South Korea Turns to Intellectual Property to Finance Its Technology Sector

*This content is an excerpt from , published by the Science and Engineering Mutual Aid Association.

In 2008, the South Korean government established the Financial Services Commission (FSC). This organization was created to oversee both the supervisory duties of the former Financial Supervisory Commission and the policy functions of the former Ministry of Finance and Economy, aiming to enhance the reliability of the financial system, which serves as the backbone of the national economy. Now in its eighth year, the FSC, under its new chairman Yim Jong-yong, announced this month that it would “boldly and swiftly pursue financial reform through three major strategies and six core tasks.” Notably, it identified the expansion of ‘technology financing’ as the first step in reforming the conventional practices of existing banks.

Technology Financing: Funding Based on Technology Assessment
Technology financing refers to the process of determining and supplying necessary funds through proper evaluation during the commercialization of a specific technology. Technology-based companies go through multiple stages from research and development to product launch. The goal of technology financing is to categorize a company’s development into stages and provide sufficient funding at the right time. This is because if left solely to the market’s autonomous judgment, funds tend to flow toward short-term results, often neglecting startups that require long-term investment.

Until now, South Korea has achieved factor-input-driven growth, improving productivity by expanding labor, capital, and energy. The current global economic order is shifting toward an innovation-driven model, emphasizing technological development and management innovation. We are now in a position where we must encourage innovation by increasing investment in information and communication technology and convergence sectors. For technological innovation to act as a driving force for national economic growth, the activation of technology financing, which evaluates a company’s technological capabilities and provides funding accordingly, must be prioritized.

However, the biggest drawback of technology as an intangible asset is that it cannot guarantee success. Even a highly acclaimed new technology faces the same risk of failure as any other product upon market release. Furthermore, since the information is not easily understood by everyone, differences in opinion between those needing funds and those providing them are inevitable. There are also frequent cases where investments fail because a company, despite receiving a loan based on its technology, fails to demonstrate passion during the commercialization phase.

Financial institutions such as banks, securities firms, and investment companies are bound to take a conservative stance on technology financing. They tend to lend large amounts to large corporations with substantial collateral, while being stingy in their evaluation and support for startups that have just begun, even if they possess advanced technology. If a robust technology assessment system is established to meticulously review and accurately analyze the growth potential and uncertainties of a company’s technology, the credibility of technology financing will increase, and innovation among technology-based companies will become more active.

Technology Financing Systems and Outlook
A prime example of a technology financing system based on technology assessment is the ‘Technology Assessment Guarantee.’ The state-owned Korea Technology Finance Corporation (KIBO) provides guarantees for loans to technology-based companies. It guarantees up to 85 percent of the loan amount within a limit of 3 billion won per company, calculating the appropriate amount after a thorough evaluation of about 40 items, including management, technology, marketability, and business viability. KIBO plans to provide 20.4 trillion won in guarantees this year alone.

Another system is the ‘Credit Loan with a Technology Assessment Certificate,’ where a company obtains a credit loan by presenting a certificate issued by a technology assessment agency to a bank. The government and financial institutions collaborate to select suitable assessment agencies, and loans are processed based on the analysis results. KIBO is the only public institution participating as a Technology Credit Bureau (TCB). However, a drawback is that banks are not actively participating because they must bear the full risk of failure.

Venture capital investment, which provides funds to promising companies, is also a part of technology financing. Korea Venture Investment Corp. (KVIC), which has formed a 1.8 trillion won Fund of Funds, currently accounts for over 40 percent of venture investment in South Korea. The remainder is contributed by various venture capital firms and partnerships. However, it has been pointed out that investment in early-stage startups (within 3 years of establishment) remains at only about 30 percent.

nAmong the various fields of technology financing, ‘Intellectual Property (IP) financing’ is currently gaining prominence. It refers to financial activities that generate revenue using intellectual property—such as patents, utility models, designs, and trademarks—held by companies or individuals, or that provide funds to support future commercialization and market share. Inquiries have been surging recently, as it allows small and medium-sized enterprises (SMEs) without liquefiable assets for collateral to secure funding based solely on their technology.

nIP financing is broadly divided into three categories: IP-backed loans, IP guarantees, and IP investment. IP-backed loans are provided with IP as collateral after its value is accurately assessed. Due to the inherent risk, this is mostly led by government agencies rather than private financial companies. An IP guarantee involves obtaining a letter of guarantee based on an IP valuation, which is then submitted to a bank for a loan. IP investment typically involves a Special Purpose Company (SPC) purchasing a company’s IP and generating revenue through licensing. The domestic IP investment market is formed by funds such as the 2.4 trillion won Growth Ladder Fund, the 700 billion won Fund of Funds, and the 400 billion won Creative Capital Fund.

nAs of 2012, South Korea’s R&D-to-GDP ratio and the patent activity of young firms ranked second among 32 OECD countries, following Israel. However, the competitiveness of its IP infrastructure was below average, ranking 17th. Technology leaders like the United States, Germany, and Japan show stronger competitiveness in their domestic local infrastructure than in their global IP infrastructure. In contrast, South Korea’s local infrastructure ranked 18th due to high IP application costs, a significant tax burden, and an insubstantial compensation system. This has led to criticism that it is not easy to secure financial support for commercialization based on IP alone.

nOn March 18, the Korea Federation of Banks, with 21 member banks nationwide, and the Innopolis Foundation in Daejeon signed a memorandum of understanding for ‘Supporting the Creative Economy and Vitalizing Technology Financing.’ They pledged to actively support technology-based startups by conducting reliable assessments of venture companies’ technologies and sharing information on technology commercialization. It is hoped that South Korean companies, which are engaged in world-class patent activities, will establish themselves as the core engine of national economic growth through technology financing.