To Overcome Low Growth... Policies Needed to Enhance Innovation and Productivity in SMEs

2024 Economic Joint Conference
'Structural Changes and Implications of the Korean Economy'
Low Growth Due to Gap Between Large and Small-Medium Enterprises
Need to Foster SME Materials, Parts, and Equipment Industry

There has been a claim that policies supporting innovation in small and medium-sized enterprises (SMEs) are necessary for South Korea's economy to overcome low growth. It is argued that existing policies, which focus on simple support and protection, should be improved to enhance growth, innovation, and productivity.

Professor Park Jeong-su of the Department of Economics at Sogang University will present a paper titled "Structural Changes in the Korean Economy and Implications" at the "2024 Joint Economic Conference" hosted by the Korean Economic Association and the Korean Public Finance Association on the 1st of next month.

In his paper, Professor Park analyzed that the cause of the slowdown in South Korea's growth rate lies in the distribution of firms centered on small businesses and the gap between large corporations and SMEs.

Among OECD countries, South Korea has the highest employment share in small businesses (fewer than 50 employees). As a result, the majority of employment is concentrated in small businesses characterized by low productivity and low wages. This contrasts with advanced countries over the past decade, where the share of large corporations has increased.

This situation leads to a decline in corporate competitiveness. The gap in labor productivity and wages between large corporations and SMEs is widening. In manufacturing, although the labor productivity of large corporations is significantly higher compared to OECD countries, the overall corporate competitiveness declines because most firms are small-scale. In contrast, most firms in OECD comparator countries are medium-sized or larger. The service sector shows competitiveness at a relatively low level on average among OECD countries.

Professor Park stated, "To improve the division of labor between large corporations and SMEs, it is necessary to foster the materials, parts, and equipment industry centered on SMEs," adding, "The policy framework should be improved to move away from support and protection-oriented policies toward enhancing corporate growth, innovation, and productivity."

He continued, "It is necessary to review the appropriateness of differentiated tax and financial support based on firm size, ease labor market rigidity, and resolve policy inconsistency and uncertainty."

However, he added that rapid policy changes should be avoided. Professor Park said, "Given the current capabilities of SMEs, it is difficult to cope with major changes, so rapid institutional and policy changes should be avoided."

Professor Park also said, "To enhance competitiveness in the service sector, regulations should be relaxed and competition encouraged to expand high value-added service industries such as medical and professional services."

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