By Lee Byoung-ki
Controversies over big business reform have become an economic hot potato recently all over the country. Ever since the issue of a fair society was proposed in 2010, discussions on the polarization between big businesses and small and medium enterprises (SMEs) have continued. These have sparked arguments demanding social responsibility on the part of chaebol, the Korea specific family-run big businesses. Furthermore, politicians began making pledges to enact asymmetric business policies that will focus on regulating chaebol and protecting SMEs at the same time even before the general election in April.
With the presidential election soon approaching, politicians are bringing forward a myriad of chaebol reform laws to promote so-called “economic democratization,” a notion obscure and yet widely disputed in Korea. A ban on circular-shareholding, the revival of the equity investment ceiling on conglomerates, tightening the separation of banking and commerce, strengthening the regulations on funneling work to conglomerates and adopting other systemic measures to regulate big businesses are under debate. Also, punitive compensation for damage and SME-suitable businesses and so forth are reviewed to be applied or adopted to protect SMEs. These regulatory laws have gone through not one but several rounds of amendments, resulting in an increase in the cost of compliance for big businesses. There have been a number of changes in the equity investment ceiling on conglomerates, holding companies and SME-suitable industries.
According to a recent analysis, the economic concentration of big businesses has not been increased, yet the specialization of conglomerates has proceeded apace, demonstrating results that economic improvement at conglomerates has spread to subcontracting SMEs. These substantive results are not taken into consideration in Korea's big business reform discussions, but words like witch hunt are on everyone's lips. Various regulations on conglomerates are already under way, including the Monopoly Regulation and Fair Trade Act, the Commerce Laws, the Inheritance Tax and Gift Tax Acts and the Korean Fair Subcontract Transactions Act to name a few. It is believed that a vague expectation of solving polarization and income distribution problems among others in one fell swoop is the driving force for regulating market structures, behaviors and governance structures of existing and competitive big businesses.
Big business reform measures debated by politicians will be threatening factors dampening the will to do business and motivation to invest for Korean big businesses. Big business reform policies will act as elements for increasing policy uncertainty with regard to big businesses, and thus lower economic growth. The world economy is already falling into a recession, and a recent business survey index (BSI) issued by the Bank of Korea has been dropping constantly due to economic uncertainty ever since July 2010. As the economy is facing an uncertain future along with uncertain corporate policies, big businesses will lean to conservative views on large investments.
It is necessary to look at big businesses from the viewpoint of globalized market competitiveness just as in other economic policies. Ruchir Sharma has recently evaluated that the 30 biggest Korean companies, once known as symbols of crony capitalism at the height of Asian financial crisis in 1998, have now transformed into a core driver of growth for the Korean economy. He has explained that this is due to state-of-the-art manufacturers overwhelming the strongholds of Western brand-dominated markets in the mid-1990s on the international stage and thus creating a genuine global brand. How should politicians see the situation of Korea's big businesses evaluated as core drivers of economic growth while big businesses here are indicated as targets of reform?
Big businesses in Korea are already competing in globalized markets. It is desirable to make sectors that have competitive power more competitive, and provide policy support for sectors with less of a competitive advantage so they can improve. This is because competitiveness has long become an essential factor in creating profits in the globalized markets. Nevertheless, we can witness substantial decrease in productivity growth rate of SMEs recently. Especially, entering 2000, the role of innovation as growth factors are decreasing for SMEs compared to big businesses. It is necessary to make efforts to complement the SME sector through better policies and systems to convert it into a competitive sector.
It is desirous to pursue policies to both improve competitiveness of parts and component-producing SMEs without harming the competitiveness of big companies facing global competition. By doing so, it will draw a virtuous economic circle and improve competitiveness of both big and small players. It is indicated that Korea's SMEs are well behind other countries in process, product, design, packaging and other nontechnical innovation areas. It could be a way to enhance the technical capacity of SMEs that produce components by learning technology through FDI from overseas companies. The reason behind German and Japanese SMEs maintaining equal partnerships with big companies is their technology and competitiveness.