[Deregulation] Support for Small Firms to Get Big Boost

Officials from Samsung Electronics and Hynix Semiconductor pose after the world’s No. 1 and No. 2 memory chipmakers agreed in early January to share key technology for the development of next-generation terabit memory devices. It marked the first time in 12 years that the two local players have reached a deal to work together in a high-profile industry sector. / Courtesy of Hynix Semiconductor

By Kim Yoo-chul
Staff Reporter

The new government is expected to focus more on creating solid partnerships between large, and small- and medium-sized companies (SMEs) as President Lee Myung-bak's economic policymakers have generally agreed that strong relationships between the firms will be one of the keys to making the country ``business friendly.''

On top of that, the government plans to help SMEs become financially sound and globally competitive by allowing large firms to buy over 50 percent of stakes in them, which had been prohibited under the former Roh Moo-hyun administration for fear of the rapid expansion of industrial capital.

``If large firms are allowed to buy over 50 percent of stakes in SMEs, then the buyers will be able to cut costs by securing stable procurement channels through their affiliates, while the smaller firms will be given human resources and technology support,'' said Kim Seung-il, a senior researcher from the Korea Small Business Institute.

Experts say South Korean industry will see more mergers and acquisitions under the new regime as the President has repeatedly promised to ease restrictions that have prevented industrial capital from owning financial institutions such as banks.

``As far as I know, large firms, which have been active in technology sharing with SMEs with an aim to maintain partnerships, will get more tax and administrative incentives from the government,'' a high-ranking government official said.

To back up the tentative plan, the government plans to spend 20 trillion won in proceeds from the sale of the state-run Korea Development Bank on creating a new state-run financial vehicle temporarily named the ``Korean Investment Fund,'' which will give financial support to SMEs.

According to industry estimates, the cumulative financial support by the nation's top 30 conglomerates to SMEs rose 45.3 percent in 2007 to 2.08 trillion won, a sharp rise from 1.04 trillion won in 2005.

``Now, what is urgently needed for the government is to set up a government-run watchdog to clear misconceptions that SMEs are just `subcontractors' of large firms,'' said Han Jong-woo, 47, who runs a factory to produce display parts.

Even the government is ready to unveil a new rule, which would force large contractors to accept a rise in the unit cost of products produced by subcontractors reflecting external and internal factors.

In South Korea, subcontractors, usually SMEs, hardly reflect increased production costs properly in the prices of their own goods, which are delivered to the large companies because of their dependence on the latter. This unfair business practice has been a pending issue hurting constructive relationships between SMEs and large companies.

The new President has long stressed that he will introduce a package of measures to curb this practice of unfair contracts and help out SMEs by restricting the reckless expansion of discount outlets run by some conglomerates.

Unlike still ``developing'' stages for partnership between large firms and SMEs, the relationship between large firms and their affiliates has strengthened further, especially where local companies have strong technology edges than global rivals.

In January, Samsung Electronics and LG.Philips LCD (LPL), the world's No. 1 and No. 2 display makers, agreed to jointly develop digital steppers with local parts manufacturers.

The immersion scanners use purified water between the lens and the silicon wafer to increase the depth of focus, allowing flat panel makers to boost productivity and lower costs when they produce liquid crystal displays. Japanese manufacturers Canon and Nikon are the leading players in the advanced technology.

Also, Samsung Electronics and Hynix Semiconductor, the world's No. 1 and No. 2 memory chip suppliers, forged a deal to share key technology for the development of a next-generation terabit memory device.

``The active tie-up between local large firms is necessary as they want to avoid excessive investment risks by splitting money via solid bilateral relations,'' an official from Samsung Electronics said.

LG Electronics operates a network loan program for its affiliates. LG provides loans for its local smaller partner with an annual interest rate of 4 percent at 2 billion won, while Samsung Electronics and Hanwha Group pay cash when they buy components from their units.

``It has become natural between large companies to share their distinctive technologies, to exchange employees and even to collaborate in financial fields because there are no barriers in global competition,'' said Kim In-gul, an economics professor of Seoul's Kookmin University.

``The government needs to give more financial benefits to companies that are active in sharing,'' he added.

Still a Long Way

Experts, however, say it will take at least a decade to clear off deeply-rooted biased stances against SMEs, though expectations are high that the new government would be ``business friendly''.

``When businesses face hardships due to oil price hikes, higher inflation in China, the subprime meltdown in the United States, large companies impose a heavy burden on SMEs. It is all but impossible to correct it in the short period,'' said a senior government official.

``What is important is not to bring a veteran foreign financier. Instead, the government should maintain strong consistency in pushing for previously announced tax and administrative policies,'' the official added.

yckim@koreatimes.co.kr