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BOK Working Paper No.2019-8, Industrial Policy for Innovative Companies: A Theoretical Approach

Economic Research Institute (82-2-759-5381) 2019.02.11 3344

Title : Industrial Policy for Innovative Companies: A Theoretical Approach

Author : Kyeong-Hoon Kang(Dongguk University), Jungu Yang(BOK)


In the aftermath of the global financial crisis, the government's role in supporting innovative companies that will lead the Fourth Industrial Revolution is growing. This paper introduces the results of recent studies into the government’s industrial policies. It examines the mechanisms that enable the supply of sufficient funds for the development of innovative technologies through a theoretical model, and then draws policy implications. Extending loans to innovative industries is likely to result in insufficient lending to emerging innovators. This is due to poaching externality that focuses on entrepreneurs with good repayment histories of existing loans. There may be an equilibrium where funding to the innovative industries cannot be achieved at all. This implies that if private financial institutions only play a role of supplying funds to innovative companies, a smooth supply of funds to innovative companies may not be attained. Therefore, the government needs to implement industrial policies to facilitate investment in innovative industries.