[Square] Support Innovation for Small and Medium Enterprise Suitable Industries

More than 10 years have passed since the introduction of the Small and Medium Enterprise (SME) Suitable Industry System. This system was introduced to protect SMEs, but as the term suggests, it also reflects the judgment that in certain industries, it is more suitable for SMEs rather than large corporations to operate for industrial development. Is this system achieving the intended effects? The problem is that it is not entirely so. The fundamental issue lies in operating the system as a method to exclude large corporations rather than supporting SME innovation.

Let’s take the Makgeolli industry, which was selected as an SME suitable industry around 2011, as an example. Makgeolli has long been perceived as a low-class alcoholic beverage compared to soju or beer, essentially regarded as a drink for the common people. It was cheap and considered a drink anyone could enjoy. From the mid-2000s, perceptions of Makgeolli began to change. It gained a reputation for being healthy, and a Makgeolli craze even emerged in Japan, expanding exports overseas. The situation changed as large corporations entered the market.

Jung Manki, President of the Korea Automobile Manufacturers Association (Former Vice Minister of Trade, Industry and Energy)

Large corporations focused on three aspects. First was the problem of headaches after drinking Makgeolli. Through research and development, large corporations improved this phenomenon. They identified that impurities mixed in Makgeolli caused headaches and introduced Makgeolli that overcame this issue. Second was the problem of quick spoilage. They solved this by introducing canned Makgeolli and other methods, allowing Makgeolli to be stored for a considerably longer time. Third was the issue of Makgeolli remaining a regional product. This was mainly due to its short shelf life, but as the storage period lengthened, this problem was naturally overcome. Distribution expanded overseas to countries like Japan. The existing overseas sales networks of large corporations in the alcoholic beverage sector played a decisive role. Domestically, marketing activities, including TV advertisements, were strengthened, increasing the number of Makgeolli enthusiasts and rapidly boosting sales. Makgeolli shipment volume grew from about 170,000 kiloliters in 2007 to 490,000 kiloliters in 2011, tripling in just four years.

In this situation, the Makgeolli industry was designated as an SME suitable industry in 2011. Instead of expulsion, large corporations faced expansion restrictions. From the perspective of large corporations, there was no longer a need for innovation efforts to increase sales. Although there was an incident of exploding canned Makgeolli in Japan, research and development to improve this was halted. SMEs could not conduct research and development to solve such problems either, due to the enormous costs involved. For the same reason, SMEs could not engage in nationwide marketing activities such as TV advertising. Large corporations gradually disappeared, and the Makgeolli market reverted to its previous regional market status. In 2015, shipment volume decreased by about 10% compared to 2011, and exports plummeted from 43,000 tons in 2011 to 13,000 tons in 2018.

The problem is that as the market shrank, the sales and profits of SMEs also declined. The market, which was thriving due to the participation of large corporations, regressed due to government intervention. This regression is not limited to Makgeolli. It is also evident in various industries such as confectionery, dining, tofu, kimchi, and used car trading. Particularly in these industries, issues of domestic large corporations being unfairly disadvantaged compared to foreign companies have also emerged.

Industrial innovation becomes more active as more market participants with high innovation capabilities participate, and the results of such innovation can sometimes lead to unexpected industrial revolutions. The SME Suitable Industry System repeatedly results in excluding companies with high innovation capabilities from the market while leaving less innovative companies in place. In the short term, it may create a slight protective effect for SMEs, but in the long term, it destroys the innovation ecosystem and ultimately makes it difficult even for SMEs. If the SME Suitable Industry System is to be maintained rather than abolished, it should shift from excluding large corporations to enhancing the innovation capabilities of SMEs.

Jung Manki, Chairman of the Korea Automobile Manufacturers Association (former Vice Minister of Trade, Industry and Energy)

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