Small Firms Bolstered Industry
I By Lee Jeong-hee
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 for jobs and for 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 than half of Korea’s 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 for understanding the business, innovations and entrepreneurship of SMEs in Korea.
Small But Sturdy
So, what is the big deal about SMEs in the Korean economy? There is a cliché signifying the importance of SMEs: “9988.” It means that SMEs account for 99 percent of companies and 88 percent 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 laboror technology-intensiveness. Actually, it is severe competition with big businesses that forces SMEs 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 clusters 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-branding 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, of 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, unlike the bureaucratic structure of big business, everyone can exert managerial abilities according to their genuine capabilities. Even a novice can 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 can, in part, be explained by this factor. 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 entire economic system. They provide 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; SMEs no longer enjoy a cheap and productive labor force. Instead, they started to advance to developing countries and international markets. Now all around 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 work ethics. In year 2000, the International Network of Korean Entrepreneurs (INKE) was organized to allow companies to cooperate for their mutual interest.
Finally, 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 several answers to this question, including 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, there are policies 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. 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.
[Picture]
President Lee Myung-bak holds a gas stove at a factory in the Banwol Industrial Park,
Ansan, Gyeonggi Province, on Dec. 10, 2008. Small- and medium-sized firms occupy
99 percent of the total number of companies and 88 percent of the manpower in the
economy.
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. The SMBA has exclusively undertaken 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 monopolize the domestic market. Korea enacted 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 occur 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. First, 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.
Second, networks ought to be emphasized. As in the past, the sharing of information, knowledge, skill and technology is the only way for SMEs to compete with big businesses.
Third, innovation and entrepreneurship is always the thrust of success for SMEs. Continuous R&D, investment in human capital, and constant transformation of structures are the keys to success.
The government's role for SMEs has changed from incubator to helper. Now the only one responsible for 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.
Industrial Park, Hotbed of Entrepreneurship
The Banwol Industrial Park was established over 10 years, starting from 1977, as part of government measures to decentralize the population from the capital area. It is the industrial belt of the west coast. It houses the so-called 3D (difficult, dangerous, dirty) businesses scattered in Gyeonggi Province and the small- and medium-sized enterprises that discharge pollution in one place. Ansan is its base city, which was the first planned industrial town established because of favorable geographical conditions with easy access to cities and natural conditions.
The park was built on an area of 15,374 square kilometers. In 2008, there were 95,025 people (men 75,241 vs. women 19,784) working for 3,752 independent companies, and they manufactured over 17 trillion won of goods.
About 70 percent of enterprises in the park are manufacturing companies such as electric-electronics (23.5 percent), steel (18.4 percent), mechanics (14.5 percent) and petrochemical (13.8 percent). The park has supported the development of major domestic industries. It is located at a strategically significant place in the metropolitan area along with Shihwa Industrial Park in west Gyeonggi, and it attracts industrial facilities from the capital area in conjunction with Guro Industrial Park. Because of its location in west Gyeonggi Province, there is an abundant labor pool, easy port access on the west coast and links to Incheon International Airport. Additionally, it is conveniently located next to densely populated markets in the capital area so that a labor supply is readily available, including researchers for technical development from universities and think tanks.
Thirty years following its establishment, the facilities have aged, and its poor road conditions aggravated traffic congestion. Scarcity of parking spaces and the environmental pollution of Shihwa Lake have become serious concerns.
Small businesses with less than 20 employees make up 83 percent of the businesses currently running there, and they face considerable difficulties as they even have to relocate production lines to nonmetropolitan areas or overseas due to wage increase or excessive regulation. In order to overcome such issues and nurture its strengths and opportunities, in 2004 the Banwol-Shihwa Industrial Park was designated as a model park for innovative clusters of component materials based on central and local government support.
In December 2009, the Korea Industrial Complex Corporation selected the Banwol as a model complex for structural development and invested one trillion won in various projects and development. The Banwol Industrial Park consists of 427 research institutes affiliated with corporations, 67 university research laboratories, and many other national think tanks, for which an effective research environment affirms the development of the cluster. It plans to create an environment friendly industrial park that recycles resources arising from by-products and waste and produces raw materials or energy resources for other businesses.
|
Small Firms Bolstered Industry
I By Lee Jeong-hee
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 for jobs and for 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 than half of Korea’s 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 for understanding the business, innovations and entrepreneurship of SMEs in Korea.
Small But Sturdy
So, what is the big deal about SMEs in the Korean economy? There is a cliché signifying the importance of SMEs: “9988.” It means that SMEs account for 99 percent of companies and 88 percent 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 laboror technology-intensiveness. Actually, it is severe competition with big businesses that forces SMEs 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 clusters 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-branding 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, of 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, unlike the bureaucratic structure of big business, everyone can exert managerial abilities according to their genuine capabilities. Even a novice can 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 can, in part, be explained by this factor. 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 entire economic system. They provide 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; SMEs no longer enjoy a cheap and productive labor force. Instead, they started to advance to developing countries and international markets. Now all around 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 work ethics. In year 2000, the International Network of Korean Entrepreneurs (INKE) was organized to allow companies to cooperate for their mutual interest.
Finally, 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 several answers to this question, including 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, there are policies 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. 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.
[Picture]
President Lee Myung-bak holds a gas stove at a factory in the Banwol Industrial Park,
Ansan, Gyeonggi Province, on Dec. 10, 2008. Small- and medium-sized firms occupy
99 percent of the total number of companies and 88 percent of the manpower in the
economy.
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. The SMBA has exclusively undertaken 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 monopolize the domestic market. Korea enacted 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 occur 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. First, 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.
Second, networks ought to be emphasized. As in the past, the sharing of information, knowledge, skill and technology is the only way for SMEs to compete with big businesses.
Third, innovation and entrepreneurship is always the thrust of success for SMEs. Continuous R&D, investment in human capital, and constant transformation of structures are the keys to success.
The government's role for SMEs has changed from incubator to helper. Now the only one responsible for 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.
Industrial Park, Hotbed of Entrepreneurship
The Banwol Industrial Park was established over 10 years, starting from 1977, as part of government measures to decentralize the population from the capital area. It is the industrial belt of the west coast. It houses the so-called 3D (difficult, dangerous, dirty) businesses scattered in Gyeonggi Province and the small- and medium-sized enterprises that discharge pollution in one place. Ansan is its base city, which was the first planned industrial town established because of favorable geographical conditions with easy access to cities and natural conditions.
The park was built on an area of 15,374 square kilometers. In 2008, there were 95,025 people (men 75,241 vs. women 19,784) working for 3,752 independent companies, and they manufactured over 17 trillion won of goods.
About 70 percent of enterprises in the park are manufacturing companies such as electric-electronics (23.5 percent), steel (18.4 percent), mechanics (14.5 percent) and petrochemical (13.8 percent). The park has supported the development of major domestic industries. It is located at a strategically significant place in the metropolitan area along with Shihwa Industrial Park in west Gyeonggi, and it attracts industrial facilities from the capital area in conjunction with Guro Industrial Park. Because of its location in west Gyeonggi Province, there is an abundant labor pool, easy port access on the west coast and links to Incheon International Airport. Additionally, it is conveniently located next to densely populated markets in the capital area so that a labor supply is readily available, including researchers for technical development from universities and think tanks.
Thirty years following its establishment, the facilities have aged, and its poor road conditions aggravated traffic congestion. Scarcity of parking spaces and the environmental pollution of Shihwa Lake have become serious concerns.
Small businesses with less than 20 employees make up 83 percent of the businesses currently running there, and they face considerable difficulties as they even have to relocate production lines to nonmetropolitan areas or overseas due to wage increase or excessive regulation. In order to overcome such issues and nurture its strengths and opportunities, in 2004 the Banwol-Shihwa Industrial Park was designated as a model park for innovative clusters of component materials based on central and local government support.
In December 2009, the Korea Industrial Complex Corporation selected the Banwol as a model complex for structural development and invested one trillion won in various projects and development. The Banwol Industrial Park consists of 427 research institutes affiliated with corporations, 67 university research laboratories, and many other national think tanks, for which an effective research environment affirms the development of the cluster. It plans to create an environment friendly industrial park that recycles resources arising from by-products and waste and produces raw materials or energy resources for other businesses.
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[table]
● Policies for small Firms
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