[Viewpoint]Creative destruction

Winston Churchill once said, “Some people regard private enterprise as if it were a predatory tiger to be shot. Others look upon it as a cow that they can milk. Only a handful see it for what it really is ― the strong horse that pulls the whole cart.”
Immediately after the foreign currency crisis, many Koreans said corporate giants, especially conglomerates, were principally responsible for the crisis. They said the conglomerates must be broken up and that we should pursue Taiwan’s economic model, which focuses on small and midsize companies and venture companies.
Since the economic crisis, more than half of the top 30 groups have disintegrated and a countless number of large companies have gone bankrupt. An increasing number of people have lost their jobs, have been unable to find a job or have felt insecure about their positions at work.
Do we really need to pursue a small business-oriented economy?
Today, an economy with larger companies has greater and more powerful benefits.
Samsung Electronics, the biggest Korean company, is expected to have more than 100 billion dollars in revenue this year. Most of the revenue is from exports, so it more than doubles the production of other industries, thanks to the multiplier effect of exports. Their market capitalization has exceeded 100 trillion won ($107 billion) this year. The company has created 200 million won in assets for every citizen.
Samsung Electronics must have helped other industries create assets worth twice its market capital. If we had 30 companies like Samsung Electronics, Korea would be a world-class developed country with a per-capita national income of more than $40,000. On the contrary, if the company was removed, Korea would end up becoming a small business-oriented economy.
The United States is a country of large corporations with the highest number of global companies. Exxon- Mobil last year boasted four times the revenue of Samsung Electronics, with a profit of $39.5 billion. It creates more than $100 million in profit every day. Switzerland is also a large corporation-oriented economy.
Korea’s main exports, such as semiconductors, steel, automobiles and ships, are produced by a few large global corporations, not small and midsize businesses.
So why do so many people advocate a small business-oriented economy? Harvard Business School Professor Thomas McCraw blames the wrong economic principles.
Professor McCraw published “Prophet of Innovation: Joseph Schumpeter and Creative Destruction” this year. Many books on economic theory in the United States argue that resources are used most efficiently when a number of small companies with no market dominance repeatedly produce the same products in perfect competition. However, Professor McCraw points out such a system is the opposite of what Joseph Schumpeter, the prophet of innovation, asserted.
The invention of the automobile made carriages disappear, and cheap, highly efficient computers made slow, expensive computers obsolete. Schumpeter called it creative destruction by innovation. The key to economic development is creative destruction, not the repeated production of the same goods by countless small companies. In this era of globalization, what determines competitiveness is the entrepreneur’s competency, innovation and strategies for creative destruction.
Schumpeter introduced those concepts and emphasized the importance of family-run businesses and large companies. The American business magazines Forbes and BusinessWeek have called Joseph Schumpeter the most influential economist in the 20th century, even more so than John Maynard Keynes. Peter Drucker, the “father of scientific management,” said the age of creative management is the era of Schumpeterian economics.
In the age of creative management, we need to be familiar with the four phases of creation.
Let’s say you are a painter. The first phase would be copying the paintings of great artists. The second phase is to paint something as good as other great artists. The third is innovation, drawing something fresh and new. The fourth phase is the creative stage, in which you paint in an original style, as Pablo Picasso did. Some people consider the third and fourth phases the innovative stages.
The creative phase means creating something original and exclusive. American corporations such as Walt Disney and 3M are creative producers. From now on, we need to push ourselves toward greater creativity, from manufactured goods to corporate management and state administration to the government’s corporate policy.
In this knowledge-based age, both large corporations and small business are important. Companies should not be discriminated against because of their size.
Smaller enterprises take up the lowest level of the corporate pyramid, and more companies take up the next level as their size increases. With bigger and higher corporate pyramids, we should encourage every company to step up to the creative level.

*The writer is a professor emeritus at Seoul National University. Translation by the JoongAng Daily staff.

by Song Byung-nak