Korea has competitive support system for small firms

• Published Jun 4, 2010 3:29 PM KST
• Updated Jun 4, 2010 3:29 PM KST

By Lee Jeong-hee

Researcher of Korea Institute of Public Administration

Small-and medium-sized enterprises (SMEs) 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.

Korea is a typical case in point in this matter. Small-and-medium sized enterprises provide more than 75 percent of employment and 50 percent of GNP and economic value in Korea. SMEs account for more than 35 percent of exports and power more half of economic growth. That is to say, they are one of the major forces behind the strong economy.

SMEs in Korea, what are they? What roles did they play in the course of rapid economic development in Korea? How did entrepreneurs of startups manage the sustainable growth of their companies? What kind of support did they get from the public and government? These are some significant questions, answers to which are crucial in understanding the business, innovations and entrepreneurship of SMEs in Korea.

Small but sturdy

So, what is such a big deal about SMEs in the Korean economy? There is a cliche signifying the importance of SMEs: "9988" It means that SMEs occupy 99 percent of the number of companies and 88% of the manpower in the economy.

Not only the quantity but also the 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 be specialized 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.

Good cases in point are regional cluster of SMEs and co-branding. The government supported the establishment of regional clusters and small businesses in one region got together, shared information and knowledge, and gained the collective bargaining power with big businesses. They also worked as a focal point within the community for development policies.

Co-brand or sharing one brand name with several companies was quite innovative and very successful. For example, the association of Seoul Furniture companies developed "Gaboro" as their co-brand name - which literally means family treasure and has a chic pronunciation - saving marketing costs.

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.

This is a mutually beneficial partnership in the sense that they could enjoy efficiency enhancement because they could utilize the strong points of their counterparts from the division of labor within one industry.

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 a novice could work as a CEO. By acting like a CEO, they soon learn the modus operandi and modus vivendi of CEOs, and become ready to start their own business. So, SMEs provided them with the opportunity to learn.

Innovation and aggressive investment of can, in part, be explained by this. Entrepreneurs joined SMEs, they are ready to learn and change, and they apply what they learn to the practice. Innovations can happen in these circumstances.

The entrepreneurship of SMEs is beneficial to the whole economic system. They provide the needed energy to boost the dynamism of capitalism in Korea.

Fifth

, SMEs have spearheaded globalization. From the 1990s when Korea joined OECD, income levels have continued to rise to the level of major industrial countries and left SMEs no longer enjoying a cheap and productive labor force. Instead, they started to advance to developing countries and international markets.

Now all around the Asia, America and Europe, there are Korean SMEs. 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. Different types of small business so called venture companies - emerged around the late 1990s.

They are specialized in highly-advanced computer electronic technology and led the economy into the knowledge-based society. Many venture companies are also investing in bio-technology, nano-technology and environmentally friendly energy ― areas that are oriented to the future. That is, venture companies are a prospective and forward-looking source of innovation.

In summary, SMEs were, are and will be one of the strong backbones and the sources of innovation in the local economy.

Small business policy

Naturally, one might ask how this could happen. There are be several answers to this question such as the high-level of education of the Korean people, characteristics of the economic system or even Korean culture. However, the most important factor is efficient and balanced public policies.

The country's Constitution itself stipulates that the Republic of Korea is responsible for the protection of small businesses. And there are many acts including the Principal Act of SMEs that provide governmental support.

Generally speaking, there 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.

Seoul's policymakers say Korea maintains one of the most attractive and systematic support systems for SMEs in the world. But the problem is some companies do not utilize the incentive system to the maximum.

The Korean government has provided various policy incentives in finance for SMEs. Government-wise, there are Trust Guarantee Funds (TGF) whose purpose is to lend money to SMEs, and many ministries have their own public funds for this purpose. In the financial sector, there is the Small and Medium Industry Bank (SMIB) which provides money to SMEs at low interest rates. In addition, the government treats SMEs favorably when they procure commodities from private markets, providing tax breaks and special tax credits.

The Small & Medium Business Administration (SMBA), a ministry-level administrative agency ― since its inception in 1996 ― has been in the driver's seat of Korea's SME-led innovation in the national economy, which has been transformed from an absolute poverty-stricken nation to the world's 13 largest economy. The SMBA has been exclusively undertaking financing for marketing and technology development, and business startups.

The other line of government intervention is its anti-monopoly and competition policies. Big business has the edge over small businesses from many perspectives and can make use of this to monopolize the domestic market. 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.

Future prospects

Beginning in the 2000s, polarization within SMEs started to happen in Korea. According to the Korea Development Institute (KDI), the distribution of SMEs 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.

, companies should diversify and stabilize their financial mobilization. In this era of turbulence, it is too risky for SMEs to depend solely on one source of finance.

, networks ought to be emphasized. As in the past, the sharing of information and knowledge, and skill and technology is the only way for SMEs to compete with big businesses.

, 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, a prominent scholar on SMEs and entrepreneurship policies, says that in this economic crisis, the market is transforming itself, so that hidden champions - SMEs - make profits, contradicting people's expectations. These hidden champions are the one and only answer for dynamic and strong economic growth.

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.