The Bank of Korea sees AI-driven productivity improvements as potentially offsetting a slowdown in economic growth. South Korea’s government is seeking to drive economic growth through 30 flagship AI transformation projects as well as investments in “ultra-innovation,” a term that denotes a very high level of innovation applied to complex customer problems.
Structural inefficiencies in Korea’s business environment signal a growing disconnect between innovation inputs and competitiveness outcomes. Korea fell seven positions in the 2025 IMD World Competitiveness Ranking (WCR). Overall, it reached a respectable 27th out of 69 economies analyzed, but this was a decline nonetheless and is largely attributed to the deterioration of business efficiency, a data subset in the ranking where it fell from 23rd to 44th place.
Business efficiency in the annual WCR is a measure of how well enterprises are performing in an innovative, profitable, and responsible manner. It captures how far the national environment enables the private sector to perform effectively and is constructed from five components:
Small- and medium-sized enterprises (SMEs) are typically viewed as fundamental for employment generation and innovation diffusion. But in the 2025 IMD Executive Opinion Survey (EOS), which feeds into the WCR results, Korean business executives rated SMEs’ effectiveness levels at just 4.47 out of 10; executives in Switzerland and Denmark rated theirs at 8.60 and 8.04.
Korea’s experience is not only a national concern but also a lens through which other innovation-driven economies can assess the balance between scientific strength and entrepreneurial diffusion.
Other innovation-led economies include Taiwan, Singapore, Finland, Japan, China, Germany, and Switzerland. Korea’s twin pressures of competitiveness erosion (particularly in business efficiency) and startup stagnation have made the situation more acute and immediately binding.
However, its peers are all in slightly different boats. For instance, China has cooled in late-stage funding and unicorn formation, and Japan shows moderation rather than collapse. Furthermore, while Finland and Switzerland sustain small but steady pipelines, Singapore and Germany display cyclical resilience. In any case, all these economies face the same broad challenge as they seek to transform strong science and technology inputs into broad-based firm dynamism, SME productivity, and durable scale-ups.
Taking a long-term view, Korea’s ability to reconcile this conflicting dynamic ultimately depends on three key axes:
“Only 29% of the population aged 18–64 cited “fear of failure” as a barrier to setting up a business (Global Entrepreneurship Monitor).”
Although starting a business is not perceived as particularly difficult in Korea, the strength of the overall entrepreneurial environment lags behind. Cultural attitudes may be shifting in a positive direction. Only 29% of the population aged 18–64 cited “fear of failure” as a barrier to setting up a business (Global Entrepreneurship Monitor).
That said, such attitudes are met with an opposing force, namely structural obstacles. Of the executives surveyed, 62% cited a lack of economic opportunities (such as jobs and business loans) as a key contributor to societal polarization. It therefore seems that barriers to upward mobility remain, reducing the chances of entrepreneurship flourishing in the country.
The country continues to invest close to 5% of GDP in R&D, which places it among the highest in the world.
Despite this, Korea remains a global leader in innovation inputs and outputs. The country continues to invest close to 5% of GDP in R&D, which places it among the highest in the world. The country also leads globally in patent applications per capita and is ranked third in artificial intelligence-related patent filings, behind only China and the US. It illustrates the strength of the country’s industrial research base and its capacity to produce technological advancements.
This is undermined, though, by the legal and regulatory frameworks supporting research commercialization, which remain underdeveloped. Worsening the situation, Management Practices dropped from 28th to 55th in the last year, while Attitudes & Values fell from 11th to 33rd. Both declines indicate a loss of confidence in the capacity of domestic institutions to support innovation and scale new ventures.
According to respondents of the EOS, Korea’s legal framework for encouraging innovation is worth 5.79 points out of 10. This suggests that despite strong inputs, the institutional environment may be constraining the transformation of scientific capacity into scalable economic value.
With the number of startups increasing over several years, as reported by the OECD, just two (ABLY and Rebellions) achieved unicorn status between January 2024 and April 2025. Their incorporation raised the cumulative national unicorn total to 33. This marks a clear deceleration in unicorn formation and is a reflection of the convergence of global financial tightening, domestic economic constraints, regulatory shifts, and the ongoing refinement of the structures forming the Korean innovation landscape.
The decline in Korean unicorns parallels a contraction in venture capital (VC) activity at a global level. According to CB Insights, global VC investment dropped by nearly 50% compared to its 2021 peak of $648bn. This retrenchment, driven by high interest rates, inflation, and geopolitical uncertainty, has significantly constrained late-stage funding availability in Korea, particularly for e-commerce and fintech firms that previously dominated the unicorn environment.
Domestically, sluggish GDP growth (estimated at 2.1% for 2024 by the Bank of Korea’s Economic Outlook), declining consumption, and persistent inflationary pressures have undermined investor confidence and deterred capital allocation. Tighter regulations have added further complexity for startups, particularly those in the fintech, platform, and crypto sectors.
Revised data privacy rules under the Personal Information Protection Act (PIPA), new oversight on digital payments, and stricter compliance regimes have increased the regulatory burden. Simultaneously, efforts to prevent speculative behavior in capital markets have limited the viability of IPOs and delayed exit opportunities.
But the short-term implications are far from negligible.
The slowdown in unicorn emergence also raises concerns about potential fatigue within the Korean innovation system. Many of the most promising scale-ups from an earlier cycle of unicorn formation that began in about 2012 and lasted about a decade, such as Market Kurly, which specializes in fresh food delivery with a well-known early morning service, and Tridge, which focuses on agricultural and fishery product data and trade, already attained unicorn status between 2020 and 2023. Clearly, the current unicorn stagnation partly originates from a shortage of late-stage candidates ready to cross the billion-dollar valuation threshold.
But the short-term implications are far from negligible. A slowdown in unicorn formation may signal a weakening of innovation capabilities, potentially reducing the country’s prominence in the global technology landscape and increasing the risk of talent outflow.
Then there’s the issue of foreign institutional investors seeking scalable, high-growth opportunities, who may decide to reallocate capital to more dynamic economies, such as Singapore (second in the 2025 WCR).
We are witnessing a process of realignment rather than a structural breakdown. The emergence of deep-tech unicorns like Rebellions (an AI accelerator startup set to mass produce its eponymously named Rebel chip, designed to use less power to run AI models, in 2026) indicates a shift away from consumer-oriented platforms toward capital-intensive, innovation-led industries.
Furthermore, an increasing proportion of Korean unicorns are achieving profitability, which signals a system that is maturing by prioritizing sustainability over rapid scaling. Public policy is expected to mitigate some of the sticking points; for instance, the government’s investment in foundational technologies, such as AI and semiconductors via the K-CHIPS Act, will likely alleviate VC contraction.
Korea’s innovation economy is entering a period of structural transition. While the country retains strengths in research capacity and intellectual property creation, its competitiveness is increasingly constrained by weak SME performance, limited entrepreneurial dynamism, and a maturing startup pipeline.
The recent slowdown in unicorn formation further highlights how necessary it is for Korea to adapt its institutional and regulatory frameworks to ensure continued momentum. Nevertheless, it would be inaccurate to conclude that the country’s innovation strength is entirely dwindling. Rather, it is moving away from rapid scale-up through consumer platforms and towards sustainable, deep-tech innovation.
Equally important is expanding inclusive access to scale-up finance.
To sustain its overall competitiveness, Korea must adopt a multi-dimensional policy agenda that addresses the structural weaknesses behind its recent decline. Revitalizing business efficiency is essential, since the experience of other innovation economies shows that high R&D spending alone does not guarantee productivity gains.
Germany and Switzerland illustrate how institutional strength, labor market flexibility, and managerial sophistication reinforce scientific excellence, while Finland displays the risks of losing momentum when efficiency falls behind innovation inputs.
Equally important is expanding inclusive access to scale-up finance. Singapore’s deliberate efforts to attract venture capital and global talent, and Taiwan’s strategic nurturing of semiconductor firms into globally competitive giants, provide instructive examples. At the same time, innovation support must extend beyond headline R&D intensity to encompass entrepreneurship incentives, digital adoption, and market access pathways. Japan’s slowdown in startup dynamism and China’s declining unicorn formation despite massive state investment underscore the dangers of relying solely on research pipelines without parallel support for scale-up ecosystems.
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