[Editorial] Enhancing SME productivity

Controversy is growing over a government-backed private commission’s campaign to restrict the entry of large corporations into certain markets in its bid to protect small and medium-sized enterprises.

A week ago, the Commission on Shared Growth for Large and Small Companies, which was established in September last year to promote win-win cooperation between big firms and SMEs, categorized 25 products as “SME-suitable” items, urging large companies currently producing them to scale back their output and others not to enter the sectors.

The list was the second of its kind following the first released in September. The 16 items on the first list included laundry detergent, cardboard boxes, plastic molds, press molds and soy sauce, while the second included more controversial items, such as tofu, kimchi, LED products and ready-mixed concrete.

In September, there was no protest from large corporations. This time, complaints were filed. On Wednesday, large concrete producers rebelled against the commission, saying they could not accept its decision. Demanding that ready-mixed concrete be taken off the list, they pledged to take all means possible, including legal and administrative measures, to protect their business rights.

Large LED producers, including Samsung LED and LG Innotek, also protested against the commission, saying its action risked stifling an opportunity to make LEDs a new growth industry. They asked for more time to reach a mutually beneficial deal with SMEs.

The revolt from large corporations highlighted the problems facing the private commission in promoting shared growth between small and large companies. The first problem concerns its legitimacy.

Concrete producers suspect the commission might have violated the Fair Trade Law or the Constitution by putting it on its list without their consent. They said they would examine the legitimacy of the commission’s decision and file a suit against it if it was found to have overstepped its bounds.

The nation’s Constitution empowers the government to “regulate and coordinate economic affairs … to ensure proper distribution of income, to prevent the domination of the market and the abuse of economic power and to democratize the economy through harmony among the economic agents.”

But the commission is not a government organization, although it is backed by President Lee Myung-bak. As such, it has no authority to pressure private companies to stay away from certain markets.

Hence the commission claims that it simply makes recommendations based on the consensus among its experts, who represent big firms, SMEs and the public. Its recommendations are not legally binding. Companies that refuse to defer to them are not subject to any legal punishment.

However, this does not mean they can ignore the commission’s decisions altogether. The commission said it would monitor regularly whether large companies follow its recommendations. Those who ignore them would risk judgment in the court of public opinion.

But this type of pressure has limited impact. For companies whose survival is at stake, it may not be effective. This has led SME advocates to urge the government to make the commission’s decisions legally binding. Lee has not chosen to do this.

In December, the commission will announce its third and last list. It needs to avoid increasing friction between small and large companies by giving them enough time to hammer out their differences. Large companies that have embraced the spirit of shared growth need to be more willing to make concessions to SMEs.

The second problem concerns whether the commission’s efforts would help SMEs improve their productivity. The commission’s designation of SME-suitable products would protect SMEs from domestic companies but not from foreign competitors. For instance, the domestic LED market is dominated by three foreign firms ― General Electric, Philips and Osram. If big domestic players pull out, can local SMEs fight off competition from the three global giants?

Probably not. This raises the question of how to improve the productivity of domestic SMEs to make them more competitive. Simply establishing entry barriers won’t make them productive. One way to enhance SME productivity is to promote mergers and acquisitions to create bigger and more efficient companies. Stimulating competition is another way to make SMEs more competitive.

SMEs have greater job creation potential than large corporations. But most college graduates shun SMEs. This problem stems from their low productivity, which hinders their growth. Improving the productivity of the SME sector is one of the biggest challenges the Korean economy faces.