2023 IRIC [1]

By Zachary Petit, Jiseon Lee and Julien Herveau

Entering the European market for Korean startups - challenges and opportunities

The International R&D Industry Con 2023 (IRIC 2023) was held on November 14th and 15th, 2023, at the Daejeon Convention Center in South Korea. KEY supported the "International Cooperation Program" within this event. This two-session program aimed to connect Korean and European stakeholders, including institutions and companies. Its goal was to foster exchange, collaboration, and facilitate market entry into Europe through exports or business establishment.

The first session of the conference was dedicated to the diverse opportunities arising from the European market for Korean companies, as well as the challenges they must overcome to develop their business in Europe.

In the first roundtable, Jeung-Jun Park, Attorney at Law at Kim & Chang Law firm [1]. Julien Herveau, French CPA and a representative of Mazars in Korea [2] and Michel Sal, Manager of Korean Operations at Czech Invest [3], discussed the potential benefits of the European market for Korean companies. In the second roundtable, Woon Sung Jung, CEO of Dassault Systèmes Korea, Phil Jae Park, Director of the Korea International Trade Association (KITA), and Peter Madsen, Program Manager of White Castle [4], presented initiatives to support Korean investors in their European projects. Both round tables were moderated by Philippe Li, President of KEY.

Korean companies see Europe as a unique opportunity for growth and innovation, benefiting from the European market, the absence of customs barriers between member countries and certain tax benefits. However, despite these advantages, they face several challenges in penetrating the European market. One of the main obstacles is the negative image and stereotypes associated with Europe, often perceived as complex in terms of taxation and regulations. This perception can discourage some companies from setting up in Europe, despite the substantial opportunities offered by this diverse and dynamic market. By overcoming these challenges and adopting a well-defined strategy, Korean companies can take advantage of the many opportunities available in Europe, strengthening economic relations between the two regions.

The International R&D Industry Convention 2023 (IRIC 2023) is an international event for consumers and suppliers in the R&D industry. Companies, research organizations, universities, and researchers interested in leveraging R&D for their business will participate in the event to share ideas and seek future collaborations. The EU-Korea International Cooperation aims to enhance mutual understanding of the bio/health industry in Europe. This event brings together key players of this industry with academic, professional and governmental backgrounds.

I. Key benefits of choosing Europe

Currently, the main target for Korean investors interested in international trade is the US market. One of the aims of the conference and its participants was therefore to present the opportunities offered by the European market, and to highlight its qualities. To this end, Julien Herveau, CPA representing Mazars in Korea, and Jeung-Jun Park, lawyer at Kim & Chang, first emphasized the economic, tax and legal advantages.

Korean companies have more and more reasons to turn to Europe. Already from an economic point of view, Europe represents the world's third-largest market, with over 500 million consumers. It is also the 3rd economic zone, from a GDP perspective, after the US and China. Three countries in Europe are in the top 10 economies: Germany, the UK, France and Italy; it is even four countries if we include the UK. Moreover, Europe has a very dynamic service sector, relying on cutting-edge technological advances. As an example, France, with its French Tech communities under the patronage of the French Ministry of Economy and Finance, is leading in the technology area. Europe's well-developed infrastructure and well-educated workforce also attract foreign companies seeking stability and growth.

The attractiveness of the European single market also results from its legal framework, creating harmonized regulations through the transposition of European directives by each European member states into their national law.

The following examples of this attractive European regulatory environment were mentioned by the two speakers:

• Europe has abolished tariff barriers between member states, making the European Union a true single market. EU countries can trade with each other without the need to negotiate or sign any free-trade agreements. Access to the European market is therefore an opportunity to develop business throughout the continent, and potentially reach all consumers.

• Furthermore, the EU-Korea Free Trade Agreement (FTA), implemented provisionally from 2011 and ratified in 2015, has removed most tariffs, leading to an increase of bilateral trade between the economic areas.

• Intellectual property protection is a key factor. Europe offers continent-wide protection through the European patent and harmonized standards for the transfer and licensing of intellectual property. This guarantees Korean companies that their innovations will be protected uniformly and effectively throughout Europe.

• Among taxes, VAT system is harmonized with minimum standard rates of 15%.  And as many European countries are member of the OECD, they follow its rules from a tax point of view, including the OECD transfer pricing guidelines.

• From a financial transparency point of view, all European listed companies are subject to International Financial Reporting Standards (IFRS).

Europe also places particular emphasis on supporting small and medium-sized enterprises (SMEs), which account for 99.8% of all businesses in Europe. R&D funding programs, financial incentives and other benefits are targeted primarily at SMEs, providing an environment conducive to innovation and growth, in particular for startups.

One of the concerns from Korean investors is often related to the tax system that is often perceived as complex and impenetrable by foreign investors. However, many European countries have reduced their corporate tax system in recent years and aim at providing greater transparency for investors. Average corporate tax in Europe and is now at c.  22%, which is consistent with the current Korean corporate income tax rate. Several European countries are also setting up incentives to support R&D activities.  For example, France has one of the most favourable tax systems for R&D in the world, with a R&D tax credit equal to 30% of qualified R&D expenses, including payroll expenses, subcontracting expenses as well as amortization and depreciation expenses. If the tax credit cannot be used, it is then refunded.

All these advantages indeed make Europe an attractive choice for Korean companies looking to expand internationally, offering both a stable environment and significant growth opportunities. Today, Germany is Europe's preferred destination for investment in technology and innovation. The country attracts major players, particularly in the automotive sector. Germany benefits from the European framework and stable economic growth, making it a benchmark in Europe. For example, in 2023, Korean manufacturers KIA and Hyundai signed a strategic partnership with German vehicle chipmaker Infineon Technologies AG to secure a supply of power semiconductors, with the aim of developing a new generation of environmentally-friendly electric vehicles. Germany, like other European countries, is placing increasing emphasis on ESG challenges in its production process, which sometimes requires finding new production methods.

France is another country of interest for Korean groups. For example, the Korean internet conglomerate, Naver, has invested significant amounts in AI research there and is currently employing more than 100 people in France. SK group is also present in France with SK geocentric, SK’s natural gas branch, who is expected to open a factory to recycle plastic in Europe. It is likely that the recent measures on business taxation in France will lead more Korean companies to take an interest in the French market within Europe.

II. Opportunities in the emerging European countries - The case of Czech Republic

These observations about Europe apply to all European Union countries. However, for economic and historical reasons, foreign investment has been concentrated in the most developed markets, namely Germany and France. During the conference, Michel Sal, representative of the Czech Invest organization in Korea, whose mission is to support foreign investors in projects with the Czech Republic, presented the advantages that this country can represent for South Korean companies. The presentation highlighted the opportunities offered by emerging economies in Europe.

Czech Republic is already home to almost 100,000 foreign companies of all sizes and originating from many countries, including Korea. For example, Korean carmaker Hyundai has chosen the Czech Republic to open a subsidiary in Eastern Europe, to take advantage of the country's infrastructure. The DELTA project, which is the governmental cooperation project of the Czech Republic, has also established partnerships with SNU and Yonsei Universities to promote exchanges and cooperation.

Foreign-owned companies indeed play a key role in the Czech economy. Although they account for less than 2% of all companies in number, they generate 70% of total sales (2022) and employ 50% of workers (2022), mainly in medium-sized and large companies. Also, these foreign companies are responsible for a significant share of R&D spending. The sectors with the highest shares of R&D spending by these companies are automotive, pharmaceuticals and electrical engineering.

Thus, Michel Sal presented key assets of the Czech Republic to attract foreign investments:

• The Czech Republic is strategically located in the center of Europe, with excellent access to established markets in the west and emerging markets in the east. Its road and motorway network is one of the densest in Central and Eastern Europe, and several rail modernization projects are underway to link the Czech Republic to the pan-European high-speed rail network.

• The Czech Republic devotes more resources to research and development. R&D spending has risen from 0.95% of GDP in 2001 to 2.00% in 2021. This high level of investment has attracted major foreign R&D investments, notably in the automotive and medical sectors. The country is also home to many multinational research and design centers, including Panasonic, Mercedes-Benz and Motorola.

• The Czech university system is renowned for meeting the needs of a competitive economy. In 2022, 60,481 students were enrolled in the technical programs. The number of university students increased from 118,000 in 1990 to 304,518 in 2022, providing a solid base of qualified graduates, including 12,068 in technical universities.

• Looking at the workforce quality, the country offers a skilled workforce at an attractive cost compared to Western European economies.

III. Challenges and opportunities for Korean startups

1. Challenges

In a second panel, White Castle representative and program manager Peter Madsen sought to identify and define the main challenges facing Korean entrepreneurs wishing to invest in Europe. White Castle is an organization that helps startups expand internationally through networking and consulting activities. White Castle began working with Korea just before the Covid-19 pandemic and has partners worldwide. They aim to support European investments in Korea and to help startups establish themselves there through administrative support and networking.

Through their work with Korean companies, White Castle and Peter Madsen have been able to identify the points that South Korean startups need to pay attention to if they want to expand into Europe:

• To succeed in Europe, rigorous preparation is essential. This involves in-depth research into the market, the competition, and the expectations of European consumers.

• To engage effectively with European partners, Korean startups need to build strong relationships with local government organizations and institutions to better understand the market and current regulations. Establishing a partnership in Europe thus can be an ease for Korean companies to develop there.

• Korean startups must navigate a complex and varied regulatory framework. European countries, although unified by certain regulations at EU level, applies country-specific regulations. This includes, for example, differences in tax systems. Detailed knowledge of these regulations is crucial to avoid costly mistakes and delays in product launches. Despite regulations tending to become simpler, it is important for Korean companies to find out about the applicable regulations in each European country they are planning to operate. Startups also need to understand the mechanisms of subsidies and tax incentives, which are particularly advantageous for R&D.

Although Korea is currently more oriented towards the USA than Europe when it comes to business, Korean technology is highly regarded in Europe. For Korean startups to succeed in collaborating with European partners, it is essential that they are well prepared and open to find local partners. Europe has all the elements necessary for success, but this requires careful preparation, particularly in terms of market research and regulation.

1. Collaboration opportunities

Finally, representatives from Dassault Systèmes and the Korea International Trade Association (KITA) commented on the development of programs and initiatives to facilitate the business and the collaboration between South Korea and the European Union, considering the perspectives that the Korean or European market can represent for companies.

A. The example of Dassault Systèmes' 3DX [5]

Dassault Systèmes, a French multinational software corporation, originally emerged from the aerospace industry and transitioned into focusing on 3D surface design software after spinning off in 1981. In the past, Dassault Systèmes focused on providing 3D design, 3D DMU (Digital Mock-Up), 3D PLM (Product Lifecycle Management), and 3D Experience solutions. Today, Dassault Systèmes has expanded its offerings to include virtual twin services, serving approximately 330,000 customers worldwide, including about 22,000 in South Korea. Their client base in Korea predominantly consists of startups and SMEs that collaborate closely with large enterprises.

Dassault Systèmes supports Korean startups and SMEs in two primary ways: through consulting and implementation of 3D virtual twin services, and through investments in training programs aimed at enhancing business capabilities. This strategic approach is exemplified in several initiatives:

• . R&D Center in Daegu: established in 2009, this center is one of the few Dassault Systèmes R&D facilities worldwide. Located in Daegu, South Korea, it focuses on developing 3D content and PLM solutions specifically for the shipbuilding industry. With 30 specialized researchers, the center plays a crucial role in advancing technology and providing local support to the shipbuilding sector in Korea and globally.

• 3DEXPERIENCE Innovation Center in Changwon: situated in Changwon, South Korea, this center aims to innovate manufacturing processes in the Gyeongnam region. It contributes to local economic revitalization by fostering talent, creating jobs, and supporting Korean SMEs and startups through training and consulting services. Notably, this initiative has helped Korean biotech firms bring new drugs to market, showcasing tangible results from Dassault Systèmes' support.

In addition to these initiatives, Dassault Systèmes plans to open a Biotech Innovation Center in 2024, further solidifying its commitment to fostering innovation and growth opportunities for Korean SMEs and startups. Through these investments and support, Dassault Systèmes is well-positioned to provide practical pathways for advancement in the Korean market.

B. Korea International Trade Association platforms and programs

Secondly, Phil Jae Park, Director of KITA, commented on different projects launched by the organization.

KITA plays a crucial role in helping Korean startups expand beyond their borders, notably by organizing Asia's largest 1:1 innovation event, the “Nextrise Global Fair”. These consultations offer valuable opportunities for startups to establish connections with world-renowned companies. This event brings together the majority of Korea's leading companies, providing a platform for startups to showcase their innovations and establish strategic partnerships. The association connects over 50 major international companies every year to consult and work with Korean startups.

Meetup offers startups the opportunity to collaborate with businesses and structure investments from global corporations. This platform enables large and mid-sized global companies to explore technological achievements and service innovations by establishing partnerships with startups. Nextrise facilitates thousands of annual consultations for investment and corporations.

Another key KITA program is the Pilot Test Program. This program aims to connect startups with bigger companies to allow them to cooperate. In order to achieve this goal, startups and more established companies face challenges that need to be overcome.

For global corporations, it is often difficult to evaluate startups when the information available is limited to documents and pitch presentations from the startups. Furthermore, the global corporations usually do risk adverse decisions due to performance pressure and budget constraints of open innovation. Lastly, they experience informational asymmetry in finding qualified and prominent straps to partner with. Often, the information available is limited to documents and presentations, making decision-making risky due to performance pressure and budget constraints. Startups, meanwhile, need real-life tests to demonstrate their potential, but fear theft of their intellectual property or technology. On the startups’ side, the KITA’s Pilot Test Program can be considered as a real-world testing on actual data through the global corporation’s scale and network that is needed in order to show off their real potential.

Thus, KITA and initiatives such as the 3DX program from Dassault Systèmes play a key role in helping startups overcome the challenges of internationalization and fully exploit the opportunities offered by European and Korean markets. The development of these initiatives is bringing the two regions closer together administratively and intensifying economic exchanges.

IV. Conclusion and key takeaways

Business and trade between South Korea and Europe have been experiencing significant growth recently. The number of South Korean companies interested in the European market keeps increasing, and same for European companies with the Korean market.

These two regions have different but complementary dynamics. South Korea is renowned for its dynamism and fast development, and Europe for its harmonized market and stability. However, a lack of mutual knowledge can be a major barrier to this cooperation. Korean start-ups, while technologically advanced and renowned for their innovation, sometimes face challenges in understanding European regulations. Similarly, European companies need to better understand the Korean market and its particularities.

Events such as the IRIC 2023 conference play a crucial role in fostering cooperation and improving understanding of Korean and European systems. They provide an opportunity to share knowledge, create networks and develop strategic partnerships, while benefiting from the expertise of players from both regions. By participating in these exchanges, European and South Korean players can better seize the opportunities offered by their respective markets and overcome regulatory and cultural challenges.

References

[1] Kim & Chang Law firm is an International law firm headquartered in Seoul and being the largest law firm in Korea with over 1,200 professionals.

[2] Mazars is an internationally integrated partnership, specialising in audit, accountancy, advisory, and tax services. Originating from Europe, Mazars has offices operating in over 100 countries and territories with more than 30,000 professionals. In Korea, Mazars Sebit Accounting Corporation is a member of Mazars integrated partnership.

[3] CzechInvest is a state contributory organization subordinate to the Ministry of Industry and Trade of the Czech Republic and whose main objectives is the transformation of the Czech Republic into an innovation leader of Europe.

[4] White Castle Partners is an accelerator and incubator firm based in Europe and in the US.

[5] Dassault Systèmes SE is a French multinational software corporation which develops software for 3D products.

Companies and Institutions

• Dassault Systemes Korea, represented by Woon Sung Jung, is the South Korean subsidiary of Dassault Systèmes, a French company specializing in 3D design, digital mock-up and product life cycle management (PLM) software. It offers innovative solutions for various industries in South Korea, helping companies to optimize their product development processes and stimulate innovation. 

  
  

• Kim & Chang, represented by Jeung-Jun Park, is the largest law firm in South Korea, renowned for its high-quality legal services covering various fields, including business law, finance, intellectual property and litigation. Founded in 1973, it provides legal advice to international and local clients, combining local expertise with a global perspective.

  
  

• Mazars, represented by Julien Herveau, is an international consulting and auditing company, founded in France, offering audit, tax, consulting and accounting services. With a presence in over 90 countries, it stands out for its collaborative and integrated approach to helping clients navigate complex and constantly evolving environments.

  
  

• Czech Invest, represented by Michel Sal, is the Czech government agency responsible for promoting foreign investment in the Czech Republic and supporting the development of local businesses. It provides advisory services, financial support and information to facilitate the establishment and growth of companies in the country.

  
  

• KITA, represented by Phil Jae Park, is an organization dedicated to promoting international trade and supporting South Korean exporters. Founded in 1946, it offers a variety of services, including market information, training and networking initiatives, to enhance the competitiveness of Korean companies on the world stage.

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• White Castle, represented by Peter Madsen, is an organization that advises startups on their investment projects internationally. It offers strategic advice, administrative assistance and operational support to help European companies set up and grow in new markets, notably in South Korea.

About the Authors