Corporate Peter Pans

The government announced a new set of measures to promote the growth of midsize companies. The keystones are increased tax deductions for research and development spending and business inheritances. Deductions for research and development will be extended to companies with revenue of up to 500 billion won ($461.47 million) from a current cap of 300 billion won. Inheritance tax deductions will be offered to companies with revenue of up to 300 billion won, up from a current cap of 200 billion won. More companies will be able to save on their tax bills.

The goal is to encourage midsize companies to expand and become bigger. In general, small companies do not want to move up the ladder to become midsize and midsize companies loathe to become large enterprises because such growth leads to fewer benefits and increased taxes. Korea offers numerous financial and tax benefits to small and midsize companies. The bigger a company becomes, the more benefits it sacrifices. A bigger scale also draws the attention of various regulators.

That’s why Korean companies take pains not to outgrow their categories. Small and midsize companies account for 99 percent of the corporate population and yet the group of just below the large category accounts for only 0.04 percent. The recent incentives are aimed at padding out that middle tier of the corporate landscape by allowing midsize companies to continue to enjoy some benefits they have grown used to even if they grow.

But this notion won’t have a lasting effect. We have seen the limits of such policies for small and midsize companies over the decades. The government has been ever-giving to small and midsize companies. As a result, they resisted growing up and became dependant. In fact, the over-protectiveness of government policies undermined and killed entrepreneurship. The latest measures go in the same direction.

In order to help companies grow out of their Peter Pan syndrome, the government must reduce such protections. Small and midsize companies must learn to be more independent and be motivated to grow up. Moreover, the government is contradicting its economic guideline of enhancing fairness and justice. It is mulling a set of tax hikes and revisions of tax codes to increase tax revenue to finance increased welfare spending. The new deductions go against this policy. Salaried workers won’t tolerate giving up their tax deductions when the government has increased benefits to companies. We need to promote small and midsize companies, but coddling may do more harm than good.