Dilemmas for symbiotic growth

Lee Sang-jae
The author is a deputy director of economy and industry news at the JoongAng Ilbo.

Mr. Cho, 53, runs a small construction company in Cheongju, North Chungcheong. But the payment for his firm’s share in a construction project — worth hundreds of millions of won, or hundreds of thousands dollars — has been delayed by two months. He pressed the first contractor to pay him the money. But the first contractor told Cho to wait a little longer until the first contractor’s financial strain is eased. But Cho is in deep water, too. He might not be able to pay his three employees this month, let alone their bonuses for the Lunar New Year. The original construction company claimed that it had advanced payments to its contractors.

The tradition of advancing payments by large companies two weeks before Lunar New Year or Chuseok to their contractors has been kept up by most large companies over the past 20 years. According to a survey by the Federation of Korean Industries (FKI), major companies had forwarded 9.2 trillion won ($6.9 billion) dues to their partners ahead of the New Year’s holiday, up 26 percent from last year. But their generosity rarely trickles down to their subcontractors on time.

Shared or balanced growth among companies big and small surfaced as a major state agenda from 2010 under CEO-turned-president Lee Myung-bak. Big companies were baffled by the term “shared growth” pushed by the Lee administration, which had promised to be “business-friendly” from the start. Their jaw widened at the idea of big companies sharing their excess profit with their smaller partners “who contributed to the surplus,” as proposed by then-prime minister Chun Un-chan, who later served as the chairman of the Commission for Corporate Partnership.

Despite the change in the governing power, shared growth policy went on expanding. Following conservative president Park Geun-hye, who pledged to become a president for SMEs under the slogan of “economic democratization,” her liberal successor Moon Jae-in focused on alleviating the income gap between employees of large and small companies. The current Yoon Suk Yeol administration enabled SMEs to reflect the surge in raw material prices from global supply chain disruptions when they bill the charge for their supplies.

Shared growth is certainly a noble idea, but it does not work well in reality. While large companies are stressed by the pressure from the government, SMEs — and the government for that matter — complain about a lack of progress.

Why is that? Large companies wish to keep their partners within their boundaries. First of all, they dislike their contractors working with their own rivals. A chairman of a large company visiting a contractor based in Incheon 10 years ago told the CEO that he liked the products and wanted an exclusive contract. “If we earn 10, you should at least get 1,” the chairman condescendingly said. The contractor was supplying the parts, yet the bigger company was acting as if it was doing a favor.

Subcontractors are also liable for the lack of progress on shared growth. They mostly settle for the status quo — instead of taking up new ventures — or resort to safer non-core business expansion. If a large company arranges low-interest loans for its contractors with its primary bank to assist their research and development, they often use the money to add new office buildings or invest in real estate rather than honing their competitiveness.

Medium-sized companies also can come under the “Peter Pan syndrome,” opting to not grow up in fear of confronting tougher regulations and business environment, as required of large companies. Of 300 mid-sized companies, 30.7 percent are mulling returning to the smaller category, according to a survey by the Korea Chamber of Commerce and Industry.

Shared growth should be upheld as SMEs need government protection. But the concept should trickle down to the lower-tier partner companies like Cho’s company in Cheongju. The time has come for deep deliberation on whether the government’s policies for SMEs actually helped them raise their competitiveness over the last 10 years. Instead of blind assistance, government support must aim at innovating SMEs through technology alliances with bigger companies. Only then can Korea produce globally competitive companies like ASML, the dominant producer of equipment for cutting-edge chips.