[South Korea Unable to Grow Large Corporations] ④ "A Grace Period Is Needed to Endure Disadvantages When Companies Grow"

Editor's NoteDoes South Korea provide a favorable environment for small and medium-sized enterprises (SMEs) to grow into large corporations? Among the 48 business groups subject to the Fair Trade Commission's regulations on mutual shareholding restrictions (with total assets exceeding 10 trillion won and 2,169 affiliated companies), many were founded by the founding families of major domestic groups currently leading the Korean economy, such as Samsung, Hyundai Motor, and LG. CJ and Shinsegae are related to the Samsung family, while LS and LX are connected to the LG family. Since the 21st century, it has been difficult to find 'newborn' large corporations created by self-made entrepreneurs in Korea. Newly emerged large corporations like Coupang, Kakao, Celltrion, and Netmarble, which have grown under new founders, are few and far between. SMEs fear growing into mid-sized companies. Mid-sized companies split their businesses to avoid being designated as large corporations. SMEs should grow into mid-sized companies, and mid-sized companies should rise to large corporations and compete on the global stage, but in Korea, the larger a company becomes, the more it encounters regulations that hinder growth rather than serve as a growth ladder. In the past, companies like Pantech and STX competed with existing large corporations but could not endure long and disappeared into history. New large corporations are not given the time to build systems and traditions to compete with existing large corporations and global giants. Asia Economy aims to examine the reality of South Korea's failure to properly nurture large corporations. It diagnoses what is needed now to create an environment where SMEs want to grow into large corporations.

To prevent SMEs and mid-sized companies from giving up on growing into large corporations, it is necessary to spread the perception that incentives are available when they reach asset sizes and employee numbers comparable to large corporations. In other words, incentives are needed to encourage SMEs and mid-sized companies to aspire to enter the ranks of large corporations.

On the 18th, the Federation of Korean Industries analyzed that there are 342 corporate regulations corresponding to 61 Korean laws. The regulatory barriers increase as the size of the company grows. When an SME, which is subject to 57 regulations, grows and surpasses total assets of 500 billion won, an additional 126 regulations apply, causing the total number of regulations to surge 3.2 times compared to when it was an SME. When a company grows further and is designated as a publicly disclosed business group with total assets exceeding 5 trillion won, 65 more regulations are added, and when designated as a mutual shareholding restricted business group with total assets exceeding 10 trillion won, another 68 regulations are added. This is a significant factor discouraging SMEs and mid-sized companies from growing into large corporations and also makes further growth of large corporations difficult.

Since large corporations are subject to more regulations, expanding the 'SME Graduation Postponement System' to include large corporations to ease their burden is emerging as one possible solution. The idea is to grant a grace period during which newly grown large corporations can continue to receive the benefits they had as SMEs until they build the capacity to compete with existing large corporations, thereby giving them time to adapt to the large corporation business environment.

Yoo Jeong-ju, head of the Corporate System Team at the Federation of Korean Industries, explained, "Mid-sized companies that have graduated from SMEs can receive the benefits they had as SMEs for a certain period after graduation, but large corporations do not have such a system. Once a company becomes a large corporation, the burden of public utility charges such as electricity bills immediately increases, as well as tax burdens like corporate tax." A recent survey conducted by the Korea Chamber of Commerce and Industry also identified the mitigation of increased tax burdens (38.7%) as the most needed policy measure for growth into large corporations.

When evaluating large-scale public construction contractors, providing incentives to companies that have just entered the large corporation category when they compete against other large corporations could also be considered as a growth motivation. Currently, the public procurement market guarantees participation of SMEs through the 'Designation System for Products Competing Among SMEs,' but companies newly entering the large corporation category face not incentives but rather expanded restrictions on participation in the public procurement market.

To make South Korea a better environment for business, deregulation of large corporations by the government must also accompany these efforts. According to the 2023 National Competitiveness Ranking released by the International Institute for Management Development (IMD) in Switzerland, South Korea's economic performance jumped from 22nd to 14th place, but government efficiency declined from 36th to 38th place. Among the detailed components of government efficiency, the business environment ranking dropped from 48th to 53rd. Considering that the evaluation was conducted among 64 countries including OECD members and emerging countries, 53rd place is a dismal result. The business environment competitiveness ranking, which includes evaluation items such as the effectiveness of competition law, the extent to which labor-related regulations hinder business, attractiveness of incentives for foreign investors, and the degree to which subsidies hinder competition, has fallen from 46th in 2020 to 49th in 2021, 48th in 2022, and 53rd in 2023, showing a worsening trend year by year.

Yoo said, "To promote sound corporate growth and the creation of quality investment and employment, it is urgent to revise discriminatory regulations against large corporations." He explained, "Representative regulations urgently needing revision to improve corporate efficiency and competitiveness include the '3% voting rights restriction for major shareholders,' which limits voting rights on shares exceeding 3% of total issued shares when appointing auditors and audit committee members, and the 'Regulation on Internal Transactions,' which restricts transactions with affiliates and subsidiaries where the controlling family holds a certain stake." The Federation of Korean Industries recently compiled '2023 Regulatory Improvement Tasks' that hinder excessive corporate investment and submitted them to the government. They proposed a total of 31 regulatory improvement tasks to the government, including regulations that prohibit subsidiaries of large corporate holding companies from jointly investing in grandchild companies.