A second financial reform is needed

Lee Jeong-dong 

The author is a professor of the Technology Management, Economics and Policy Program at Seoul National University’s College of Engineering. 

What is finance? Most people think of it as an intermediary that accepts deposits and moves money from one place to another. Yet as digital technology increasingly performs that intermediary function more efficiently, finance has a more fundamental responsibility that cannot be replaced: sharing risks that industry cannot bear alone and bringing the future into the present. New products and services come into being only after enduring years of uncertainty and repeated trial and error. The capital that sustains that long period of accumulation is known as patient capital.

Korea's industrial rise was, in many ways, a history of patient capital. The country's transformation from a largely agricultural economy into a global leader in semiconductors and automobiles was made possible by capital willing to shoulder risks over long periods. At the time, patient capital came mainly from three sources: direct government support, long-term lending by banks and retained earnings within large corporations. Together, the government, banks and businesses formed a three-way partnership that shared risks and nurtured industries that had not previously existed.

That partnership, however, unraveled rapidly after the 1997 Asian financial crisis. No single event caused the change. Rather, between the late 1990s and the early 2000s, financial-sector restructuring, government-funded bailouts, the introduction of capital adequacy regulations, market-based lending standards and the rollback of state-directed finance all took place within a short period. Let us call this series of changes Korea's first financial reform. Its direction was clear: Finance shifted from bearing risk to managing risk.

That transformation was necessary. It broke the cycle of financial distress and established market discipline, leaving Korea with a far more stable financial system. But it also came at a cost. Banks that had once shared industrial risks gradually distanced themselves from the real economy. In 1975, 76.6 percent of private-sector credit flowed to businesses. By 2020, that figure had fallen to 53.4 percent.

Even retained corporate earnings, once the final source of patient capital, are losing that role. The real problem is that even the cash companies have accumulated is no longer flowing into long-term, high-risk investment. Instead, it is increasingly parked in safe assets and short-term financial instruments.

The problem is not a shortage of money. Household financial assets have reached record highs and corporations are sitting on hundreds of trillions of won in cash. What Korea lacks is patient capital willing to bear the risks of the future. The government, banks and corporations have all become more reluctant to take risks. The wellspring of patient capital has begun to dry up.

The deeper problem is that patient capital is needed now more than ever. Before the first financial reform, Korea was still catching up with more advanced economies. There were established benchmarks to follow, allowing latecomers to narrow the gap. Today, however, imitation is no longer enough. Survival depends on designing original concepts rather than copying existing ones. The risks of innovation have grown while the time needed to accumulate knowledge has become longer, yet the time horizon of finance has become shorter. That is the deepest contradiction facing Korean industry today.

For someone crossing a desert without a map, what matters most is not a so much a map as a reliable compass and a spring that never runs dry. Patient capital is that spring.

Korea now needs a second financial reform. If the first reform was designed to prevent another financial crisis, the second must help the country overcome the era of low growth. If the first was about reducing financial risk, the second should transform finance into a system capable of bearing the risks of innovation. That transformation should proceed in three directions.

First, the government should become an anchor investor. Korea should establish a publicly-backed institution, similar to British Patient Capital, dedicated to long-term investment in deep tech and high-growth companies.

Second, long-term capital should be redirected toward innovation. Pension and public funds, despite being Korea's largest sources of long-term capital, rarely invest in deep tech because of regulatory and evaluation constraints. Korea should ease those restrictions and enable long-term venture investment under appropriate safeguards.

Third, patient capital requires viable exit channels. Korea's deep tech ecosystem relies too heavily on initial public offerings while its M&A market remains underdeveloped. Expanding the M&A sector and improving secondary markets would encourage long-term investment by allowing capital to circulate more efficiently.

Banks should be evaluated not only on profitability and financial soundness but also on their contribution to fostering new industries. The financial system should reward institutions that support long-term innovation rather than simply avoid risk.

Korea does not lack technology or entrepreneurs. What it lacks is a financial system that can sustain innovation over time. While the first financial reform built finance for a market economy, the second must build finance for an innovation economy. That is the challenge this era presents, and the answer Korea must provide.