Royal University of Phnom Penh

Institute for International Studies & Public Policy

Department of International Relations

“Corporate Inequality in South Korea: SMEs competitiveness after Asian

Financial Crisis”

Subject: IR402: Governance Issues in Globalized World

Lecturer: Ms. TANN Channarath (TCN)
Class: E4.2

Group 2

Team members
MON Panhavuth
SORN Sreyang
TRY Sarak
YOEUN Darachan

Academic Year: 2023-2024

 Table of Contents

Abstract...................................................................................................................................3

I. Introduction......................................................................................................................... 3

A. Research Problem......................................................................................................... 4

B. Research Objectives and Questions..............................................................................4

C. Significance of the study................................................................................................5

II. Literature review................................................................................................................ 5

III. Methodology...................................................................................................................... 6

IV. Finding............................................................................................................................... 7

A. Government policies and initiatives for SMEs after Asian Financial Crisis.................... 7

B. Difficulties faced by SMEs in the contemporary time.....................................................9

V. Conclusions......................................................................................................................10

VI. Policy Recommendations.............................................................................................. 12

VII. Limitations......................................................................................................................13

References............................................................................................................................14

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Abstract

This study delves into the impact of the Small Medium Business Administration

(SMBA) and several other government policies after the Asian Financial Crisis and analyzes

its effectiveness in bridging the corporate inequality that had persisted in South Korea. We

start the discussion with a brief introduction to the Chaebol economic growth strategy then

skip to after the Asian Financial Crisis where the Korean Government made efforts to bridge

corporate inequality by establishing SMBA and SMEs-favored policies. We end the study

discussion by analyzing the effectiveness of government efforts to bridge corporate inequality

and provide further policy recommendations to address the issue of corporate inequality. The

study found that SMEs still struggle with many issues within the current economy and the

government initiative for the SMEs is not as effective as intended.

I. Introduction

South Korea's economic growth strategy since the early 1960s heavily promoted

export-oriented conglomerates (chaebols) or Large Enterprises (LEs). This strategy fueled

impressive economic transformation but also fostered unfair competition and inequality for

Small and Medium Enterprises (SMEs). Recognizing this, the government shifted its focus to

SMEs, albeit with limited action until the 1990s (Gregory et al, 2002). The establishment of

the Small Medium Business Administration (SMBA) in 1995 and several other policies

marked a significant effort to address corporate inequality but the effect remains to be

analyzed.

According to Loecker et al (2022) corporate inequality or firm inequality refer to the

images that companies are looking increasingly different in terms of their productivity,

wages, markups and size. Usually these issues happen due to uneven distribution of wealth,

power, resources and opportunities among different corporations within an economy. This

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issue is particularly clear within South Korean society ever since the government adopted the

Chaebol economic growth strategy in the 1960s. Chaebol is a conglomerate group system that

many large Korean private companies suchlike Samsung, Hyundai, Kia, LG, and Lotte have

been playing a critical role in South Korea’s rapid export expansion and economic growth.

Forty-five businesses, which manage 85% of Korea’s GDP, are Chaebol members that enable

them to access cheap loans from Korean banks thanks to the political power coming from

lobbying activities (Akarsu, 2021).

A. Research Problem

For decades, a gap between large and small businesses has been a deep

wound in South Korea's economy, a lasting mark from the Chaebol-driven

growth strategy launched in the early 1960s. Despite this long-standing

problem, the government took surprisingly long, nearly 30 years, to finally

begin addressing it. While many studies such as Gregory et al (2002), and Kim

(2006) have focused on examining the issue of corporate inequality itself, our

research takes a different approach, aiming instead to analyze the effectiveness

of the government's efforts to bridge this divide.

B. Research Objectives and Questions

The objective of this study is twofold: first, to analyze the effects of

SMBA and SMEs-favor policy after 1998; second, to provide policy

recommendations that address corporate inequality and help increase SMEs

competitiveness in the Macroeconomy. The main research question that this

study aims to answer is: How effective is the South Korean government's

effort to bridge corporate inequality after the Asian Financial Crisis?

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 With two sub-research questions:

1. What specific policies and initiatives has the South Korean

government implemented to address corporate inequality since

the Asian Financial Crisis?

2. What are the difficulties faced by SMEs in the South Korean

business environment in the contemporary time?

C. Significance of the study

In a context of growing corporate inequality and challenges faced by SMEs in South

Korea, this study delves into potential policy interventions. Its findings and recommendations

hold actionable recommendations for policy makers to pave the way for a more equitable and

dynamic economy, where SMEs can thrive alongside larger corporations

II. Literature review

Kim (2004) examines the relationship between corporate governance and productivity

performance, focusing on family ownership and capital structure, particularly the Chaebols.

Kim has found that family ownership concentration and productivity performance is much

stronger in chaebol firms than in non-chaebol firms. This is due to the fact that the

government provides unfair preferential interest rates with almost risk-free for large firms

such as the chaebols. This finding was further backed by another finding that high debt

reliance negatively affected the productivity of non-chaebol firms while having the opposite

effect for chaebols. This means that the government subsidy scheme purposely drives away

small business borrowers and gives unfair advantage to chaebols borrowers. Furthermore, in

terms of how the Asian Financial Crisis impacted the financial market, according to the study

by Yoon (n.d.), the value of the Korean Won fell in relation to the US dollar by half, while the

stock market had a more than 50% loss. Due to this, there was a severe economic slowdown

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in 1998, with a 5.8% decline in GDP. A spike in unemployment from 2% to 8.1% resulted in

the closure of numerous businesses (Yoon, n.d.). Later following the publication brief of

Asian Development Bank (Tariq, et al., 2021), SMEs continue to be the top priority of South

Korea’s economy as there are numerous government programs and policies put in place to

promote business growth, fostering start-ups, and supporting micro, small, and medium-sized

enterprises.

The other researches has been done to look at SMEs policies and challenges in

Zimbabwe and South Korea. SMEs in both countries contribute significantly to employment

and economic development. The evidence shows that both countries and strategies used by

governments recognize the need to support SMEs and continuously review policies to

improve their operational environment. More importantly, the findings by Majoni et al.

(2016) clearly show major challenges of SMEs in South Korea include accessing business

finance, skills shortages, infrastructure inadequacy, managerial skills, and environmental

issues. Following this, Gregory et al. (2002) examined the prospects for Korea's SMEs in the

21st century, emphasizing venture enterprises to promote technological competitiveness.

Their study points out that the Law on Special Measures for Fostering Venture Enterprises

aims to improve the atmosphere, funding opportunities, and globalization. However, their

research also discussed that more work is needed to improve infrastructure and foster venture

businesses, including business incubators, tech parks, and KOSDAQ stock exchanges.

III. Methodology

This is qualitative research, grounded in an interpretive approach, that emphasizes

understanding the subjective meanings and interpretations of social events based on

experiences such as the explanation of corporate inequality in South Korea. Data is collected

through digital archival and document-based research, focusing on Government policies and

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initiatives aimed at SMEs post-Asian Financial Crisis, alongside contemporary challenges

faced by these businesses. Content analysis serves as the primary data analysis tool, utilizing

a deductive approach. This approach categorizes findings based on pre-existing knowledge

and expectations, specifically the assumption by the authors that corporate inequality still

exists in modern South Korea. The final analysis evaluates the effectiveness of government

policies and initiatives in enhancing SME competitiveness in the aftermath of the crisis.

IV. Finding

A. Government policies and initiatives for SMEs after Asian Financial Crisis

Small Medium Business Administration (SMBA) is a national policy of South

Korea to address the small and medium-sized enterprise (SMEs), fostering

challenging and innovative SMEs so as to maximize the growth potential of Korea.

The Korean SMEs account for 99% of all corporations and 88% of all employees in

South Korea, making it a crucial area for the country to carefully look into (KOISRA,

2017). Furthermore, SMEs are significant for a country’s development to have a more

competitive and healthier economy. Small and medium-sized enterprises stimulate

competition for the design of products, prices, and efficiency. Without SMEs, large

enterprises would hold a monopoly in almost all the activity areas (CFI, n.d.).

On top of that, during the Asian Financial Crisis, also called the “Asian

Contagion,” there was a sequence of currency devaluations and other events that

began in July 1997 and spread across Asia (Michael, & John, 2013). South Korea was

one of the country’s most severely impacted by the Asian Financial Crisis. The

Korean currency lost half of its value against the US dollar, while the country's stock

market declined by more than 50%. This resulted in a severe economic downturn,

with GDP dropping by 5.8% in 1998. Unemployment surged from 2% to 8.1%,

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forcing many enterprises to close (Yoon, n.d.). The Asian Financial Crisis had a

lasting impact on South Korea. The crisis led to a significant economic slowdown and

increased inequality (Kim, 2006). SMBA’s policies were part of national efforts by

financing and business development. The Small and Medium Business

Administration, since its foundation in 1996, has supported SME-led innovation as a

dynamic force powering the national economy. Its primary mission has been to foster

innovative but challenged SMEs to maximize the country’s growth potential and

competitiveness.

Moreover, notwithstanding changes in the government or the country's economic

policies, SMEs in the Republic of Korea have benefited from various forms of public

policy support during the past 50 years. Developing and implementing policies for

company expansion, startup support, and micro, small, and medium-sized enterprise

(MSMEs) support falls within the purview of the Ministry of SMEs and Startups, to

provide financial, marketing, and technological support, the ministry works with

SME-related (or connected) institutions. Namely, the Korea Credit Guarantee Fund,

the Korea technological Finance Corporation, the IBK for finance, the Small and

Medium Business Administration, and the Korea Technology Finance Corporation for

technological financing are a few of them. Likewise, the rights and interests of SMEs

are represented and safeguarded by the Korea Federation of SMEs, a sort of

self-regulatory organization. By creating relevant policies and services, it seeks to

coordinate SMEs with the government and offer a favorable economic environment

for them (Tariq, et al., 2021).

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 B. Difficulties faced by SMEs in the contemporary time

There are several difficulties that SMEs in South Korea are facing. One of the

main reasons for the challenges faced by SMEs is financial management and limited

access to finance. In South Korea, financial assistance to the SME sector is divided

into indirect and direct funding. Bank loans are the largest source of funding, with

South Korea's loans reaching $443.5 billion in 2010 and $471.6 billion in 2012.

However, these loans often result in higher interest rates, increasing operating costs,

and reducing SMEs' competitiveness (Majoni et al., 2016). SMEs often struggle to

secure sufficient funds for their operations and expansion by facing difficulties in

accessing loans from banks and financial institutions due to stricter lending criteria

and the preference for larger, more established companies.

Following this, it still has limited market opportunities for SMEs. South Korea

has established SME training centers to help SMEs navigate business issues and

compete globally. However, SMEs still face challenges in entering global markets due

to a lack of resources and expertise (Majoni et al., 2016). As a result of the 1997

financial crisis, the Korean government's restructuring efforts focused on financial

institutions and big enterprises (Gregory et al., 2002). While large corporations have

established global networks and distribution channels, SMEs may lack the necessary

resources and expertise to compete internationally. Inadequate management has led to

inadequate market research, overconcentration, a lack of succession plans, poor

bookkeeping and records, and the inability to separate business and personal finances.

Another challenge is caused by government policies and legislation. As Korea

Credit Guarantee Fund (KODIT) in South Korea, the government owns SME funding

partners. In cases of default by SMEs, these organizations have the power to attach

9
 properties that would have been surrendered as collateral security. The government is

directly or indirectly sanctioning the activities. Directly, it is sanctioning this behavior

by not protecting the SMEs that would have defaulted on repaying their loans.

Indirectly, the government is sanctioning this conduct by not adequately funding its

activities, thus allowing it to rely solely on its revolving finances (Majoni et al.,

2016). Because of this, it shows that the SMEs default in the payment of their loans

because of mismanagement; a significant portion defaults due to the non-conducive

economic environment in which these small to medium enterprises exist. Thus, there

are difficulties faced by SMEs in the South Korean business environment in

contemporary times.

V. Conclusions

This paper delves into the effectiveness of Korean government initiatives and policies

for SMEs, examining their impact on the current landscape of corporate competition. Despite

the seemingly well-intentioned nature of these interventions, our findings paint a nuanced

picture. While advancements have been made, the issue of corporate inequality remains

stubbornly persistent. SMEs continue to grapple with a multitude of challenges, some of

which ironically stem from the very government initiatives designed to aid them. This begs

the question: are current policies truly empowering SMEs, or are they inadvertently

exacerbating the very problems they seek to address? This study will aim to offer some

policy recommendations to help tackle corporate inequality and promote SMEs

competitiveness in the economy.

Nearly three decades after the turbulence of the Asian Financial Crisis, the South

Korean government has finally awakened to the critical role small and medium-sized

enterprises (SMEs) play in the nation's economic prosperity. This newfound appreciation has

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spurred the creation of dedicated support institutions like the Small and Medium Business

Administration (SMBA), the Korea Credit Guarantee Fund (KODIT), and even an entire

Ministry of SMEs and Startups (Niazi et al, 2021). These entities aim to nurture SME growth

and equip them with the tools to navigate the competitive marketplace.

However, despite these laudable efforts, concerns linger regarding the government's

effectiveness in addressing the persistent issue of corporate inequality. SMEs continue to face

significant hurdles in the contemporary landscape. Limited access to financial resources,

restricted market opportunities, and even potential discrimination from government-backed

programs like KODIT (as highlighted by Majoni et al., 2016) remain formidable obstacles.

These shortcomings cast a shadow over the government's commitment to fostering a level

playing field for all businesses.

Despite numerous government initiatives and policies aimed at leveling the playing

field for SMEs, our analysis reveals persistent shortcomings in addressing corporate

inequality. Firstly, the sheer quantity of initiatives can be overwhelming, creating

bureaucratic hurdles and diluting resources. This spreads benefits too thinly for individual

SMEs, hindering their effectiveness. Secondly, the enduring influence of chaebols remains a

major concern, even if the goal isn't to impoverish them. As Kim (2006) points out, excessive

debt can cripple smaller businesses, while government guarantees and preferential interest

rates make borrowing virtually risk-free and cost-effective for chaebols. This advantage

allows them to pursue risky ventures with greater ease, further widening the gap between

them and SMEs.

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VI. Policy Recommendations

Both SMEs and Large-Enterprises have significantly played contributive roles within

South Korean economy. Since inequalities are faced by many SMEs, there are 2 policy

recommendations, each for both the SMEs and, the South Korean government and relevant

institutions to enhance equality among the country’s businesses.

Firstly, SMEs have to focus on or specialize their final or unfinished products and

services based on their comparative advantage. Among the largest chaebols are Samsung,

LG, Hyundai, and SK Group, these 4 giant companies could not fully supply 100% to both

domestic and global demands. This policy recommendation would transform challenges into

opportunities for SMEs to run their business procedure with less risk and failure due to less

competitiveness from Large-Enterprises as chaebols may not be competitive. SMEs have to

take strong courage at the first stage in building their own business capability to be capable

enough in equalizing their accessibility in both domestic and global markets. Once their

business strengths are suitable enough for further competition, inequality would also vanish

slowly from South Korean business environment as well.

Secondly, besides a very strong courage that is taken by Korean SMEs, governmental

and institutional roles are necessarily required to assist SMEs in their resilient business

strength. Providing loans by the government, banks, Bank of Korea, and more relevant

institutions as reliable creditors with low-interest rates would support SMEs a lot to enlarge

their operations to process their business. SMEs could have this financial assistance to

develop capitals, advance technologies, and enhance interconnectedness between both

national and international partnerships. Besides providing aids, simplifying regulations to

reduce the complexity and the bureaucratic hurdles for starting and operating a business is

also important. Plus, fair business competition laws that regulate to prevent unfair practices

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by large companies on SMEs and public procurement that dedicate quotas for SMEs'

participation in government contracts would also lead to easy and motivated procedures for

them to operate their business successfully and effectively.

These 2 policy recommendations could shift business inequalities into an equal

business environment in South Korea very efficiently. However, all SMEs, Large-Enterprise,

government, and related institutions should also be cooperative in proceeding business

processes to reach maximum and expected outcome for overall prosperity.

VII. Limitations

The study focuses on South Korea's specific context, potentially limiting its

applicability to other countries with different economic structures and political landscapes.

This could lead to overgeneralization and misinterpretation of findings in other contexts. The

research relies on existing definitions and frameworks for "corporate inequality," and

involves the element of personal contribution of ideas which could potentially lead to biased

speculations and recommendations.

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crisis: strategies, constraints, and performance in a global economy.

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performance of Korean manufacturing firms: Corporate governance and the “chaebol

problem.” Journal of the Japanese and International Economies, 20(2), 209–233.

doi:10.1016/j.jjie.2005.02.001

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