Chapter 6 The Effect of Asset Composition Strategy on Venture Capital Firm Efficiency : An Application of Data Envelopment Analysis

The Korean government has driven the venture capital market since KTB Network was created in 1981 to provide capital to the high tech firms. Due to the venture policy, the venture capital market has undergone a compressed growth in a short period of time. In 1986, the government enacted the “Small and Medium Business Start-up Support Act” and “Finance Act to Support New Technology Businesses” to provide legal bases to establish venture capital (VC) firms. The government pushed the VC firms to carry out equity investments on small and medium businesses within the age of 7 years. Hence, the Korea Development Bank Capital and TG Venture, the archetypes of today’s VC firms, have been established to finance high tech firms such as Medison, Mirae, and Sambo Computer (Lee 2003). In spite of the efforts made by the government, until the mid-1990s, there were problems in constructing the venture capital market, due to poor system to finance technology and lack of policy measures to support the high tech firms. There was no exit system to liquidize the equity investments, and most of the investment targets were from mature industries which brought low returns. Further debt financing was preferred to equity investment because of the low risk and high interest rate. In 1996, the object-oriented economy started growing since the internet rapidly spread out in the entire nation. The Kim Dae Jung Government (1998–2003) enacted the “Special Act to Foster High Tech Firms” in 1997 to overcome the financial crisis (1997–1998) by promoting market efficiency, industrial restructuring, research and development, and job creations. This in effect induced enormous number of start-ups of high tech firms. The KOSDAQ boomed and there was a tremendous growth in the information technology industry and the venture capital market in 1999. The venture policy took a dominant role in creating the venture capital market during the introduction stage in 1981–1986 and market formation