Published : 2013-01-04 20:07
Updated : 2013-01-04 20:07
One notable aspect of Korea’s corporate landscape is the meager presence of intermediate-sized companies ― businesses that are larger than small and medium enterprises (SMEs) but smaller than large corporations.
According to a recent report from the Korea Trade-Investment Promotion Agency, midsized businesses accounted for a mere 0.04 percent or 1,291 of the nation’s 3.12 million enterprises in 2010.
The share is much smaller compared with other countries, including Germany (11.8 percent), Sweden (13 percent), Switzerland (1.2 percent) and the Netherlands (1.2 percent).
The tiny percentage of midsized companies suggests that the ladder of growth for Korean SMEs has been broken. President-elect Park Geun-hye recently said she would become a president for SMEs. She needs to repair the ladder first.
By doing so, she can unleash the huge job creation potential of SMEs. Jobs are usually created by rapidly growing companies. If SMEs grow into midsized companies and further into large corporations, they will generate a large number of jobs in the process.
The marginal presence of midsized businesses is largely attributable to two factors ― the deeply entrenched dominance of chaebol groups and the abrupt discontinuation of government support for companies that graduate from the SME category.
To rein in chaebol conglomerates, Park has pledged a set of measures under the slogan of economic democracy, including the proposed ban on any fresh arrangements for circular equity shareholdings.
While curbing chaebol dominance, Park needs to introduce a system to ensure continued support for companies that grow beyond SME level.
Currently, the government provides a total of 160 kinds of benefits to SMEs to help them grow. But the problem is that as soon as a company grows beyond the SME level, it is deprived of most of the benefits.
This means the company has to face powerful competitors, including formidable chaebol affiliates, without any support or protection from the government.
So many SMEs simply refuse to grow to maintain their SME status, a phenomenon aptly dubbed “the Peter Pan syndrome.” They use various means, including splitting their operations into two, to ensure that their sales and workforce size meet the SME criteria.
Under the current law, a company loses its SME status when it has 300 or more regular workers on its payroll or its annual revenue exceeds 150 billion won on average for three years.
Recently, TriGem Computer provided a case in point. A midsized manufacturer of desktop, notebook and all-in-one PCs for foreign computer vendors, TriGem has set up a new company to gain recognition as an SME.
The company’s move was prompted by a recent government decision to procure desktop PCs exclusively from SMEs.
According to a survey conducted by the Federation of Korean Industries, three out of every 10 SMEs undertook such measures as dividing themselves into multiple units or selling off some of their assets in order to remain in the SME category.
The report says a company even replaced some of its regular workers with non-regular ones to meet the SME requirements.
This is a tragedy that should be stopped. A company can contribute to the economy by following a natural growth trajectory. If this trajectory is reversed, not only the company but also the national economy suffers losses.
To provide a ladder of growth to SMEs, the government needs to revamp the current support system for them. It should ensure that benefits are phased out over an extended period of time to help companies that graduate from the SME sector ease into their new environment.
On New Year’s Day, the National Assembly passed bills submitted by the Ministry of Knowledge Economy to entitle midsized companies to some of the benefits they had to forego due to their expansion.
The bills increased R&D tax credits for companies fresh from the SME category and expanded the scope of companies eligible for a 70 percent deduction on inheritance taxes. These measures are steps in the right direction.
But the ministry should go further and establish a support system that is tailored to the specific needs of individual midsized companies. Last year, it unveiled a plan to foster 300 world-class companies. To attain that goal, a system of industry-academia-government cooperation is essential.