Protecting Firms Alone Won't Make Them Grow
IT DAILY ·
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The government has set out to "restore the corporate growth ladder" in industrial policy and the 3rd Basic Plan to Promote the Growth of Mid-Sized Enterprises (2026~2030).
It plans to let mid-sized enterprises retain their status for a period even after growing into large corporations and to reorganize size-based differential regulations.
The Bank of Korea and KDI have also reviewed the size-based support system and the effects of the suitable industry designation system, while discussing demonstration-and-procurement links and easing the support cliff after growth.
The government had already included the phrase "restoring the corporate growth ladder" in its industrial policy this month, and on the 1st the Ministry of Trade, Industry and Energy laid out a direction to reactivate the path that allows companies to keep growing as it announced the 3rd Basic Plan to Promote the Growth of Mid-Sized Enterprises (2026~2030). The plan's main policy direction is restoring the corporate growth ladder, with "restoration" presented as reconnecting something that is not working properly. The government has framed the growth process from small businesses to mid-sized enterprises to large corporations as a policy target for restoration.
To that end, the government plans to allow mid-sized enterprises to retain their status for a certain period even after growing into large corporations, while reorganizing regulations that differ by company size. This stance is linked to the government's diagnosis that the number of companies growing from small businesses into mid-sized enterprises has declined, while the number of companies returning from mid-sized enterprises to small businesses has increased.
According to the "2024 Basic Statistics on Small and Medium Enterprises" released by the Ministry of SMEs and Startups in September, small and medium-sized enterprises account for 99.9% of all companies in South Korea, and their share of workers stands at 80.4%. However, according to a medium- to long-term in-depth study titled "The Current Status of Small and Medium Enterprises in Korea and Ways to Improve Support Programs," included in the Bank of Korea's economic outlook report last November, labor productivity among domestic manufacturing SMEs is about 32% of that of large corporations, showing a wide productivity gap compared with the OECD average of 55% versus large corporations.
The study did not see support shortages alone as the cause of this problem. Even though support programs cover taxes, policy finance, research and development, startups, exports, and sales channels, the system was criticized for making company size the criterion for support, reducing assistance once a firm graduates from SME status, and adding new regulations as companies get larger. The Bank of Korea pointed out that this size-based support system could discourage firms from growing and could trigger the so-called "Peter Pan syndrome."
It has been noted that when a company grows, some benefits may disappear, so the gains from growth and the losses from reduced benefits need to be considered at the same time. The explanation is that because support is withdrawn when the size of a recipient company expands, there is an incentive to remain small within certain ranges.
In this regard, the Korea Development Institute (KDI) released a report titled "The Economic Effects and Policy Direction of the SME Suitable Industry System." According to the report, after a suitable industry was designated, the exit probability of firms producing the relevant items fell, but no clear changes were found in most performance and input indicators.
On the 8th, the ministry will begin recruiting the lead institution for next year's "government's first demonstration and procurement project." This program involves demonstrating startup technologies and products using public infrastructure, and it links the demonstration results to government purchases and securing sales channels. As a result, the policy scope expands from development cost support to a stage that connects with actual demand.
Corporate growth cannot be achieved through technology development alone. First, demonstration and procurement results are needed, and initial results serve as a track record to show to the next customer. The conditions for technology-holding companies to grow in the market also depend on overcoming barriers beyond subsidies.
In this context, the policy being pursued by the Ministry of Trade, Industry and Energy, "deferring graduation for mid-sized enterprises," has grounds for the need to ease the support cliff immediately after growth. But delaying graduation alone cannot restore the growth ladder. Firms that need protection require a safety net, while entities engaging in unfair practices require strict discipline. The task of growth policy is to create markets and institutions that allow promising firms to move to the next stage without support. The performance standard for industrial policy should also be set not on the number of protected firms, but on the number of firms that no longer need protection.
The Bank of Korea analyzed that if the conditions for changing "who is supported and how" are met, total output could rise by 0.4% to 0.7% without increasing the support budget. Accordingly, policy evaluation is insufficient if it only tallies the number of supported firms and the amount of support. It must also ask how many companies have grown into mid-sized enterprises through improved productivity and expanded markets, and whether they can compete with existing market leaders.
Source: IT DAILY · Kim Byung-joo
Original: https://www.itdaily.kr/news/articleView.html?idxno=242288
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Source: IT DAILY
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