The Republic of Korea's Small and Medium-Size Enterprises and Their Support Systems

Abstract

The collective support system for small and medium-size enterprises (SMEs) is more important in the Republic of Korea than in other countries, but is less important than private support mechanisms. The success of Korea's collective support lies in well-functioning governance structures, in which hierarchical controls and human resource policies are especially important.

Kim and Nugent evaluate the effectiveness of private and collective technical, marketing, and financial support systems for the Republic of Korea's small and medium-size enterprises (SMEs) and entrepreneurs. Their report draws on a survey of 122 SMEs that make woven textiles (42 firms), auto parts (20 firms), electronic parts (20 firms), and factory-automation products (40 firms).

Although Korea has a dense network of public technology-support institutions, Korean SMEs tend to turn to private sources of technical support (especially from buyers, suppliers, and moonlighting engineers) more often than to public institutions. Even so, some collective support was used often and valued highly, especially in technologically dynamic sectors. For technical assistance to be timely and relevant, its delivery must increasingly be decentralized - to industry-specific institutes and to geographic clusters of SMEs in the same industry.

Among various collective providers of technical support for Korean SMEs, at least one was used by more than half of the SMEs surveyed. Collective marketing support was used much less than private sources and was not considered very useful - except by firms in the initial stages of exporting or in the pioneer stage of a new export industry. Generally, networks of local agents and foreign traders developed as firms gained in export experience.

Financial assistance is the most critical form of support for SMEs. The Korean government has made extensive use of parastatal finance institutions, targeted credit, and credit guarantee schemes. Government intervention in finance was so pervasive that the line between private and collective support blurred. Most SMEs sampled used at least one collective institution of financial support, and rated them very positively.

This paper - a product of the Finance and Private Sector Development Division, Policy Research Department - is part of a larger effort in the department to examine the impact of proactive intervention on SME performance.