Kosdaq Needs Overhaul to Become Credible Home for Korean Innovators

Capital purgatory

Kosdaq needs drastic overhaul to become a credible home for Korea's innovative firms

Markets, like people, eventually become what they repeatedly reward. Thirty years after its launch, South Korea's tech-heavy Kosdaq has become a market that rewards survival more readily than success.

That is an awkward legacy for an exchange created to finance the country's next generation of innovators. As the Kosdaq marks its 30th anniversary on Wednesday, celebration gives way to an uncomfortable question: Why has the country's growth market stopped growing?

Few figures better capture the market's imbalance than this. Through June 29, the Kospi had surged 94.79 percent this year, climbing from 4,309.63 to 8,394.65 after reaching a record high above 9,100 earlier in June. The Kosdaq, by comparison, slipped 2.64 percent, falling from 945.57 to 920.57.

This divergence reflects more than a semiconductor boom. It suggests that Korea's flagship growth market is no longer allocating capital where future growth is most likely to emerge.

Much of the Kospi's remarkable ascent has been driven by the extraordinary earnings boom of Samsung Electronics and SK hynix. Investors simply followed profits into semiconductor stocks. Projected net profits now differ by roughly 73 times between the two markets.

The concentration also carries risks. The 26 sidecar activations recorded on the Kospi this year reflect a growing level of volatility. The Bank for International Settlements has warned that concentrated AI investment could amplify future financial instability and trigger a prolonged investment slowdown if expectations fail to match reality.

The Kosdaq's weakness, however, cannot simply be blamed on semiconductor enthusiasm. The deeper problem is investor trust. Weak companies remain listed while stronger ones increasingly migrate to the Kospi. Instead of becoming a destination for long-term capital, the Kosdaq has acquired a reputation as a market where money becomes trapped.

The growing presence of zombie companies lies at the heart of that problem. Nearly one-third of Kosdaq-listed companies cannot generate enough operating profit to cover interest expenses, almost double the share on the Kospi.

Research by the Bank of Korea suggests this is more than an accounting concern. A 1-percentage-point increase in the share of zombie firms reduces investment and employment growth at healthy companies by 0.14 to 0.18 percentage points over the following two to three years, because scarce capital remains tied to businesses with little prospect of recovery. A market designed to finance innovation instead preserves stagnation.

The government's latest reform plan includes stricter delisting standards for penny stocks and a new promotion and relegation system dividing the Kosdaq into premium, standard and regulatory segments.

They are necessary but insufficient to restore investor confidence or revive the market's original purpose.

Venture investors rightly caution that innovative startups often look financially weak during their early years. A regulatory framework that relies too heavily on backward-looking financial metrics could discourage precisely the kind of high-risk entrepreneurship the Kosdaq was created to foster.

The goal is not to maintain a tidier exchange populated only by mature companies, but to nurture a trusted market where promising firms can raise capital while persistently uncompetitive ones leave without delay.

Regional competitors offer useful lessons. China's ChiNext and STAR markets have combined registration-based listings, greater governance flexibility and firm enforcement against fraud to build more dynamic financing ecosystems for innovative companies. Korea should learn from its experience and recognize that efficient entry matters little without equally efficient exit.

Thirty years is long enough for any market to reveal its character. The Kosdaq has spent too much of that time preserving inefficient firms instead of reallocating capital to more dynamic ones.