Growth-averse firms pose threat to South Korea's economy

Since the 2010s, many terms have been used to describe South Korea’s sluggish economic growth, but few capture the problem as sharply as “Peter Pan companies.” Like adults who refuse to grow up, these firms deliberately avoid growth and can no longer be considered true businesses. An economy made up of such companies struggles to function normally. The deeper problem is that South Korean society has failed to address Peter Pan companies for more than a decade.

The term first came into the spotlight in 2012, when South Korean media began using it. At the time, the Federation of Korean Industries (now the Korea Economic Association) surveyed 279 small and medium-sized enterprises (SMEs) and found that three in ten had carried out artificial restructuring, corporate spinoffs, or relocated factories overseas to maintain their SME status. The discovery that these companies were channeling resources to avoid growth rather than pursue expansion sparked concern across sectors.

The survey also found that when an SME grows into a mid-sized enterprise, it loses 160 benefits and faces 84 additional regulations. A similar survey conducted in September by a research team led by Professor Kim Young-joo at Pusan National University found that the number of additional regulations had risen to 94. Even modest growth can result in the loss of support in areas such as taxes, research and development, and finance. Because the “pain of growth” often outweighs the benefits, many companies choose to avoid expanding. Among small business owners, it is not uncommon to hear statements such as, “It is better to reduce revenue by 100 million won to retain SME benefits than to increase it by 1 billion won.”

South Korea’s economy grew 2.4 percent in 2012, the year Peter Pan companies first drew attention, marking the start of a prolonged period of low growth ranging from 2 to 3 percent. Structural factors such as low birth rates, an aging population, and China’s manufacturing boom likely played a larger role. Yet when a substantial portion of the economy’s backbone—its SMEs—focuses on artificially limiting workforce and revenue growth, achieving high growth becomes nearly impossible. Increasingly, even well-established mid-sized firms that would normally fall under large enterprise regulations are joining the ranks of Peter Pan companies.

Over the past 13 years, various solutions have been proposed to address Peter Pan companies. Last year, the government introduced measures offering tax reductions for up to seven years to SMEs that grow into mid-sized enterprises. Provisions were also put in place to allow deferred application of research and development tax credits. Still, concerns remain that these steps may have arrived too late.

The average number of employees in South Korean companies fell from 43 in 2016 to 40.7 in 2023. In 2023 alone, about 570 companies that had reached mid-sized status reverted to SMEs. Between 2020 and 2023, only four out of 10,000 SMEs successfully expanded into mid-sized enterprises, representing just 0.04 percent. The failure to respond when warning signs first appeared in 2012 has helped accelerate Korea’s decade-long low-growth trajectory.

The solution is not complicated, though it may not be easy. The ecosystem must be structured so that companies are encouraged—or even compelled—to grow. Simple support based solely on company size should be scaled back, while additional assistance is directed toward firms that are expanding. Some in the private sector even advocate offering “rewards” to SMEs that successfully become mid-sized companies. A country and its businesses that fear growth have no future. The hope is that next year will mark the beginning of the end for Peter Pan companies.