Technology and Korea’s Business Systems in Action
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SMEs in TransitionDespite the government’s focused promotion of SMEs in the past two decades, they have faced many problems. Promotional policies have not been effective due partly to the increasing dominance of chaebols in the financial and product markets and partly to flooding inflow of competitive products from China. In addition, linkages between SMEs and large firms have had enormous transaction costs: exploitation of small by large firms has taken the form of deferred payments and widespread financial kickbacks. As a result, the weakness of “related and supporting industries,” in Porter’s (1990) phrase, has become a serious problem, intensifying the large firms’ dependence on Japan for technology-intensive parts and components and slowing the pace of product and process innovation. Arguably, although SMEs face real problems in the Korean business system, Korea faces fewer barriers to the growth of entrepreneurial, technology-based SMEs than does Japan, especially in terms of labor markets. The lifetime employment patterns of Japan have no analogue in Korea, especially for technical talent. And as the case of Medison illustrates, it is possible for technology-based SMEs in Korea to achieve not only a strong domestic market but to become global companies. The role of such firms in the Korean business system is bound to grow in the future. This is particularly true after the Asian crisis. Large chaebols have reduced their R&D activities by about 13 percent after the crisis in order to improve short-term liquidity. This resulted in a major surge of technology-based small firms in Korea. Well-trained scientists and engineers, who had been laid off by chaebols, formed a large number of technology-based small firms. The recent promotion of venture businesses by the government also played a role in fostering the surge of venture firms. On the contrary to general expectations, the number of corporate R&D laboratories increased from 3,060 at the time of the crisis in Korea to 4.232 a year and half later. 95 percent of the increase is accounted for by SMEs, signaling that on-going restructuring of chaebols have forced many of high-caliber scientists and engineers to spin-off to form technology-based small firms and that such moves would make a significant dent in skewed industrial structure in Korea. Koreans are very entrepreneurial, if the activities of emigre Koreans are any guide. In the United States, Koreans have been among the most entrepreneurial of immigrant groups, engaging in small-scale family business in trade and commerce, much like the Chinese, although with even greater intensity. And yet entrepreneurship is clearly a key factor in the development of the Korean business system and its technological capabilities. Peter Evans (1995), for example, identifies the “state-fostered entrepreneurship” of the 1970s as a key factor in Korea’s success in the information industries, compared to Brazil and India. That entrepreneurship was initially channeled by government policy into certain sectors and certain forms (the large-scale, diversified industrial enterprise) is undeniable. But the recent promotion of venture businesses by both the central and local governments fosters a new type of entrepreneurship in technology-intensive areas.
The Asian crisis has, however, forced Korean firms to actively invite FDI in order to mitigate pressing short-term cash flow problems. Not only peripheral businesses but also core businesses are on sale. Consequently, unlike China and Southeast Asian countries, which have witnessed a sharp plunge in FDI after the Asian crisis (e.g., Singapore 24.8 percent and Taiwan and Malaysia 19 percent down), Korea saw a drastic increase in FDI. For example, FDI in manufacturing increased from $2.3 billion in 1997 to $5.7 billion in 1998. A lion’s share of the new FDI is associated with merger and acquisition of Korean firms by foreigners. Hewlett-Packard purchased a 45 percent stake in its Korean subsidiary from its joint venture partner, Samsung Electronics for $36 million. Dow Chemical took over Ulsan Pacific Chemical by purchasing a 20 percent stake. Phillips purchased a 50 percent stake in LG’s highly profitable flat panel display business for $1.4 billion. Volve purchased Samsung’s construction machinery division for $730 million. If assets sales are included, Korea’s top five chaebols raised over $7.4 billion in one year after the crisis. In short, Korea’s business system will be far more linked with foreign multinationals than ever before. In conclusion, Korea has been transformed from a subsistent agricultural economy into a newly industrialized one within a single generation. In this transformation process, technology development has been a driving force in the evolution of Korea’s business system. In the mature technology stage, Korea’s business system had a strong developmental state and a limited number of large chaebols have dominated production and market. Although this business system had been relatively effective in the 1960s and 1970s, it has become a major rigidity for Korea to adapt itself to the changing market and technology environment in the 1980s and 1990s, leading to a major economic crisis in November 1997. The serious problems of the rigidity and the necessity of radical changes had widely been recognized for many years, but Korea, like many other countries such as the United Kingdom, began to take actions only after painful experience of a major economic crisis.
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