AI Investment Spurs Separation Rule Relaxation Debate... Ministries Divided on the Issue [Why&Next]

Fair Trade Commission Takes Cautious Stance on Easing Restrictions

There is growing confusion within government ministries over the relaxation of the separation between industrial and financial capital (the so-called “firewall”) to boost investment in new industries such as artificial intelligence (AI). Joo Byungki, the chairperson of the Korea Fair Trade Commission and the key official in charge, stated, “We cannot change regulations that have been in place for decades just because of complaints from a few companies,” directly expressing concerns about the risk of conglomerates turning financial firms into private coffers and the side effects of increased economic concentration. His remarks, which appear to target SK-often cited as a major beneficiary of deregulation-stand in stark contrast to the more open tone of the presidential office and economic ministries, which have hinted at possible relaxation of the rules. Joo also took a firm stance against allowing fund management companies (GPs) to facilitate large-scale investments worth trillions of won, arguing that such measures could undermine the foundation of the current regulatory regime. He emphasized that companies should first consider traditional financing methods, such as using retained earnings, issuing bonds, or raising capital through the financial markets, and only see the relaxation of the separation between industrial and financial capital as a last resort.

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43-Year-Old Separation Rule: Difficulties in Large-Scale AI Investment Under Current System

The separation between industrial and financial capital is a principle that prohibits industrial capital from owning or controlling financial capital. Introduced in 1982 to prevent conglomerates (industrial capital) from using financial institutions as private coffers, the regulation remains one of the core safeguards against the concentration of economic power and the transfer of industrial capital risks to the financial sector, despite some easing of related laws in December 2021 to meet rising demand for investment in innovative startups.

The business community argues that this outdated regulation, established 43 years ago, no longer fits today’s corporate environment and is calling for its relaxation. President Lee Jaemyung accelerated the debate on this issue when, during a meeting with Sam Altman, CEO of OpenAI, on October 1, he said, “We can consider relaxing the separation rule for AI investment.” The AI industry requires massive, long-term investments amounting to tens or even hundreds of trillions of won. For Samsung and SK to supply high-performance memory semiconductors to OpenAI’s Stargate project, they would need to double their current semiconductor production lines and attract external funding on a trillion-won scale. SK Group Chairman Chey Taewon recently remarked on the need for a “new system to support AI investment” for this very reason.

The core of the debate is whether to relax two key regulations binding holding companies. The proposals include lowering the mandatory shareholding ratio of a holding company’s grandchild company in its great-grandchild company from 100% to 50% under the Fair Trade Act, and allowing the establishment of GPs to operate financial funds under holding companies. Currently, industrial capital such as large conglomerates is prohibited from owning financial companies or directly creating funds to attract large-scale investments from external institutional investors such as pension funds. Even if grandchild companies of holding companies like SK Hynix want to build semiconductor plants, there is no way for them to receive external investment.

An official from the financial investment industry pointed out, “Due to the separation rule, domestic companies must rely solely on traditional funding methods such as corporate bond issuance, capital increases, or internal reserves for AI investment. Attracting equity investment, which does not incur interest costs, is blocked by the regulation, while bond issuance or loans entail significant interest expenses and are recorded as liabilities on financial statements, making them unsuitable for large-scale investment in new industries.” Given the global reality where the AI race has become a key national survival strategy, some argue that, at least for AI, the regulation should be exceptionally relaxed to allow market capital to flow into high-tech industries.

Since the separation rule is enshrined in multiple laws-including the Fair Trade Act, the Banking Act, the Financial Holding Companies Act, and the Act on the Structural Improvement of the Financial Industry-some are suggesting that a special law be enacted to address the issue. There is precedent for such exceptions: the previous Moon Jae-in administration enacted a special law on the establishment and operation of internet-only banks, allowing industrial capital to hold up to 34% of voting shares in internet banks.

Will Ministry Differences Stall the Debate?

Economic ministers have indicated the possibility of exceptional relaxation for strategic industries such as AI. On November 19, Deputy Prime Minister and Minister of Economy and Finance Koo Yooncheol suggested that the government would consider the issue “within the bounds that do not undermine the fundamental spirit of the separation rule,” while Minister of Trade, Industry and Energy Kim Jeonggwan stated, “It is important to do everything possible to build competitiveness in sectors such as semiconductors.” Given the broad consensus within and outside the government on easing regulations to expand AI investment, some predict that the Fair Trade Commission will find it difficult to maintain its opposition. Issues such as the risk of private coffers and moral hazard can be addressed through supervision and regulation. Kim Jeongsik, Professor Emeritus of Economics at Yonsei University, said, “It is necessary to activate discussions on regulatory relaxation within the scope that does not fundamentally shake the current legal framework, rather than a radical easing of the separation rule.”