[Editorial] Small Business Need Restructuring

Regarding the widening gap between large businesses and small- and mid-sized enterprises (SMEs), the Bank of Korea (BOK) pointed out that such a trend was attributed to “structural vulnerability rather than the business cycle,” adding, “it is urgent to enhance competitiveness of SMEs by improving their structures.”

The Korea Development Institute (KDI) says stagnant investment in facilities is a main reason for a shrinking investment by SMEs and emphasized, “Restructuring is necessary in the service sector, where a large number of SMEs are involved.”

While large businesses have improved their competitiveness thanks to restructuring during the Asian financial crisis, SMEs, which have been considered “subject to protection,” are struggling. SMEs are subcontracting-dependent, less productive and vary greatly by sector and company. SMEs account for 87 percent of employment but only 51 percent of production for the whole industry. Productivity has been undermined due to a surge in the number of small-scale enterprises, low investment in facilities and a low level of technology; investment has been on the decrease since 2002. Since then, one-fourth of all SMEs have gone into the red.

The Prescription-

An intensive restructuring should be carried out on a continual basis to avoid this. The BOK advises that marginal SMEs should be driven out of business and that financial aid for stagnant businesses should be reduced and redirected into “innovative and growth-promising” SMEs instead. The KDI also suggests transforming the basic direction of government policies for the service sector and SMEs from “protection and nurturing” policies into “competition-enhancing and opening” policies, and overhauling the government’s assistance and regulation systems.

The unemployed that are inevitably created amid restructuring should be absorbed by encouraging them to change jobs after getting outplacement training, and by increasing unemployment benefits.

The government agrees on the diagnosis and the prescription, but is reluctant to push for restructuring due to immediate job-creation issues.

However, it should stop neglecting advices on how to be competitive in the future, and it should stop bragging about not using artificial economic stimulus packages. It needs to come up with policies that facilitate the overhaul of SMEs and the service industry, which are capillary vessels of the Korean economy.

When it achieved one billion won in real gross domestic product (GDP), the Korean economy created about 33 percent more jobs 10 years ago than it does today.

It takes more growth to sustain the same level of employment these days. In order to create better jobs, the government should resolutely drive inefficient service providers and other marginal enterprises out of business and encourage them to change the types of businesses they are in.