Lee Jung-hee KIPA research fellow

By Lee Jung-hee

Small-and medium-sized enterprises (SMEs) in Korea have made a remarkable contribution to promoting industrial productivity and leading economic growth. Small businesses and their entrepreneurship have been a primary source in providing jobs and powering the economy.

Several characteristics and quality of SMEs in Korea is worth our attention.

First, they are both labor ― and technology-intensive. In order to produce more with less input, they should specialize in the utilization of one factor of production ― either labor or technology.

Many companies enter into new markets where they can enjoy the advantage of labor- or technology-intensiveness. Actually, it is the severe competition with big businesses that forces them to be highly productive ― a kind of survival of the fittest in the industrial eco-system. SMEs can find their ecological habitat in either the relatively high-labor intensive or high-tech industries.

Second, there is a closely-knit web of SMEs in Korea. Compared to big businesses and foreign companies, small businesses were at a disadvantage when they started marketing their own brand name or investing in research and development (R&D).

Their alternative strategy was to build up their own networks and share the resources to maximize the benefit of cooperation. (ex: regional cluster & Co-branding)

Third, their relationship with the big businesses and conglomerates, chaebol in Korean, was not always bad because they depended on each other though they competed sometimes.

In many cases, SMEs produced goods through original equipment manufacturing (OEM) contracts with chaebol. For instance, SMEs made many, if not all, the parts for big carmakers Hyundai, Kia and Daewoo for Promoting efficiency & mutually beneficial partnership.

Fourth, in Korea, SMEs have been the source of entrepreneurship. Studious individuals can realize their ambitions. In SMEs, not like in the bureaucratic structure of big business, everyone can exert managerial abilities according to their genuine capabilities. ― even offering novice leaning and experience. Fifth, SMEs have spearheaded globalization.

They are working within the global value chain, producing in partnership with major businesses of multinational companies, exporting Korean managerial style and working ethics. In year 2000, the International Network of Korean Entrepreneurs (INKE) was organized to allow companies to cooperate for their mutual interest.

Lastly, SMEs, especially venture companies have played a very important role in the structural change of the Korean economic system. They are specialized in highly-advanced computer electronic technology and led the economy into the knowledge-based society. (ex: bio-technology, nano-technology and environmentally friendly energy investment)

The most important factor is efficient and balanced public policies. Here are two groups of public policies giving protection and support to SMEs in Korea, first, those for financial support, and second, those for fair competition and control of monopolies.
First, the Korean government has provided various policy incentives in finance for SMEs. In the financial sector, there is the Small and Medium Industry Bank (SMIB) which provides money to SMEs at low interest rates.

The Small & Medium Business Administration (SMBA) has been in the driver's seat of Korea's SME-led innovation in the national economy.

Second, the Korean government has provided anti-monopoly and competition policies. Korea legislated the Anti-Monopoly Act in the 1980s and created the Fair Trade Commission to level the ground for fair competition. Thanks to these measures, SMEs have relatively fair surroundings for their economic activities.

Now the distribution of SMEs in Korea is not bell-shaped, but a twin peak model. This phenomenon reflects the advancement of high-tech venture companies on the one hand, and the economic difficulties of other SMEs on the other.

Several policy measures have been proposed. First, companies should diversify and stabilize their financial mobilization.
Second, networks ought to be emphasized. Third, innovation and entrepreneurship is always the thrust of success of SMEs. Continuous R&D, investment in human capital and constant transformation of structures are the key to success.

The government's role for SMEs has changed from incubator to helper. Now the only one responsible for the innovation and entrepreneurship are the SMEs themselves.

Hermann Simon, leading scholar on SMEs said that in this economic crisis, the market is transforming itself and the hidden champions of SMEs are the ones that transform and produce dynamic and strong economic growth in one economic system.
Will Korea produce these kinds of hidden champions? We are not certain. However, at least, it has a lot of hidden champions and they are very good role models for future entrepreneurs.