Shifting small and medium enterprise support criteria from revenue or asset size to business age, combined with improved restructuring efficiency, could increase Korea's gross domestic product by up to 0.7 percent, according to a Bank of Korea study.
The BOK said in a report titled "Current Status of Korean SMEs and Ways to Improve Support Systems" released Wednesday that "the current SME support criteria rely on revenue indicators that have little correlation with productivity, making it closer to universal support rather than selective support."
While SMEs play an important role in job creation and economic growth, they still fall short of becoming a core driver of growth and innovation in Korea, the report assessed. According to the BOK, labor productivity of small and medium manufacturers stands at about 32 percent of large enterprises, below the Organisation for Economic Co-operation and Development average of 55 percent. The proportion of marginal firms also increased from 12.6 percent in 2012 to 18 percent last year.
The government has implemented various SME support measures, but the report pointed to problems including reliance on revenue-based universal support, the spread of "Peter Pan syndrome" where SMEs avoid growing, inadequate exit-related systems, and overlapping support for similar programs.
The BOK explained that simply improving inefficiencies in support policies could significantly boost economic effects. Even without increasing the scale of support, adjusting "who" and "how" to support could increase GDP by 0.4 to 0.7 percent, the report projected.
The report first proposed shifting support criteria from revenue to business age. Reallocating support funds to low-age companies with high productivity would increase GDP by 0.45 percent, the study found. It also identified a 0.06 percent effect from easing Peter Pan syndrome as subsidies would no longer be linked to revenue size. "Business age better reflects company productivity compared to size and is difficult for companies to arbitrarily adjust, making it a realistic alternative," a BOK official analyzed.
Additionally, improving restructuring efficiency to U.S. and Japan levels through early exit of distressed firms would increase GDP by 0.23 percent and reduce the marginal firm ratio by 0.23 percentage points, the study showed. This means changing SME support criteria and reforming restructuring systems alone could increase Korea's production by about 0.7 percent.
"SME support systems need to be supplemented in a direction that enhances productivity and dynamism through improved target selection and incentive structures, rather than increasing the 'quantity' such as the number of support programs or budget size," stressed Choi Ki-san, senior economist at the BOK's Economic Research Institute.
