To secure future growth engines, policy finance and private finance need to redefine their roles, and shift not only the scale of funding supply but also the way it is allocated, participants said. With a global supply chain reshuffle and intensifying technology hegemony competition, they said financial policy needs to be refined to cover strategic industries, support for small manufacturers and investment in early-stage innovative firms.

The Korea Institute of Finance, the Korea Institute for Industrial Economics and Trade and the Hana Financial Research Institute held a seminar on June 11 at the Korea Federation of Banks on changes in the policy paradigm to secure future growth engines.

Ham Young-joo (함영주), chairman of Hana Financial Group, said recent uncertainty in global supply chains means industrial and financial policy directly tied to national security can no longer be considered separately. He stressed that finance should properly assess R&D investment and intangible technological capabilities and support companies across their life cycle from start-up through growth and leap forward.

Ham said productive finance in the true sense is completed when it goes beyond fostering advanced future industries and combines with inclusive finance that broadly covers root industries and numerous small and mid-sized manufacturers that underpin the economy. He said he would play a leading role as part of a cooperation model linking industrial policy, policy finance and private finance so South Korean companies can secure future technological competitiveness and lead the global technology ecosystem.

Direct finance lags major countries; conventional finance hinders innovation

Koo Jeong-han (구정한), head of the Center for Industrial Structure Innovation Finance Research at the Korea Institute of Finance, said the role of policy finance needs to be re-established in line with changes in the industrial ecosystem. As a low-growth trend has become entrenched since the global financial crisis, he said policy finance should strategically focus on areas difficult for the private sector to shoulder, rather than supplying funds in the same way as during past high-growth periods.

Koo said South Korea needs to address weaknesses even in advanced strategic industries where it has strengths, including through strategic investment in necessary parts of the value chain.

On AI semiconductor technology development, he said funding should be supplied across firms with potential rather than relying only on startups. He also proposed building an integrated platform for generating and using sectoral data through links among industry, academia and research, with government support through policy finance, as country-by-country competition in physical AI is expected in the long term.

In corporate restructuring, he stressed the importance of pre-emptive responses. Koo said the workout role of policy finance institutions such as Korea Asset Management Corp should be expanded, and that when industrial restructuring is needed, a whole-of-government response is required.

Kim Nam-hoon (김남훈), head of the economic and industrial analysis team at the Hana Financial Research Institute, reviewed the role of private finance in promoting productive finance. He said performance improvement continues to be led by large companies, while small and medium-sized firms face persistent weakness in sales and profitability, widening the gap.

Kim questioned whether there is sufficient funding to support innovative industries and long-term investment. He said supplies of direct finance and risk and patient capital such as venture capital, suitable for advanced industries, new technology investment and nurturing scale-up firms, need to expand, but the role of direct finance in South Korea remains low compared with major countries.

He said conventional finance that relies on physical collateral, credit ratings and real estate is hindering innovation. Kim said a low share of venture capital constrains industrial innovation, and that the ecosystem is insufficient to supply funds to innovative and early growth-stage firms.

He also stressed that revitalising exit markets should come first to attract venture capital. Kim said activating exit markets is a more urgent task than capital inflows themselves for bringing in venture capital and building an innovation ecosystem. He said there are limits in that the industry demands future-value finance, but failure and responsibility burdens and incentive structures are not concentrated in the industry. As causes of conservative funding execution, he cited soundness regulations and constraints, an imbalance between risk and return, and a lack of patient capital.

Kim proposed establishing a system to supplement institutions so that capital inflows can be induced from the perspective of boosting mid- to long-term industrial competitiveness rather than generating profits. He said financial groups should commonly support advanced strategic industries but differentiate by specialised areas based on each company's expertise and strengths, while cautioning that excessive competition in the speed of capital supply and crowding could lead to capital soundness risks.

Need to supplement expertise and exit markets

Lee Byeong-sik (이병식), a deputy head at Hana Bank, said there is broad consensus in actual financial execution on the need to support advanced industries, expand direct investment, provide strategic and selective support, supply large-scale funds and carry out pre-emptive restructuring.

Lee said productive finance is ultimately an investment in the direction in which South Korea will grow. He stressed that as banks can grow together only if the national economy grows, financial institutions need to align with policy direction and strengthen expertise.

He also pointed to internal changes at financial institutions as a task. Lee said higher expertise is needed to expand direct investment by moving away from loan-centred review practices, adding that while financial institutions are making multifaceted efforts to secure specialised personnel, they need to consider whether the pace is sufficiently keeping up with changes in government and companies.

He also cited limited access to information on early-stage companies and new technology fields. Lee said financial institutions have long executed loans and investments based on sales performance, and proposed that investment in areas before performance fully materialises, such as early-stage firms or new technologies, needs to expand further. He also mentioned the need to revitalise exit markets.

Lee said financial institutions have no choice but to consider risk and soundness. He said an ecosystem that can stably supply resources to advanced industries and government-led fields can be formed only if financial institutions continue to grow, adding that sufficient communication is needed on what the government should do and what the private sector should bear.

He said policy finance or government compensation for returns, and direct support for companies need to be discussed together. Lee said roles should be demanded at a level the private sector can bear, and that a virtuous cycle should be created in which the private sector discovers and nurtures good companies in line with government policy direction and then reinvests the returns.

Lee added that harmony is needed, with the role of policy finance strengthened further and private finance also making an additional effort.

Financial Services Commission: 'Need qualitative shift in fund allocation'

Kang Seong-ho (강성호), director of the National Growth Fund at the Financial Services Commission, said that to promote collaboration between policy finance and private finance, a qualitative shift in allocation methods is needed as well as expanding the scale of funding supply.

Kang said the National Growth Fund was designed as a collaboration structure in which policy finance first bears risk and private finance later provides growth capital. He said expanding the growth fund and pushing AI and semiconductor transition and pre-emptive restructuring are important, but there also needs to be consideration of how to make existing capital flow more efficiently into productive areas.

He pointed to existing client-centred support practices in financial institutions' actual execution processes. Kang said if asked to expand support for AI or semiconductor fields, financial institutions say they will set related key performance indicators, but from a working-level perspective there is inevitably an incentive to focus sourcing on existing clients or companies already doing business, rather than new companies.

Kang said it could result in a method of supporting more those among existing client firms that are partly pursuing AI transition, adding that transaction convenience and information asymmetry can affect fund allocation more than corporate efficiency, creativity or innovation.

He also criticised that support tends to be centred on extending maturities or refinancing existing loans rather than supplying new funds. Kang said support focused on rollover funds can be counted as productive finance performance, but in some cases it may not be clear whether the company is an innovative firm pushing AI transition or AX or GX.

Kang also mentioned that collaboration between policy finance and private finance is not easy in the field. He said differences in interest rates, information asymmetry and differences in deal sourcing structures between policy and private financial institutions make collaboration difficult.

Kang said when a policy finance institution proposes pursuing a specific deal together, a private financial institution may feel it is difficult to match policy finance's low funding costs. He said conversely, when a private financial institution proposes project financing, a policy finance institution may judge it as bringing a deal with low returns and high risk.

Kang said information asymmetry and fragmentation of collaboration occur because each financial institution holds different deals and data. He stressed that to allow policy finance and private finance to smoothly play seed and platform roles, more thought is needed on how to bridge the gap.

Kim Nam-hoon, a team leader at the Hana Financial Research Institute, said cooperation between policy finance and private finance needs to be approached from the perspective of enhancing national competitiveness beyond simple profit pursuit, stressing the need to expand cooperation between the two sides.