Association for Public Policy Analysis & Management

This research aims to re-evaluate the impact of institutional path dependence on economic and industrial development with regard to financialized business model in market-oriented economies. It employs a qualitative approach to look at the origin of institutions for small firms like biotech startups in Korea dating back to 1997, as the country’s economy was on the verge of collapsing. By examining the origin and reproduction institutions, it is useful to understand how past decisions could interact with current situations to present new opportunities in a temporal sequencing manner. A common understanding of path dependence, especially in historical institutional studies, is that institutions evolve in rather constrained paths due to decisions and actions made in the past. It has often implied negative connotations in relation to increasing returns to stability of existing institutions leading to inefficient economy and lack of innovation. Such characteristics generate varying rates of economic growths and innovations in different countries. In that respect, Varieties of Capitalism (VoC) theory implicates that industries based on radical innovation and scientific knowledge, namely biopharmaceuticals, require institutions that could rapidly deliver resources including capital and skilled personnel for high-risk projects, for which liberal market economies, like the US and UK, have comparative institutional advantages. On the contrary, South Korea, one of coordinated market economies by VoC, is more likely to accelerate development progress in other industries, seen as more incrementally innovative.

Many countries have adopted the current financialized approach to innovations in the biopharmaceutical industry created in the US. However, a number of scholars (Pisano, 2006; Lazonick et al. 2017; and Lazonick and Tulum, 2011) have questioned the long-term survival of the US biopharmaceutical industry. Their argument was premised on business strategies of multinational corporations (often referred to as Big Pharma) to maximize shareholder value through share buy-back and outsourcing R&D activities to research-focused biotech startups. As a result, they have continued to maintain drug price-gouging behaviors imposing mounting threats not only on US but international users and patients in need of healthcare.

For this research, archival search for documented information about the legislation process of state-led special measures for venture startups and interviews with ministerial agents revealed that the purpose of the act was transformed with the inception of IMF relief fund and the new administration led by the former president Kim Dae-jung. Also, the long lasting division between conglomerates and small and medium sized enterprises (SMEs) has remained until now, making it difficult for the latter group to survive. However, recent minor changes in the institutional setting for startups and venture capitalists have attracted experienced scientists and researchers, from both domestic and international pools, led to increased R&D performance levels in collaboration with existing pharmaceutical comapnies, measured by major technology transfer deals with Big Pharma, and production capacity for international markets. Based on these findings, this research argues that path dependence of institutions can help initiate development in new industries under different institutional environments with benefit of liberalized financial allocation for innovation and growth.