[Economy Pulse] Conditions for the Success of Productive Finance

Productive finance has become a key buzzword in today's financial markets. The Lee Jaemyung administration has called for a shift in the role of finance to restart the country's faltering growth engine. The National Growth Fund, a flagship outlet for productive finance, has also begun its preparations. With the goal of launching on December 10, the fund has opened its secretariat and is currently establishing its governance structure. Already, the four major financial holding companies have pledged to invest 400 trillion won in productive finance and inclusive finance over the next five years.

In fact, productive finance is not an unfamiliar concept. As early as the 19th century, classical economics viewed finance as serving the function of productive capital when it enhanced the real economy's productive capacity. The term "productive finance" came to the forefront around the time of the global financial crisis. The crisis was attributed to unproductive flows of capital within the financial sector, leading to calls for a shift in finance toward technology and productivity. In Korea, the term was first used as a policy concept during the Moon Jae-in administration. What has changed is the creation of large-scale, long-term funds dedicated to clearly defined investment areas, bringing the concept of productive finance closer to its essence.

The positive effects of productive finance can be illustrated by the widening per capita GDP gap between the United States and the European Union. Over the past 20 years, the growth rate of major EU countries has not even reached half of that of the United States. This difference stems from the United States raising productivity through large-scale, sustained investments in new technologies and equipment, compared to Europe. Total factor productivity increases the closer the timing of capital investment is, and the faster new technologies are embedded into capital goods. The United States enjoys higher productivity than Europe due to rapid technology adoption and an accelerated investment cycle.

For productive finance to function properly, the selection of investment targets is paramount. Policy funds of a similar nature have been launched with each change in government, but their results have often fizzled out. This underscores the need for a sophisticated and meticulous evaluation system. Companies must be vetted through collaboration with experts from various fields in the private sector, not by government agencies. The vetting process should be based on actual business performance, not just for the sake of investment. The perspective must shift from that of a financial investor to that of a strategic investor. Post-investment monitoring should be strengthened, and a performance-based management system should be established. In this regard, expectations are high for financial holding companies, as they can leverage the economies of scope in information across their affiliates to facilitate collaboration. In fact, research in the United States has shown that after the repeal of the Glass-Steagall Act, companies that received funding from universal banks saw improvements in productivity and increases in market capitalization.

Productive finance is not a concept that rises and falls with political administrations. It must serve as a game-changer in the financial paradigm. Productive finance has the capacity to bring together private capital, government, and corporations under a common purpose, providing benefits to all stakeholders. This is why it is essential to attract funds from a diverse and broad range of investors. It also justifies considering the investment of pension funds, including the National Pension Service, in productive finance. These funds can participate as anchor limited partners in private equity and infrastructure investments, while minimizing risk through a blended finance structure. The UK's major private pension funds, which lack a public pension system, have pledged to invest at least 5% of their assets in venture and growth companies and at least 10% in the private market by 2030 (through the MHC and MHA agreements). Similarly, an executive order in the United States now allows the inclusion of private equity funds in the management of 401(k) retirement plans. These examples are worth noting. Attracting global capital is also important, as the total sum of capital raised from various sources will be more effective in accelerating growth.

To establish productive finance, it is also essential to vitalize the exit market. In a system where initial public offerings are virtually the only exit option, it is difficult for successful venture capital to be recycled into new innovative companies. The introduction of business development companies (BDCs) alone is not enough. A dedicated secondary market platform is needed, where limited partner interests or fund shares can be traded. An information system must be built to ensure that net asset value (NAV), as well as company and fund information, are disclosed transparently and clearly. Regulations on institutional investors trading unlisted equity stakes should also be minimized. Such a platform could also contribute to the activation of mergers and acquisitions.

Productive finance has begun with great ambition. Finance must evolve from "making money with money" to "growing the economy with money." Rather than pursuing short-term profits, finance must be reborn as a force that supports the expansion of productive capacity and growth. When stakeholder capitalism is applied to finance, the sustainability of the Republic of Korea will be enhanced.

Lee Junseo, Professor of Business Administration, Dongguk University