'Boiling water' strategy for SMEs
By Lee Sang-jin
Late in October, 3M Chairman Inge Thulin met Prime Minister Kim Hwang-sik and exchanged opinions on how to recover from the worldwide economic crisis based on the company’s global exposure. His proposal was to initiate an ongoing heightened investment in innovation-based technologies and create jobs for people. These two goals can be achieved by reinvigorating small and medium-sized enterprises (SMEs). In Korea, SMEs account for 99 percent of business establishments and 88 percent of employees. They constitute the lion’s share of enterprises across all sectors. They also account for a large proportion of national value additional to the economic output.
However, a substantial productivity gap persists between large and small firms and, to make the situation worse, the gap is widening. SMEs were hit by the recession that followed the financial crisis of 2008. Their prospects are uncertain because of the mature domestic market and an ageing and shrinking population profile. What pressing challenges do SMEs face while expanding their businesses? Why are they failing?
A number of systemic market failures and external factors exist, which demand government interventions. First, SMEs invest less in R&D, innovation and worker training than optimal levels. Second, information asymmetry arises with the provision of public information and advisory services to SMEs. Lastly, attempts by public entities to “pick winners” are apt to lack flexibility and adaptive capability responsive to the unique needs of the SMEs.
Where do we find solutions for these matters? Transforming traditional SMEs to high-growth ones must be a new policy goal. In order to fulfill the new policy goal, two pronged approaches can be taken: the “boiling water” and the “glass ceiling removal” strategy.
The glass ceiling removal strategy, which will appear in the next column, deals with curbing large firms’ entrenched market power and remedial measures necessary to prevent harm to SMEs. The boiling water strategy has to do with enhancing policy efforts above a certain threshold in important aspects, with sufficient impact being felt by SMEs with great potential. Those important aspects include gaining access to financial resources during times of economic uncertainty, facilitating an ecosystem for SMEs and nurturing entrepreneurship, which are to be addressed simultaneously.
Banks’ risk-aversion and a reliance on fixed assets for collateral put many SMEs at a disadvantage when looking for funds. Innovating companies find it more difficult to access external finances because of their risk profile. Venture capital firms do not function well in Korea, so the government should step in. Exemplary cases are found in “Inno-biz” and “Global Stars” programs, which provided financial support through dedicated funds.
Multi-faceted ways are worth seeking with respect to the development of the SME ecosystem. Growth requires the right mix of human capital. Korea’s workforce tends to favor secure employment in large corporations, and SMEs remain constrained to attracting experienced and skilled workers. Human resources are always a challenge for SMEs. The Japanese practice of “leasing” senior workers (shukko) from bigger companies could make much needed human-capital transfer on behalf of SMEs. Such benefits may not be available to innovative SMEs without policy guidance.
Cooperation, even between apparent rivals in the same field, can play a role in growth and can help overcome the potential hurdle of limited resources. The “sector council” may be a useful tool to pool SMEs’ limited resources for hiring and training employees. The council can also retain the scale to understand the range of available business support.
The fledgling firm may go down the drain when its core technology becomes obsolete within a short period of time. It is critical to make the transition from narrow-cast products for pilot customers to scalable products for the majority of consumers. Japan’s Kohsetsushi Centers by respective local governments support SMEs with technical assistance and training, networking, testing and instrumentation. In contrast, Denmark’s Accelerace offers customers insight, value propositions and business models, marketing strategies and pitch training in an intensive five-month process. These programs can be benchmarked because more market and action-focused due diligence process has a higher probability for success. When most local governments in Korea are equipped with such entities, provision of managerial competence will be kept at arm’s length.
The entrepreneurial spirit drives SME CEOs to look for markets far beyond Korea’s borders. Singapore undertook the “Business Leaders Initiative” to enhance management capacity in SMEs. Starting a company should be perceived as an attractive professional option and successful company founders deserve a great deal of respect. It is also important to allow entrepreneurs to fail. Fail forward, then you will do it better. However, higher penalties for failure hold many entrepreneurs back. That is why a modification of the bankruptcy laws is called for. This goes without a change in social attitudes towards entrepreneurs who failed.