The 'Payment Linkage System' Amid 3 Highs Sparks a Glimmer of Hope

SME Venture 2022 Year-End Review

The small and medium-sized venture business sector spent the year 2022 battling the triple crises of high exchange rates, high inflation, and high interest rates. As the domestic venture investment market shifted from a boom to a harsh winter, even startup companies, once considered new engines of economic growth, faced difficulties. Despite these challenges, there were notable achievements. The long-awaited delivery price linkage system, a 14-year goal of the small and medium business community, came to fruition, and the number of venture companies with sales exceeding 100 billion KRW increased the most. The task for the small and medium venture business sector is to ensure that the power of innovation and growth confirmed during this difficult year continues into the next year.

◆ Igniting a Spark of Hope Amid the Triple High Crisis = The essence of the crisis faced by the small and medium venture business sector due to the triple highs of inflation, interest rates, and exchange rates is 'uncertainty.' The prolonged Ukraine conflict has further amplified this uncertainty, resulting in a global economic slowdown and weakened consumer sentiment. The domestic venture investment market was hit directly. After several years of booming investment, the venture industry entered a cooling period this year due to the global economic recession. According to a survey by Startup Alliance, 8 out of 10 founders felt that the startup investment market contracted this year. Meanwhile, with the government’s mother fund venture investment budget reduced from 520 billion KRW this year to 413.5 billion KRW next year, the industry is concerned that the harsh winter in the venture investment market may continue long-term.

However, the small and medium venture business sector steadily kept the flame of hope alive despite this year’s crisis. A representative example is the delivery price linkage system. The bill, which mandates that increases in raw material prices be reflected in delivery prices in transactions between primary contractors and subcontractors, passed the National Assembly plenary session this month. The core of the bill is to require that the agreed increase in delivery prices due to rising raw material costs be recorded in contracts. The industry expects this to foster win-win cooperation between large corporations and small and medium venture companies and to break the vicious cycle where small businesses suffer operational difficulties whenever raw material prices surge.

The resilience of small and medium venture companies against the economic downturn was also confirmed. As of the end of last year, the number of venture companies with annual sales exceeding 100 billion KRW reached a record high of 739. This is an increase of 106 companies compared to the previous year, marking the highest growth rate in the past decade. Their total sales amounted to 188 trillion KRW, ranking third among business sectors. The number of domestic unicorn companies also increased to 23 as of the end of June.

◆ Will Spring Come for SMEs in 2023? = The outlook for next year from the small and medium venture business sector is not very optimistic. The triple high crisis that constrained companies this year remains. According to a survey conducted by the Korea Federation of SMEs targeting 410 small businesses, 61.5% of respondents expect the business environment next year to be similar to this year. While 26.3% anticipate deterioration, only 12.2% expect improvement.

The gloomy outlook seems to be influenced by chronic labor shortages. Since July last year, the 52-hour workweek system has been applied to companies with fewer than 50 employees, causing difficulties for ventures and startups. For workplaces with fewer than 30 employees, the '8-hour additional extended work system,' which allows up to 60 hours of work per week if agreed upon by labor and management, was extended this year before its sunset. The expansion of the inheritance tax deduction limit for business succession is another issue that the SME sector must continuously advocate for to facilitate smooth corporate succession.

Successful business succession requires long-term preparation, and 96% of small businesses facing succession prefer pre-gifts for planned succession. The bill to introduce a 'multiple voting rights system,' a long-standing wish of the venture industry, has been stalled in the National Assembly’s Judiciary Committee for over a year. The venture sector is urging swift review and passage of this bill, which is essential for their next leap forward.

Researcher Im Soo-sun of the Korea Small Business Institute stated, "Despite the difficult economic conditions caused by COVID-19 and the complex crisis, key figures related to small and medium venture companies, the main drivers of high value-added creation, have increased, which is a positive message for our economy." She added, "Although there were significant difficulties due to investment contraction and tightening liquidity this year, there were also qualitative changes such as the activation of M&A in the startup sector."

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