[In-Depth Review] "Enhance Effectiveness of SME Policies by Selecting Growth-Centered Support Targets"

Jaewoo Lee, Head of Industrial Economy Team, Overseas Economic Research Institute, Korea Eximbank

Jaewoo Lee, Head of the Industrial Economy Team, Overseas Economic Research Institute, Korea Eximbank

Small and medium-sized enterprises (SMEs) in South Korea are the backbone of the economy, accounting for 99% of domestic companies and about 83% of total employment. Not only do they hold a significant share in the economy, but as the core of the materials and components industry, they form the foundation of the industrial ecosystem. At the same time, as economically vulnerable entities, they are always at the center of industrial policy.

Accordingly, the government supplies policy funds amounting to about 4-5% of the total annual budget (approximately 20 trillion won) to foster SMEs. Support programs are also diversified, with more than 1,600 programs covering all areas from startup to export stages, including technology, manpower, finance, marketing, and management consulting.

Despite such support, the reality of Korean SMEs is harsh. The annual productivity growth rate of SMEs has been continuously declining since 1990 and has remained below 1% since 2014. This sluggish productivity leads to exports, with less than 2% of SMEs (with fewer than 249 employees) engaged in exporting. Ultimately, the gap with large corporations is widening.

Why does the competitiveness of SMEs fail to improve despite substantial support across various fields? The first reason is the issue of selecting support targets. Most support programs are designed so that companies in worse conditions are more likely to be chosen. Therefore, the future growth potential of a company does not play an important role in selection. Instead of selecting a "promising tree," there is a high possibility of selecting "empty husks" with low competitiveness and no growth potential. Consequently, the effectiveness of support in fostering company growth inevitably decreases.

The second problem is the scale of support funds per company. Although the overall support scale appears large, the amount of support per program is inevitably limited due to the operation of numerous programs. Moreover, since support performance is evaluated by the number of supported companies, the amount of support per company becomes even smaller. Because the support amount is small, it is difficult to observe policy effects.

Lastly, proper evaluation of support outcomes is not conducted. Since supported companies are not given clear performance targets, the success of the support remains unclear. This is because policy officials focus on the number of policy implementations rather than the results. It would be strange if a policy that does not set clear growth targets for companies with low growth potential could produce growth outcomes for SMEs.

So, what is needed to enhance the effectiveness of SME policies?

First, when establishing support policies, it is essential to remember that the goal of SME policy is company growth, not survival support for uncompetitive companies. Under this principle, the criteria for selecting support targets should be based on the future growth potential of companies. Next, clear growth goals should be presented to supported companies, and incentives such as receiving more benefits based on the degree of goal achievement should be provided to encourage goal attainment. Finally, support programs should be boldly reduced to eliminate policy overlap and inefficiency, and the total amount of support funds allocated to selected companies should be increased to enhance the effectiveness of support.

The content of Article 1 of the Framework Act on Small and Medium Enterprises clearly indicates the direction of policy. Let us implement policies keeping the following in mind:

"This Act aims to support the creative and autonomous growth of SMEs by stipulating the basic matters of policies for fostering SMEs and the direction SMEs should take, and further to advance the industrial structure and promote balanced development of the national economy."

This content was produced with the assistance of AI translation services.