Korean entrepreneurship is lagging
*The author is a senior editorial writer of the JoongAng Ilbo.
Kim Joon-il may be one of the most envied businessmen in Korea. He sold off the household container brand Lock & Lock to Hong Kong-based private equity firm Affinity Equity Partners for 629.3 billion won ($584.6 million) last year. Instead of keeping the 39-year-old business within the family, he took his money from the sale to Vietnam. “Vietnam is like South Korea 35 years back. Local staff are always smiling. It feels good to be their employer,” he said. He is currently building a 20-story high-rise in Ho Chi Minh City.
Lee Sang-rok, the founder of Carver Korea, which is famous for its beauty brand AHC, devoted himself to cosmetics from the age of 25. In his mid-40s, he sold off Carver Korea to Bain Capital Private Equity for 1 trillion won after AHC hit jackpot on TV home shopping channels and in China. He used his riches to purchase a building near Sinsa Station in southern Seoul. Bain Capital also purchased nearly half of Hugel — a bio firm founded in 2001 that makes dermal facial filler used for beauty and cosmetic surgery injections — for nearly 1 trillion won.
These companies have three things in common. They generated 200 billion won to 500 billion won in revenue a year, and more than half of their revenue came from overseas. Despite their competitiveness, the founders chose to sell their businesses off to foreign equity firms.
We admire Germany for its fleet of strong small companies. The Korean government has been eager to nurture promising small and mid-sized enterprises. Yet successful entrepreneurs sell their hard-built enterprises to invest in property instead. Their riches are envied. Many businessmen who run factories in Korea say they wish to retire to travel and live comfortably off the returns from real estate investments.
Entrepreneurs are losing their spirit for many reasons. Owning a business has become very risky. Owners of four out of the five top business groups have served a prison term. Among the top 10 conglomerates, 60 percent of their chairs were convicted of crimes. Large business groups get raided and probed regularly by authorities.
Samsung Group has had to face investigations by the Fair Trade Commission, Financial Services Commission, Employment and Labor Ministry and the prosecution. Hyundai Motor is busy trying to fend off an attack from U.S. activist fund Elliott Management and Lotte Group’s Chair Shin Dong-bin is behind bars. The business community has been bombarded with anti-corporate policies such as the spike in the minimum wage, shortened legal work hours and the hike in corporate taxes. Entrepreneurship, unsurprisingly, has fizzled out.
Economics strictly differentiates the unproductive rich from productive entrepreneurs. A businessman is a person who takes risks to create new value. The rich invest in properties and build wealth through rent gains. Economist William Baumol said a society will wane if unproductive activities, such as rent-seeking, prevail. Governments around the world are doing their utmost to boost entrepreneurship through cuts in corporate and inheritance taxes.
Korea’s inheritance tax rate amounts to 50 percent, double the average of 25 percent among members of the Organization for Economic Cooperation and Development. U.S. President Donald Trump wants to axe his country’s estate tax. He argues it is unfair to slap a death tax on the deceased who would have paid income and property taxes during his or her lifetime. He thinks there is more harm — such as losing national riches and sluggish investment — than benefit from the estate tax, which accounts for just 1 percent of the federal tax revenue. But Seoul has raised the inheritance tax under the pretext of easing income disparities.
President Moon Jae-in celebrates his first year in office on May 10. Goldman Sachs said its data shows that the global economy is performing better than it has in the past in 10 years. The chip boom sustained the Korean economy last year, but the upturn is expected to soften. Moon has vowed to create income-led growth, but his economic scoreboard has been poor. Consumption is stubbornly sluggish and unemployment is at its highest in 17 years.
The time has come for policymakers to reexamine their economic direction. Growth is fueled by productivity, not income. Nobel Prize-winning economist Paul Krugman famously said that productivity isn’t everything, but in the long run, it is almost everything.
The country’s 30 largest business conglomerates sit on a cash hoard of 883 trillion won. They must be convinced to spend the money on research and development and facility investment to boost productivity. The government must use some of the charm it is currently using on Pyongyang on businesses at home.
JoongAng Ilbo, April 2, Page 31