If the criteria for supporting small and midsize corporations are changed from sales to years in operation, corporations' long-term production capacity increases by 0.45%. If the restructuring process is also streamlined, the increase widens to 0.7%.
On Jan. 8, the Bank of Korea published a report titled "Status of Korea's small and midsize corporations and plans to improve support systems." Jang Geun-ho, Choi Gi-san, Seo Jae-yong, Lee Hyeong-seok, Kim Jin-young, and Kim Yong-su of the Bank of Korea's Economic Research Institute took part in writing the report.
The research team noted that small and midsize corporations form the foundation of the economy, accounting for 99.9% of all corporations in Korea, but their productivity remains low. In manufacturing, the labor productivity of small and midsize corporations is only about 32% of that of large corporations, far below the average of Organization for Economic Cooperation and Development (OECD) members (55%), and capital productivity is also on a downward trend.
The research team cited the government's support criteria as a reason why the productivity of small and midsize corporations has not improved. The government defines as small and midsize those corporations whose average sales over the past three years are 180 billion won or less and provides policy finance to corporations that meet this standard. However, there is criticism that such a policy is causing corporations to avoid growth to meet the support criteria, creating the so-called "Peter Pan syndrome."
The complexity of restructuring procedures, which delays the exit of insolvent corporations, was also raised as a problem. The current restructuring system is dual, consisting of court-led rehabilitation procedures and creditor financial institution-led workouts (work out·corporate restructuring). But these systems are designed around large corporations, tend to be complicated and prolonged, and are therefore not easy for small and midsize corporations to use.
Using a general equilibrium model, the research team analyzed how much productivity would increase if the government changed the support target from "sales-based small and midsize corporations" to "corporations with seven years or less in operation." The analysis found that corporations' total output would increase by 0.45% in the long term, and wages would rise by 1.08%.
If restructuring procedures are made more efficient, total output increases further. The research team estimated that if improvements to the restructuring process lower capital disposal expense by 10%, total output would rise by 0.227%. Changing the sales criterion and streamlining restructuring procedures would raise total output by up to 0.7%.
The research team said, "Even without increasing the budget, simply changing 'whom to support, by what criteria, and how to support and restructure' leaves room to lift total output by 0.4%–0.7%," adding, "Improving system design suggests that growth and dynamism can be enhanced through the small and midsize corporations institutional sector."