1. Introduction

The Korean economy, which used to exhibit little venture start-up activity, is now working to build an economic and social mechanism that makes the creation and development of venture businesses possible, as the pre-existing economic system was clearly discredited by the economic crisis of 1997-1998. This is also partly due to the fact that venture businesses that are currently operating have been judged to have beneficial effects on the

economy and the nation’s social structure. Indeed, venture businesses, as the leaders of the new economic paradigm of the knowledge-based economy, are expected to play a major role in the economy’s shift from a conventional industry orientation to a knowledge-based industry orientation. However, it is clear that national competitiveness will only truly improve when the capacities of all industries and regions are enhanced, rather than only those of specific industries or regions. Along these lines then, given the recent tendency of venture businesses to set-up shop in specific regions (mostly metropolitan areas, especially ), the establishment of an economic system that activates venture businesses in more industries and more regions is necessary. In this study, adopting the view that the environment for the start-up and development of ventures must be improved on a national scale, the regional distribution of venture businesses is examined, along with the current investment conditions for venture capital in each region. Then, related suggestions to improve the environment for venture businesses are offered. 2. Regional Distribution of Venture Businesses

(1) The Current Regional Distribution of Recognized Venture Businesses

As of the end of November 2001, among the 11,365 recognized venture businesses, 8,296 businesses (73.0%) were located in the Seoul metropolitan area (comprised of Seoul, , and Gyeonggi), while the 3,069 remaining businesses (27.0%) were located outside the area. In the Seoul metropolitan area, 5,295 (46.6%) of all venture businesses were concentrated in Seoul, 3,001 (26.4%) of them in Incheon, and the remainder in Gyeonggi. Outside the metropolitan area, 1,504 (13.2%) venture businesses operated in the Yeongnam area, 1,128 (9.9%) in the middle region, and 437 (3.8%) in the area. Taking a closer look at each region, while recognized venture businesses were distributed mostly in Seoul and Gyeonggi, there were a fair number of venture businesses in -Chungnam, -Gyeongbuk, Incheon, and -. However, Seoul (5,295 businesses, 46.6%) and Gyeonggi (2,431 businesses, 21.4%) each held more than 10% of the total number of recognized venture businesses.

Source : Small and Medium Business Administration. Areas that held 5-10% of the nation’s total include: Daejeon-Chungnam (775 businesses, 6.8%), Daegu-Gyeongbuk (571 businesses, 5.0%), Incheon (570 businesses, 5.0%), and Busan-Ulsan (556 businesses, 4.9%). Areas with less than 5% were : Gyeongnam (377 businesses, 3.3%), -Jeonnam (273 businesses, 2.4%), Chungbuk (252 businesses, 2.2%), Jeonbuk (142 businesses, 1.2%), Gangwon (101, 0.9%), and Jeju (22 businesses, 0.2%). This unbalanced regional distribution of recognized venture businesses is caused not by a difference in those companies’economic activities, but by the varying regional advantages of those areas for venture businesses. In order to calculate the degree of venture companies’regional imbalance, it is necessary to examine the overall economic activities in those regions. Thus, the regional distribution of recognized venture businesses is compared in the following with the regional distribution of small and medium enterprises of overall industries and of manufacturing industries. To accomplish this, the whole country is divided into 4 areas: the Seoul metropolitan area, and the provinces of the middle region, Honam, and Yeongnam.

presents the results subdivided by region. In the Seoul metropolitan area, in 1999, the proportion of small and medium enterprises of overall industries and manufacturing industries reached 44.5% and 55.8%, respectively, while that of recognized venture businesses hit 73.0%. In fact, the Seoul metropolitan area was the only region where the proportion of recognized venture businesses was larger than those of small and medium enterprises of overall industries and manufacturing industries. Within Seoul itself, the percentages of small and medium enterprises of overall industries and manufacturing industries were 24.0% and 19.3%, respectively, while that of venture businesses was 46.6%. By comparison, in Incheon and Gyeonggi, the regional share of venture businesses was lower than that of small and medium enterprises of manufacturing industries, but higher than that of small and medium enterprises of overall industries. Specifically, in Incheon, the share of venture businesses was 5.0%, which was higher than the 4.7% of small and medium-sized enterprises of overall industries, but lower than the 8.0% of Source : National Statistical Office, The report on basic statistics for businesses in 1999, 2000. Korea National Statistical Office, The statistical report on mining and manufacturing industries in 1999 (nationwide), 2000. Small and Medium Business Administration,“ The Present Condition of Venture Businesses (at the end of November, 2001)”, 2001. Note : The number of recognized venture businesses are based on figures from the end of November, 2001. The number of small and medium businesses in manufacturing industries and overall industries are based on data from the end of 1999. those of manufacturing industries. In the case of Gyeonggi, venture businesses there made up 21.4% of all recognized venture businesses in the nation, a higher proportion than the 15.8% of small and medium enterprises of overall industries, but lower than the 28.4% of those of manufacturing industries. On the other hand, the regional share of recognized venture businesses in the Daejeon-Chungnam area was 6.8%, which was lower than the 6.9% of small and medium enterprises of overall industries but higher than the 4.3% of those of manufacturing industries. Regarding Seoul, the number of recognized venture businesses in Seoul at the end of November 2001 had reached 5,295. Among them, non-manufacturing ventures accounted for 65.7% or 3,477 companies, around two-fold the number of manufacturing venture businesses. On the other side, the number of recognized venture businesses outside of Seoul totaled 6,040 companies, with manufacturing ventures accounting for 83.7% of them (5,078 companies) and non-manufacturing ventures for the rest (992 companies or 13.3%), showing that an overwhelming weight of manufacturing ventures operated outside of Seoul. Given the above, the distribution of the types of venture businesses in Incheon and Gyeonggi may reveal important implications since these two areas are included in the Seoul metropolitan area, and are normally seen as having much in common with Seoul in terms of their environment for venture businesses. In fact, looking at the types of venture businesses in Incheon and Gyeonggi, their percentages of manufacturing ventures were much higher than any other area’s. Namely, about 87.7% and 87.6% of recognized venture businesses in Incheon and Gyeonggi, respectively, were manufacturing ventures. These figures are higher than the average for areas outside of Seoul, which is 83.7%. And they suggest that the regional disparity in the start-up and development of non-manufacturing venture businesses is not due to differences between the Seoul metropolitan area and other regions, but to differences between Seoul and areas outside of Seoul.

Source : Small and Medium Business Administration. To help explain the disparity, it should be noted that most non-manufacturing ventures are computer-related companies. For instance, among the 3,477 non-manufacturing ventures in Seoul, 2,955 companies are involved in computer-related activities, and about 757 out of the 992 non-manufacturing ventures outside of Seoul are as well. It seems then that the reason for the concentration of overall venture businesses in Seoul is that most non-manufacturing ventures, especially those related to Information Technology (IT) services, are located in Seoul. While there are many venture businesses in Incheon and Gyeonggi. most of them are manufacturing related.

(2) Changes in the regional distribution of recognized venture businesses

As just mentioned, it is clear that venture businesses are concentrated in the Seoul metropolitan area, and especially in Seoul itself. In order to see how this situation came about, changes in venture companies’regional distribution from June 1999 to November 2001 are examined in the following. First of all, the percentage of venture businesses in Seoul increased gradually, showing no dramatic changes in 2001. In June 1999, the percentage of ventures in Seoul stood at 35.5%. In March 2000, the figure exceeded 40% and then rose to 46 - 47% entering 2001. Second, there were no large shifts in the percentage of venture businesses in the Gyeonggi area. Although the figure had decreased a little until 2000, it started to increase entering 2001. In June 1999, it recorded 22.5%. Later, it dropped to 20.2% in December 2000, before turning upwards to mark 21.4% in November 2001. Third, while the percentage of venture businesses located in Incheon had been falling, more recently, it has been stagnating. The percentage of ventures in Incheon marked 8.6% in June 1999, decreased to 7% in December 2000, and then remained around 5% from July to November 2001. Fourth, though the percentage of ventures in the Daejeon·Chungnam area, which is somewhat famed as a venture hotbed, increased previously, the figure has exhibited a declining tendency lately. The percentage of ventures in the area was 5.9% in June 1999 and 7.6% in March 2000. However, the figure dropped to less than 7% in the second half of 2001. This latest trend is disappointing, considering the expectations that venture activity would be strong, centering around the Daedeok Research valley. Lastly, except for those areas mentioned above, the percentage of venture businesses has mostly fallen or stagnated in all other regions. In summary, recognized venture businesses have been centralized in the Seoul metropolitan area and the degree of centralization has deepened. As evidence, the percentage of venture businesses in the Seoul metropolitan area increased from 66.6% in June 1999 to 70% in June 2000, and has been above 73% since August 2001. However, within the metropolitan area, only the percentage of ventures in Seoul has exhibited an increasing tendency. Those of Incheon and Gyeonggi have not. Thus, the problem of the centralization of venture businesses in the Seoul metropolitan area may be understood as a problem of centralization in Seoul. The regional distribution of recognized venture businesses as shown above imply that there are large differences in the business environments of those areas. It also indicates that those differences may widen with the further regionally unbalanced development of ventures.

3. Regional investment of venture capitals

Although it is unavoidable that the business environments of those areas will vary, it is widely believed that the differences between the Seoul metropolitan area and the non-metropolitan regions are too great. It is true that, if favorable factors for business activities are mainly gathered in one location, synergy effects may occur, resulting in the enhancement of business conditions in that location. However, the other side of the coin is that other locations will lack the necessary environment for business activities, thereby wasting their potential. To better understand this situation. the amount of venture capital investment in each region is examined in the following. (1) Investment amount of venture capital by region1)

The most representative venture capital firms, venture investment companies and funds, had invested a total of 2.8691 trillion won in 1,973 companies by the end of 2000. Of the amount, 2.4219 trillion won was invested in 1,697 companies in the Seoul metropolitan area, and 447.2 billion won in 277 companies in the non-metropolitan area. Clearly, venture capital investment has been far too focused on the Seoul metropolitan area (Table 2). In the Seoul metropolitan area, investment has been most active in Seoul. By the end of 2000, venture investment companies and funds had invested 1.8444 trillion won in 1,366 companies (69.2% of all venture businesses in Korea) in Seoul, while only investing 57.1 billion won (2.0% of the total investment amount) in 32 companies (1.6% of all venture businesses) in Incheon and 520.4 billion won (18.1%) in 298 companies (15.1%) in Gyeonggi. In contrast, venture capital investment in the non-metropolitan area has been relatively insignificant, although Daejeon, Chungbuk, Chungnam, and Gyeongnam have seen some small amounts. The problem here is that venture capital investment has been funneled more and more into the Seoul metropolitan area at the expense of the other regions. For example, by number of venture businesses, the Seoul metropolitan area’s share of total venture capital investment hit 61.0% in 1998, increasing gradually to 77.9% in 1999 and 86.0% in 2000. By investment amount, the area’s share surged to 77.2% in 1999 and to 84.4% in 2000, from 59.2% in 1998. The centralization of investment in the Seoul metropolitan area has been completely the result of the lure of Seoul. In fact, while Seoul’s share of the total investment has been rising every year, those of Incheon and Gyeonggi have been decreasing, similar to that of the non-metropolitan area. In 1998, Seoul’s share of the venture capital investment stood at 37.5%. The figure then increased to 57.0% in 1999, and to 69.2% in 2000. Likewise, the amount of investment,

1) All the statistics used for the analysis of the regional investment of venture capital in this study are based on the actual performance of venture investment companies and funds, as estimated by the Small and Medium Business Administration. Also, the term“ investment”in this study means the sum of investment and financing support funds. Source : Small and Medium Business Administration. Note : Based on the amounts of investment and venture capital financing by venture investment companies and funds. which was at 37.3% in 1998, increased to 53.7% in 1999, and to 64.3% in 2000.

(2) Degree of venture capital in each region

Without question, investment by venture investment companies and funds and others has been absolutely focused on Seoul. It should be noted though that the number of venture businesses in Seoul also far exceeds the number of ventures in other areas. Accordingly, in order to accurately compare the amount of venture capital investment by region, the regional distribution of venture businesses must be considered.

is a comparison of the number of recognized venture businesses, the number of companies invested in by venture capitals, and the invested amounts. For Seoul, the number of recognized venture businesses at the end of 2000 stood at 4,068. At the same time, the number of companies that received investment from venture capitals totaled 1,366. Thus, 33.6% of the recognized venture businesses attracted venture capital investment. On the other side, for all other areas excluding Seoul, 607 companies (or 12.8% of the total) received investment from venture capital. Even subdivided by region, less than 20% of the recognized venture businesses typically drew investment from venture capitals. By any measure, those recognized venture businesses that received

Source : Small and Medium Business Administration. Note : Based on the amounts of investment·financing of venture investment companies and funds. venture capital investment were concentrated in Seoul. But despite that fact, the amount of investment received per company, (the total amount of venture capital investment divided by the number of recognized venture businesses), was not that different between Seoul and the other regions. The capital city recorded 453 billion won per company, while the other regions recorded an average amount of 217 billion won per company. The reason for the smaller differential in terms of investment received per company is that the amount invested in each company by venture capitals in Seoul was less than that for each company outside Seoul. The average venture capital investment in companies in Seoul was about 1.35 trillion won, while the average amount in companies outside Seoul was 1.688 trillion won. Why the gap? The biggest factor may be that most invested companies in Seoul were non-manufacturing companies, and therefore, their funding requirements were lighter. Most of the venture businesses in the other regions were manufacturing companies, and thus, needed relatively larger amounts of funding to succeed.

4. Conclusion

Venture businesses in Korea have developed rapidly since the end of the 1990s, mainly on account of the following factors: the restructuring of the Korean economy after the economic crisis of 1997-1998, the nation’s shift toward a digital economy and the accompanying rapid development of its IT industries, the activation of the Kosdaq market and the resulting venture investment boom, the successful cases of some start-ups, and the strong venture promotion policies of the government. To date, however, most Korean venture businesses are located in the Seoul metropolitan area, and especially in Seoul. As mentioned before, the reason for the Seoul-centric development of venture businesses is that the area is more conducive to the economic activities of venture businesses than any other. In this regard, according to a survey conducted from July to September of 2000 by the Small and Medium Business Administration, non-metropolitan venture businesses especially experienced difficulties in securing labor (chosen by 40.6% of respondents), capital (29.9%), and information (11.4%). For these reasons and others, 24.8% of them had plans to move to a new location. The most popular destinations were the Seoul metropolitan area excluding Seoul itself (47.7%), Seoul (32.5%), other regions (10.0%), and others (5.5%). The trend cannot be ignored: If the disparity in regional conditions for venture businesses continues, venture businesses will centralize more and more around the Seoul metropolitan area. Therefore, efforts to improve the economic environment for regional venture businesses are crucial. First of all, to improve conditions for regional venture businesses, it is very important to build up local networks among academia, research institutes and industry in the area to capture synergy effects. That is, the establishment of a Regional Innovation Systems and local clusters must be promoted for regional venture business development. Furthermore, regional venture businesses’easy access to venture capital and other financial support is necessary. In this vein, local public authorities must work to encourage venture capitals to invest in regional venture businesses. For its part, the national government may provide joint funding for venture funds formed and led by local self-governing bodies. In addition, the qualitative improvement of the business incubation programs promoted by the national government and local authorities is urgent. The previous policies that emphasized the quantitative expansion of business incubators must be re-examined. In their place, programs to uplift training ability through the improvement of existing business incubators must become the priority of policies. Finally, policies for the activation of regional venture businesses must be led by local governments, to ensure their appropriateness for regional conditions. From this point of view, a re-thinking of the relationships between the national government and the local governments is necessary, so that policies may be promoted more systematically.