[Countries Where SMEs Struggle] ⑤ 99% Share Only 25%... Need to Lead Win-Win Cooperation

Number of Businesses and Workers Shows
Absolute SME Proportion, but
Gap with Large Corporations Widens
Need to Improve Unfair Trade Practices

99% is the proportion of small and medium-sized enterprises (SMEs) among all businesses in South Korea. Approximately 83% of all workers are employed in these SMEs. This means that SMEs form the backbone of South Korea's national economy and job creation. However, the 25% share of operating profits held by SMEs is quite different from their number of businesses. A total of 57.3% of operating profits belong to large corporations, which account for only 0.3% of all businesses.

Since COVID-19, the polarization between SMEs and large corporations has intensified. With less than 1% of large corporations taking more than half of the total operating profits, disparities have widened in productivity and investment scale. The labor productivity gap per employee between large and small-medium enterprises reaches 3.3 times, and the scale of research and development (R&D) investment differs by 3.7 times. Moreover, SMEs face a challenging environment with raw material risks, logistics disruptions, the 52-hour workweek, minimum wage issues, and unpreparedness for carbon neutrality and ESG (environment, social, and governance) requirements. Experts suggest that a path forward must be found through win-win cooperation between large corporations and SMEs at the corporate ecosystem level.

According to the Korea Federation of SMEs on the 30th, as of last year, the number of SME businesses in South Korea was approximately 6.88 million, with 17.44 million workers employed. Considering that the total number of businesses in South Korea is 6.89 million and the total number of workers is 21.07 million, the share of SMEs in the economy is absolute. However, despite this status, the gap with large corporations is perceived by the industry to be widening recently. A survey conducted by the Korea Federation of SMEs targeting 500 small and medium manufacturers found that 43.8% responded that the polarization between large and small-medium enterprises worsened after the spread of COVID-19. Additionally, 45.4% answered that improving unfair trade practices is most necessary to resolve polarization.

[Image source=Yonhap News]

Management Difficulties of SMEs Supplying to Large Corporations Intensify

Especially this year, due to the sharp rise in raw material prices such as iron ore, crude oil, and pulp, the management difficulties of SMEs that process raw materials and supply them to large corporations are worsening. Although raw material prices are rising with the global economic recovery, SMEs are facing profitability deterioration because these increases are not properly reflected in supply prices.

The industry’s position is that due to the vertical relationship and unfair trade between large corporations and SMEs, the burden of raw material price increases is entirely borne by SMEs. According to the ‘Raw Material Price Fluctuation and Supply Instability Survey’ conducted by the Korea Federation of SMEs, 86.2% of SMEs were unable to reflect the increase in supply costs in their supply prices. Although the Win-Win Cooperation Act was amended to allow SME cooperatives and the Korea Federation of SMEs to negotiate price adjustments with large corporations on behalf of SMEs lacking bargaining power during supply cost fluctuations, the conditions are stringent, and concerns about retaliation such as transaction termination remain.

Yang Byung-chan, head of the Sustainable Infrastructure Division at Daishin Economic Research Institute, explained, "Although large corporations are small in number, the money they earn is tremendously more than that of SMEs. The government’s long-term task is to incentivize large corporations to actively support SMEs without cutting supply prices unfairly."

Keyword: Win-Win Cooperation Between Large and Small-Medium Enterprises

If SMEs lose growth momentum and their investment capacity weakens, it will eventually lead to core personnel outflow and labor shortages, further deepening polarization between large and small-medium enterprises. Since COVID-19, labor shortages in small manufacturing companies have worsened due to a decrease in foreign worker arrivals. Rapid minimum wage increases, the enactment of the Serious Accident Punishment Act, and the uniform 52-hour workweek system are also cited as reasons making it difficult to operate SMEs in Korea.

Furthermore, the government’s carbon neutrality policy has deepened SMEs’ concerns. According to a survey conducted this year by the Small and Medium Business Corporation, 56.1% of SMEs responded that they have no preparation plan for responding to carbon neutrality. Yang Chan-hoe, head of the Innovation Growth Division at the Korea Federation of SMEs, pointed out, "On the ground, SMEs do not know what or how to do for carbon neutrality and lack the capacity to prepare. It is necessary to develop carbon neutrality response measures through industry associations and introduce supplementary measures such as supply price linkage systems and electricity rates dedicated to SMEs."

Experts emphasized that win-win cooperation between SMEs and large corporations is of utmost importance. Noh Min-seon, head of the Future Strategy Research Group at the Korea Institute for Small and Medium Enterprises, said, "The keyword is ‘win-win cooperation between large and small-medium enterprises.’ Since it is difficult to overcome various current variables by SMEs’ efforts alone, policies are needed to strengthen large corporations’ support activities for SMEs and provide incentives accordingly." Noh added, "If win-win cooperation between large and small-medium enterprises occurs in various aspects, it can become a significant stepping stone to enhance each other’s survivability and competitiveness."