Fragile state of small business in Korea

Korea is seeing a coffee shop boom. The value of the domestic coffee market jumped from 430 billion won (366.1 million U.S. dollars) in 2006 to 2.4 trillion won (2.04 billion dollars) last year, and is forecast to hit 3 trillion won (2.55 billion dollars) this year. Cafes, however, are not benefiting from such growth. Their number exponentially increased from 1,500 in 2006 to 12,400 last year, much faster than the market`s growth. A coffee shop chain can survive the average survival period of seven months due to increased rent and royalties. Two to three years are needed to see which coffee shops will survive.

The number of new companies in Korea hit a record average of 6,300 per month through April this year, up 18 percent from the same period last year. Job creation could be expected from this but this is not the case. Most business startups are small. Moreover, the number of companies with five employees or more fell from August last year while that of companies with four or less staff members soared. There was little increase in the number of start-ups by those in their 30s and 40s in contrast to a large increase by those in their 50s or older. The 50-something entrepreneurs had been laid off from their jobs and started traditional small businesses such as restaurants, lodging facilities, and retail or wholesale operations with small capital.

An alley near an apartment complex in Seoul`s Shindang district has seven competing beauty salons. Samsung Economic Research Institute said 1.7 million people are involved in small business in an area where competition is fierce, falling under the bottom 20 percent of the income bracket. Statistics Korea said 70 percent of startups can survive their first year but only 45 percent can make it to three years. As older people start small businesses, the situation is getting worse.

Small business owners can receive no government protection if they go bankrupt. Korea Workers’ Compensation & Welfare Service began offering unemployment insurance for the self-employed in January, but has insured just 6,770 people. The insurance also provides unemployment benefits if small business owners are forced to close shop and fail to get jobs. An Employment and Labor Ministry source said, “Owners are reluctant to close their businesses though they aren`t performing well but a minimum level of protection for them is needed.” The government and politicians should find a fundamental solution for small businesses, which have formed a “red ocean” given the high rate of failure. Hopefully, those who run for president at the end of the year can think about how to create jobs at large companies for the country`s estimated two million small business owners.

Editorial Writer Hong Kwon-hee (konihong@donga.com)