[South Korea Unable to Grow Large Corporations] ⑤ After Expanding Company Size... Policy Support Disappears and "Pay 30 More Types of Taxes"

10th Anniversary of the 2014 'Junggyeon Company Act'... "Lacks Practicality"
"Establishing a Framework for Junggyeon Company Development is the Key to Overcoming the 'Peter Pan Syndrome'"

Editor's NoteDoes South Korea have 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 emerging 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, and 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, but in Korea, as companies grow larger, they face more regulations that hinder growth rather than serve as growth ladders. 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 guaranteed 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 inability to properly nurture large corporations. It diagnoses what is needed now to create an environment where SMEs want to grow into large corporations.

A CEO A, who runs a semiconductor equipment manufacturing company in Icheon, Gyeonggi Province, is facing difficulties in hiring talent this year. This is because the SME graduation grace period, which is granted for three years after becoming a mid-sized company, ended at the end of last year. From this year, the company can no longer receive employment-related tax benefits such as income tax reductions for employees, social insurance premium tax credits, and special tax treatments for employment retention that were available under SME status. CEO A is considering whether to split the overseas sales department into a separate corporation to return to SME status.

The "Peter Pan syndrome," where SMEs fail to grow into mid-sized companies and even sound mid-sized companies want to revert to SME status, is holding back the Korean economy. As companies grow, benefits decrease but regulations increase, dampening the will of SMEs to grow into large corporations. Although about 10 years have passed since various support measures, including the enactment of the Mid-sized Companies Act based on the "growth ladder theory" during the Park Geun-hye administration in 2014, progress remains stagnant.

SMEs are classified as mid-sized companies if their average sales exceed 40 billion to 150 billion won by industry or if their total assets exceed 500 billion won regardless of industry. When becoming a mid-sized company, the 57 regulations previously applied increase by 126, totaling 183 regulations. Meanwhile, about 160 benefits such as employment support, tax credits, policy funds, and export support disappear. The number of taxes to be paid increases by about 30 types. Except for improvements in corporate recognition and expansion of financing scale, there is virtually no incentive for companies to voluntarily enter mid-sized company status. The situation is similar when advancing from mid-sized to large corporations.

At the Small and Medium Enterprise Growth Ladder Policy Forum, Kim Ki-moon, Chairman of the Korea Federation of Small and Medium Business, is speaking.

The concept of mid-sized companies in South Korea was concretized with the enactment of the Mid-sized Companies Act in January 2014. The purpose was to create a separate category between large and small businesses to provide tax and financial benefits. Initially introduced as a 10-year temporary law set to expire in July 2024, it was converted into a permanent law on March 30 this year. However, due to the perception over the past decade that the law would soon expire, detailed legislation reflecting field realities was hardly realized. Mid-sized companies existed only as a concept and were treated as a "gray area" without a main government department, caught between the Ministry of SMEs and Startups overseeing SMEs and the Ministry of Trade, Industry and Energy overseeing large corporations.

Industry experts agree that to fundamentally solve the Peter Pan syndrome, proper mid-sized company development policies must be established. They point out that the dichotomous structure of large and small companies and the proliferation of populist policies aimed at winning the votes of SMEs, which make up 99% of all companies, have caused the Peter Pan syndrome. It is now said that a foundation for nurturing mid-sized companies should be established so that SMEs can break free from relying solely on government support like greenhouse flowers.

Kwon Jong-ho, president of the Korea Association of Mid-sized Companies (professor at Konkuk University Law School), pointed out that the framework of government support policies needs to be changed. He advised that as companies grow, incentives should shift from financial support to regulatory relaxation to promote leaps forward. Professor Kwon said, "Since government budgets are limited, it is difficult to continuously provide benefits given to SMEs to mid-sized companies as well. It is more efficient in terms of government resource management to support mid-sized companies so that even if financial support decreases, they feel that regulations have been eased when transitioning from SMEs to mid-sized companies."

Professor Kwon also suggested that rather than formal classifications such as venture, small, mid-sized, and large companies, "pinpoint support" should be provided by selecting industries and groups of companies that lead the market or are lagging behind. He advocated for additional systems like the "Special Act on Enhancing Corporate Vitality" (One-Shot Act). The One-Shot Act is a system that helps companies autonomously restructure their businesses by simultaneously lifting related regulations such as commercial law, tax law, and fair trade law, and providing tax and financial support. Professor Kwon said, "Early-stage mid-sized companies often need to attract investment for business expansion but frequently face difficulties in defending management rights. The multiple voting rights system passed by the National Assembly in April should not be limited to venture companies but applied more flexibly in various ways."