Rethinking start-ups

The South Korean economy is stuck in a tunnel of slow economic growth. We have no idea when we will reach the end and see light again. The latest data only darkens the gloomy outlook. Outstanding loans of self-employed businessmen, which stood at 94 trillion won ($84.5 billion) at the end of 2010, surged by 40 trillion won in the last four years. During this period, lending to large companies grew 29 trillion won. Loans to small and mid-sized firms decreased. Self-employed businesses may soon be sitting on as much debt as small and midsize companies. In fact, their debt could exceed the latter’s. This means loans that could turn sour are building up fast in our financial sector.

The spike in loans to self-employed businesses is due to depressed domestic demand. Competition is getting heavier and yet demand remains weak. To make up for losses, more and more self-employed people are turning to debt to try to stay in business.

Why do we have so many self-employed people in our country anyway?

The turning point was the massive layoffs and corporate restructurings after the financial crisis in 1997. Many middle- and senior-ranking employees found themselves without jobs. With nowhere else to turn, they opened up their own businesses. Younger people also left their workplaces amid job insecurities and clambered on the start-up bandwagon.

The government cheered and encouraged the start-ups. Experts all advised the Korean economy to shift away from reliance on large manufacturers and an export-oriented economy to solve its structural problems. They suggested that the economy would gain vitality when young talents with ideas and businesses became as successful as American entrepreneurs like Bill Gates or Steve Jobs. The government rolled out various start-up promotion policies. Incubating centers mushroomed on university campuses and in local government organizations. The government was pressured to be more aggressive in its support so that start-ups could provide a solution to the high unemployment rate among young people.

Economic planning must calculate the outputs against the inputs and policies should be prioritized accordingly. They say one out of 10 start-up companies succeed at best. In other words, the failure rate is 90 percent. Starting up a business is not that hard. Even if the business ends up among the 90 percent that fail, you could comfort yourself by saying you gave it a try. Tax funds that went into the failed business could be rationalized as investments, seeds planted for future successes. But if there are too many failures, the cost on both individuals and society as a whole could be heavy.

The path to success is bumpy and narrow. A few somehow succeeded to lead economic growth. But it might be more helpful to individuals if there were more practical options to be successful than starting one’s own business. It is better for a society to foster an environment or business ecosystem in which companies can grow together instead of encouraging individuals to venture into their own businesses en masse.

Daniel Isenberg, a Harvard Business School professor and expert on entrepreneurship, stresses that a society’s resources should be spent more on raising children well than giving birth to more babies. He called for a rebalancing of entrepreneurship policy toward scale, not start-ups. Kim Woo-choong, chairman of the now-defunct Daewoo Group - who was a legendary figure for building a business to a global scale after starting out as a salary-earner - shared the same idea. He started his own business after five years working for a company. He now advises young people in Vietnam to start business after at least 10 years of work experience. Because we now live longer, starting a business after 10 years of career experience and building up of human networks is not waiting too long. The experience and networking will help reduce the odds of failure.

Our society somehow confused start-ups with a kind of social security policy. Start-ups became a kind of means to give opportunities to less privileged young people. But in economic terms, start-ups are an extremely unequal process. Only a small number succeed out of hundreds of failures. Success does not build on piles of failures. Focus and filtering out could prevent losses and social costs.

The start-up spirit is important. We need to see more adventurous entrepreneurs. But even more importantly, we need more successful entrepreneurs. The surge in loans to self-employed businesses amid lackluster corporate investment is a sign that the economy is going in the wrong direction. The myth about start-ups needs rethinking.

Translation by the Korea JoongAng Daily staff.

JoongAng Sunday, Nov. 23, Page 31

The author is an economics professor at the National University of Singapore.

By Shin Jang-sup