[South Korea Unable to Grow Large Corporations] ① "Growth is Scary"... The 'Peter Pan Syndrome' Wanting to Remain a Forever SME

Asset 10 Trillion Mutual Investment Restriction Business Group 'Defense' TF
"We Don't Want to Become a Large Corporation"...SMEs Suffering from Adult Child Syndrome

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 KRW and 2,169 affiliated companies), many were founded by the founding families of major domestic groups currently driving the Korean economy, such as Samsung, Hyundai Motor, and LG. For example, 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 advance to large corporations and compete on the global stage. However, in Korea, as companies grow larger, they face more 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 and disappeared into history. New large corporations are not given the time to build systems and traditions to compete with existing large corporations and, furthermore, global giants. Asia Economy aims to examine the reality of South Korea’s inability to properly nurture large corporations. We diagnose what is needed now to create an environment where SMEs want to grow into large corporations.

Energy group Samchully recently attempted to organize a group related to large business conglomerates. As of last year, Samchully’s total assets amounted to 9.8639 trillion KRW. Although it qualifies as a public disclosure business group with assets exceeding 5 trillion KRW, it does not yet meet the 10 trillion KRW threshold to be classified as a mutual shareholding restricted business group. The company aims to avoid surpassing 10 trillion KRW in total assets as it grows further. Samchully stated, "Due to a temporary increase in accounts receivable payable to Korea Gas Corporation, our assets rose to around 9 trillion KRW, increasing the likelihood of being included in a large business group."

Logically, a company should be celebrated as it grows larger. However, Korean companies fear growth because regulatory burdens increase as the company expands. For example, when designated as a mutual shareholding restricted group, the number of regulations they must comply with increases from 274 to 342, an increase of 68 (24.8%).

The number of large corporations in Korea has remained stagnant for decades. Over the past 10 years, while the GDP grew by nearly 50%, the number of businesses leading the Korean economy increased from 3.47 million to 6.07 million, nearly doubling. However, the number of companies with 300 or more employees only slightly increased from 3,334 to 4,404.

A view of Daebul National Industrial Complex, Yeongam-gun, Jeollanam-do. [Photo by Jeonnam Province]

According to an analysis of the nationwide business survey statistics by the Federation of Korean Industries on the 17th, as of the end of 2021, the number of large corporations with 1,000 or more employees was 852, accounting for only 0.014% of all businesses. This proportion decreased from 0.015% in 2011, ten years earlier. The proportion of businesses with 300 or more employees also declined from 0.10% to 0.07% over the same period. In contrast, major advanced countries have seen an increase in the proportion of large corporations. For example, in the United States, the proportion of large corporations rose from 0.56% in 2011 to 0.88% in 2021.

Currently, the government regulates 82 public disclosure business groups with assets exceeding 5 trillion KRW (3,076 affiliated companies). Among these, 48 are mutual shareholding restricted groups with total assets exceeding 10 trillion KRW. These groups are subject to disclosure obligations under the Fair Trade Act, prohibitions on unfair benefits to related parties, as well as bans on mutual shareholding, circular shareholding, and debt guarantees, and are under stricter supervision by the Fair Trade Commission.

Many companies fear the regulations they must face the moment they are labeled as large corporations, leading them to underreport their corporate status or avoid growing into large corporations altogether. This phenomenon is a kind of Peter Pan syndrome observed in the industry. Peter Pan syndrome refers to the psychological condition where adults behave like ‘adult children’ who cannot adapt to adult society.

Experts warn that if Peter Pan syndrome continues to spread in the industry, the pace of corporate innovation and productivity improvement will slow down. Professor Bin Ki-beom of Myongji University’s Department of Economics said, "Peter Pan syndrome can be an obstacle for SMEs to grow into mid-sized companies and for mid-sized companies to become large corporations." Professor Kim Jung-hyuk of Korea University’s Department of Business Administration added, "If companies split their business units to avoid being designated as large corporations, the number of affiliates increases, and although the number of employees may rise, tasks that one person could do are done by two, resulting in inefficient use of manpower."