The Effect of Institutional Mechanisms Under the Uncertain Environment : The Case of the Venture Firm Recognition System in South Korea and Its Implications for the Failure of Institutions

Abstract

The attempt to expand small business enterprise in South Korea is in peril. After the 1997 financial crisis, while economic circumstances in the country were still highly uncertain, the government intervened in the diffusion of venture business firms, which were a newly emerging form of small business in South Korea. I argue that the Korean government's system of selecting prominent venture firms succeeded in increasing the number of venture businesses in Korea, but that, while trying to do so in a very short time, it also endorsed firms which were hardly promising. Using the Cox proportional hazard model as my main research tool, I find that when the criteria of endorsement are ambiguous, firms exposed to higher environmental uncertainty and showing poor market performance tend to acquire government's endorsement more quickly. Consequently, as the number of marginal firms among the endorsed venture businesses increased, it hurt the legitimacy of the government's initiatives to support venture business. The Korean government decided to scrap the system by 2006, earlier than previously planned.