I. Introduction
1. Background
(henceforth Korea) like in other Asian countries. As of the end of 2015, about 3.6 million SMEs were in businesses, employing 14.6 million people in Korea. Since large companies employ about 2.1million workers, SMEs sector contributes to 87.2% of the national workforce.
Table I-1. Basic Statistics of SMEs in Korea
Source: Korea Federation of SMEs, DB (http://www.kbiz.or.kr/home/homeIndex.do?menuCode=stat).
Note: 1963~2000 (Number of works of SME – over 5 persons), 2010~2015 (Number of works of SME – over 1 person)
*Large firms: Number of works - over 300 persons.
The relative roles of SMEs in Korea's economy have changed rapidly. The roles of SMEs have undergone at least two very clear stages; there was a stage where they declined sharply from early 1960s to 1976, and their roles gradually have increased (from 1976 to recently). However, the latter trend appeared to be delayed and reversed as Asia saw the 1997-99 currency and financial crisis and SME’s investment decline in the mid-1990s.1
Undoubtedly, SMEs took over the manufacturing sector of the economy in the early 1960s, but, by the mid-1970s, Korean government realized the limitation of the light industry driving policy. The government's policies to foster heavy chemical industry were developed in such a way to provide preferential treatment to large corporations. Korea has become famous for its extreme power in the economy and the public sector of large chaebol2 (conglomerate) firms.
In fact, In Korea, where large corporations and chaebol are leading the economy, SMEs are in stark contrast to other East Asian economies such as Japan and Taiwan, which play a much more important role than large corporations.3 The rapid growth of Korean Chaebol is closely
1 Nugent, Jeffery B. and Seung-Jae Yhee (2001). Small and Medium Enterprises in Korea: Achievements, Constraints and Policy Issue: World Bank Institute.
2 Chaebol is run a large industrial conglomerate, controlled by an owner or family that in South Korea.
3 Scitovsky, Tibor (1986). “Economic Development in Taiwan and South Korea, 1965–1981.” In Lawrence J.
Lau, ed., Models of Development: A Comparative Case Study of Economic Growth in South Korea and Taiwan. San Francisco, Calif.: ICS Press.
1963 1973 1980 1990 2000 2010 2015
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related to the Korean government and economic development policies.4
After the middle of 1970s, SMEs have steadily grown into suppliers of Chaebol due to relatively low wages, interrelationships with large enterprises, and market protection.5
4 Nugent, Jeffery B. and Seung-Jae Yhee (2001), Op. cit.
5 ibid.
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1.2 Korean Government Innovation Policy for SMEs
Since the early 1980s, Korean government has fully enacted policies to support SMEs.
However, there is little evidence as to whether these policies had a major impact, and if so, there is little evidence of whether these policies have been socially cost effective. The revival of SMEs also had influence on employment and export of manufacturing industries. If small business support policies were effective, income disparity trends are related, and lowering inequality is certainly one social benefit of such policies.6
Promotional measures for SMEs explain the majority of the legal and institutional characteristics of SME growth.7 There were quite fragmentary and highly selective monetary and financial incentives. However, the overall industry incentive system was not very effective in promoting growth for small businesses because it supported large companies. In the 1980s, while implementing a focused and comprehensive policy to promote small and medium-sized businesses, the government began to establish an industry-specific incentive system to turn it into a functional and effective policy support.8 In April 1982, a ten-year long-term plan for promoting SMEs up to 1991 was formulated. Small business-related laws such as SME Basic Law and Small Business Promotion Law were revised. Several new promotional measures were taken. It is worth noting that industrial policies focusing on technology and human resource development are extremely useful for the development of SMEs, as the direction of the new policy greatly promotes the innovativeness of SMEs. It also greatly helped growth of small businesses by promoting foreign capital inflows and technology permits through trade liberalization policies.9 The industrial policy of the 1990s was to strengthen industrial competitiveness as the Korean economy rapidly liberalized and integrated into the global economy. After the financial crisis in 1997, the development policy of SMEs promoting technology development was further strengthened as Korean economy became unable to rely on large companies. The Venture Business Promotion Act was enacted in 1997 to promote venture businesses, especially high-tech industries.10 The government also implemented policies such as information technology (IT) education, information management system promotion, and digitalization support for production lines to enhance IT utilization of SMEs.11 Nowadays, SMEs are considered to be major producers of ideas, innovations and corporate technologies, and are recognized as a major source of new employment and as an economic hub. SME policy in Korea also particularly emphasizes innovation, globalization, and balanced development with large companies12. Thus, the Korean government strongly emphasizes the policies of the SMEs that can lead to innovation, globalization and balanced development with large companies.13
6 Nugent, Jeffrey B., and Seung-Jae Yhee. (2002). “Small and Medium Enterprises in Korea: Achievements, Constraints and Policy Issues”: Small Firm Dynamism in East Asia, pp. 85–119.
7 Xueyi, Zhu and Fang Cunhao, (2010). “Evolution of SME Policy in Japan and Korea: Experience and Policy Implications.”
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increased the budget. Indeed, the expenditure for SME-operated government research and development (R&D) projects recorded 2,897 billion won in 201614, which is equivalent to 15.2%of the government’s total R&D investment and similar to that of the US SBIR’s total support.
According to the National Science and Technology Knowledge Information Service (NTIS) database, which integrates the management of all government R&D projects, among the 30,448 R&D projects awarded to firms in 2010-2014, the median fund amount was 200 million South Korean Won (KRW) while the top 20% marked KRW 525 million to 54.7 billion and the bottom 20% was less than KRW 100 million. In the US, the number of Phase Ⅰ projects, which is the proof-of-concept stage, and a total from USD 0.1 million to USD 0.15 million is provided for 6-9 months, (about USD 0.10 million per project) outnumbered Phase Ⅱ projects, which supports the subsequent full-scale R&D with funds reaching $1 million for a period of 24 months, by two to even three times. But, in Korea, about 80% of projects were funded with over KRW 100 million per project―this implies that there is a strong tendency to omit the initial proof-of-concept stage and begin with full-fledged support. Such bold and aggressive investments in SMEs R&D are also high in the international community.
Table I-2. Comparison total R&D investment among the nations Size of SMEs Korea
Unit: USD 1 million, PPP exchange rate
Note: Figures in parentheses denote government-funded R&D costs.
Source: Main Science and Technology Indicators (OECD stat webpage)
In 2016, KRW 3 trillion of the KRW 8.1 trillion was earmarked for the innovation of SMEs in the form of R&D grants, making Korea the second biggest spender next to the US among OECD members, ahead of Germany and Japan in absolute amount.
However, despite these investments, Korean SMEs' technological innovation is inadequate compared to other countries. In response to this, South Korean SMEs are consistent with low price policy for prices in other markets15 . At the end of April in 2015, Small & Medium Business Cooperation (SBC) conducted 'Survey on Korean Product Recognition by US
14 Ministry of Science and ICTㆍKorea Institute of Science & Technology Evaluation and Planning, 2017. 2016 National R&D Project Report and Analysis.
15 Nugent, Jeffery B. and Seung-Jae Yhee (2001), Op. cit.
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Consumers' targeting 1,000 consumers across the US. The percentage of respondents who answered "purchasing motive" for Korean products as "price" was 68.1%.16 Eventually, the Korean SMEs will use a strategic low-cost policy for entering new markets, but Chinese products already take control of the market, which can replace them. In other countries including the US market, Korean SMEs product is lower in awareness than China’s; even more so in Chinese market, all parts are found to be inferior to Chinese17.
The most powerful weapon for SMEs is not the lowest price. It invites customers to view products and services as products and obscures the value added. In addition, SMEs that want to compete at lower prices can be eliminated at any time by large competitors with lower operating costs.
It is not easy to overcome the difficulties faced by SMEs in Korea. The new acquisition of innovative technology by SMEs to overcome these risks is even more risky and longer.
Public and private financing for SMEs can also be disrupted by market uncertainty and lack of adequate collateral.18 If this situation persists, the productivity gap between SMEs and large corporations can no longer be narrowed. Therefore, it will be much more difficult to hire skilled and talented workers in front of SMEs.
16 Small and medium-sized companies, use the flexible price strategy when entering the US!, July 31 2015, from: http://news.joins.com/article/18358121
17 Foreign Consumer Recognition Result of Korean Products, Jan 22 2018, from:
http://www.ieconomic.co.kr/news/articleView.html?idxno=7603
18 Nugent, Jeffery B. and Seung-Jae Yhee (2001), Op. cit.
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