do not want to go public even at the stunning marketvaluation. According to an article in The Economist, 11published on Feb 24 th 2011, Mr.Ohlsson, CEO of IKEA group, the highly successful global furniture maker whose successwas analyzed to come from lean operation, shrewd tax planning, and tight control, said thatIKEA is more competitive as a privately owned company. Instead of sweating to meet thequarterly targets the stock market demands, it can concentrate on long-term growth.According to a paper recently written in UK, 12out of total SMEs in UK looking forexternal finance, only around 1-2% is looking for equity finance. Working for the last 10years in the field of SME financing in Korea, I would say the situation is not that differentalthough I failed to figure out the exact percentage from credible statistics. Why is this so?(b) Big-success potential is not visible from early or R&D stageThere are also cases when VCs, entrepreneurs themselves, or both sides fail to noticethe scalability of business at early stage. Uncertainties at early stage of technology businessoperation or R&D stage are often not clearly detectable even for the most seasoneddealmakers.11 For more detail, please see http://www.economist.com/node/1822940012 SME Access to External Finance, January 2012, BIS ECONOMICS PAPER NO. 16154

Is Equity-Financing Always Optimal for Innovative SMEs?--How about Credit Guarantee?pp. 139-180The critical consideration in financing R&D is verifying success probability of theproject and its economic feasibility, not scalability. There is indeed difference between risksVCs deal with well and risks associated with early-stage ventures or R&D projects.Entrepreneurs with engineering background are mostly the ones with great researchcapability, tenacity, and perseverance, but with not much talent for communicating theirvision and for marketing their passion. They rather immerse themselves in R&D activitiesfirst without much thinking about making fortune out of their ideas. They frequently do notrealize the scalability of their idea until their business shows significant performances.For the government, the worry is that taxpayers’ money keeps flowing into projects thatare meaningful from the engineer’s perspective, yet lacking in economic feasibility. In thisregard, KOTEC, which has about 150 engineers who had come to understand financing andventure businesses, developed the R&D appraisal model 13 .In Korea, many of potentially promising R&BD projects (Research & BusinessDevelopment) carried out by technology ventures are financed through government grantsand KOTEC’s CGS. KOTEC uses its own proprietary technology appraisal system insteadof traditional credit rating to provide financing properly based on future prospects, not pastfinancial track record.Out of 52,194 KOTEC clients, only 207 were KOSDAQ-listed companies at the end of2011. Among the 207 KOTEC’s clients listed, higher than 80% were financed both byKOTEC and VCs: most of early stage funding from KOTEC, combined support in mid-stage,and most of later stage funding from VCs.13 For more detail, see “Project Financing & Technology Appraisal Guarantee,” pp61-78, JSD 19th155

第 25 期Assuming all the VC-fundable firms were actually KOTEC’s clients, about 2,070companies are either listed or probably-be-listed when taking into account the fact that VCs’investment success rate is less than 10% 14 . There are many other cases that VCs get in toinvest in mid stage or in later stage of KOTEC’s clients when early stage uncertainty getspretty much cleared out. Does it ring a bell?(c) Is Credit Guarantee adequate for innovation financing?The idea that companies with the orientation of innovation, creativeness, anddistinctively high concept need more modern financing than traditional bank financing isneedless to say a valid thought.Then, is credit guarantee scheme not proper for innovation financing because it is amundane antique scheme? Here I would like to highlight two policy practices from EU. Thefirst one is Risk Sharing Financing Facility (RSSF). The below two diagrams illustrate theschemes used by European Investment Bank (EIB), a specialized institution which was setup at the EU level for SMEs’ risk financing, structuring and guaranteeing portfolios of SMEand microfinance loans/leases.The purpose of this scheme is to improve access to “debt financing” with a higher thanaverage risk profile for RDI (Research Development & Innovation) projects coming fromFP7 15framework. The scheme attempts to draw participations of private sector includingbanks and VCs later by ring-fencing early stage project risks primarily targeting, but notlimited to, 16SMEs and Mid Caps of low/sub-investment grade. Please note that EIB tries to14 Among the ten percent three fourth of them exits through IPO; remaining 25% exit through M&A, while inthe U.S., exit through M&A reaches 79% of cases15 7 th Framework Programme (2007-2013)16 A project propeller can a company, a consortium or even an research institution156

Is Equity-Financing Always Optimal for Innovative SMEs?--How about Credit Guarantee?pp. 139-180only the projects, not the project entity.In Diagram 3, the grant comes from FP7 programme and not from EIB. EIB provideseither debt financing or guarantees. When project risk decreases, private sector’sengagement gets easier.Source : Gunnar Muent’s presentation material from a forum on December 2006,Brussels, held by EIB Innovation 2010 InitiativeDiagram 3Framework of Risk Sharing Finance FacilityI think this is an ideal case of public-led “Public Private Partnership (PPP)” in whichlimits of market was well taken into its design. In this way, different strengths and interestsof each side would be well balanced for a common purpose of regional economic prosperityin the future. I noticed RSFF in 2008, and actually benchmarked it, after thoroughlyreviewing all the historical contexts in combination with analysis on current situation inKorea, when we created its own R&D financing scheme that is sternly positioned currently.157

第 25 期Diagram 4Details of Risk Sharing Finance FacilitySource : Gunnar Muent’s presentation material from a forum, EIB Innovation 2010InitiativeThe other example, as illustrated in Diagram 4 is the framework named Horizon 2020, 17successor program to FPs, which was designed to facilitate the competitiveness of EUnations. It plans to use CGS as a main vehicle to finance for EU’s innovative and researchoriented SMEs (RSIs) including start-ups.It is noteworthy that such scheme of EU came out as a result of thorough high-level andwork-level coordination among member countries. Also, please note that all the innovationsupporting programs have a clear goal of narrowing the gap between U.S. and EU asstipulated in the part of “Lisbon Treaty.” To compete with U.S. they developed their own17 Risk Sharing Instrument for Research & Development & Innovation driven SMEs and Small Mid-caps, RSI-Frequently Asked Questions (updated as of 23 April 2012), EC & EIF.158

Is Equity-Financing Always Optimal for Innovative SMEs?--How about Credit Guarantee?pp. 139-180schemes to be pertinent to the context and given condition of EU.Furthermore, it is not really a matter of financing scheme itself, but a matter of how toassess and evaluate the right subjects where market is wishy-washy to take risk as well as amatter of how far the public plays a role.There are actually three distinguished advantages of CGS in innovation financingunless it is abused to overshoot or beneficiaries are not blindly selected:1)CGS is the cheapest source of risk financingThe conventional advantage of using CGS applies regardless of policy areas: with smallcapital in hand now, government can leverage money supply to the targeted policy segment.Also, it is a cheap source of risk capital for the beneficiaries because CGIs are operated,more often than not, with the concept of “targeted loss” rather than IRR.2) It is possible to manage risk systematicallySignificant volume of rendering credit guarantee mainly through “ratings” enables CGIsto manage risk with sophisticated model because it is a lot easier to gauge the shape ofdistribution, which is nearly impossible in the case of VC investment portfolio due to highvariance. In case of KOTEC, it could roll up the minimum grade to be beneficiary, let’s sayB to BB of its own rating, if risk is going over its targeted level or if government asks todecrease funding due to fiscal constraint.3) It helps indirect financing source (short term loans) to be de facto patient capitalFor big firms, they source risk capital to propel long-term projects or to extend capital159

第 25 期expenditure through direct financing; issuing of bonds, 18stocks, etc. However, the optionsare not available for SMEs. CGS not only makes possible for SMEs to issue bonds by creditenhancement, but also in effect serves as indirect financing, which is mainly for financingshort-term need of working capital, to stay long with companies through rollovers.It is clear now why EU has employed CGS as main vehicle in the Horizon 2020 in thistroubled situation of global financial crisis.III. Things That We Need to Know before Benchmarking ElsewhereIn Silicon Valley which is Mecca to ambitious ventures, getting equity funding fromVCs or angels instead of getting bank loan to realize their innovative ideas is the norm. Asexplained in the previous chapter, it has distinct excellence.The second most referred example for benchmarking next to Silicon Valley innowadays market-friendly trend of policymaking in Korea comes from Israel. The country istruly worth examining. In fact, a newspaper recently mentioned Israel’s YOZMA Fund 19asthe ideal subject for benchmarking for new SME policy. The article also quoted that thescheme would significantly help the problem of “Youth Unemployment.”According to the book, Start-up Nation, 20 Israel’s per capita VC investment is 2.518 Currently there are only about 200 companies eligible to issue straight bond without credit enhancement inKorea where primary bond market is well developed compared to other nations in ex-Japan Asia19 YOZMA means “initiative” in Hebrew. The scheme was started by Yigal Erlich, the chief scientist under theMinistry of Trade and Industry, came up with the idea of establishing a $100M public fund of funds toinvest in private VC funds in 1993. From the initial stage of operation, Yozma brought 10 private VC fundsto Israel to ensure local skill building and collective learning for VC industry. For more detail, please see“Policy and VC: The Case of Israel, Jenny Stefanotti, April 20, 2012, Developing Jen.” Its unique feature ofsharing risks between government and VCs is indeed worth looking at.20 Start-up Nation: The Story of Israel’s Economic Miracle, 2010, Dan Senor and Saul Singer, A Council onForeign Relations Book160

Is Equity-Financing Always Optimal for Innovative SMEs?--How about Credit Guarantee?pp. 139-180times that of U.S., 30 times that of Europe, and 80 times that of China. It is called ‘SiliconValley of the Middle East’ and indeed impressive. The book also quotes the fact from a May2009 factsheet that Israel has the most venture firms listed in NASDAQ with 63: 48 forCanada, 6 for Japan, 5 for GB, and 3 for Korea.Established by the Israeli government, YOZMA Fund catalyzed a total fundraising of$250 million and investment in over 200 start-up companies. During the course, it employedPublic Private Partnership in a very unique way, combining strengths from each side. It wassuccessfully privatized in 1997 after proving excellent track record, and it still exists asprivate VC.Above all, it is impressive in that the scheme smartly nurtured and enhanced localinvestment skills by effectively bringing in the acumen to function as “Smart Money” 21from U.S. VCs. It also successfully synchronized their risk appetite with that of U.S. byincubating and accelerating Israeli start-ups to be sellable in U.S. either through IPO orAcquisition.We should appreciate successful schemes elsewhere and also must seek to incorporatesome of its elements in our policy designing. However, a successful policy schemeelsewhere mostly results from their own specific context of history, policies and culture. I donot deny the benefits of benchmarking, but we need to thoroughly analyze the context anddifferences in a given circumstance first.This is so because nurturing SME competitiveness through innovation is an issue with a21 Smart Money means VCs do help businesses to grow after investment. Silicon Valley VCs are known to benot only providing funds, but also to be helpful in marketing, talent gathering, and connecting start-ups tovaluable business network161

第 25 期much larger scope. An article from The Economist 22points out that Israel succeededthrough YOZMA Fund only to the extent that they learned from U.S. how to make deals atinflated prices out of already existing competitiveness, such as the army’s technologicalprowess 23which provided the know-how behind many an Israeli start-up.Another article 24also points out that Israel is seriously lagging behind when it comesto igniting private-sector creativity other than several areas of traditional strength such asinternet security and falls short of building SMEs that mature through time and create wellpayingjobs domestically and decent incomes for middle-class Israelis. The article criticizedIsrael’s business model as being based on selling its existing brains to be adopted overseas.In both articles, it is clear that SME innovation contains multiple areas, not limited toselecting stars, businesses with excellent scalability within a foreseeable time period.Ranging from identifying and selecting R&D projects with commercial feasibilities tonurturing healthy enough SMEs which would increase stability in the ecosystem ofCorporate Korea, the big picture is very complicated and thus requires broadly coordinatedperspectives and proper policy mix.A global solution positively affecting the overall landscape of innovative SME policysegment cannot be found even if Korea creates a program synonymous with YOZMA Fund.Especially, it will hardly solve “Youth Unemployment” problem. It is in fact a mistake.Silicon Valley and YOZMA Fund alike select and grow potential superstars thoroughly22 “Beyond the start-up nation,” Dec 29 th 2010, The Economist: Schumpeter23 The article exemplified camera pills (which transmit pictures from inside human body) came from missilesthat can “see” their targets24 Start-up Nation? Why Israeli Tech Companies Still Often Fail, Samuel Scott, August 17 th 2011162

Is Equity-Financing Always Optimal for Innovative SMEs?--How about Credit Guarantee?pp. 139-180based on entrepreneurial merit 25to realize the highest exit values out of it. To be selected forfunding, entrepreneurs need not only a distinguished merit, but also an ability tocommunicate them effectively, which Asians, in general, are weak at.More often, the latter - ability to run the show - is more important because investorsthere have a tendency to believe that “an idea perceived to be impressive but managed by ateam that is perceived to be poor at demonstrating it should not receive a dollar.” This is acontract with EU’s practice mentioned in the previous chapter.Under such Spartan style of neo-merit-based system, entrepreneurs with the next bigideas but without immediate talents in communicating their vision will hardly securefinancing even with good enough business plans or ability to come up with uniquetechnologies.Moreover, those with both merit and talent of running the show are mostly the oneswho would proceed to another high career path, if the option to start a venture were notavailable, not the ones who failed to find job. Even assuming business model andcommunication skills can be trained in the short run through U.S. style of accelerationprogram such as Y-Combinator, 26merit and passion cannot be. Especially in the case ofmerit, distinguished quality comes from inborn gift, immersion in a certain field for asignificant period of time, or some combination of both.25 I was a director of VC club at the Fuqua School of Business at Duke University and I did MBA internship inSan Jose for summer 2007 at SDForum to host an Investor Forum (it is renamed as SVForum now:http://www.svforum.org) screening 640 applications to select 8 finalists to the Pitch ceremony, sitting downand discussing together with Silicon Valley venture capitalists for the selection. I also served as an interimCFO in my second year of MBA for Storyblender.com (http://www.crunchbase.com/company/storyblender)founded by my cousin, who was a founder of Cyworld in Korea, flying back and forth between RaleighDurham and SFO 27 times seeking VC funding26 A recently popular business accelerator in Silicon Valley in which experienced entrepreneurs mentor youngnew entrepreneurs very intensively for short period of time through a validated and standardized learning tocome up with attractive business plan for investors.163

第 25 期IV. Fundamental Problems Associated with SME Policy Area inKoreaFailure or inefficiency in policy execution comes either when policymaker has morethan one purpose when planning a scheme or program or when too many programs arecompetitively chasing after one policy target. However, in SME policy area both tendenciesare to a degree unavoidable.A several years ago, at the national audit by the congress, a congressman criticizedKOTEC for financing and giving venture certificate to “Grandma Won’s Bossam 27 ,” afranchised food chain store started as a small merchant shop long time ago by an old lady. Itapplied for technology guarantee of KOTEC and venture certificate because it had an R&Dplan.KOTEC staff, after taking due-diligence with two external experts of a patent lawyerand a Ph.D. with food-related technology, approved the venture certificate and also financedthe project because the patent on its recipe was pretty strong and the project was clear: todevelop recipes suitable to young people’s and foreigners’ taste. Technology business ratingalso turned out to be high. However, many people just regarded it as a traditional foodrestaurant.The reason for telling this episode upfront is to explain the origin of such confusion.1. The historical context of Korean SME Policy: Chronological Hierarchy,Nested, and OverlappingIn Korean SME policy area, there exist three conceptual segments that are “nested” and27 Bossam is a Korean traditional food which we wrap a piece of broiled pork with Kimchi. It is yammy.164

Is Equity-Financing Always Optimal for Innovative SMEs?--How about Credit Guarantee?pp. 139-180“chronologically hierarchical”:(1) Balanced resource allocation to improve the problem of “Limited Access toCredit” for overall SME sector,(2) Cultivation of innovative SMEs who can grow strong and become the motivepower for future economic development, and(3) Supporting people who lost or could not find jobs to stay active in their very fieldof economy by opening micro-enterprises or small retail stores.Under economic planning, resources are mobilized and allocated by the government inaccordance with policy priority, often under the motto of “Growth first, Distribution later.”As our economy grew through staged planning, the three policy segments have beengenerated in chronologically hierarchical manner.The first SME policy came from “currency principle” starting from the late 70s: thebelief that monetary increase is the main pathway to help and boost targeted sector. Thispolicy firstly viewed the entire SME sector just as an “industry.” In addition to its originalmotive for balanced resource distribution to previously alienated sector, the policy had theintent of emergency credit line extension as an anti-cyclical macroeconomic measure.Also, it has evolved as a means to fertilize several broad sub-sectors such as export-SMEs and technology-SMEs. Here, please note that these are sector-specific concepts, notones specific to individual company. KOTEC was also established to grow technology SMEsector simply by availing more financing to such broad-concept sectors.The second policy segment reflects the perspective of competitiveness policy whichrose around the late 80s. This policy looks similar to aforementioned one because it has165

第 25 期sector-specific themes such as low-cost-energy SMEs. However, it shares different roots andmore importantly, the different strength or different degree of innovativeness came to matter.The government pretty sophisticatedly incorporated a sense of “choice and focus” onindividual SMEs as well as sectors with more specific theme.The third segment existed as a small fraction of the first segment. However, it wassignificantly extended to be treated as an independent segment primarily after the currencycrisis in 1997 during which many people lost jobs and pushed to open small business forliving.I would like to call the first policy segment as “classical,” the second “shaping,” and thethird “adaptive.” In the past, these three were nested in a chronological hierarchy prettyclearly, divided at first with a little overlapping, although the second segment sounds morelike something out of priority: most of institutions dealing with the first segment was underfiscal policymakers.But roughly after 2000, the three segments are becoming more and more heading into a“parallel” structure, meaning the fall in importance of the first segment and the rise of theother two. Also, as I described with the episode above, segments are increasingly convergingto create larger areas of overlapping.At the end of this year, a former president of a federation of start-up clubs fromuniversities in Seoul city came to see me for consultation on his business model. His planwas to start as a small flagship shop to sell “lunch packs for beauty,” reasonably priced lunchbox made of healthy organic vegetables. He will also use the Internet and mobile to advertiseand to get delivery orders. He also planned hiring of unemployed youth as part timers fordelivery at first, and later to promote them to be franchisees when his business grows to a166

Is Equity-Financing Always Optimal for Innovative SMEs?--How about Credit Guarantee?pp. 139-180degree. Also, he prepared creative user generated content platform and storytelling for hisbrand.This business model belongs to overlapping part of the three segments from day onewhile Granda Won’s Bossam was slowly transformed from one segment to the other.Let me highlight on the third category, which is the most problematic one in Korea. Atthe end of 2010, the proportion of small businesses was 31.3% of total employed population,double the OECD average, making 4 th among OECD countries (5.6% for U.S. and 13% forJapan). After the currency crisis, the number increased from 2,410,000 in 1996 to 4,730,000in 2008.If we look further into the segment, the problem is more serious because out of4,730,000, ages over fifty are 3,100,000. Most of small businesses are gravitated to thecategory of ‘easy-to-open, hard-to-sustain’ business types; 37.1% for small retail stores, 32%for food and beverage service. Among all small businesses, 70% are self-employed withoutany other employee.This segment had and has a connotation of welfare. Promoting opening business forearly retirees and unemployed youth through micro loan and credit guarantee is cheaper thanbuilding high level of social safety net, which has perennially been deferred on the prioritylist by other policy areas under fiscal constraint. Now the segment is about to explode.Solutions suggested by experts can be summarized as below:1) Creating new types of business categories that ensure higher value added,2) Upgrading and Converting existing ones to be more competitive usingelements of New Economy such as IT technology, and167

第 25 期3) Increasing the number of stable medium-sized companies with job creationpotential1) and 2) are in the “shaping” segment, and 3) are in the “classical” segment. The trendof convergence will be intensified, and the degree of overlapping will be higher. Thediagram on the left in Diagram 5 in the next section features the SME policy area wherethree segments are nested; “classical” to the upper side, “shaping” on the left middle, and‘adaptive’ on the bottom of right side.The different altitude expresses the chronological hierarchy, which is dismantling andconverging more and more toward being parallel. The three segments are in partsoverlapping and the extent is growing only larger. The dots in the segment are variousprograms and schemes.2. SuggestionsDue to above-mentioned complexity, which is not static, but dynamic, it is very difficultfor policymakers to land in good policy planning. Frustrated in highly fragmented policylandscape, they are tempted to seek a new breakthrough program, perennially, fromadvanced countries and expect that introduction of an excellent program will pivot from onenascent policy segment to the next, eventually influencing the entire SME policy area.The diagram to the left in Diagram 5 features such thought.168

Is Equity-Financing Always Optimal for Innovative SMEs?--How about Credit Guarantee?pp. 139-180Source: edited the original picture made by Michael Wu 28 , Ph. D. Lithium’s PrincipleScientistDiagram 5Concept of Pivoting and Real SME Policy LandscapeInefficiency or policy failures are likely to occur when policy makers try to catch twobirds with one stone. For example, when introducing a world-class business elite cultivatingprogram such as “accelerators” – or a Korean version of Y-Combinator, it is a mistake for apolicymaker to target this program to be suitable for turning unemployed youth to be agileentrepreneurs, thus trying to satisfy both reducing youth unemployment rate and at the sametime nurturing competitive young world class entrepreneurs.Venture Primary CBO issued in 2001, which penalized KOTEC big time, was in thesame case. It was not only funding innovative SMEs, but also monetary policy trying tocushion the magnitude of shock.28 As management borrows a lot of concepts from science recently like Theory of Constraint or DecisionScience, I borrowed this concept from a genius scientist, Michael Wu, Ph.D who demonstrated distinguishedexcellence in the analysis of the complex dynamics of social interaction and online communities, inspiringmany SNS start-ups in Korea.169

第 25 期The failure will call for other programs or schemes to be newly introduced, adding tothe complexity. Once programs or schemes are made or benchmarked, they tend to be deeplyseated into the landscape. When political leaders invent or benchmark a new program, itprovokes competitions by those existing ones; e.g. when the concept of accelerator isintroduced under limelight fresh from Silicon Valley, existing venture incubators upgradetheir services to resemble it.When policy focus is shifted to highlight a new target sector, existing institutionscompetitively come up with new programs to stay in line with the policy trend; otherwise,they will be regarded as slow, dummy, and thus needlessly “public.” Efforts of eachinstitution on the sector with policy priority only worsen the degree of overlapping. This iswhy Korea has around 420 SME support programs. Even greater inefficiency is likely toarise when multiple programs are chasing after one target without clear division of roles.In brief, inefficiency in the public SME policy sector comes either from the fact thatmultiple purposes are explicitly or implicitly commingled in one policy scheme or from thefact that many partially overlapping schemes are competitively pursuing one purpose. Theseare all cases of coordination failure.The solution in this regard is clear. I would like to suggest a two-tier solution. At thehigh-level policy planning, all the related ministries should form a board, representatives ofwhich are from various ministries with SME related issues. Planning may begin withmapping out each ministry’s pending issues and long term goals relative with SMEs, andthen fit them into the three aforementioned segments to have coordinated perspectives.Next step would be enumerating all the existing SME related programs and also optthem into the three segments, highlighting those in overlapping areas. Now, with issues with170

Is Equity-Financing Always Optimal for Innovative SMEs?--How about Credit Guarantee?pp. 139-180overly crowded programs in one hand, and issues that need new programs will behighlighted. Then, taking fiscal status as constraint, policy priority should be set.Then, the policy board should fine-tune overlapping programs by reshuffling,readjusting, and redesigning to make existing programs to be consistent with policy purposeswithout wasteful overlaps. To foster optimal Policy Tuning 29and Policy Mix, voice frompractice level both from public sector and market should be heard sufficiently beforeintroducing a new scheme or a new programDecision to allocate missions and roles should be based on institutions’ capabilities andmerits which come from distinct resources, not on which ministry an institution belongs to orwhether it is public or private. To do so, each institution’s past performances andcompetency should be reviewed in line with coordinated policy perspectives.In this regard, I believe that the action of National Assembly which passed the bill inlast February to allow KOTEC to legitimately invest in early stage ventures by equity up to10% of its base capital was the right decision. The assembly thoroughly reviewed KOTEC’sperformance 30for the past seven years of equity investment practices on the pilotexperiment under Financial Service Commission’s guide principle – only up to 10 billionKorean Won per year starting from 2005 when I and my team first made the practicalguidelines.This question implies credit guarantee is for debt financing and it takes different29 In this paper, I conceptually divided “Policy Coordination” into two sub-concepts: “Policy Tuning” meansthorough in-advance planning frequently through scenario testing with careful side-effect analysis whengovernment tries to achieve more than one purpose through one scheme, which often requires interdepartmentcommunications whilst, “Policy Mix” means a set of multiple policies set to pursue one purpose.30 Out of 43carly ventures KOTEC invested with equity from 2005 to 2010, 16 went public(IPO). The averagercrurn for KOTEC was around 30% although the terms were very generous while VCs' average rcturn isnormally 10% or below in Korea.171

第 25 期mindset and skills when it comes to equity financing. This is understandable; however, suchassumption looks over the two facts that KOTEC has cultivated specialty in early stageventures through long time since 1997 and in the course, KOTEC equipped itself withdistinguished expert infrastructure.In fact, no other entity in Korea, I believe, has dealt with the early stage ventures bothin massive manner and in selective manner depending on demand of the time and policytaste for each time period. As a result, it has cultivated the stage-specific skills.In addition to fine selection of institutions to best serve the policy purse, institutionsthemselves from both public and private sectors should communicate more to buildpartnerships in a way each can concentrate on its own core competency and therebycompensating one another to form a desirable Policy Mix, instead of desperately competingand marginalizing.In its R&D financing, KOTEC increased the number of other institutions to partner inthe scheme under support agreement to activate R&D special guarantee program, whichsubdivides R&D into development, preparation for commercialization, andcommercialization phases and determine fund support based on the technology appraisaldifferentiated for each phase to provide guarantee. Both KOTEC hopes to improve itspractice by partnering with specialized institutions for each phase.Diagram 6 The Growth Stage and Policy Phase172

Is Equity-Financing Always Optimal for Innovative SMEs?--How about Credit Guarantee?pp. 139-180A rationale for public sector’s role in the supply of entrepreneurship is that publicinstitutions can play a pivotal role in certifying new firms to outside investors. The idea isthat government programs can identify and support the creation of new firms in industriesthat do not attract private venture capital: for example, technology-intensive industries 31 .According to financial theory, this failure to attract capital might be due to a type of“herding” behavior; i.e., private venture capitalists herd themselves into particular industries.Government certification of promising firms might shift some private venture capital intothese neglected areas. This assumption is based on the fact that the private sector is notwilling to accept the certification role, owing to possible free-riding problems. This view isconsistent with evidence that private venture capital focuses more on the later stages of afirm’s growth and development than on the early stages of a start-up 32 .Public institutions in SME innovation segment and KOTEC will do better on fertilizingand seeding while market investors including VCs will do better at expediting and harvesting.When YOZMA Fund is benchmarked effectively without mistaking its magnitude of impactand without confusing the policy target, VCs in Korea will learn the know-how to make theirharvesting golden.In summary, the public institutions have their own raison d’etat and the market playershave their own raison d’etre. How to create a far-reaching policy lies in smart coordinationbetween the two. Issues within SME policy area in Korea are so entangled that it is hard todeal with without employing collective intelligence. Market cannot stand in the middlebalancing the “deal” for the benefit of various parties with different purposes.31 Oana S ecrieru and Marianne Vigneault, Working Paper 2004-10, “Public Venture Capital andEntrepreneurship”, Bank of Canada32 Amit, Brander and Zott, 1998, “Why Do Venture Capital Firms Exist? Theory and Canadian Evidence”,Journal of Business Venturing 13. pp 441-466.173

第 25 期V. Conclusive RemarkMichael Sandel, 33in his recently published book, “What Money Can’t Buy,” points outthat market-oriented thinking, for the last several decades, has been widely extended intomany areas previously ruled by non-market norms.The so-called Market Society, which represents a stern shift from a society with amarket economy as one of its essential elements, forces members to think almost everyhuman activities in terms of market value and its efficiency.According to the book, Market Triumphalism has its roots from the time when RonaldReagan and Margaret Thatcher in 1980s declared that key to prosperity and freedom are allin the hands of the market. Afterwards, Bill Clinton and Tony Blair maintained and evenreinforced the idea that market is the only mechanism to achieve common public virtue.Market has its own function, and I do not deny its importance. However, it is definitelynot a panacea. Market may better solve problems in some areas that the public sectorfrequently fails to solve, and vice versa. The combination to reach an optimum would beachieved when each does its best to achieve its own purpose in harmony.Undesired overlapping of functions or failure from one side to perform at the implicitlypromised level may provoke inefficiency. However, solution for this situation rarely comesfrom letting one side dominate the other. It rather depends more on the power ofadministration and coordination.We should think once again about the idea that market is always more efficient and thusshould eventually replace nearly all public functions. Too much prevalence of this idea33 Michael J. Sandel is professor of government at Harvard University174

Is Equity-Financing Always Optimal for Innovative SMEs?--How about Credit Guarantee?pp. 139-180would lead our society to throw the baby out with the bathwater.While CGIs operate in the financial market, CGIs perhaps have their own purposes thatmay not always be in line with market principles. In brief, as the title of the recentlypublished book 34speaks for itself, access to credit is a “public good,” and credit guarantee isan effective scheme to bridge the state and the market.It is true that the wide use of CGS in the field of innovation financing or start-upfinancing, for instance, has contributed to Korean culture that rarely forgives losers inventures because once ruined credit status scarcely allows entrepreneurs to challenge againwith the lessons learned from failure.Early this year, KOTEC has launched new programs to pilot this area of failure. One isguarantee for business rehabilitation in which 11 companies were funded with 2.1 billionKorean Won to try again. The other is guarantee for business turnaround, in which 147companies were supported with 62.4 billion Korean Won. However, the program is still in itsinfancy and not a global solution as well.I wanted to analyze and suggest possible solutions for problems regarding joint suretypractice somewhere in this paper. The deep-seated and widespread practice in Korea,exercised by almost all lending institutions, CGIs, and even VCs that invest with redeemablepreferred stock, is to make entrepreneurs jointly liable to the amount rendered. However, Iconcluded that the subject deserves a lengthy writing that should be left for another chance.34 Credit guarantee: a public good between State and Market, 2012, Bancaria Editrice175

第 25 期References:Annual Report 2008. Korea Technology Finance CorporationCho, Yoon Je, 2009. The State Governance Structure and Economic Policies in Korea,Seoul: Hanul PublishingFranco Bassanini and Edoardo Reviglio, 2012. Credit Guarantee: A Public Good betweenState and Market, BANCARIA EDITRICEHarry Huizinga, 1997. Are there Synergies between World Bank Partial Credit Guaranteesand Private Lending? The World Bank and CentERJacob Levitsky, June 1997. Credit Guarantee Schemes for SMEs – an international review,Small Enterprise Development, Vol. 8, No. 2Martin Reeves et al, September 2012. Your Strategy needs a strategy. Harvard BusinessReview, pp 76-83Michael J. Sandel, 2012. What Money Can’t Buy, WiseberryPaul Gompers et al, 2008. Venture Capital Investment Cycles: The Impact of Public Markets,Journal of Financial Economics, 87 (2008): 1-23Sergio A, 2007. Financing Innovation-Oriented SMEs: A Boost to Sustainable Growthand Employmen, paper presented at the Conference on Financing Innovation-orientedBusiness to Prpmote Entrepreneurship: Experience of Advanced Countries and Lessonsto Korea, Seoul KoreaW. Chan Kim and Renee Mauborgne, September 2009. How Strategy Shapes Structure.Harvard Business Review, pp 73-80176

Is Equity-Financing Always Optimal for Innovative SMEs?--How about Credit Guarantee?pp. 139-180Appendix. KOTEC’s Appraisal and Financing from its Annual Report 2011Technology Business FeasibilityAppraisalTechnology Value AppraisalComprehensiveAppraisalPurpose ofAppraisalTechnologyAppraisalModelAppraisalResults▪Technology appraisal guarantee▪Venture certification, Inno-Bizdesignation▪Appraisal of the business feasibility ofthe patent▪Technology appraisal for loan review▪R&D appraisal, technology transfer,trade evaluation, etc.KTRS (6BusinessCategories)TechnologyStart-UpEnterprise▪Appraisal for industrial propertiesright for investment in kind▪Appraisal of the collateral value oftechnology▪Estimation of technology transferand trade base price▪Appraisal forinvestment▪Listing ofventureenterprise toKOSDAQ▪Stock valueappraisal⇩ ⇩ ⇩CulturalContentsAppraisalModel(11 Areas)R&DAppraisalModel1-PersonVentureAppraisalModelKnowledgeServiceAppraisalModelStandard Model for TechnologicalValue AppraisalProfitApproachMarketApproachCostApproachOtherMethodsTechnologicalValueMarketabilityBusinessFeasibilityOtherManagementEnvironment⇩ ⇩ ⇩Appraise technological value and businessfeasibility in terms of score or ratingAppraise the value of technology interms of amountAppraisein termsof expertopinion,score, orratingAppraisein termsofamount177

第 25 期KOTEC’s Programs for SME Growth StagesDivisionContents

Is Equity-Financing Always Optimal for Innovative SMEs?--How about Credit Guarantee?pp. 139-180InvestmentInvestment Multiplier GuaranteeInvestment Connected with GuaranteeAppraisal of technological competency and commercialfeasibility of patented technologyR&D Plan Support ProgramAppraisal for Venture CertificationTechnologyAppraisalAppraisal for INNO-BIZ SelectionAppraisal for KOSDAQ ListingAppraisal of Stock ValueAppraisal of Technological ValueTechnology and Management ConsultingOtherSupportTechnology Transfer and M&AOperation of Venture Start-up SchoolOther Information Service179

第 25 期ItemsAcceptance ofGuaranteeOutstanding GuaranteedLiabilitiesPayment underGuarantee (a)Trend of Guarantee Provision of KOTECFiscal Year(Unit: billion Won)2008 2009 2010 2011Cases 56,026 68,336 70,743 74,246Amount 12,563 17,571 16,934 16,917Cases 63,986 74,372 78,338 79,602Amount 12,593 17,145 17,426 17,315Cases 1,290 1,685 1,361 1,565Amount 482 622 636 620Recovery (b) Amount 264 320 253 322Income fromGuarantee Fee (c)160 195 213 218Net Profit/Loss(b)+(c)-(a)-311 -435 -344 -573Personnel Changes Related with Technology Appraisal(Unit: Persons, %)Year 2007 2008 2009 2010 2011Total Number ofEmployees1,066 1,066 1,056 1,072 1,068Technology AppraisalSpecialists441 568 586 578 559Ratio 41.4 53.2 55.5 53.9 52.3Appraiser withDoctor's Degree107 109 116 126 131180