Left: Financial traders at Baring Brothers’ Seoul office work on one of the first electronic trading systems in Korea in 1991. Right: Two decades later, Daewoo Securities traders have a more spacious room and better equipment. / Korea Times file

By Kim Young-jin

Improving competitiveness of the Korean financial industry has always been an important task for the continued success of the Korean economy. In any economy, a well-functioning financial system and its timely development is necessary for the efficient allocation of the society’s limited funds and resources.

Quite attractive for the Korean economy as its new growth-driver is its financial industry, because it creates high added value and has strong employment effects on highly educated personnel. The excellent management and profitability of the well-known established foreign financial firms instills domestic envy, and raises a spirit of challenge in Korea to build a stronger and better domestic financial industry.

Building a strong financial industry, however, is not an easy task. The plan to establish Korea as the financial hub for Northeastern Asia had been set up quite long ago; this plan, although ambitious, had not yet produced any tangible results.

“Why isn’t there an equivalent of global players like Samsung or Hyundai in the Korean financial sector?” some may ask. It is about time for us to ascertain the main culprit for the underdevelopment of the Korean financial industry.

Since the 1990s, I had numerous chances to visit leading financial firms in Europe. Observing their trading rooms, I felt that it would be a really tough task, if not nearly impossible, to catch up with them without careful and thorough preparation. The Korean financial industry might require more investment and efforts than Toyota or Samsung had put during their critical early development stage.

When asked why the Korean financial sector lacks a strong player equivalent to Samsung Electronics, most would quickly bring up rigid regulations as an answer. Strict and inflexible regulations in Korean economy in general have undoubtedly hindered the growth of its financial sector. An inefficient regulatory system in today’s ever-changing environment reduces competitiveness of an industry, and consequently globally competitive company is unlikely to emerge from a country where management autonomy is far from guaranteed. If regulation causes the problem of exceeding the boundaries of its original purpose, that is to ensure stability of the financial sector and to protect the interest of general public, then development of the financial industry would be hard to come by. Regulatory body, therefore, should always be keen on how to achieve its original goals, with the minimum amount of regulations. Efficient minimum regulation is one of the necessary conditions for further development of the financial industry.

Although efficient minimum regulation is important, it alone cannot guarantee the growth of financial industry. A more important factor is a better understanding of the financial industry by people working in the sector and their effective adaptability to a changing environment.

In the past, when transportation and communication methods were not yet developed, services such as money exchange, transfer, and deposits to control liquidity were the most important services. The main competitiveness for financial companies came from the low transaction costs derived from economies of scale and scope.

As the economy evolved, however, the need for such services declined. Instead, the different kind of services of financial companies was growing; the service of providing solutions to the problems from informational asymmetries. The era when you can boast about yourself as better for having larger capital, more offices and more customers has passed. It is the quality of employees, not the number of employees, which is important in today’s financial industry.

Many scholars in the field of finance argue that the future of financial firms lies in their ability to accumulate, process, and analyze relevant information. It means the future of financial firms and the financial industry lies in their ability to utilize information. It is defined as the ability to process and analyze accumulated information to better serve customers’ needs.

But improving such capability will be a difficult mission to achieve. Information has unique characteristics that other products do not have. Let us take TV for an example. If a company manufactures TV, one could determine its quality immediately just by turning on the manufactured TV set and checking the quality of the screen and sound. The quality of information, on the other hand, cannot be judged immediately. This problem is directly linked with the reliability of information processing — it is not something a financial company can solve overnight. To achieve a reputation for providing reliable information, a company over time has to keep on producing and supplying correct information to the market until it gains trust.

The reason for strong competitiveness of the leading foreign financial firms lies in their expertise in handling information. The only way to catch up with them and to upgrade the Korean financial industry to the next level is through developing information-handling capabilities of people working in the financial companies. To do this, strong incentive-based measures should be taken to attract superior human resources to the financial sector.

On top of that, investments in educating and training financial specialists should also be strengthened. A manufacturing company idle in its investment on R&D and equipments would not have a bright future; it is the same for financial companies if they underestimate the importance of education and training. There is no other way to develop a successful financial industry in Korea, other than nurturing competency of the professionals in the financial industry.

Kim Young-jin is a professor of Seoul National University Business School