metadata: authors: 0: author: Linsu Kim
1: author: Nugent, Jeffrey B.
count: Korea, Republic of
docna: 0: docna: The Republic of Korea's small and
            medium size enterprises and their support systems
docty: Policy Research Working Paper
subtopic: Construction Industry,Common Carriers Industry,Food & Beverage Industry,General Manufacturing,Pulp & Paper Industry,Plastics & Rubber Industry,Vocational & Technical Education,Skills Development and Labor Force Training,Educational Sciences,International Trade and Trade Rules,Business Cycles and Stabilization Policies
teratopic: International Economics and Trade,Water Resources,Finance and Financial Sector Development,Infrastructure Economics and Finance,Private Sector Development,Industry
abstracts: cdata!: The authors evaluate the effectiveness
            of private and collective technical, marketing, and
            financial support systems for the Republic of Korea's
            small and medium-size enterprises (SMEs) and entrepreneurs.
            Their report draws on a survey of 122 SMEs that make woven
            textiles (42 firms), auto parts (20 firms), electronic parts
            (20 firms), and factory-automation products (40 firms).
            Although Korea has a dense network of public
            technology-support institutions, Korean SMEs tend to turn to
            private sources of technical support (especially from
            buyers, suppliers, and moonlighting engineers) more often
            than in public institutions. Even so, some collective
            support was used often and valued highly, especially in
            technologically dynamic sectors. For technical assistance to
            be timely and relevant, its delivery must increasingly be
            decentralized - to industry-specific institutes and to
            geographic clusters of SMEs in the same industry. Among
            various collective providers of technical support for Korean
            SMEs, at least one was used by more than half of the SMEs
            surveyed. Collective marketing support was used much less
            than private sources and was not considered very useful -
            except by firms in the initial stages of exporting or in the
            pioneer stage of a new export industry. Generally, networks
            of local agents and foreign traders developed as firms
            gained in export experience. Financial assistance is the
            most critical form of support for SMEs. The Korean
            government has made extensive use of parastatal finance
            institutions, target credit, and credit guarantee schemes.
            Government intervention in finance was so pervasive that the
            line between private and collective support blurred. Most
            SMEs sampled used at least one collective institution of
            financial support, and rated them very positively.
geo_reg_key: 517198,517191,119225
repnme: repnme: The Republic of Korea's small and
            medium size enterprises and their support systems
display_title: The Republic of Korea's small
            and medium size enterprises and their support systems
listing_relative_url: /research/1994/12/697844/republic-koreas-small-medium-size-enterprises-support-systems
topicv3: Manufacturing Sectors m1326521 1281,Vocational Education and Technical
            Training m1326570 1573,Trade m1326924 698,Education m1327048 470,Training Programs m1504140 2817
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: International Economics and Trade,Water Resources,Finance and Financial Sector Development,Infrastructure Economics and Finance,Private Sector Development,Industry
origu: Development Economics and Chief Economist
no_of_pages: 84
model_extractions: POLICY **RIESEARCH** WORKING **PAPER** 1404

# Summary findings

Kim and Nugent evaluate the effectiveness of private and collecrive technical, marketing, and financial support systems for the Republic of Korea's small and mediumsize enterprises (SMEs) and enitrepreneurs. Their report draws on a survey of 122 SMEs that make woven textilcs (42 firms), auto parts (20 firms), electronic parts (20 firmns), and facory-automation products (40 firms). Although Korea has a dense network of public technology-support institutions, Korean SMEs tend to turn to private sources of technical support (especially from buyers, suppliers, and moonlighting engineers) more often than to public institutions. Even so, some collective support was used often and valued highly, especially in technologically dynamic sectors.

For technical assistance to be timely and relevant, its delivery must increasingly be decentralized - to industry-specific institutes and to geographic clusters of SMEs in the same industryn Among various collective providers of technical support for Korean SMEs, at least one was used by more than half of the SMEs surveyed. Collective marketing support was used much less than private sources and was - not considered vcry useful except by firms in the initial stages of exporting or in the pioneer stage of a new export industry. Generally, networks of local agents and foreign traders developed as firms gained in export experience.

Financial assistance is the most critical form of support for SMEs. The Korean government has made extensive use of parastatal finance institutions, targeted credit, and credit guarantee schemes. Gavernment intervention in finance was so pervasive that the line between private and collective support bluried. Most SMEs sampled used at least one collecdive institution of financial support, and rated them very positively.

- - This paper a product of the Finance and Private Sector Development Division, Policy Research Department is part of a larger effort in.the department ro examine the impact of proactive intervention on SME performance. Copies of the paper are available free from the World Bank, 1818 H StreetNW, Washington, DC 20433. Please conta Daniele Evans, room N9-OSS, extension 38526 (78 pages). December 1994.

_The Poleif Reseac Workiog Paper Sries dissmmates the fmndhgs of waok_ n progress _to encourage the exchange_ of _ias about development issues. An objective of the series is to get the findings_ **_oid_** _quicly, even if the presentions are less than fidly polisbed. The papemr cay the nams of the authors and should be used and cited accorfingly. The fmdings, interpetations, and conclusions are tbe authors' own and sbould not be attributed to the World Bank, its Execute Board ofDrectors, or any of its member countrie_ Produced by the Policy Research Disseminaton Ccntcr
# The Republic of Korea's Small and Medium-Size Enterprises and Their Support Systems

_Linsu Kim Jeffrey B. Nugent_
# Table of Contents

|1. IntroducUon ..........................<br>I|
|---|
|11. SMEs and Sectors Under Study ............<br>..............<br>2|
|Methodology ..........................<br>2|
|Summary of the SME Sample ................<br>..........<br>3|
|<br>Summary of Industry Sectors ............<br>..............<br>7|
|<br>111.<br>Technical Support Systems<br>..........................<br>12|
|Overview............................<br>12|
|Survey of Industry Sectors ...........<br>...............<br>15|
|Conclusions ..........................<br>20|
|IV. Marketing Support Systems ............<br>..............<br>21|
|Overview..........................................<br>22|
|Survey of Industry Sectors .......................<br>24|
|Conclusions .......................<br>28|
|V- Financial Support Systems .......................<br>29|
|Overview.............. .............................<br>30|
|Characteristics of Financial Support in Korea ....................<br>30|
|Use of Financial Support Services .............................<br>35|
|<br>Conclusions .................<br>38|
|V]. The Govemance of Korea's Support System .........<br>.............<br>39<br>|
|Vil. Policy Recommendations ............<br>.........................<br>42|

# Tables

|Table 1: Small, Medium, and Large Enterprises in Korea (1963-1988) ...|...<br>45|
|---|---|
|Table 2: Variability Among Chosen Sectors .......................|46-51|
|Table 3: Sources of Collective Technical Support in Korea .....<br>......|. 52-57|
|Table 4: Lag Times of Exporters by Sector ........................|58-67|
|Table 5: Distribution of Govemment-Led<br>Funds for SMEs (1980-1990) .|. 68-76|
|Table 6: Governance Investigation: Oversight Agencies .....<br>.........|77-78|
Linsu Kim and Jeffrey B. Nugent Korea University and University of Southern California

# I. Introduction

Korea has achieved remarkable manufacturing and export growth over the last three decades.' Most observers credit this success to the performance of the country's well-known large enterprises (LEs) and corporate conglomerates _(chaeboO._ But since the mid-1970s, Korea's small and medium enterprises (SMEs) have also made important contributions.

Table 1.1 presents data on the relative shares held by small (5-19), medium (20-199) and large (200 or more) enterrises in the Korean economy over time. The role of SMEs in the Korean economy follows a "V' pattern. Adding the small and medium enterprise figures together, it can be seen that the SME share of Korea's manufactuing employment dropped from 66.4 percent in 1963 to just 37.6 percent in 1976, but had climbed back to 51.2 percent by 1988. Correspondingly, the share of manufactuing value added by SMEs dropped from 52.8 to 23.7 percent, and rose to 34.9 percent by 1988. The contnbution of SMEs to Korea's total exports has also risen substantally, since 1978. The SME share of Korean commodity exports rose from 22.1 percent in 1982 to 42.1 percent in 1990, before falling slightly in 1991 to 39.9 percent.<sup>2</sup> During the 1970s and especially the 1980s, Korea created a number of institutions and support mechanisms to encourage the development of SMEs. Indeed, several international agencies identified Korea as a leader in developing SME-support programs. Efforts to promote

**1** Korea's GDP has increased more tha9 percent per anmnm in real terms since 1965, withT manufacturing sector growth exceeding 15 percent per annum. Exports have been a driving force behind this growth, increasing at an average anmnal rate of almost 20 percent since the mid-1960s. Korea has also succeeded in diversifying exports from a base of laborintensive light industrial products to include such exports as steel, automobiles, machinery, electronics, and other high technology items.

2 In Tables L1 and I.2, SMiEs are defined as enterprises with less thn 200 employees. Elsewhere in this paper, SMEs are defined as enterprises with less than 300 employees.

3 See especially UNIDO (1986) and Nanjundan (1986).
SMEs began with promulgation of the "Small and Medium Industry Basic Law" of 1966. In the 1970s, government policy focused mainly on helping SMEs maintain operating stability and penetrate new markets. In the first half of the 1980s, emphasis shifted to the expansion of SME business boundaries, the modernization of production processes, and the support of start-up enterprises. More recently, in the wake of rapidly changing markets and technological competition, government policy has shifted again, toward helping SMEs achieve product innovation, factory automation ant computerization, and to promoting the development of rural SMEs.

This report evaluates the effectiveness of the collective and private technical and marketing - support mechanisms available to Korea's SMEs.' The focus will be on four industry sectors woven textiles, automobile parts, electronic parts, and factory automation. The next chapter describes the research methodology used, summarizes characteristics of the SMEs in our sample, and provides historical background about the four industry sectors we chose to examine. Chapter III descnrbes technical support systems used by SMEs in Korea and their effectiveness. Export marketing support systems are described in Chapter IV. Finally, Chapter V compares and contrasts the effectiveness of different support systems and derives some lessons for policy.

## H. SMEs and Sectors Under Study

# **UI.1** Methodology

The woven textiles, auto parts, electronic parts, and factory automation products sectors were chosen because, as Table 11 1 shows, they exhibit different and distinctive characteristics, especially with respect to complexity of production technology, rate of technological change, export propensity, and degree of subcontracting. Table 11.2 indicates that, in each of the four 4 These mechanisms have often been evaluated from the perspective of government and intrnational agencies (see, for example, Keddie, Nanjundan, and Teszler (1989), Kilby (1979), Little, Maznmdar, and Page (1987), and Levitzly (1985)), but seldom from the perspective of the SMEEs themselves, as done in this study.

2
sectors, SMEs play a significant role in tenns of number of firms, employment, manufacturing value-added, and exports.

Researchers obtained lists of SMEs from each sector's respective trade association. For the factory automation sector, which lacks its own trade association, researchers compiled a list of SMNEs from the Directory of Automation Equipment Manufacturers (1992). From these lists, firms were selected on the basis of a multistage stratified sampling technique in which the finn population was sampled in each of the following size groups (measured by number of workers): less than 50, 50-99, 100-199 and 200-plus. Our study samxled 122 firms in the four chosen sectors: 42 producing woven textiles, 20 producing auto part.. 20 producing electronic parts, and 40 involved in the production of factory hatomatiorn products. Table 1.3 shows the distribution of sampled SMEs. Data was collected from the chosen SMEs through interviews. To develop the inLerview protocol, the researchers visited the key organizations managing technical and marketing support systems in Korea, and interviewed knowledgeable individuals there.

11.2 **Summary** of **the** SME Sample The SMEs in our sample differ significantly across sectors in terms of ownership, manpower, technological level, degree of subcontracting, and export orientation.

Ownership. Most of the SMEs (68 percent overall) are owned by individuia entrepreneurs. About a quarter of the sample SMEs are collectively-owned (corporations and partnerships). Two firms in each sector (except for woven textiJes) are joint venures with foreign firms, while two of the SMEs in the factory automation sector are subsidiaries of large conglomerates.

The overall level of educational achievement among Korean manager/entrepreneurs is very high. Almost 75 percent of entrepreneurs in our sample have a college education and more than 10 percent have graduate education (see Table 11.4). About half of them have earned a science or engineering degree, often direcdy related to their line of business. Beyond this, however, the age and educational background of entrepreneurs at the sample SMEs reflect the charactenstics of their sectors, with the youngest and best-educated found in the technologically dynamic factory automation sector.

3
More than 90 percent of the entrepreneurs have previous job experience, usrwlly related to their present position. This confirms that technical entrepreneurs in Korea tend to spin off from their incubating organizations, facilitating the emergence of technology-based SMEs and the rapid diffusion of technology within the industry and the economy.<sup>5</sup>

**Firm Size** and Technological Level. The individual SMEs in our sample have tended to start small and grow significantly over time, all indication of their generally high level of success. Most SMEs began with less than 50 workers, but many had grown to more than 200 workers by 1991, as shown in Table II.5. Note, though, that in the woven textile sector, some 30 percent of the sampled SMEs shrunk in terms of employment between the time of start up and 1991, perhaps due to the increasing use of automatic looms. Because the resurgence of SMEs in Korea is a relatively new phenomenon, few of the SMEs in our sample go back more than 20 years. As shown in Table 11.6, most of the sample SMEs were founded in the 1970s and 1980s. Many have increased their technological capability through a long process of imitative learning. Generally the SMEs we sampled began with primitive indigenous technologies, and later upgraded both products and production processes in a piecemeal fashion through reverse engineering of existing foreign products. 6

The **Significance** of Subcontracting. Subcontracting relationships are an important means by which SMEs receive support from larger and more well-established enterprises.? Indeed, See Roberts and Wainer (1971) for a useful review of spin-off phenomena in the United States. Kim (1988) provides useful sources on the process of technical entrepreneurs spinning-off from previous employers to form new SMEs in both developed countries and in Korea.

6 Kim and his associates have studied several industries to identify the process of technological upgrading in Korea over 15 years. Their studies found a consistent pattern of orga.nic evolution over time. See Kim (1980) for the electronics industry, Kim and Kim (1985) for the machinery industry, Amsden and Kim (1989) for the automotive industry, and Westphal, Kim, and Dahlman (1985) for other industries. Kim and Lee (1987) synthesize some of these studies.

7 The term subcontractng is generally used in the conventional manner to mean an ongoing vertical business relationship between the final product assembler and the parts/components supplier. However, the term is used differently in the woven textiles 4
Korean knowledge of the Japanese subcontracting experience has led Korea to try to imitate Japan's model of subcontracting.' The Korean version differs, however, in that it usually involves only two levels as opposed to the complex pyramid of Japanese subcontracting relationships.

While only 18.6 percent of Korea's SMEs received any revenue from subcontracting in 1968, this percentage had risen to 70 percent by 1990. Of those SMEs involved in subcontracting, the percentage that depended on it for at least 80 percent of their revenues increased from a little over 60 percent in 1968 to almost 90 percent in 1990. While the incidence of subcontracting among smaller SMEs was substantially lower than for larger SMEs as recendy as 1986, the smaller SMES had virtually caught up with the larger ones by 1990.

Subcontracting appears to be negatively related to the level of experience that the firm's owners have in sales and technology. This indicates that subcontracting can act as a substitute for experience or educational background.

Special Designations. The Korean government uses a system of "special designations." In principle, SMEs given special designations should receive priority in the allocation of various forms of support from the government. In 1975, the government enacted the SME _Gyeyul-hwa_ Promotion Act to strengthen and stabilize vertical relations between the country's large assembly firms and smaller, independent parts/components suppliers. SMEs thfat received the _"Gyeydl-hwa"_ designation were generally expected to maintain a close supplier relationship with one or more larger finms. Government assignation of these _Gyeyul-hwa_ designations peaked in the early 1980s, but has since stabilized at about 330 parent firms and about 2,100 subcontractors.

Beginning in 1983 the government created the category of "Promising SMEs", to identify roughly 1,000 firms each year with the potential to become stronger and larger SMEs. To receive this designation a firm must be small (usually less than 50 workers), its operations must be essential to other SMEs (such as tool-making, dyeing, and welding), and it must have potential for growth. SMEs with a high level of exports may also receive this designation. Between 1983 sector, where it mearns.a verdcal business relationship between order-placing firms (largely traders), and fabric-supplying weavers.

See Kang and Park (1990) and Kim, Joo Hoon (1991).

_5_
and 1992, a total of 8,333 SMEs were classified as "Promising SMEs" and received special government support. By 1992, 3,521 of them had graduated from this special status, 1,174 had lost their status, and only 3,638 remained "Promiring SMEs".9 A third special designation is that of "Technically Advancing SME," designed to foster the survival and growth of small, technologically-intensive firms. Finns that invest more than 5 percent of sales revenue in research and development are eligible for this designation. The government also promotes "Technology-sharing Consortiums" in which SMEs from different sectors (and thus not direct competitors) are encouraged to share complementary technologies with each other.

Fourth, the governmen **t** argets technology-intensive imported components and products for localization. Korean SMEs that can produce import-substitutes for these items receive various preferential forms of government support. Most of these import-substitute designations were initiated in the mid-1970s, proliferated in numbers and importance through the early 1980s, and remained relatively stable through 1991.

Finally, the government established "SME Sanctuaries" to reserve certain product lines for SME production over a given period of time. The areas reserved for SMEs were due to expire in 1992, but the sanctuaies were extended for three more years after considerable debate. The number of sanctuaries had increased from just 23 in 1979 to 235 by 1989, including a number of wood and paper products, non-metallic mineral products, and rubber and plastic products.

Table 11.7 shows the number of SMEs in our sample that have received one or more of these special designations. Almost 73 percent of the 122 sample SMEs had been designated a "Proirsing SME" at one time. Less than a third of the sample had been designated part of a subcontracting relationship, i.e. the gyeyul-hwa designation. The "localization" or importsubstitute designation is even less prevalent. While 65 percent of the 20 SMEs producing auto parts and 15 percent of the 20 SMEs producing electronic parts received this status, no sample SMEs in the other two sectors did.

9 Ministry of Trade, Industry, and Energy and the Association of SME Cooperatives, _Jungso Giup Jiwon Jedo (SM_ Support Schemes), March 1993, page 238.

6
II.3 Summary **of** Industry **Sectors** Woven Texties. Korea's woven textile industry dates back to the establishment of a local silkworm experiment station in the 19th century. Later efforts to develop local cotton and wool textile production during the period of Japanese occupation (1909-1945) gave a significant boost to the industry. The industry is highly concentrated in Korea's Taegu region, approximately 200 miles south of Seoul. Large-scale modern spinning mills and synthetic chemical fiber plants were built in the region in the 1950s and 1960s. In 1965 the govenment made the Taegu region an industrial zone for woven textiles, and by 1989 the region housed 78.2 percent of Korea's woven textile firms.

By 1963, the woven textile sector had as many as 1,260 establishments (each with five or more workers), employing a total of 54,518 workers. This single industry accounted for 13.6 percent of manufacturing employment and 7.9 percent of manufacturing value-added. Despite rising labor productivity, relatively rapid growth in other industries, and virtually no increase in the total number of textile-weaving establishments, employment grew to almost 90,000 by 1973. Between 1973 and 1979, Korea began to increase its share of world textile markets at the expense of Japan. The number of textile weaving establishments rose by about 70 percent to 2,126 and employment rose to 170,871, thereby increasing the sector's share in manufacturing employment to slightly over 8 percent. Since 1979, while the nmnber of firms and the sector's real output have continued to grow rapidly, employment has fallen in both absolute and relative terms. This has been largely a response to the country's rapid increase in real wage rates."' As a result, in 1988 the woven textile sector accounted for only a little over 5 percent of manfacturing employment and 3.6 percent of manufactring value-added. Although labor productivity in this sector has increased steadily, it has generaly done so in small increments based on minor changes in technology, relying on gradual replacement of old equipment. Shuffle-loom technology remained virtually unchallenged unil the mid-1980s, when the switch to shmttleless looms begant1 10 Among all countries reporting data on real wage rates since 1969, Korea's increased the most rapidly between 1970 and 1989 [World Bank Development Report, 1992].

**11** Amsden 1989, chapter 11.

7
Textile weaving is a typical SME industry, since one can easily start up a weaving business with a few looms. Small weaving establishments were dominant early on, but their influence waned during the 1960s and 1970s with the emergence of large chaebols. With the help of govermment policies, SMEs have made a comeback since the 1980s revealing the same V-pattern common to many aspects of SME developmem in Korea. Defining SMEs as those establishments with less than 300 employees, the SME share of woven textile employment fell from 60.1 percent in 1963 to 52.6 percent in 1973, before rising to more than 60 percent again in the 1980s. A sinilar pattern appears in the SME share of value added.

The Korean govemment has strongly encouraged the development of woven textile exports. As early as 1961, the government designated woven textiles a "Strategic Export Sector", and offered financial support through the newly-created SME bank. In 1962, the government introduced an Export Inspection Law to ensure high quality exports. The govermnent-inspired Woven Textiles Exporters Cooperative was established in 1965, and helped to encourage information-sharing among its members. In a further push to promote exports beginning in 1965, the government stipulated that existing finns could only expand capacity for products that would be exported, and t'hiat new textile firms must export at least 70 percent of their output. The growth of Korea's woven textile exports has slowed since the late 1970s due to obsolete machinery, increasing competition, and growing protectionism in the US and other industrial countries. In response, the government enacted the "Textile Industry Modernization Law" in 1979. This law targeted the woven textile and dyeing industries for structural adjustment, upgrading to higher value-added products, foreign technology transfer, modernization funds, and improved support systems, especially for technological assistance.

Korea's woven textile exports are increasingly dominated by SMEs. Tn 1983 the SME share was 21.3 percent, only slightly higher than the average 20 percent SME share of total manufacturing exports. By 1991, the SME share of woven textile exports was 60.6 percent, more than 20 percentage points higher than the 39.9 percent SME share of all manufacturing exports. Thus, even though the woven textile sector has been declining in overall manufacturing importance in recent years, it has been of growing importance in terms of SME exports, especially since 1988.

8
Automobile Parts and Componens. Before 1960, Korea's auto parts sector existed only to meet replacement demand for imported military vehicles and to rebuild civilian vehicles from military equipment. Beginning in the 1960s, however, the govermnent designated the auto industry a "strategic sector" and began to aggressively promote its development. In 1962, Korea began assembling Japanese Nissan cars from semi-knock down (SKD) and complete knock-down (CKD) kits. Following the Korean economy's deliberate and dramatic shift toward promotion of heavy and chemical indurtries beginning in the early 1970s, Korea's automobile production jumped from 28,000 in 1970 to 123,000 in 1980 and 1.5 million in 1991. Meanwhile, the government set progressively higher local content requirements and designated automobiles one of the nation's ten strategic exports in 1979.

Auto parts firms naturally tend to congregate near major automobile assembly firms, rather than in a single geographic region. Many firms are clustered in Ulsan and Pusan in the southeast, near Hytuni Motors, while odters are scattered in Inchon and the west-entral region near Kia and Daewoo Motors. A significant number of auto parts firms are also located in the southwest near Asia Motors.

The Korean govermen provided a blueprint for linkages between the large _chaebol_ auto assemblers and the smaller auto parts firms, specifying which items were reserved for SME subcontractors. While the system was modeled on Japan's multi-layered subcontracting pattern, only two basic layers developed in Korea: between auto firms and prime subcontractors, and between prime subcontractors and a large number of secondary subcontactors. Auto parts firms usually specialize in one or, at most, a few principal products. The older firms, especially the exporters, generally produce relatively simple mechanical products. Over time, however, new firms have emerged to produce and export increasingly sophisticated products, often of an electrical nature.

The SME role in Korea's auto parts industry has evolved unevenly, although the basic V- pattern of SME finms in Korea can be seen. The SME share of employment in the auto parts sector fell from 100 percent in 1963 to 79.3 percent in 1973. During the subsequent period of extremely rapid growth in the industry, the SME share of employment plummeted to 31.2 percent, before rising again to 58.4 percent in 1988.

9
Auto parts produced by SMEs are not primarily exported directly, although many are ultimately exported as part of finished automobiles. Auto parts of SMEs began to qualify for targeted export finance when the government made automobiles a strategic export industry in 1979. At the same time, important segments of the auto parts industry were reserved for SMEs and designated for development via subcontracting. Virtually all the sampled SME firms in this sector received special designations as localization/import-substitute or subcontractor firms, and with them special forms of government support. As a result, Korea's auto parts exports have grown rapidly, from 37.1 million in 1983 to 417.2 million in 1991. Meanwhile, the SME share of such exports hat grown from 9.6 percent in 1983 to 44.1 percent in 1991.

Electronic Parts and Components. In response to market opportnities created by an import substitution policy, Korea's electronics industry began assembling foreign components and parts wita equipment purchased from overseas in the 1960s. The government soon enacted the Electronics Industry Promotion Law and, like textiles, designated the sector a strategic export industry, offering incentives for achieving ambitious production and export targets. As in the auto parts industry, the governnent also set increasing localization targets for electronics production. The local content requiements for black and white television sets, for instance, increased from 30 percent in 1966 to 50 percent by 1969 and 90 percent in 1975.

As a result of these policies, the industry, concentrated near the city of Seoul, grew more than 50 percent each year from 1966 to 1976. The industry received another boost from direct foreign investment by multinational coxporations, who increasingly trned to Korea for electronic parts and components. In 1963 the sector consisted of 143 establishments employing over 7,500 workers. Employment grew moderately (at least by Korean standards) unil 1973. Employment more than quadrupled between 1973 and 1979, however, and doubled again between 1983 and 1988 to reach 1,100 establishInents with more than 138,000 workers.

The relative role of SMEs in this sector exhibits the classic V-patterm observed in other sectors. The SME share of employment fell sharply from 77.8 percent m 1963 to 26.1 percent in 1979. By 1988, however, the share had risen to 30.7 percent. In the case of value-added, however, the SME share fell continuously from 84.8 percent in 1963 to 16.7 percent in 1988, as large Korean firms (LEs) began to produce such capital-intensive products as color picture tubes, 10
audio and video-tape. and semiconductor products in the 1970s and 1980s. In fact, these three products accounted for 60 percent of electronic parts production in 1990. As indirect exporters, electronics parts firms have qualified for at least some export incentives. Although electronics accounted for almost four percent of the country's total exports by the late 1970s, most electronics exports were manufactmred by large joint ventures and foreign subsidiaries that soured laborintensive products in Korea. Between 1983 and 1991, however, electronics parts exports increased almost ten-fold, while the SME contribution to this total increased at an even ster rate. The SME sbare rose steadily from 19.5 percent in 1983 to 24.8 percent in 1991. In 1991, SME exports of electronic parts accounted for 8.3 percent of the country's total SME exports.

Factory **Automao** Until the 1970s, Korean policy favored the importation of foreign capital goods rather than the development of a local capital goods industry. However, by the late 1980s, labor unrest, high wages, and the shortage of factory workers had dramatically increased demand for factory automation. The production of factory automation equipment in Korea soared from $98 million in 1985 to $686 million in 1990. In 1989 the government announced a policy of further strengthening high-tech industries, including factory automation, to strengthen Korea's inrnational competitiveness through higher productivity.

The factry automation sector encompasses a range of machinery and electronics products and is dispersed around the country. Major items include mnmencally-controlled machine tools and industrial robotics, computer-aided design and computer-aided manufacuring systems, programmable logic controllers, flexcible manufacturing systems, and other automation-related products. SMEs mainly produce numerically-controlled machine tools and automation-related products.

Because the factory automation industry does not have its own trade association, reliable statistics on the number of enterprises in the sector, employment, value-added, and exports, are not available. Fragmented iformation indicates the same V-pattern shown in other sectors: SMEs dominated production of factory automation products early on, often reverse-engineering foreign factory automation equipment. When local demand increased sharply in the late 1970s, large factory automation equipment users (such as shipbuilders and automobile assemblers) entered the industy, often by licensing foreign technologies, and became the major suppliers of factory 11
automation equipment in the 1990s. Consequently, the share of LEs in factory automation employment rose from 0 in 1973 to 73.1 percent in 1979 but fell back to 51.7 percent in 1983 and 31.4 percent in 1988, reflecting the strong emergence of SMEs in this sector.

# III. Technical Support Systems

# **M.11** Overview

Technology improvement is an important means by which finms strengthen their market competitiveness. SMEs are at a disadvantage in this area compared to LEs, however, because they often lack both the qualified technical personnel and the resources to invest heavily in R&D or to acquire foreign technology. While therefore, extenal technical support systems play a key role in promoting the growth of SMEs, as shown below their use varies considerably according to differences in process technology. This chapter discusses Korea's collective technical support systems (state, public, and private non-profit)<sup>12</sup> , based on data collected from the four selected sectors.

Although some collective agencies date back to the 1960s, these early sources of technical support were not SME-oriented. Most agencies extending support to SMEs appeared in the late 1970s and early 1980s, as the growing importance of SMEs in Korea's economy was recognized. These tended to be state or public organizations with a general broad-based mandate. Most recently, in the late 1980s, industry-specific non-profit R&D centers began to appear as the technical needs of SMEs became more complex.

Major State and Public Agencies. Korea offers an extensive network of agencies providing collective technical support. This support is generally in the form of technical assistance, training programs, information services, or joint research opportunities. Most technical support agencies offer a combiration of services, often supported by financial and tax incentives.

12 State support refers to government technical support institutes staffed by civil servants. Public support refers to institutes established by the state but not staffed by civil servants. Non-profit institutes are often established jointly by the state and industry associations to provide specific types of technical support.

12
Korea's network of collective technology support agencies (see Table m. 1) is headed by the Industrial Advancement Administration (IAA), under the Ministry of Trade, Energy, and Industry. This state agency was created in 1973 to coordinate the functions of technical support agencies for both large and small firms. Under LAA's jurisdiction are the National Industrial Technology Institute (NITI) and eleven Regional Industrial Technology Institutes (RITIs), which provide technical extension services directly to enterprises. These institutes function as follows: (1) They receive applications for technical assistance from firms. (2) Following the Japanese practice, they then mobilize technical experts from networks of outside technical experts based in academia or other public and private institutions. Their own staff accounted for only 11 percent of the technical experts employed in 1991. (3) They follow a "family doctor" type systm, in which particular technical experts are assigned long-term to SMEs so that technical ties can be maintained over a long period of time. The number of SMEs receiving technical assistance from NIT! increased from 158 in 1982 to 884 in 1987, and 1,307 in 1992.13 The Small and Medium Industry Promotion Corporation (SMIPC), established in 1979, is the most important public agency providing technical support exclusively for SMEs. Among its many activities, SMTPC runs a piant modernization program to help SMEs improve production, a business conversion program to help SMEs change from labor-intensive to technology-intensive production, and a collectivization program to promote sharing of facilities such as water treatment plants among SMlEs.

Unlike NITI and the RTs under IAA, SMIPC provides not only technical assistance, but also managerial and technical training, technical information services, and fnancial support. When an SME receives approval for plant modernization, for example, SMIPC provides preferential finance to undertake plant modernization, offers training programs, and extends technical and information assistance to implement the project. SMIPC also acts as an intermediary for SMEs that want access to foreign technology and expertise. It mantains nine branches - throughout Korea and four overseas offices in Europe, Japan, the United States, and most 13 Advancement Administration Gisul Jido Upmoo Pyunram (Technical Assistance Manual) 1992, P. 72.

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recently China. SMIPC also boasts a large institute for technical and managerial training, and maintains contacts with foreign technical agencies in order to recruit retired foreign technical experts.

Public Research Institutes. The Korea Institute of Industrial Technology (KAITECH) was established in 1989 as an integrated manufacturing technology research institute assisting SMEs. KAITEC!is technical services are more advanced thban those of NMI and SMIPC. It offers its own R&D and polytechnical education programs and lhas six development centers designed to transtfr technologies developed within KAITECH to industries. In addition, KAITECH promotes joint research with both LEs and SMEs. The government subsidizes the R&D expenses of participating ftmis, R&D instittes, and universities. It is difficult to assess the impact of KAITECH at this stage, since the institute is still in a formative period.

The Korea Productivity Center (KPC), which became a public organization in 1986, also offers technical support related specifically to factory and office automation. Its services include technical assistance, training, and information related to automation. The Korea Institute of Design and Packaging (KIDP) is another public institution with a specific mission: to help firms, particularly SMEs, improve industrial design and packaging. This helps SMEs advance from original equipment manufacturing to exports under their own brandname.

Several public research institutes also offer technical services to SMEs, such as the Korea Institute of Science and Technology (KIS1), and the Korea Institute of Machinery and Metals (1D1I). The Industrial Technology Information Center, established 1962, is a public institute that collects, processes, and disseminates technical information for industry. SMEs that subscnbe to this service can access the center's database.

Non-Profit **Instites.** Another category of research institute is the non-profit institute, founded jointly by industry associations and the government. The Korea Standards Association (KSA), with 11 regional offices, assists SMEs mainly through its educational/training programs and publications on quality standards. With government support, some industry associations have also established their own inspection and testing institutes. There are now five of these in vanous sectors.

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Industry associations such as the Electronics Industry Association of Korea (EIAK) and the Korea Association of Machinery Industry (KOAM) provide technical training and information services to their respective industries. Some industries, with partial government support, have established their own R&D institutes. The Korea Textile Industry Technology Institute (KOTrIT, the Korea Automotive Technology Institute (KATECH), and the Korea Electronics Technology Institute (KEI), are good examples. Although KATECH AND KETI are to young to assess their long-term impact (both were formed in 1989), they are expected to play a major role in assisting their respective industries. KOTITI, in contrast, dates back to 1978, when the government established a technical training institute for the texfile industry in Taegu.

As shown in Table M.2, 8,513 SMEs reported receiving same form of technical assistance in 1992. Private groups assisted the largest number of these finms (45.2 percent). The bulk of this pnvate assistance came from other parent firms, suppliers, and buyers. The total mimber of SMEs assisted by pnvate groups may be even higher, since the figures in Table 1II.2 for private agencies are based on what appear to be conservative estimates, while those fo. the public and non-profit agencies are actal figures.

The next most important assistance providers were state and public agencies (44.1 percent), of which NI and SMIPC played the key role. While state and public agencies were consulted by SMEs almost as fequently as private sources, however, they were evaluated as only moderately useful. General non profit agencies ranked a distant tiird, providing assistance to just over 10 percent of the 8,513 frms. While these conclusions are useful, additional insights are available by loiking in more detail at some key differences in the use of technical support across industry sectors.

**m.2** Survey of Industry Sectors

Hypotheses. The conceptal framework for stegic behavior of SMEs and the evolution of sectors reviewed in Chapter II, as well as the review of collective technical support systems in 111. 1 above, helped us to formulate a set of hypotheses about collective technical support systems in Korea. Our survey then tested these hypotheses. The basic hypotheses we began with were as follows: 15
* As an economy matures overall, its technical support systems are likcely to become more elaborate. Similarly, in less technology-intensive sectors, finns are likely to obtain some technical knowledge through simple processes such as "learning by seeing." However, "learning by research" should become a more important source of technology in technology-intensive sectors.

* During early periods of industrialization, when Sme problems tend to be relatively simple and general in nature, broad-based technical support agencies are likely to be able to provide useful assistance to SMEs. During later years of industrialization, however, industry-specific support agencies with R&D capabilities are likely to provide more useful assistance to SMEs.

* In less technology intensive sectors SMEs lacking internal capabilities are more likely to compensate for their internal deficiencies by using collective support services from the general purpose system than SMEs with greater internal capabilities. In technology intensive sectors, SMEs with greater internal capabilities are more likely to use support from industry-specific R&D institutes, as their internal capabilities enable them to assimilate and adapt technologies provided by them.

* Order-placing prime contractors are likely to play a key role in SME product improvement and innovation, .hlie equipment suppliers may play an important role in process improvement.

* Export-oriented SMEs are more likely to use collective technical supports than inwardly-onented SMEs, since exportng SMEs have to sustan their international competitiveness.

* The concentration of SMEs in a geographic region will facilitate interactions and make the diffusion of technology more rapid among them.

* SMEs that use one type of support service are more likely to use other types of support for two reasons. First, some collective support agencies provide multiple support services for a single project. Second, different forms of support are often related. For instance, export-oriented SMEs that receive marketing support are likely to receive process modernization finance to improve productivity. To modernize, they will also need technical information, assistance, and training.

Woven Textiles. The production of woven texties involves the least complex technology of the four sectors surveyed, and the rate of technological change tends to be relatively low. Cost advantges generally derive from either low labor costs or high rates of capacity utilization over long periods of time, or both, Table m.3 shows that more than 75 percent of the woven textije 16
firms did not introduce any new products during the three-year period from 1989 to 1991, compared to only 5 to 10 percent of those in the other sectors. Moreover, all of the new products introduced in the woven textile industry in 1991 were either imitations of foreign models or new applications of existing technology.

Table 1.4 presents 17 different sources of external technical support for product upgrading. Textile weaving firms relied mainly on various forms of "learning by seeing" such an imitation of competitors' products and observation at international exhibitions. The order placing frm and local buyers were also important sources of product improvements for woven textile firms. Foreign equipment suppliers are another important source of product ideas, because process improvement and product quality improvement are closely linked in this sector. In contrast, despite government efforts, the number of textile weaving SME that mentioned public R&D institutes as a source of ideas was low (only 6 of 42) compared to the other sectors in this study. Table 1.4 also shows how sample SMEs evaluated the usefulness of these sources of product ideas. Most solurces received an average score of close to 4 on a 5-point scale, indicating the relative satisfaction of users.

In Table _M.5,_ which examines the source of ideas for process improvements, textile weaving firms again listed "firms engaged in similar business activities" as their most common source of ideas. The frequent practice of learning by seeing among these firms may be partly due to the fact that the firms are clustered around Taegu, making close interaction possible. Foreign cqwupment suppliers, who can bring about radical process improvements through introducmg new - equipment -- such as shuttleless looms in the 1980s were also frequently mentioned. In contrast, no SMEs mentioned public technical support agencies for process improvement.

Table E.6, which provides more detail on the effectiveness of collective technical support agencies, indicates that very few Smes in the woven textiles sector used the services of colPtctive support agencies for technical information, technical assistance, and training. None used them for joint or contractaal research. On the other hand, industry-specific institutions such as trade associations and KOTITI received the most frequent mention, suggesting that industry-specific technical expertise is helpful to at least some SMEs producing woven textiles.

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**Automobile Parts.** While SMEs in the auto parts sector frequently introduce new products to meet the demands of assemblers and keep up with changing auto technology, the stimulus for these new products comes largely from the auto assembly firms that place orders with the SMEs, rater than from within **the** firm. This lack of in-house technological expertise among auto parts SMEs is evident from Table II.3, which shows only moderate levels of product newness and originality. Assemblers rely heavily on Japanese suppliers for more technologyintensive parts and components.

There are, however, clear indications that Korean auto parts SMEs are making strong efforts to upgrade their technological capability. For instance, all of the 20 sample SMEs in this sector made use of one or more of the sources of technical support identified in Tables A.4 and E.5 for product and process improvements. As with woven textiles, order-placing firms (who are final assemblers in this case) were used most frequently. Unlike the woven textiles sector, however, the order-placing final assemblers provide active technical assistance to auto parts firms in order to ensure the quality of their parts. The assemblers are more effective in assisting SMEs in product improvement than in process upgrading, since their processes differ significantly from those used by parts manufacturers. Since technical specifications are determined by the final assemblers, interational exhibitions and other imitative forms of technical assistance are of **little** value to auto parts makers.

Auto parts SMEs also tned to collective technical support agencies for help with product and process improvement more frequently than SMEs in the other sectors. Foreign technology transfer (usually via licensing) was also used relatively frequently, and evaluated relatively highly, by the auto parts firms.'<sup>4</sup> A variety of technical support agencies were used by auto parts SMEs seeking technical information, technical assistance, taining, and joint/contractual research (see Table **m.6).** In terms of specific agencies, the SMIPC as well as the IAA (in the form of the NMI 14 The finding that foreign equipment suppliers are important sources of technology is consistent with other studies. For instance Kim and his associates (e.g., Kim, 1991 and Kim and Kim, 1985) consistently show that foreign equipment buppliers play a crucial role in transferring product and process technologies. Their expertise and experience enable them to provide users with crucial product information.

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and RITMs) most frequently supplied the technical assistance, while the Korea Productivity Center and the Korea Standards Association provided the most training. Nevertheless, the services of these agencies were ranked as only moderately useful. It seems that the car assemblers' need for increasingly sophisticated parts and components has motivated SMEs in this sector to aggressively seek product innovations. Although they turned frequently to collective support systems in this quest, the more generally-oriented collective support systems could not meet all their needs. The new industry-specific trade association, KATECH, is therefore expected to improve collective support systems in this sector, as did KOTITI in the textile-weaving sector. In seeking product innovation, a few auto parts SMEs also actively engaged in joint and contractual research with government technology support agencies.

Electronic Parts and Components. Our survey indicates that SMEs producing electronic pars seldom produce new or highly original products. Consequently, assemblers rely heavily on Japanese suppliers for their more technology-intensive parts and components (Table E13). Critical components of Korean-made personal computers, for instance, are largely made in Japan.

Again, ordtr-placing firms were the most firequent source of ideas for product and process miprovements, although their technical help was not viewed as very useful. This may be because there are far fewer parts and components in the final electronic products than in the automobile industry, and the performance of parts mounted on printed circuit boards tends to be more stable than that of the mostly mechanical parts and components in an automobile. SMEs in this sector are also less active than those producing auto parts in seeking technical assistance from collective support agencies, and find the usefulness of collective support low. The low use of collective technical support systems and high use of international exhibitions suggest that electronics parts SMEs are followers rather than leaders in the international marketplace.

Factory Automation. Technology plays a crucial role in the factory automation sector, and our survey found that SMEs in this sector make the greatest use of the variety of technical support systems available to them. Table **m.3** shows the high degree of both newness and originality in Korea's factory automation products.

Buyers (both local and foreign) and international exhibitions are the most important source of product ideas in this sector. Buyers often order custom-designed automation systems to meet 19
their specific needs, and international exhibitions are another excellent source of information on cutting-edge technology.

To develop new products based on ideas acquired from buyers and international exhibitions, factory automation SMEs seek multiple sources of technical assistance, from public R&D institutes to foreign technology licenses. Tables A.4 and Il.S show chat public agencies were the most frequent sources of technology (15 of 40 for product change and 7 of 40 for process improvement) with a high average usefglness score of 4.0 for both. In addition, informal links between industries and universities appear to be strong and cost-effective: SMEs identify individuals within universities with relevant expertise to their technical tasks and hire them temporarily on a moonlighting basis.'<sup>5</sup> Factory automation has become a popular buzz word, and many collective technical support agencies offer automation-related assistance. Table m.6 shows that technical support agencies have been fairly well used by the sample SMEs in this sector. KAITECH, in particular, an integrated manufactunng R&D institute, was used most frequendy by SMEs in this sector. As technology becomes too complex to imitate in this sector, sources of support with high levels of expertise become increasingly relevant to the SMEs. Although the factory automation sector does not have its own trade association, its SMEs benefit from the services of KOAMI, the machinery industry association. KOAMI is listed as the most frequent source of technical information, while KSA and KPC offer relevant training programs.

# **m.3** Conclusions

The survey findings lead to several conclusions.

1) SMEs in technologically dynamic sectors use collective technical support systems more frequently than those in less dynamic sectors. Therefore, technical support systems are likely to play an increasing role as Korean technology moves upscale and becomes more difficult to imitate. The increasing enforcement of intellectual property rights will also contribute to the rising importance of indigenous technical support systems.

1S This finding is consistent with previous studies. See Kim (1993) for a detailed discussion of the evolving links between the R&D community and industry in Korea.

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2) While state and public agencies are frequently used, SMEs generally report that their services are only moderately useful. This may be related to the fact that state and public agencies lack manufacturing know-how and cannot compete with foreign equipment suppliers in furnishing detailed blueprints and assisting industry with critical production problems.'<sup>6</sup> Some public agencies also suffer from bureaucratic inertia, and are unable to change in response to quickly aeveloping industry and market needs. In the saile vein, technical information disseminated by technical information centers was not very relevant to the needs of most SMEs.

3) To address this problem, industry-specific, non-profit technical extension centers need to be strengthened. Their usefulness is already clear. In our survey, SMEs in the woven textile sector listed KOTITI, the sectoi-specific R&D center in Taegu, as their most frequently used and most effective source of technical assistance. The recent establishment of industry-specific R&D centers for auto parts producers (KATECH) and electronics parts producers (KETI) are expected to help address the need in these sectors.

4) Another example of the need for specific problem-solving is the frequent mention made of the value of assistance from individual technical experts, often from Korean uniiversities or retired experts from abroad. It would appear to be more cost-effective for SMEs to identify individual engineers with relevant expertise and hire them on a temporary basis to solve specific problems than to enter into formal research contracts with institutions.

_5)_ The prevalenice of private technical support and its relatively high usefulness ratings hold another policy lesson. While Korea's rich network of public technical support systems plays an important role, it would seem equally important to allow private technical support systems to develop, since they are obviously meeting an important need. The importance of order-olacing firms and equipment suppliers is well demonstrated in our survey. Encouraging groupings of similar enterprises and the formation of industryspecific associations would also be helpful.

6) In terms of which SMEs make the best use of technical support systems, our data found the size of the SME to be a much more important factor than any "special designation" that the industry may have received. For instance, despite the fact that designations like "Promising SME" were designed to help relatively small SMEs gain access to supports, our data shows that larger SMEs not only use collective technical support systems more frequently, but consistently assign them a higher usefulness score. While it is important to promote these larger SMEs, it is equally if not more important to promote dynamic smaller firms. Collective technical support agencies should develop new measures to help smaller SMEs emerge, overcome "infant mortality, " and develop successfully.

# IV. Marketing Support Systems

16 See Krim (1989) for a detailed discussion of public research instimutes in Korea.

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# IV.1 Overview

According to standard economics textbooks, marketing should take care of itself after quality is assured and prices are competitively set. In practice, however, marketing costs are far from negligible, and at:ractive market opportunities do not necessarily yield immediate exports for a particular firm or country. As a result, assistance in penetrating international markets can be of especially critical importance to small and medium enterprises, who lack the in-house resources of larger firms. This is even more true in less developed countries, where current and reliable market information is hard to get and transaction costs may be high.

The Korean government recognized early on the importance of export support for domestic industries, developing a variety of institutions to assist firms with export marketing in the 1960s. The largest provider is the Korea Trade Promotion Corporation (KOTRA), a government agency establisthed in 1962 to offer a wide variety of services including information about foreign market opportunities, market research, assistance with trade fairs and overseas marketing trips, and identification of other sources of services, such as export insurance. In its early years, KOTRA mainly helped large firms, but as these firms became more self-sufficient, its activities have focused more on SMEs. KOTRA operates in 65 countries, and has a membership of 7,000 Korean enterprises who pay membership fees based on firm size. KOTRA established the Korea Trading Company (KTC) in 1969 to provide import/export agency services to SMEs. Unlike KOTRA, however, KTC operates on a commercial basis. The two periods of greatest activity for both KOTRA and KTC were the early to mid-1970s (followed by a decline between 1979 and 1982) and between 1983 and 1990.

Not all the important sources of collective marketing support are of government origin. In the private sector, the Korea Traders Association (KTA) is a large association that represents the interests of Korean trading firms from all sectors of the economy. KTA focuses on public relations and lobbying, but also encourages information-sharing among its members. Another source of collective marketing support is the Cooperative Association of SMEs, founded with government support in 1962. The Cooperative has a network of industry associations, some of which operate independently and provide a variety of marketing services, varying with the 22
activism of the individual association. The activities of several of the more active associations parallel those of KOTRA, such as information-sharing, introduction of foreign buyers, and training, although the associations have the advantage of being industry-specific.

Each of the four industry sectors in our survey also has its own association andlor cooperative that can provide marketing assistance. The woven textiles sector has a woven textile cooperative and a textile exporters association, both established in the 1960s. The Korea Automotive Cooperative (KAIC), established in 1962, hosts an annual auto parts exhibit in Korea and mru permanent showrooms in both Chicago and Seoul. The electronics sector has both the Korea Electronics Industries Cooperative, formed in 1967, and the Electronic Industries Association of Korea (EIAK), formed in 1976. Both organizations provide market research and information services, and facilitate participation in trade shows. Finally, SMEs in the factory automation sector can turn to the Korea Association of Machinery Industry (KOAMI, founded in 1969, which provides many export support services and hosts an International Factory Automation and Precision Instruments Show.

Many SMEs in Korea also rely on private trading agents to handle their exports, which can reduce the need for collective marketing support. The character of these private agencies and the nature of SME/agent relations vary considerably, however. In the woven textile sector, for instance, the relationship between an exporting SME and its agent is so close that it may be considered subcontracting, while for auto parts and factory automation firms, the relationship with export agents is more independent. Often SMEs tun to local agents because they do not have adequate experience or foreign language skills to deal with foreign buyers on their own.

It should be noted that when asked about their level of exports, SMEs usually report only those products sold directly to a foreign buyer. In other words, if the buyer is a local Korean agent, the sale would likely not be reported as an export, even if the product is ultimately destined for export.<sup>17</sup> Thus, exports reported by SMEs in our sample are generally what economists refer to as direct exports, while sales to a local Korean agent would be indirect exports.

17 Many auto parts producers, for exaWle, do not know whether the parts they produce for large assemblers will end up in exported automobiles or not.

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# IV.2 Survey of Industry Sectors

# A. Hypotheses and an Aggregate Pattern

We began our survey of SME marketing support with certain hypotheses about the behavior of SMEs.

e Firms in sectors that have a long history of exports, and where private exporting arrangements (such as subcontracting and local trader networks) are well developed, are likely to have proportionately less need for collective marketing services. This implies that firms in the woven textiles sector, with its relatively long exporting history, would need public marketing support less than firms making electronic parts, for instance, who have a shorter export history and less well-developed networks to turn to. In a similar vein, we expected that firms in more mature exporting indust **i** es like woven textiles would be less likely to change their choice of exporting chanmels than those in less experienced exporting sectors, who are on a steeper learning curve.

* Within this framework, we expected to find an industry cycle at work. In other words, firms that begin exporting early, relative to other firms in the same sector, would rely relatively more on collective support at the outset of their export activity. As firms in the sector gain experience, the reputation of their products in overseas markets would grow and export markets in the sector would thicken. Thereafter, firms that follow them into the market would tend to have less need of collective supports. Instead, they would be likely to increasingly rely on direct interactions with agents and foreign buyers:

* We also expected to find a firm cycle at work. Within a given sector that already has export experience, fims that are relatively new to exporting would logically tend to use collective marketing services more heavily than others. Similarly, if a sector's product mix (and presumably buyers) changes frequently, as is the case in factory automation, firms in the sector would be likely to rely on collective support services more heavily.

* Finally, we looked at firm size. Even though the need of small fihms might be greater, we expected that large firms would tend to use public marketing support more than smaller firms, simply because they find it relatively cost-effective on a per-unit basis. Small finms seemed likely to find subcontracting arrangements a simpler and more cost-effective export channel.

Our survey data indicates an interesting time lag pattern between the founding of the firm 7i.e. start-up) and the firm's first export. For those sample SMEs that have ever exported, Table _IV.1_ indicates that the average number of years between start-up and first export is 6.3 years across all sectors. Across all sectors, the lag from start-up to first export accrued from 9.9 years for the most mature firms, to 1.7 years for the more recent firms. Looldng just at factory 24
automation, the time lag for exporters in the " 16+ " age group was 14 years, compared to just 2.4 years for firms in the "1 to 8" age group. Clearly, as the presence of Korean exports in a given industry becomes accepted in overseas markets, it becomes easier for younger and less experienced firms to enter these markets.

We now examine how our hypotheses held up in the four sectors surveyed, looldng for common patterns and sources of differences between them.

Woven Textiles. Because Korean woven textiles have a long trading history, exporting firms in this sector can take advantage of the strong network of subcontractors and traders that developed relatively early in the Taegu region. Consequently, the importance of collective marketing agencies was found to be relatively low.

A relatively high 73.8 percent of the sample textile-weaving firms/fare exporters - with exports accounting for 70% or more of sales for half the sample. Table IV.2 examines the relationship between SME characteristics and choice of export channels. The entries represent the average relative importance on a scale of 1 (low) to 5 (high) assigned by SMEs to one of four means of gaining access to export markets: through the fim's direct efforts, using foreign buyers, using non-profit sources of collective marketing support, and subcontracdng. In a mature exporting industry like woven textiles, one finds a relatively small amount of change over time in the choice of channels and support systems.

Table IV.2 also confirms that private sources of marketing support play a more important role in this sector than do collective agencies. For instance, "subcontracting" and "foreign buyers" received consistently high marketing support scores, while "support of non-profit agency" (i.e. collective marketing support) received low scores.

Consistent with our hypotheses, Table IV.3 shows that a greater number of services were used and valued relatively highly by those textile firms that began exporting relatively early on compared to other finns in this sector. Early exporers found such services as introduction of foreign buyers, participation in overseas trade fairs, exploratory marketing trips, and overseas distribution of promotional materials relatively useful. The table also shows higher use of some 25
of these services by large exporters in this sector, perhaps due to their higher level of exports and thus lower unit costs.

Both KOTRA and the industry associations were used by about a quarter of all woven textile exporters, and received quite respectable usefulness scores. Early exporters, however, tended to rely more on industry associations than on KOTRA for support. In addition, the KTA has been used by about 10 percent of all SME exporters in the woven textile sample group, and its services were highly rated.

Automobile Parts and Components. The Korean government has itervened more in the auto parts sector than in any other sector in this study, designating numerous products as special import substitutes and creating guidelines for subcontacting relationships. Despite strong production relations between auto parts firms and auto assemblers in Korea, however, their ties are not as important to export marketing as in Japan's multilayered subconting system, where large auto firms provide strong support to firms all the way down the subcontracting chain.<sup>1</sup> ' By 1991, 60 percent of the samples auto parts fixms exported dirdy. However, direct exports exceeded 20 % of sales for only one fourth of these. Table _IV.4_ looks into the relatonship between characteristics of auto parts finrs and choice of export channels. Given the lack of a direct foreign buyer network in the auto parts sector, it is not surprising that the foreign buyers received only the minimal 1.0 rating in terms of importance. At first export, SMEs in this sector ranked "support of a non-profit agency" (i.e. collective marketng support) relatively highly. As expected, however, the table shows that as firms gain exporting experience, the relative importance of foreign buyers and direct efforts increases, while the importance of collective marketing support decreases.

is As a result, Kim Joo Hoon (1991) and Kan and Park (1990) urge the Korean government to go fiuter in encouraging the development of a multilayered subcontacting system.

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Although early exporters ranked the usefulness of collective marketing support relatively highly, Table IV.5 indicates that a higher proportion of late exporters than early exporters report ever using individual collective marketing -services. There is also a clear difference in the usefulness of these services. In this sector, import-export agencies, international bidding, and joint venture technology ties consistently receive relatively high usefulness ratings while information, introduction of foreign buyers, distribution of promotional materials abroad, and attendance at foreign trade fairs receive relatively low ratings. KTC was used by only one of 12 SME auto parts exporters who evaluated it highly. The industry association and KOTRA each were used by four fis, but evaluated less highly.

Electronic **Parts and** Components. The electronic parts sector shows a relatively high export propensity. Almost three quarters of the sample electronics parts makers in our sample were exporting by 1986, and more than half of these exported at least 70 percent of total sales. Earlier exporters tend to make parts for consumer electronics while more recent exporters make parts for industrial electronics.

Table IV.6 shows that first-time electronics parts exporters rated collective marketing support more highly than SME exporters in any other sector, while foreign buyers ranked relatively low. This is consistent with the considerable change in product mix, technological complexity, and market niche common in this sector, which would seem to require more complex marketing rer-zements and more marketing support. Conversely, first-time exporters in this sector do not rely heavily on their own efforts or direct contacts with foreign buyers. As in other sectors, however, the relative importance of both direct efforts and foreign buyers increases as firms gain exportng experience, while the importance of collective marketing support gradually declines. Also as in other sec.ors, long-time (early) exporters and larger exporters rate collective support and foreign buyers as relatively important. Although subconracting is relatively important for both early and late exporters, there is less difference between its importance in the current period than at first export, when smaller first-time exporters rely more heavily on subcontracting as an export channel. Table IV.7 confirms the relatively high importance of collective marketing support for both early and late exporters in this sector. The collective 27
marketing services most valued by the early exporters were information, buyer introductions, and both domestic and international trade fairs. As for the value of specific agencies, none of the sample SMEs in this sector used KTC, and very few turned to industry associations for support. KOTRA was used by more than 50 percent of all exporters, 67 percent of early exporters, and 62 percent of large exporters, although usefulnes **s** cores were not high.

Factory Automation. Table IV.8 compares export channels used by early and late exporters, and support **s** everal of the hypotheses postulated at the beginning of this chapter. First it shows the increasing importance as firms mature of both direct export efforts and contacts with foreign buyers among early exporters in this sector, although the level of direct efforts was high to begin with while contacts with foreign buyers were relatively low. Conversely, subcontracing becomes less important as firms gain export experience. The importance of collective marketing support has generally held steady at modest levels. And as we found in other sectors, both direct efforts and collective marketing supports are more important to large exporters than smaller ones. The forms of collective marketing support used most frequently vary considerably depending on whether a firm is an early or late exporter, as shown in Table **_IV.9._** Early exporters rely on relatively general services such as international trade fairs, marketing trips, and distribution of promotional materials. Large exporters, not surprisingly, are more likely to have used a wider range of services, but those they value most highly are relatively specific services such as help in obtaining foreign standards and help arranging joint ventures with foreign firms.

As for the use of specific agencies, factory automation producers in the sample (like electronic parts producers) did not use the services of the KTC, while more than half of the exporters used the services of KOTRA. More than half have also turned to their industry association for assistance. All three of these agencies received average usefulnes **s** cores, with little variation from one ype of exporter to another. As found in other sectors, however, all agencies are more likely to be used by firms in an early stage of exporting, as well as exporters with more employees and larger exports in terms of both absolute value and percentage of sales.

# IV.3 Conclusions

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The sector-by-sector survey in the preceding section shows a close relationship betwem export marketing choices and sector and firm characteristics that is genc rally consistent with the hypotheses made at the outset. As with other types of SME support, collective marketing support received relatively low use and usefulness ratings compared to private channels of support. Despite these generally lower ratings, Table IV. 10 shows that more than half of all SMEs in our survey used some form of collective marketing services. While KOTRA's services were used most widely, KTC ranked highest in terms of usefulness.

We close by summarizing the major conclusions that can be drawn from the survey data in this chapter: 1) Korean SMEs have a wide choice of marketing support systems, both private and collective, to use in mitigating their export marketing problems. The channels they chose varied in predicrable ways according to the characteristics of the firm and the sector they are in.

2) Of these characteristics, the two basic determinants of export marketing channels are the presence of preexisting networks at the initial stage of expansion into export markets, and the importance of the SME's prior endowments at the time exporting begins.

3) Another important predictor of choice of marketing channels and strategies is timing; i.e. whether a firm begins exporting early or late in the industry's export cycle, and whether the firm has been exporting a relatively long or short time. In the case of both the sector and firm exporting cycle, it generally holds true that the earlier the firm is within the cycle, the more important it finds collective forms of marketing support.

4) Other important characteristics that help determine export marketing choices are the size of the firm and the availability of private support in the form of subcontracting networks and readily available foreign buyers. Where available, private sources are preferred over collective sources of marketing support.

_5)_ Collective marketing support, on the other hand, is relatively useful to firms that have fewer pnvate options and those that have relatively large export volumes. In either case, it generally seems to hold true that the more sector-specific services are generally viewed as the most useful.

V. FinEancl Support Systems 29
# V.1 Overview

Financial assistance is the most critical support system of all for SMEs. Without it, other forms of support are of little use. Finance is important at every stage in a firm's life cycle, from start-up through expansion, penetration of foreign markets, modemization and technological acquisition, to the firm's ever-changing needs for working capital. As a result, most SMEs in Korea and elsewhere identify finances as their most important constraint.'<sup>9</sup> In Korea, government financial assistance is widely available in many different forms. This chapter will describe the main systems of financial support, and how SMEs use and evaluate them.

# V.2 Characteristics of Financial Support in Korea

There have been two periods of strong growth in Korea's financial markets. The first was between 1965 and 1972, a period of financial liberalization and high interest rates. This was followed by a period of financial repression, lasting until the second growth period began in 1980.20 The importance of private financial support has risen during the high growth periods, while collective financial support g&'ined ground during the slower 1970s. Yet even during the 1980s, when financial markets developed rapidly, credit was not easy to come by due to governent efforts to lower the debt-equity ratio of Korean firms, considered high relative to most other countries.

The relative importance of different types of financial support has changed over time and across sectors. Both technological development fimds and ventare capital for encouraging start-up of technology-intensive firms became available only in the mid-to-late 1980s, for example. At the same time, funds available for special purposes, such as cooperative activities, have declined. A. **Distinhing** Private from Collective Support

> 19 See KIET (1992).

**20** For a detailed analysis of these change5 and policy variations, see Cho (1989).

30
Anywhere that government intervention in fmancial markets is pervasive, as it is in Korea, it is difficult to distinguish between sources of private and collective financial support. The task is even more difficult in Korea for several reasons.

First, many commercial sources of credit, such as banks, were nationalized until the early 1980s, and thereafter have remained subject to strict regulation with respect to both interest rates and credit allocation. Second, several financial institutions are partly private and partly public. Third, public funds in Korea often go through private channels and private funds through public channels. Fourth, public guarantees of private contracts and financial instuments play an important role in Korea. Finally, there are various areas of coopcration and complementarily between the private and public sectors.

Despite these difficulties, such distinctions are useful for comparative and analytic purposes. We will therefore draw the line between them as descrnbed below.

Private: Five types of external finance are considered "private financial support" for the purpose of this study:

- 1) equity funds from public or private offerings of shares;

- 2) corporate bonds;

- 3) credit from commercial banks;

- 4) credit from relatively unregulated non-bank financial institutions (the "curb" market); and

- _5)_ credit from relatives and friends.

Equity fimds and corporat bonds (sources 1 and 2 above) are generally less important to SMEs because they are subject to severe information asymmeties, and hence suffer from adverse selecton and moral hazard problems that are easier for large finms to overcome. Corporate bonds have become an important source of finance for larger, corporate SMEs during the 1980s, however.

Credit from the "curb market", (source 4) has generally been the most important source of private finacial support for Korean SMEs. Curb market credit is actually an aggregation of different components, including a) rudimentary credit markets based on reputation and family relations but with no tradable assets; b) rotatig credit schemes in which interest rates to 31
depositors and lenders rise with duration;<sup>21</sup> c) informal commercial paper markets;<sup>22</sup> d) the curb market proper;23 and e) semi-regulated financial institutions such as mutual savings and loan funds, popular funds, and private finance companies. While these "curb markets" developed in the 1960s and gained strength ir, the 1980s, they were severely repressed from 1972 to 1978, when the govermnent tried to channel all funds through the more highly-controlled banking system.

More difficult to distinguish from collective sources are those cases in which SME loans come from commercial banks but are subject to compulsory credit allocations, or cases involving commercial bill discounting and other means of financing SMEs that are supported by central bank guarantees and incentives. In both cases, tlese methods are treated as private rather than collective financial support in the present analysis.

Collective: Three sources of financial support are considered 'collective" in this study. They are: 1) specialized financial institutions and specialized funds witiin non-specialized financial institutions, catering to SMEs; 2) government-supported venture capital companies that finance technology-based SMEs; and 3) credit guarantee facilities.

# B. Main Agencies Providing Fmancial Support

21 According to Cole and Park (1983), a 1971 national survey showed that 71 percent of Korean households participated in such schemes, though the rate may have declined somewhat since then.

nt These markets, in existence since 1972, are operated by chaebol-owned finance companies and regulated by the Bank of Korea, although less so than commercial bank credit. They have their own credit rating system which, by relating interest rates to credit ratings, encourages timely repayment.

23 The curb market is a large-scale informal credit market with its own collection agency, brokers, and real estate agents. The latter serve both as a source of fuuds and as providers of expertise in assessing the value of real estate offered as collateral.

32
Korea's specialized collective sources of financial assistance, and their increasingly proSME orientation, are summarized in Table V.1. The most important source of SME financial assistance is the SME Restructure Fund, created in 1978 to stabilize the financial situation of SMEs having trouble getting credit. This fund was expanded in the late 1980s to facilitate structural adjustments within the SME sector.

Several industry-specific funds, merged to form the Industrial Development Fund in 1986, have played an important role in financing equipment modernization and technology development. The National Investment Fund, created in 1973 to finance the government's push into heavy and chemical industries, now spends 30 percent of its funds on financing SME purchases of locallyproduced capital goods. The newest fund, the Special Facility Fund, was created in December 1989. Half its money is used to fiace plant modernization of SMEs. The Mutual Aid Fund, created in 1984 with both government funds and deposits in mutual aid banks, finances joint purchasing activities among different SMEs.

Table V. 1 also shows that the share of such special and targeted funds in total SME credit remains modest despie their growth, at generally less than 10 percent.' Most of these funds are channeled to SMEs through the SME Bank. This largely governent-owned bank (created in 1961 and formerly known as the Industrial Bank of Korea), finances its activities through lowinterest loans from the Bank of Korea, deposits, and govement-guaranteed bond issues. Thus, the special SME fuids do not account for all of the SME Bank's activities?1 According to Table V.2, loans directly from the SME Bank accounted for less than 10 percent of the total loans received by SMEs at the end of 1990.26 The Citizens National Bank, established in 1963, is financed in ways similar to the SME Bank, and is again largely government-owned. CNB caters primarily to Korea's smaller SMEs 24 The exceptionally high share shown for the first half of 1990 appears to be an aberration attributable to incomplete recording of bank credit.

25 See fIET (1992).

> 26 Some funds from the SME Bank destined for SMEs are also channeled through other banks.

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and to household businesses. As shown in Table V.2, it accounted for another 3.8 percent of the total outstanding loans to SMEs. Yet commercial and non-bank financial institutions are far more important sources, with 21.8 percent and 47.2 percent of the total, respectively. Local banks also account for almost 10 percent of the total. These banks are found mainly in small towns, and have been privately-owned from the beginning, although they are highly regulated.

Central Bank regulations have contributed substantially to the large SME allocations under Korea's highly regulated regime. During the 1970s, conunercial banks (then owned by the government) and local banks were required to allocate 30 percent and 70 percent, respectively, of their new credit to SMEs. These requirements were later increased to 35 percent (and in 1992 to 45 percent) and 80 percent, respectively. Actual lending by both commercial and local banks increased sharply from 32.7 percent and 57.1 percent, respectively, in 1981 to 37.8 percent and 73.2 percent in 1989.27 The highly-regulated regime began to change in November 1993, when the government announced a major financia **l** iberalization program. It is not yet clear what effect this change will have in practice on SME access to finance.

Commercial banks are induced to finance SMEs in several additional ways. One of the most important means is Central Bank discounting of the commercial bills of SMEs and export Emance. Second, the credit guarantee system plays an important role for SMEs lacldng collateral. The Korean Credit Guarantee Fund (KCGF) was created in 1976, and has provided credit guarantees almost exclusively to SMEs since 1983. During the 1980s, well over 75 percent of the KCGF guarantees, and 60 percent of the amounts guarnteed, have been for fms with less than 50 employees. Meanwhile, the number of SMEEs with oustanding credit guarantees increased from 15 in 1980 to more than 46,000 in 1990, while the amounts outstanding rose from 598 million to 5230 billion won during the same period. Yet even despite this rapid increase, in 1990 only about 20 percent of the loans received by SMEs were guaranteed by the KCGF or its KIET (1992).

Interest rates on export finance used to be far below those on other bank loans. Perhaps because of the susceptibility of this practice to charges of dumping, these differentials have been substantially reduced or even eliminated in recent years.

34
counterpart for technology-intensive sectors, the Korea Technology Credit Guarantee Fund. As shown in Table V.3, officially-guaranteed loans were just 13.1 percent of SMB loans in 1988, while loans with non-official guarantees (such as from firms, relatives, and friends) accounted for 26.1 percent of the total.

Table V.4 shows a high variation in interest rates across segments of Korea's financial markets, indicating that financial markets are still highly fragmented. While the various differentials narrowed considerably during the partial and gradual financial liberalization ot ale 1980s, they are still substantial, especially between unregulated financial (or curb) market sources and regulated bank loans.

# V.3 Use of Financial Support Services

On the basis of our review of sector characteristics in Chapter II, and the brief summary of financial services in Korea provided above, we began this investigation of financial support for SMEs in our four target sectors with the following hypotheses:

* At start-up, SMEs lack experience and thus are likely to have little access to formal sources of external support. As a result, they are likely to be heavily dependent on their own capital and that of relatives and friends. The few formal sources of financial support readily available to start-up SMEs, namely funds to support working capital needs and exports, are likely to be heavily used, whether they are collective or private.

* When given a choice between private and collective sources of financial support, SMEs (especially smaller ones) are expected to make relatively greater use of private financial support. This is because collective support involves a high level of paper work and accounting that is especially difficult for SMIEsT as well as larger loan amounts and longer loan duration. Collective financial support is therefore likely to be used relatively heavily by the largest SMEs and ixher larger enterprises. For longer-term credit, however, since private financial support is less well-developed, qualifying SMEs may tam more often to collective support.

* Among collective financial support providers, the Korean Crwdit Guarantee Fund (KCGF) and the Citizens National Bank (CNB) are especially oriented to small SMEs and, in the case of the KCGF, to those that lack collateral. Therefore, smaller SMEs are expected to make relatively greater use of these two agencies.

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We distinguish between the use of different types of funds, while drawing comparisons across sectors and support sources. We look at both the level of use and the degree of usefulness of various forms of financial support, measured on a scale of 1 (low) to 5 (high).

Startup finance: Consistent with our first hypothesis, our survey indicated that among the sample SMEs, the main sources of finance at start-up were the firm's existing capita!, as well as capital from informal sources such as relatives and friends (Table V.5). Private loans were another source for at least six sample SMEs, as were parent firms for a few others. As expected, collective sources of support (sources 1 to 4, 11, and 12) were lightly used at start-up, tapped by only 6 of the 122 surveyed firms. Looking across the four sectors, users of collective financial support were limited to the relatively high tech sectors of electronic parts and factory automation.

A surprisingly high 21 sample SMEs, or about one-sixth of the sample, reported using general bank loans at start-up (i.e. source 5, "other' bank loans). However, over half of the users of such loans are in the woven textiles sector, which has several features that may make such loans more feasible. First, these textile firms have the highest degree of geographical concentration (around Taegu), fostering the development of information networks conducive to credit monitoring. Woven textile producers also have the lowest rate of technological change, perhaps making them relatively low-risk. Finally, these firms also have a proven record of growth in both sales and exports.

The last column of Table V.5 also shows the average usefulness of the various sources of financial support. With the exception of two rarely-used collective sources, (governmentsupported venture capital firns and the SME Bank's Restructure Fund), all sources averaged high scores of at least 4 on a 5-point scale.

**Expyrt** Finance: Table V.6 provides data on the use and usefulness of eleven different sources of export support among sample SMEs, and then aggregates these sources into three general categories: pnvate, commercial, and parent firm.<sup>29</sup> Almost all exporting SMEs made use

29 Support for overseas investment is included in these aggregates since in each case this involves finance for an exporting SME. Nevertheless, since these funds were used by only four SMEs, their exclusion would have little effect on the results.

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of at least one source of support. The two most common sources of export finance are trade finance (used by 46 SMEs) and the specialized fund for export industry facilities (used by 31 SMEs), followed by trade bills and export loan funds. Only one sample SME reported receiving export finance from a parent firm, compared to five who received start-up finance from a parent firm (as shown in Table V.6).

The private sources of export finance tended to be used by slightly more SMEs, and received slightly higher usefulness scores an the collective sources. However, once again, the sources were al' regarded as very useful (i.e., receiving average usefulness scores higher than 4) with the exception of two rarely used sources: the Fund for Penetrating New Overseas Markets and the Circular Loan Fund of the SME Bank.

**Working** capital: SMEs have access to, and appear to make use of, a much greater variety of financing sources for working capital than for other purposes, as shown in Table V.7. The average nmmber of sources used is well over three per firm. Of the 17 sources listed, only two were nrt utilized by any sample SMEs, and ten sources were used by eight or more sample SMEs.

Private i-ancial sources such as commercial bill discounts, overdrafts, and general loans, accounted for more than 75 percent of the total use. In this table, collective sources of support are divided into two groups: one relatively pure group composed of directed -:. dit channeled through either the SME Bank or the Korea Development Bank, and the other (labeled semicollective), consisting of subsidized and highly regulated bank funds of a more general nature, such as the CNB and the Mutual Fund. While fumds from virtually all sources received high usefulness scores, averaging 4.0 and above, private financial sources received slightly higher usefulness scores than collective and semi-collective sources.

Process Modernization and Technology Development: The mnmber of sources of collective financial support for process modernization (mainly equipment) is relatively high. Table V.8 lists thirty sources, with each SME on average maling use of a relatively high 2.2 sources of assistance. Virtually all financial sources received usefulness scores of at least 4.0.

Along with process modernization, Korea also has an array of collective of technology development loans. Unlike for process modemization, use of these funds is quite modest. Only 70 firms, or 57 percent of the sample, reported the use of even one such source. The most 37
commonly cited sources were the Fund for IndustriaL Development, the Fund for Improvement of SME Technology, and the Fund for Upgrading Industrial Technology, but even these were used by only 8, 13, and 11 sample SMEs, respectively. Frequency of use varies more across sectors in this area more than it does for other types of financial support. Under 50% of the sample woven textile finms, reported ever using technology development funds.

Credit Guarantee System: Table V.9 presents data on the use of four different sources of credit guarantees. On average, the sample SMEs have each made use of just over one such source. All four sources receive high average usefulness scores of nmore than 4.5, reflecting the extremely high evaluation of this form of financial support system by its users. V.4 Conclusions Despite the fmancial constraints and risks that induce many SMEs to minimize their need for external finance, access to financial support is of crucial importance to SMEs in Korea. The major conclusions that can be drawn from the survey data in this chapter are as follows: 1) Korean SMEs hav,: access to a large number of sources of financial support, and many are widely used. Although individual supports are often lightly used, overall use is high relative to both other support systems in Korea and to the use of financial support by SMEs in other countries.

2) With very few exceptions, both private and collective sources of financial support ranked high in terms of usefulness, i.e. they were rated 4.0 or higher on a 5-point scale by the SMEs. Private financial support received slightly better marks than collective financial support, however.

3) Despite the highly regulated and segmented financial market in Korea, SMEs do not appear to be starved for fnancial support. During the financially repressive 1970s, however, there was some evidence that financial constraints were a more serious problem. Much of Korea's success is attributable to the provision of strong incentives for loan repayment.

4) Korean SMEs are rarely dependent on a single source of financial support, and they often have a choice between collective and private forms of support, and among various collective fiums.

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In view of this wide variety, one might suspect that most Korean SMEs would not be severely impacted by denial of an application to one particular financing source. Table V.13 examines this hypothesis by asking the question "what would have happened if the SME did not receive financial support'?' Seventy-four percent of the sample indicated that if financing were denied, they would simply seek an alternative source of finance. Only 10 percent responded that they would give up the project. In other words, most Korean SMEs seem increasingly able to pick and choose among alternative sources of financing.

# VI. The Governance of Korea's Support Systems

Korea is a leader in developing SME support programs, and its SME support systems sometines appear to be more effective than those in other developing countries. Overall, our findings confirmed that the Korean government had developed extensive and ambitious SME support systems, and that the SMEs in our sample had a high awareness of these programs. Although, many programs are lightly used. What aspects of Korea's collective support systems account for the successes and failures of its collective support programs?

This section analyzes governance issues in Korea based on in-depth interviews with key staff members of nine support providers: eight public support agencies and one industry association. The analysis of governance focuses on four distinct mechanisms for inducing 'good" performance: hierarchical controls, human resource policy, voice (i.e. SME participation), and market tests. The eight agencies include Korea's tbree most important SM finmcial institutions; The SME Bank, Citizens National Bank, and the Korea Credit Guarantee Fund; the three most importantexport marketng support institutions: Korea Trading Company, KOTRA, and the Korea Traders Association; and the two most important technical support agencies: KAITECH and SMIPC. The industry association is t'he Korea Electronic Parts and Components Association (KEPCA).

**m;erarbical** Controls. Each of the agencies listed above has several oversight agencies, or bureaucmrtic principals, that monitor and supervise the agency, shown in Table VI. 1. At the pre-operative stage they exercise control mainly through the evaluation and approval of agency

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budgets. All except KTA and KPCA, which are membership organizations, must obtain budgetary approval from their bureaucratic principals.

At the operative stage, hierarchical principals control support agencies through regulations and personnel appointnents. The latter is an important means of control in that the bureaucratic principals appoint the executives of all support agencies except those of the aforementioned associations. Although political networks play an important role appointments, Korea is unusual in that competence is about equal in importance to political conmections. At the post-operative stage, the bureaucratic principals evaluate the performance of support agencies mainly through performance audits. All agencies are regularly audited and receive performance evaluationis from their bureaucratic principals. As Table VI.2 shows, controls are probably the most important sources of good governance for both financial and technical support systems.

**Human Resource Policies.** The delivery of quality service cannot be attributed solely to hierarchical supervision of oversight agencies. Organizational behavior literatare postulates that the performance of organizations is a function of both motivation and ability, which suggests that human resource policies are also important to organization performance. Indeed, Table VI.2 identifies human resource policy as the most important source of good governance for all the public support systems.

Most of the sample support agencies (with the exception of SMIPC and KEPCA) emphasize educational qualifications, experience, and competence in their hiring practices. This enables these support agencies to recruit employees who are more qualified than those of the private sector. SMIPC and KEPCA, however, recruit new employees largely on the basis of personal contacts.

The average salaries at the agencies vary widely, from 8 million wonlyear at KEPCA to 20 million won/year at KTA. The average salary level of all sample support agencies (16.1 million won/year) is 50 percent higher than the industry average of 10.4 million wonlyear, according to a 1992 wage survey undertaken by the Ministry of Labor. Not surprisingly, members of these agencies enjoy both high self-esteem and social prestige. In contrast, employees of KEPCA, where salaries average only about half those of the other agencies and are below the industry average, have lower self-esteem and prestige.

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"Voice" of SMEs within Agencies. We found the "voice", or participation of SMEs within the support agencies, very limited. Only three of the nine support providers have SME representation on their boards. In the absence of direct representation, the support providers interviewed use weaker and more indirect mechanisms to reflect SME voice. The SME Bank, KTA, KTC, and KAITECH undertake regular surveys to identify the needs of their client SMEs. SMIPC and KCGF have their own individual systems of monitoring the "voices" of their actual and potential clients.

Market Tests. Support agencies vary in the :xtent to which they charge fees for their services, but in alnost all cases, the fees charged by collective support agencies in Korea are nominal. It therefore appears that fees do not constitute a barrier to use of support agency services for SMEs.

The three sample financial institutions charge no fees for their mgement, legal, tax, and other consulting services, and only direct costs for their training programs. Among the export marketing support agencies, KOTRA charges fees for subscriptions to its periodicals, but these account for only a smal fraction of its budget. KTA, a membership association, charges an annual membership fee of 110,000 won. By contrast, KrC operates more like a private firm and charges actual costs plus margin. Among technical support agencies, KAITECH charges its clients only direct costs for its services, and this income accounts for just a small portion of its budget. SMIPC charges only a percentage of its direct costs to clients.

Competition Among Support Agencies. Although collective support agencies have some advantages over private ones, such as the ability to offer services at below-market prices, there appear to be very few restrictions on private sector participation in the provision of financial, marketing, and technical support. As a result, the collective support agencies in our sample perceive significant competition from other institutions and private firms.

In the area of financial services, the SME Bank and CNB are theoretically in competition with private banks and non-bank financial institutions in offering services to SMEs. Yet in practice, the WME Bank and CNB receive very litme competition in handling the highly desirable low-interest rate "strategic funds" that have grown in relative importance in recent years. In the case of marketing, collective support providers face more substantial competition from the private 41
sector. Although no private firms offer service as extensive as those of KOTRA and KTA, private general trading companies are strong competitors and their services are often more up-todate and specific to the needs of the individual exporter. In the case of technical support, there is much less competition from the private sector. Although large principal contractors often provide technical assistance to SME subcontractors on an ad hoc basis, this practice is less common between secondary contractors and their subcontractees. Also, technical collective technical support agencies charge such low fees for their services that private suppliers have trouble competing with them.

# **VII Poicy Recommendations**

This detailed survey of 122 SMEs in Korea and related analysis, leads to certain conclusions about SME support policies: 1) SMEs, more than larger firms, face genuine externality problems in gining technical knowledge, marketing information and advice, and financing. Considering the favorable effect of past government policy favoring large firms, and the growing advantage of SMEs in terms of flexibility, technical efficiency, and the ability to fill market niches, it would seem that government support for SMEs is also likely to yield ample benefits. In apparent recognition of this, the government introduced several additional measures for SME support in 1992 and 1993. These included an upward adjustment of the IOU discount ceiling and the allocation of an additional 500 billion won (US$625 million) for SME fnance in 1992 alone.

2) The institutional governanoe stucres of SME support agencies in Korea appear to be a factor in the relative success of SME support services. Compared to other developing countries, the multiplicity of use of SME support systems in Korea, and the relatively high values attached to them, are commendable.

3) Finally, despite overall high usage levels, there are many SMEs that have not used any type of collective support in a certain area, or if they have, were not satisfied. Our survey suggests several specific measures that might be taken to improve SME support in Korea.

* SME support providers should take steps to strengthen the "voice" of SMEs in their organization **s** o that SMEs can better exert pressure to improve compatibility between SME needs and support.

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* Industry associations should build up their human resource base through higher salaries and better conditions so that they can attract the same high quality personnel as ouner collective support providers. To accomplish this relatively quickly, for instance, the government could commit itself to matching the contributions of association members on the condition that the recipient agency accept certain specified reforms.

* Technical support systems for SMEs deserve the highest priority in Korea at this stage in its development. Technical support is not only the least available from the private sector but also the most likely to grow in importance given the increasing complexity and specificity of industry's technical needs. In this regard, as an industry evolves in response to technical and market changes, it is imperative that support systems evolve accordingly to ensure that SME assistance is relevant and timely. Recent attempts to create industryspecific R&D institutes in Korea appear to be an important step in this direction.

* A relevant lesson from the woven textile experience is that it is wise to locate R&D support centers near clusters of SMEs in the same industry. Institutions such as KATECH and KETI would do well to offer national networks of local support providers, to assure that their services are readily available to geographic clusters of SMEs in the same industry.

* In the design of delivery systems,there are significant tradeoffs between the benefits of specificity and comprehensiveness. Narrowly focused agencies have the benefit of being able to concentrate on the most efficient way of achieving a single objective; they can also hire geuiine specialists, and can reduce the trasaction costs of preparing and reviewing applications for support. On the other hand, agencies with a broader mandate can take advantage of economies of scope, can more easily develop national networks of local support providers, and can serve a broader cross-section of firms, tu enhancing the agency's viability. Choices should be support-system specific and perhaps also industryspecific. Technology support probably has the greatest need to be industry-specific. Financial support, given the fbngiitity of money, probably needs the least specificity.

* Our survey provides evidence that collective support providers play a more important and catalytic role in the earlier years of both finn and industry cycles, a time when alternative sources of support may be less available. Therefore, proposals to encourage greater private sector SME support in the later stages of firm and industry cycles should be considered. Collective suppliers should charge fees sufficient to cover service costs at later stages, leveling the playing field between collective and private support providers. Even in cases where support services need to be provided at nominal fees, provision of services could sometimes be contracted out to private providers on a competitive basis. Finally, even if private providers of a given service do not exist, the collective service providers could be privadzed later.

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* Market tests and competition in the provision of SME support should be encouraged wherever possible, and private and commercial sources of support should be provided whenever appropriae. The credit guarantee system is a good example. Efforts should be made to encourage support providers to pay more attention to the needs of small SMEs, given the fact that most of the support systems are more frequently used by large SMEs than by small ones.

* The creation of geographic concentrations of producers and support providers in certain specific regions appears to be affected more often by historical accident than by conscious policy. Nevertheless, because of the relevance of spatial external economies and agglomeration effects,30 appropriate regional concentrations should be encouraged by public policy whenever possible.

30 See especially Scott (1988) and Arthur (1989).

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Table **I. 1**

# Small, Medium, and Large Enterprises in Korea: Manufacturing Shares ( 1963-1988)

||Class (by number<br>of workers)|||||||||
|---|---|---|---|---|---|---|---|---|---|
|Share of<br>Manufacturing<br>Establishments|Small<br>(5-19)<br>Medium<br>(20-199)|80.4<br>18.3|77.9<br>19.8|72.2<br>23.4|61.7<br>.2.4|57.9<br>35.7|59.2<br>36.2|_56.7_<br>39.2|56.9<br>39.5|
||Large<br>(200+)|1.3|2.3|4.4|5.9|6.4|4.6|4.1|3.6|
|Share of|Small<br>(5-19)|29.0|22.2|12.2|8.0|7.5|10.1|10.3|11.1|
|Manufacturing<br>Employment|Medium<br>(20-199)|37.4|32.0|27.2|29.6|30.6|36.1|39.6|40.1|
||Large<br>(200+)|33.6|45.8|60.6|62.4|61.9|53.8|50.1|48.8|
||Small<br>(5-19)|19.3|12.1|5.6|3.6|4.2|4.6|4.7|4.9|
|Share of||||||||||
|Manufacturing<br>Value-Added|Medium<br>(20-199)|33.5|23.6|21.6|20.1|22.2|24.0|26.8|30.0|
||Large<br>(200+)|47.2|64.2|72.8|76.3|73.5|7L.4|68.5|65.1|

Source: Economic Planning Board, _Report of the Mining and Manufacturing Census_ (1963, 1968, 1973, 1978, 1983) and _ReporT on Mining and Manufacturing Survey_ (1976, 1986).

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Table 11.1

# Variability Among Chosen Sectors

# (a) In terms of Technology

<!-- Start of picture text --> Complexity of Production Technology<br>Unit or Large batch or Continuous<br>small batch mass production process<br>High Factory automation<br>Electronic parts<br>Rate of<br>Technological Medium Auto parts<br>Change<br>Low -Woven textiles<br><!-- End of picture text -->

# (b) In terms of Subcontracting and Export Propensity

<!-- Start of picture text --> Degree of Subcontracting<br>l__________ IHigh Medium Low<br>Woven textiles<br>High<br>Medium Electronic<br>Export parts<br>propensity<br>Auto parts<br>Low<br>Factory Automation<br><!-- End of picture text --> 46
Table [1.2

# Share of SMEs in the Sectors under Study (1990)

|Sectors||SME Share|||
|---|---|---|---|---|
||Number<br>of Firms|Employment|Value<br>added|Exports|
|Manufacturing<br>average|98.3|61.7|44.3|45.5'|
|Factory<br>automation-|99.5|93.0|85.6|20.2|
|Auto parts|97.5|66.5|48.3|44.1|
|Electronic parts|94.1|31.8|17.5|24.4|
|Woven textile|98.1|53.2|67.8|60.6|

- Note: 1988 figure - 1991 figure 'These figures are for the machine tool sector in 1988.

Source: The Korean Sm?all and Medium Industry Promotion Corporation (SMIPC).

Table 11I.3 Distribution of SMEs in Sample <!-- Start of picture text --> Number of Finns<br>Factory Auto Electronic Woven<br>automation parts pans textiles<br>Number of Employees (unit/small batch) (mass/large batch) (continuous process)<br>< 50 18 4 4 8<br>50-99 13 7 5 10<br>100-199 6 4 8 16<br>> ;z00 3 5 3 8<br>Tota 40 20 20 42<br><!-- End of picture text --> 47
Table **11.4**

# Age **and** Education **of** SME Entrepreneurs

# **NUMBER** OF FIRMS

||Woven<br>**te3lle**|Automotive<br>part|**Eleronic**<br>**ut**|**FAct=**<br>**automaton**|**ToI**|
|---|---|---|---|---|---|
|**AGE**||||||
|30s|5|||5|10<br>(8.2%)|
|40s|15|_5_|9|21|50|
||||||(41.0%)|
|5Os|15|10|,|11|41|
||||||(33.6%)|
|60s|_5_|_5_|5|3|18|
||||||(14.7%)|
|70s|2||1|3|3|
||||||(2.5%)|
|AVERAGE AGE|50.38|54.20|53.40|47.45||
|EDUCATION**(years)**||||||
|**6**|1|||1|2|
||||||(1.6%)|
|9|1||||1<br>(.8%)|
|12|8|1|3|1|13|
||||||(10.7%)|
|14|1|||1|2<br>(1.6%)|
|16|28|18|17|28|91<br>(74.6%)|
|18|3|1||9|13<br>(10.7%)|
|AVERAGE|14.93|15.90|15.40|16.05||
|EDUCATION||||||
|TOTAL FIRMS|42|20|20|40||

4t
Table **11.5**

# Growth of Firm Size in Four Sectors

|Employment Size<br>at Start-Up|Employment S<br>149<br>_50-99_|ize in**1991**<br>100-199|200**+**|**TO!al**|
|---|---|---|---|---|
|Woven Textiles|||||
|1-49|_5_<br>6|4|_5_|20|
|50-99|4<br>1|0|0|**_5_**|
|100-199|2<br>4|4|1|11|
|200 +|1<br>0|1|2|4|
|Total|12<br>11|9|8|40|
|Auto Parts|||||
|149|3<br>5|2|5|15|
|50-99|1<br>1|1|0|3|
|100-199|1<br>0|0|1|2|
|200 +|0<br>0|0|0|0|
|**Total**|5<br>6|3|6|20|
|Electronic Parts|||||
|1-49|4<br>5|_5_|1|15|
|50-99|0<br>0|4|0|4|
|100-199|0<br>1|0|0|1|
|200 +|0<br>0|0|0|0|
|Total|4<br>6|9|1|20|
|Factory Automation|||||
|1-49|17<br>10|4|1|32|
|_50-99_|0<br>1|2|2|5|
|100-199|0<br>0|0|0|0|
|200+|**0**<br>**0**|**0**|**0**|**0**|
|Total|17<br>11|6|3|37|

49
# **Table 11.6**

# Age of **Sample** SMEs **by Sector**

|||De|cade**founi.e**|**d**|||
|---|---|---|---|---|---|---|
||1950s|<br>**l9COs**|**1970s**|**1980s**|**19Os**|**Total**|
|Woven<br>Textiles|3 (7.1)|<br>5 (11.9)|15 (35.7)|18 (42.8)|1(2.3)|42 (100)|
|Automotive<br>Parts|0|4 (20.0)|9 (45.0)|7 (35.0)|0|20 (100)|
|ElwCtroDic<br>Parts|0|2 (10.0)|10_(50.0)_|8 (40.0)|0|20 (100)|
|Factory<br>Automation|2 (5.0)|<br>6 (15.0)|8 (20.0)|23 (57.5)|f (2.5)|40 (100)|
|Iotal|**_5_**(4.1|) 17 (13.9|) 42 (34.4|)<br>_56 c45.9)_|2 (1.6)|122<br>(100)|

50
# **Table** II.7

# Distribution of Special Designatlions by Sector

||"Pro<br>n|mnisig SME"<br>%|**Part**<br>Subc<br>Netw<br>n|of<br>ontractig<br>ork<br>%|Loca<br>(Imp|lization Sector<br>ort Substitute)|Total<br>Sample|
|---|---|---|---|---|---|---|---|
|Woven textiles|26|50.0|1|2.4|0|-|42|
|Automotive parts|19|95.0|18|90.0|13|65.0|20|
|Electronic parts|19|95.0|13|65.0|3|15.0|20|
|Factory automation|25|62.5|_5_|12.5|0|-|40|
||89|73.0|37|30.3|16|13.1|122|

51
Table 11.1

# Sources of Collective Technical Support in Korea

.Government Agencies Industrial Advancement Administration (IAA) which also operates the: National Industrial Technology Institute & 11 Regional Industrial Technology Institutes (NII (RITI) Government Inspection and Testing Institute Public Agencies (receiving government support) Small and Medium Industry Promotion Corp. (SMIPC), with 9 regional branches Korea Academy of Industrial Technology (KAITECLH) Korea Productivity Center (KPC) Korea Institute of Industrial Design and Packaging (KIDP) Other Public R&D Institutes, such as: Korea Institute of Science and Technology (KTST) Korea Institute for Machinery and Metals (KIMM) Industrial Technology Iformation Center Non-Profit Institutes (Government-Industly Alliances) Korea Standards Association (KSA) 5 Regional Inspection and Testing Institutes Industry-Specific Associations, such as: Electronics Industry Association of Korea (EIAK) Korea Association of Machinery Industries (KOAMI) Industry-Specific R&D Institutes, such as: Korea Textile Industry Technology Institute (KOTrII) Korea Automotive Technology Institute (KATECH) Korea Electronics Technology Institute (KETI) 52
Table 111.2

# Suurces of SME Technical Assistance (1992)

||Number of SMEs|%|
|---|---|---|
|STATE AND PUDLIC AGENCIES (total)|3,753|44.1|
|Industrial Advancement Adninistration (IAA)<br>(including NITI and RITIs)|1,402|16.5|
|Small and Medium Industry Promotion Corporation (SMIPC)|1,921|22.6|
|Korea Academy of Industrial Technology (KAITECH)|250|2.9|
|Korea Productivity Center (KPC)|7|0.1|
|Korea Institute of Industrial Design and Packaging (KIDP)|93|1.1|
|Other public R&D institutes (6)|80|1.0|
|NON-PROFIT AGENCIES (total)|910|10.7|
|Inspection and testing institutes (6)|692|8.1|
|Korea Siandards Association (KSA)|180|2.1|
|Korea Management Association (KMA)|38|0.5|
|PRIVATE AGENCIES (total)|3,850|45.2|
|Other consulting finns|350|4.1|
|Other finns (parents, supplier, and buyers)|3,500|41.1|
|Total|8,513|100.0|

# Note: Numbers in a parentheses indicate the number of institutions.

Source: Industrial Advancement Administration _Jwzgso Giup Gisoolijido Jun gangki Kibon Gyehaik_ (Mediumand Long-term Plan of SME Technical Assistance Program), Mimeograph, August, 1993, p.<sup>25</sup> .

53
Tabk 11I3

# New Product Development and Innovation Across Sectors

||Woven<br>Textiles<br>n=42|Auto<br> <br>parts<br>n=20|Elect.<br>pans<br>n-20|Factory<br>automption<br>n-40|
|---|---|---|---|---|
|(a) FREQUENCY OF NEW PRODUCT DEVELOPMENr<br>Average number of new products<br>introduced per year (1989-1991)|3.48|16.40|9.38|1.68|
|Proportion of firms that have not<br>introduced new products in 3 years|76.2|5.0|5.D|10.0|
|(b) NEWNESS' OF NEW PRODUlCTS<br>(1991)<br>1. No difference from existing<br>products|4|Number of Mentions<br>1|2|1|
|2. Moderate difference from<br>existing products|5|12|7|3|
|3. Iniermediate<br>difference from<br>existing products|0|2|5|3|
|4. Significant difference from<br>existing products|0|4|3|16|
|**_5._**Radical difference from<br>existing products|0|0|0|S|
|Mean score (between I and**_)'_**|1.5|2.5|**_2.5_**|3.8|
|(c) ORIGINALrrY- OF NEW PRODUCTS (1991)<br>1. Imitation of domestic models|0|Number of Mentions<br>1|0|0|
|2. Imitation of foreign models|1|9|11|0|
|3. Application<br>of existing<br>technology in domestie market|8|9|5|0|
|4. Adaptation of foreign technology<br>for domestic narket|0|0|1|5|
|5. Introduction of new products with<br>better perfornance than comparable<br>ones in foreign market|0|0|0|I8|
|6. Introduction<br>of new products never<br>previously deedoped in foreign<br>countries|0|0|0|5|
|Mean score (between 1 and 6)|2.9|2.4|2.4|5.0|

NOTE: ' Newness refers to the degree of difference of the new products compared to existing products produced by the same enarprise. The mean score indicates an ordinal position between I (no difference) and 5 (radical difference).

' Originality refers to the degree of difference of the new products from existing products or technologies available elsewhere. The mean score indicates an ordinal position between I (imitaon of domestic model) and 6 (compktly new producQ).

54
Table 11.4

# Sources of Ideas/Technology for Product Improvesnent

||W<br>Te<br>(n=<br>n|oven<br>xtiles<br>42)<br>Us!!|Aut<br>P<br>(n<br>a|omotive<br>uts<br>=20)<br>Usfl|Ele<br>P<br>(n<br>n|ctronic<br>ans<br>=20)<br>Usfl|Fa<br>Auto<br>(n<br>a|ctory<br>mation<br>=40)<br>Usfl|
|---|---|---|---|---|---|---|---|---|
|1. Order-placing firm|14|4.0|_15_|4.6|13|2.6|4|4.5|
|2.Jointventure partners _|0|-|2|5.0|4|4.0|2|4.0|
|3. Domestic equipment supplier|4|4.0|3|4.7|4|4.3|0|-|
|4. Foreign equipment supplier|l1|3.9|4|4.3|8|4.3|2|4.0|
|5. Local buyer|8|3.9|0|-|1|3.0|11|3.9|
|6. Foreign buyer|2|4.4|3|3.7|4|4.0|5|4.0|
|7. Finms engaged in similar<br>business activities|20|4.0|2|3.5|4|_4.5_|5|3.4|
|8. Private consulting firm|0|-|0|-|1|5.0|0||
|9. Industry association or<br>other nonprofit institution|3|4.3|1|3.0|2|3.0|4|3.3|
|10. Public technical support agency|6|3.7|11|3.9|6|3.0|_15_|4.0|
|11. Intenational exhibition|9|4.9|3|4.3|11|4.6|15|4.1|
|12. Technical information center|0|-|1|2.0|3|3.0|1|4.0|
|13. Imitating existing products|12|4.2|0|-|0|-|2|3.0|
|14. Individual use of researchers<br>in university|1|2.0|2|4.0|3|4.7|ll.|3.6|
|15. Individual use of foreign<br>professionals|3|4.3|2|3.5|2|5.0|9|3.9|
|16. Technology uransfer|5|4.0|8|_5.0_|3|5.0|9|4.3|
|17. Other firm|0|-|0|-|3|4.7|_5_|4.0|

Note: n = The frequency of mention by sample SMEs.

Usfl = 'he degree of uscfulness mentioned by interviewees from 1 Oeast usefil) to 5 (most useful).

55
# Table m.s

# Sources of Ideas/Technology for Process Improvements

||W<br>Te<br>(n=<br>n|oven<br>xtiles<br>42)<br>Usfi|Automotive<br>Parts<br>(n=20)<br>n<br>Usfil|Ele<br>P<br>(n<br>n|ctronic<br>ans<br>=20)<br>Usfl|Fa<br>Aut<br>(n<br>n|ctory<br>omation<br>=44)<br>Usfl|
|---|---|---|---|---|---|---|---|
|1. Order-placing firm|5|4.0|9<br>3.3|8|2.6|3|4.0|
|2. Joint venture partners|0|-|3<br>4.7|3|4.3|2|4.0|
|3. Domestic,equipment<br>supplier|4|3.8|6<br>4.5|5|4.4|2|4.0|
|4. Foreign equipment supplier|12|3.8|5<br>4.8|7|4.6|2|4.5|
|5. Local buyer|3|4.7|0<br>-|2|3.5|3|4.3|
|6. Foreign buyer|3|4.7|1<br>3.0|2|3.0|2|3.5|
|7. Firms engaged in similar<br>business activities|20|4.0|1<br>3.0|0|-|4|3.3|
|8. Private consulting firm|0|-|1<br>4.0|0|-|1|4.0|
|9. Industry association or<br>other nonprofit institution|2|4.0|2<br>_4.5_|0|-|0|-|
|10. Public technical support agency|0|-|7<br>3.3|4|2.8|7|4.0|
|11. International exhibition|4|4.3|1<br>3.0|0|-|1|4.0|
|12. Technical information center|0|-|1<br>1.0|1|1.0|0|-|
|13. Imitating existing products|0|-|0<br>-|0|-|0|-|
|14. Individual use of researchers<br>in university|0|-|1<br>4.0|0|-|4|3.0|
|15. Individual use of foreign<br>professionals|1|5.0|1<br>_5.0_|0|-|6|4.3|
|16. Technology transfer|1|3.0|4<br>4.5|2|5.0|4|3.8|
|17. Olherfirm|0|-|1<br>4.0|0|-|1|2.0|

Note: n = The frequency of incidence mentioned by sample SMEs. Usfl = The degree of usefulness mentioned by interviewees from I (least useful) to S (most useful).

56
Table 111.6

# Usufuhles of ColectIve Tehndology Support Agenis

||Woven<br>Textiles<br>n-42<br>nuifi|Auto<br>**part**<br>n-20<br>n Usf|Elect.<br>parts<br>n-20<br>n Isnl|Factory<br>autmation<br>**_us40_**<br>nusn|
|---|---|---|---|---|
|TECHNICAL INFORMATION<br>|||||
|SMIPC|_1_5.0|1 3.0||4 2.5|
|Industrial Advancement Admin.<br>||1 4.0<br>||1 2.0<br>|
|Korea Academy Industrial Technology||1 5.0||1 4.0|
|Technical Information Center||2 2.0||1 4.0|
|Korea Institute of Science and Technology (lUST)|||1 4.0|1 4.0|
|Korea Standards Association||1 4.0||2_4.5_|
|Korea Productivity Center||1 3.0|42.8|5_2A_|
|SME-related banks||||1 4.0|
|Other govt. iristitutions|||2 4.0||
|<br>Trade Associations|2 4.0|2 4.0|23.5|8 3.4|
|Other indutstry-related insL.|1 4.0||3 3.7|1 4.0|
|TECHNOLOGY ASSISTANCE|||||
|SMIPC|3 3.0|_5_2.8|5 3.8|4 2.3|
|Industrial Advancenent Admin.||4 4.3|1<br>-|3 4-0|
|Kora Academy Indusrial Tech.||2 3.5|1 4.0|_6_4.2|
|Korea Standards Association||1 4.0|||
|Korea Productivity Center|||2 4.0|1 .30|
|SME-related banks|_15.0_||||
|Other government institutions|||1 4.0||
|Trade Associations|1 4.0||||
|Other Industry-relted inst.|S_5.0_|||3 4.0|
|TRAINING|||||
|SMIPC||3 3.7|2 4.0|6 3.5|
|Idusty Advancement Admin.||||3 3.7|
|Patent bureau||1 3.0|1 3.0||
|<br>Korea Sandards Association||<br>4 3.5|<br>7 3.1|11 3.7|
|Koa Productivity Center|2 4.5|8 4.1|33.7|8 3.8|
|SME-related banks<br>||||1 4.0|
|SME Cooperative Hcadquartes||1 4.0|||
|Other goverment instiutions|||1_5.0_||
|Trade Associations|1 3.0|||1 4.0|
|Other industry-related inst.|1_5.0_|||3 4.3|
|JOINT TECHNOLOGICAL DEVELOPME|||||
|Korea Academy Industrial Tech.||2 4.5|1 5.0|2 3.5|
|JUST||2 4.5|14.0|4 4.3|
|Other government institutions|||2 5.0||
|<br>Other indusuy-rated inst.||||2 3.5|
|CONTRACT TECHNOLOGICAL DEVELOPMENT|||||
|SMIPC|||1 4.0||
|Korea Acaderny Industrial Tech.||1 4.0|14.0|1 2.0|
|Other govt. institutions||1 4.0|||
|Other indusuy-related inst.||||2 3.5|
|<br>KIST|||1 2.0||
|Total Number of Mentions|18|44|43|86|
|Not n-Freue<br>Usll-Udulusus (1 le<br>nsaU0Smosusf|||||
|qy<br> <br> <br>SEs sdecd only mce**agc .n**ch<br>ofer<br>c<br>uoagasies.|||||

57
Table **IV.1**

# Lag Times for Exporters by Sector

|||Average Years of|Lag:|
|---|---|---|---|
|Sector|Age of Firm<br>(Years)|From Finn StartUp<br>to First Export|From First Export<br>to First Direct<br>Export|
|All|All|6.33|1.89|
||1-8|1.65|0.25|
||_9-15_|3.89|1.25|
|_l_______________|16+|9.92|2.78|
|Woven Textiles|All|5.09|2.25|
||1-8|1.70|0.25|
||9-15|2.40|2.25|
|l________________|16 +|9.76|3.50|
|Auto Parts|All|7.54|0.00|
||1-8|1.50|0.00|
||9-15|5.40|0.00|
||16 +|11.33|0.00|
|Electronic Parts|All|3.60|2.23|
||1-8|0.00|0.00|
||9-15|5.33|0.50|
||16 +|4.22|3.11|
|Factory Automation|All|10.24|1.60|
||1-8|2.60|0.40|
||9-15|7.00|0.00|
|l______________|16 +|14.00|2.44|

58
# Table IV.Z Woveni Textile Samiple: Chtoice of Export Channcls

||Early|Exporters (<br>_N= _5|Before 1977)<br>||||Late Ex|porters (1977<br>N = 25|or Later)|
|---|---|---|---|---|---|---|---|---|---|
||Direct<br>Effort<br>of Firn|Foreign<br>Buyers|Non-Profit<br>Agency<br>Support|Sub-<br>Contracting||Direct<br>Effort<br>of Finn|Foreign<br>Buyers|Non-Profit<br>Agency<br>Support|Sub-<br>contracting|
|Relative Importance (1-5)<br>At First Export||||||||||
|All|2.4|3.2|1.2|4.2|All|2.5|2.4|1.3|4.0|
|Small (< 100 workcrs)'|2.5|3.0|1.0|5.0|<IW10|2.6|2.6|1.3|3.9|
|Large**(.**100 workers)'|2.3|3.3|1.3|3.7|> 100|2.3|1.9|1.3|4.3|
|< 10 yrs. Experience|1.0|1.0|1.0|5.0|C 3 yrs. exp|2.6|2.8|1.3|3.9|
|10 + Experience|3.3|4.7|1.3|3.7|3 + yrs. exp|2.4|1.7|1.3|4.1|
|Relative Importance (1-5)<br>Current"||||||||||
|All|2.4|3.2|1.2|3.2|All|2.6|2.6|1.4|3.9|
|Small Size'|2.5|3.0|1.0|4.5|<100|2.7|2.8|1.4|3.9|
|Large Sizc'|2.3|3.3|1.3|2.3|> 100|2.3|2.0|1.4|4.0|
|<1O yrs. Experience|1.0|1.0|1.0|_5.0_|< 3 yrs. exp|2.8|2.8|1.4|3.9|
|10 + yrs. Experience|3.3|4.7|1.3|2.0|3 + yr s. exp|2.2|2.0|1.4|4.1|
|||All Expo|rters|||||||
|Relative Importance (1-5)||||||||||
|<br>Current|2.5|2.8|1.3|3.7||||||
|Small Exporter<br>(CS billion won)|2.2|2.5|1.3|4.2||||||
|Large Exporter<br>(>5 billion won)|3.1|3.1|1.5|3.2||||||

# 'Size at first export.

The time elapsed since start-up averages 24 years for early exporters and 6.2 years for late exporters.

Note: Use is measured on a scale of I (low) to 5 (high). 'Current' period is 1991.

59
# Table IV.3

# Woven Textile Sample: Usefulness of Collective Marketing Support

|l<br>________________________________|**Early**<br>**Expor**|**ters**|**Late**<br>**Expor**|**ters**|**Large**<br>**Expo**|**rters**|
|---|---|---|---|---|---|---|
|**1.**Number of Firms|_5_||14||10||
|2. Average Relative Importance of Support by Public<br>or Non Profit Agency for your Firm to Penetrate<br>-Export Markets.<br>_|||||||
|a. At First Export|1.2||1.5||1.4||
|b. In 1991|1.2||1.3||1.4||
|3. Proportion of Firms Receiving Service Provided by<br>such an Agency and its Relative Usefulness.|Ever<br>Used'|Usf|Ever<br>Used|Usfl|Ever<br>Used|Usfl|
|Information on Export Opportunities|.40|3.5|.23|4.0|.40|3.5|
|Introduction of Buyers|.20|5.0|.07|4.0|.10|2.0|
|Participation in Domestic Trade Fair|0||0||0|-|
|Participation in Overseas Trade Fair|.20|_5.0_|0|-|.10|_5.0_|
|Support of Exploratory Marketing Trips|.40|4.5|0|-|.20|3.0|
|Export-ImportAgency|0|-|0|-|0|-|
|Obtaining Foreign Standards|0|-|0|-|0|-|
|Overseas Distribution of Promotional Material|.40|4.0|0|-|.40|2.8|
|Joint Venture Technology Ties withForeignFirm|0|-|0||0||

Ever used = Average probabiity of ever having used. Usfl = Average usefalness score on a scale of 1 (low) to 5 (high).

Note: Early exporters began exporting before 1975. Late exporters began exporting after 1985.

60
# Table IV.4 Auto Parts Sample: Choice of Export Clianncls

||Early|Exporters (<br>_N=6_|Barore 1985)||||Late Ex|porters (1985 o<br>N=6|r Later)|
|---|---|---|---|---|---|---|---|---|---|
||Direct<br>Effort<br>of Firm|Foreign<br>Buyers|Non-Profit<br>Agency<br>Support|Sub.<br>Contracting||Direct<br>Effort<br>of Firm|Foreign<br>Buyers|Non-Profit<br>Agency<br>Support|Sub-<br>contracting|
|Relative Importance<br>At First Export||||||||||
|All|2.5|1.0|2.2|3.3|All|1.5|3.8|2.0|2.2|
|Small_(<_80 workers)'|3.3|1.0|1.3|3.0|c150|_1.5_|4.5|1.0|1.5|
|Large (-> 80 workers)'|1.7|1.0|3.3|3.7|_150_+|1.5|3.5|2.5|2.5|
|Relative Importance<br>Current"||||||||||
|All|3.2|2.7|1.2|2.8|Ali|2.8|4.5|13|3.2|
|Small Size'|4.3|1.7|1.3|3.0|<150|2.0|5.0|1.0|2.5|
|Large Size'|2.0|3.7|1.0|2.7|150 +|3.2|4.2|_1.5_|3.5|
|RelativeImportance<br>Current||All Expo|rters|||||||
|Sniall Exporter<br>t< 1500 million won)|3.3|3.3|1.2|2.8||||||
|Large Exporter<br>(> 1500 million won)|2,8|4.0|1.4|2.8||||||

* Size at first export.

" The lime elapsed since start-up averages 10 years for early exporters and 4.2 years for late exporters. _Note:_ 'Current" period if 1991.

_61_
# Table IV.S

# Auto Parts Sample: Usefulness of Collective Marketing Support

||JE<br>Exporters|arl|yLate<br>Export|ers|IL<br>Exporters|arge<br>|
|---|---|---|---|---|---|---|
|1. Number of Finms<br>_<br>_|||7||6||
|2. Average Relative Importance of Support by Public<br>or Non Profit Agency for your Firm to Penetrate<br>Export Markets.||||||l|
|a. At First Export|2.4||1.8||2.6||
|b. In 1991|1.0||1.3||1.4||
|3. Proportion of Firms Receiving Service Provided by<br>such an Agency and its Relative Usefulness.|Ever<br>Used|**Usfl**<br>-|Ever<br>Used|Usfl<br> <br>-|Ever<br>Used|Usfl|
|Infonnation on Export Opportnities|0||.29|2.5|.33|2.5|
|Introduction of Buyers|.20|2.0|.29|1.5|.17|2.0|
|Participation in Domestic Trade Fair|.20|3.0|.14|3.0|.17|3.0|
|Participation in Overseas Trade Fair|0||.14|1.0|.17|1.0|
|Support of Exploratory Marketing Trips|0|=|.14|1.0|.17|IA)|
|Export - ImportAgency|0||.14|4.0|0|-|
|ObtainingForeign Standards|0||0|-|0|-|
|Overseas Distribution of Promotional<br>Material|.20|3.0|.14|2.0|.17|2.0|
|Joint Venture Technology Ties with Foreign Firm|0||.14|4.0|0||

Ever used = Average probability of ever having used. Usfi = Average usefulnes **s** core on a scale of 1 (low) to 5 (high).

Note: Early exporters began exporting before 1984. Late exporters began in 1984 or later.

62
# Table IV.6 Electronic Parts Sample: Choice of Export Clhannels

||Early<br>Direct<br>Efrort<br>of Firm|Exporters (<br>_N =6_<br>Foreign<br>Buyers|Before 1980)<br> <br>Non-Proait<br>Agency<br>Support|Sub-<br>Contracting||Direct<br>Effort<br>of Firm|Late Ex<br>Foreign<br>Buycrs|porters (1980 o<br>_N=_9<br>Non-Profit<br>Agcncy<br>Support|r Later)<br>Sub-<br>contraccing|
|---|---|---|---|---|---|---|---|---|---|
|Relative Importance<br>At First Export||||||||||
|All|2.0|1.8|3.3|2.8|All|1.6|1.9|2.4|3.0|
|Small (C 50 workers)'|2.3|1.7|3.0|3.0|• 60|2.0|2.7|2.0|27|
|Large_e_ 50_workers)|1.7|2.0|3.7|2.7|60 +|1.4|1.4|2.6|3.2|
|Relative Importance<br>Current"||||||||||
|All|3.7|4.5|1.7|2.5|All|3.1|3.2|1.3|2.0|
|Small Size(<br>40)'|4.0|4.3|1.7|3.7|_<60_|2.8|3.0|_1.5_|2.0|
|UIrge Size(__50)'_|3.3|4.7|1.7|1.3|60 +|3.4|3.4|1.2|2.0|
|Relative Importance<br>Current||All Expor|ters|||||||
|Small Exporter<br>(Exp<_1500_million won)|3.3|3.6|1.2|2.2||||||
|Large Exporter<br>(Exp > 1500 million won)|3.5|3.9|1.6|2.6||||||

Size at first export.

The time elapsed since starn-up averages 17 years for early exporters and 6 years for late exporters.

Note: 'Current" period is 1991.

63
# Table IV.7

# Electronic Parts Sample: Usefulness of Collective Marketing Support

||**Early**<br>**Expor**|<br>**ters**<br>|**Late**<br>Expor<br>|ters|**Larg**<br>**Expo**|**e**<br>**rters**|
|---|---|---|---|---|---|---|
|1Numberof Finns|6||19||8||
|2. Average Relative Importance of Support by Public<br>or Non Profit Agency for your Firm to Penetrate<br>Export Markets.<br>________<br>a. At First Export|3.3||2.6||3.0||
|b. In 1991|1.7||1.3||1.6||
|3. Proportion of Firms Receiving Service Provided by<br>such an Agency and iLs Relative Usefulness.|Ever<br>Used'|Usfl|Ever<br>Used|Usfl<br>|Ever<br>**Used**|**Usfl**|
|Information on Export Opportunities|.50|3.7|:11|5.0|.38|3.7|
|Introduction of Buyers|.50|2.0|.11|3.0|.38|2.0|
|Participation in Dosnestic Trade Fair|_.50_|3.3|.33|3.0|.50|3.2|
|Participation in Overseas Trade Fair|.33|3.0|III|3.0|.25|3.0|
|Support of Exploratory Ma&leting Trips|.17|2.0|.1 i|2.0|.25|2.0|
|Export - Import Agency|O||-<br>O||O||
|Obtaining Foreign Standards|O||O||O__||
|OverseasDistribution of Promotional Material|0|-|0||0||
|Joint Venture Technology Ties with Foreign Firn|0|-|0||0||

2. Average Relative Importance of Support by Public or Non Profit Agency for your Firm to Penetrate Export Markets. ________

- a. At First Export

- b. In 1991

- Ever used = Average probability of ever having used. Usfl = Average usefulnes **s** core on a scalz of 1 (low) to 5 (high).

Note: Early expoiters began exporting before 1980. Late exporters began 1980.

64
# Table IV.8

## Factury Automnation Sample:<sup>Choice of Export Channels</sup>

||Early|Exporters (B<br>_N =6_|efore 1984)<br>|||.<br>|Late Exp<br>|orters (1984 or<br>_N-10_<br>|Later)<br>Sb|
|---|---|---|---|---|---|---|---|---|---|
||Direct<br>Effort<br>of Firm|Foreign<br>Buyers|Non-Profit<br>Agency<br>Support|Sub-<br>Contracting||Direct<br>Effort<br>of Firm|Foreign<br>Buyers|Non-Profit<br>Agency<br>Support|u-<br>contracting|
|Relative Importance<br>At First Export||||||||||
|All|3.2|2.7|1.5|2.8|All<br>|2.3<br>|3.6<br>|2.0<br>|2.2<br>|
|Small (< 90 workers)'|3.3|1.7|2.0|3.3<br>|< 90<br>|2.2<br>|3.6<br>|1.4<br>|1.4<br>|
|Large**(.2**90 workers)'|3.0|3.7|1.0|2.3|90 +|2.4|3.6|2.6|3.0|
|Relative Importance<br>Current"||||||||||
|All|4.4|3.6|2.0|2.0|All<br>|3.1<br>|3.1<br>|1.9<br>|1.9<br>|
|Small Sizet. 90)'|5.0|4.0|3.0|1.5|• 90<br>|224<br>|2.8<br>|1.6<br>|1.0<br>|
|Large Size (.90)'|4.0|3.3|1.3|2.7|90 +|3.8|3.4|2.2|2.8|
|Relative Importance<br>For All Exporters|Ex|ports Unimp|ortant t5. 10%|<sup>of sales)</sup>||Exp|orts Importa<br>|nt (> 10%<sup>of</sup><br>|<sup>sales)</sup><br>|
|At First Export|2.5|3.4|1.4|2.3||3.2<br>|2.8<br>|3.0<br>|2.8<br>|
|Current|3.0|3.2|1.5|1.7||5.0|3.5|3.0|2.0|
|Size at first export.<br>The time elapsed since start-up a|verages<sup>11.3 years</sup>|<sup>for early expo</sup>|<sup>rters and 4 year</sup>|<sup>s for late exporters.</sup>||||||

Note: 'Current' period is 1991.

65
Table 1V.9

# Factory Autoniation Sample: Usefulness of Collective Marketing Support

|____________________|**Early**<br>|Exporters||**Late**<br>Expo|rters|**Large**<br>Export|ers|
|---|---|---|---|---|---|---|
|1. Number of Firms|6||||4||
|2. Average Relative Importance of Support by Public<br>or Non Profit Agency for your Firm to Penetrate<br>Export Markets.||||_|||
|a. At First Export|1.5||2.0||2.0||
|b. In 1991|1.7||1.9||2.0||
|3. Proportion of Finms Receiving Service Provided by<br>such an Agency and its Relative Usefulness.|Ever<br>Used|Usfl|Ever<br>Used|Usfl|Ever<br>Used|Usfl|
|Infonnation on Export Opportunities|.50|2.7|.50|3.2|.75|3.3|
|Introduction of Buyers|.33|3.5|.40|3.0|.75|3.3|
|Participation in Domestic Trade Fair|.33|4.0|.50|3.8|.75|3.7|
|Participation in Overseas Trade Fair|.83|4.2|.20|4.5|.50|4.0|
|Support of Exploratory Marketing Trips|.16|4.0|0|-|.25|4.0|
|Export-ImportAgency|0|-|0|-|0|-|
|Obtaining Foreign Standards|0|-|.20|5.0|.25|5.0|
|Overseas Distribution of Promotional Material|.50|2.7|.30|3.3|.75|3.7|
|Joint Venture 1echnology Ties with Foreign Firm|0|-|.20|4.0|.25|5.0|

Ever used = Average probability of ever having used. Usfl = Average usefulness score on a scale of 1 (low) to 5 (high).

Note: Early exporters began exporting before 1984. Late exporters began after 1984.

**b6**
Table IV.10 Use and Non-Use of Collective Marketing Support Across Sectors

|A. Use|All E|xRorters|Large|ExRorters|
|---|---|---|---|---|
||Overall<br>Usage Rate|Usefulness|Overall<br>Usage Rate|Usefulness|
|Korea Trading<br>Company|.05|4.8|.07|4.5|
|KOTRA|.39|3.1|.56|3.0|
|Industry<br>Associations|.31|3.1|.30|3.1|
|Others|.04|4.1|.07|3.0|

|B. Non-Use-|Number of<br>Ex pming SMEs|Of which: Never<br>Used|Percent of<br>Non-Use|
|---|---|---|---|
|Woven Textiles|31|12|38.7|
|Auto Parts|12|4|33.3|
|Electronic Parts|15|7|46.7|
|Factory Automation|17|5|29.4|
|Total|75|28|37.3|

67
# Table V.1

# Distribution of Governme nt-Led Funds for SMEs, 1980-1990

||||||||Unit: 100|million W|on|
|---|---|---|---|---|---|---|---|---|---|
||Total<br>government<br>led funds<br>(A)|SME<br>Restructure<br>Fund|Indus'l<br>Dvlpmnt<br>Fund'|National<br>Investmt<br>Fund|Indus'l<br>Techngy<br>Improvmnt<br>Fund'|Special<br>Facility<br>Fund|Mutual<br>Aid<br>Fund|**Net**<sup>**3**</sup><br>lending<br>increase<br>to<br>SMEs<br>(B)|Ratio<br>(A/B)|
|1980|195|195|0.4|||||10,020|1.9|
|1981|185|182|3|||||14,290|1.3|
|1982|170|168|2|||||12,720|1.3|
|1983|356|347|9|||||15,440|2.3|
|1984|449|428|21||||10|14,600|3.1|
|1985|501|449|42||||87|13,980|3.6|
|1986|817|497|<br>161||72||426|14,080|5.6|
|1987|2,007|<br>919|276||386||781|14,891|13.5|
|1988|2,537|1,018|321||417||1,168|35,367|7.2|
|1989|5,320|2,835|1,143||174||620|58,404|9.1|
|1990o|6,189|2,161|206||52|3,150w|<br>6201|27,899|22.2|
|Total|20,480|9,199|2,184|[,7542|1,101|3,150|3,092|232,219|8.8|
||100%|44.9%|10.7%|8.6%|5.4%|15.4%|15.1%|||

Notc: 1) Limited to Icnding handled by SME bank.

2) Balance **at** June, 1990. Limited to lending handled by **SMB** Bank **amd** Citizen National Bank.

3) **Net** increase in lending to **SMEs** by banks.

4) Actual lending. Amount eararked is .1000 billion won.

5) Lending between January-May. 1990.

6) For the **first** six months.

Source: KIET (1992) 68
# Table V.2

# Sources of Private Financial Support for SMEs

At **the** End of 1990, Balance **Standard (Unit 100** million won, %)

||Total<br>Loans (A)|SME<br>Loans (B)|% of all<br>SME<br>Loans|B/A|
|---|---|---|---|---|
|Banks,**of which:**|739,401|357,364|(52.8)|48.3|
|Commercial Banks|329,748|147,289|(21.8)|44.7|
|Local Banks|83,077|61,268|(9.1)|73.7|
|SME Bank|69,817|66,620|(9.8)|95.4|
|CNB (Citizens National Bank)|56,924|25,497|(3.8)|44.8|
|Korea Exchange Bank|31,163|7,970|(1.2)|25.6|
|Housing, Agric., Fishing & Pasture Assoc.|168,672|48,720|(7.2)|28.9|
|**Non-Bank Financial Institutions, of**<br>which:|699,909|319,082|(47.2)|_45.6_|
|Short-Tenn Finance Cos.|98,348|42,692|(6.3)|43.4|
|Integrated Finance Cos.|44,354|11,002|(1.6)|24.8|
|Lease Cos.|118,418|50,967|(7.5)|43.1|
|Investment Trusts|142,770|54,799|(8.1)|38.4|
|Trust Accounts|110,097|55,099|(8.1)|50.0|
|Insurance Cos.|90,112|30,290|(4.5)|33.6|
|Mutual Credit Fund|95,810|74,233|(11.0)|77.5|
|[Total|| 1,439,310|| 676,446|(100.0)|47.0|

Source: Ministry of Finance and Chamber of Commerce and Industry (1991).

69
# Table V.3

# Trends in Bank Loans **to** SMEs, 1986-1988

|__________________________|19|86|198|7|198|8|
|---|---|---|---|---|---|---|
|Type of Loan:|Billion Won|% of Total|Billion Won|% of Total|Billion Won|% of Total|
|Collateral-Backed|80.9|66.0|85.5|62.2|104.1|60.7|
|Officially Guaranteed Loans|13.1|10.7|16.9|12.3|22.4|13.1|
|Other Loans (including those<br>with Guarantees from other<br>than Official institutions)|28.6|23.3|35.2|25.6|44.8|26.1|
|Total Loans|122.7|100.0|137.6|100.0|171.3|100.0|

## Source: Kang and Park 1990

70
# Table V.4

# Interest Rates in Korea's Fragmented Financial Markets, 1965-1990

|Year|General Bank<br>Loan Rate<br>(1 yr-Maturity)|Special<br>Funds|Loans in<br>Unregulated<br>Financial (Curb)<br>Markets|Deposit<br>Rate<br>(1 year)<br>_|Inflation<br>Rate|
|---|---|---|---|---|---|
|1965|18.5||58.9|30.0|11.6|
|1970|24.0||50.2|22.8|16.1|
|1975|15.5||40.5|15.0|25.3|
|1978|17.1|13.0|41.7|16.9|14.4|
|1980|16.0|12.0|46.1|15.1|28.3|
|1982|15.0|10.0|29.7|11.4.|9.8|
|1985|12.0|10.0|24.6|10.0|2.5|
|1988|12.5|10.0|23.8|10.0|7.1|
|1990|11.0|10.0|23.0|8.0|6.5|

Sources: 1965-1978 from David C. Cole and Yung Chul Park. Financial Develooment in Korea. 1945-1978, Harvard University Press. Subscquenz years. Ministy or Finance.

71
# **Table** V.5

# Use **and** Usefulness of **Different** Sources of Financial **Support** at Start-Up

||||Number of|Users|||
|---|---|---|---|---|---|---|
|Source of Financial<br>Support|Woveln<br>Textiles|Auto<br>Parts|Electronic<br>Parts|Factory<br>Automation|Total|Useflness|
|1. Venture Capital|0|0|0|2|2|3.0|
|2. New Tech. Finance<br>Co. or Investment<br>Association|0|0|1|0|1|_5.0._|
|3. SME Restructure<br>Fund ofSME<br>Bankl|0|0|0|2|2|_5.0_|
|4.**SML**Bank's Fund<br>for Technology-based<br>SMEs|0|0|1|0|1|2.0<br>_|
|5. Other Bank Loans|11|3|2|5|21|4.5|
|6. Own Capital|32|19|15|37|103|4.5|
|7. Corporate Bonds or<br>Commerical Paper|0|0|3|0|0|-|
|8. Private Loans|3|0|0|3|6|4.2|
|9. Relatives, Friends|17|4|3|8|32|4.4|
|10. Parent Firms|21|1|0|2|_5_|4.8|
|11. Support Services<br>forEstablishing<br>a Firm|0|0|0|0<br>_|0|-|
|12. Guarantee System<br>for New Ventures|0|0|0|0|0||
|Special Sources Used|65|27|22|59|173|_|
|N|42|20|20|40|122||

Average usefulness on a scale of I (low) to 5 (high)72
# Table V.6

# Use and Usefulness of Financial Support for Export and Overseas Investment

|Source||=|Number of|Users|=|Usefulness'|
|---|---|---|---|---|---|---|
|A. Individual<br>Sources|Woven<br>Textiles|Auto<br>Parts|Electronic<br>Parts|Facuory<br>Automation|Total|4.74|
|1. Trade Finance|27|2|10|7|46|4.7|
|2. Fund for export<br>industry facilities|16|3|5|7|31|4.5|
|3. Tradebill|3|3|6|3|15|4.2|
|4. E;xport loan fund|7|0|3|1|11|4.4|
|5. Overseas investment<br>fund|0|1|2<br>_|0|3|4.3|
|6. Fund for penetrating<br>newoverseasmarkets|0|0|I<br>_|1<br>_|2|3.0|
|7. Fund for SME<br>export marketing within<br>fund for industrial<br>technology _|1|0|2|2<br>_5||4.2|
|8. Circular Loan (SME<br>Bank) for exporting<br>SMEs|2<br>I|2|0|0|4<br>.|3.7|
|9. Overseas factoring|0|0|0|0|0<br>O||
|10. Fund for the<br>overseas transfers of<br>excess capacity within<br>SME Restructure Fund|1|0-|0|0|1|5.0|
|1. Parent Fund|0|0|0|1|1|4.0|
|Total|57|11|29|22|119||
|Number of Sample<br>SMEs_____|42|20|20|40|122||
|B.Sources Aggregated<br>Into Classes|||||||
|1. Commerical Sources<br>1+3|30|5|16|10|61|4.6|
|2. SpecialGovernment<br>led funds 2+(4-10)|27|6|13<br>_|11|57<br>_|4.4|
|3. Parent Firm|0|O|O||I 1|<br>4.0|

**Average uscuihncss on a scale** of **1** (low) **wo S (high).**

73
# Table V.7

# Use and Usefulness of Financial Support for Working Capital

|Source|||Number of U|sers||Usefulness|
|---|---|---|---|---|---|---|
||Woven<br>Textiles|Auto<br>Parts|Electronic<br>Pans|Factory<br>Automation|Total||
|1. City banl's general loan|39|16|17|35|107|4.6|
|2. Commercial bill diseount|21|i8|17|29|85|4.2|
|3. SMEs mumal-aidfund|2|2|4|2|10|4.1|
|4. Worldng capital from SME Bankls special<br>fund|9|5<br>|3<br>_|2|19|**_4.5_**|
|5. Citizen' National Bank's fund for small<br>firms|0|1|2|1|4|3.5|
|6. Korean Development Bank's Medium to<br>Long-TermLoan<br>_|2|2|2|0|6|4.5|
|7. Factoring loans|0|3|1|4|8|3.8|
|8. Mutual Fund|14|6|2|8|30|4.4|
|9. Tnrst Loans|6|6|11|3|26|4.0|
|10. Consuner Finance|I|0|0|0|1|5.0|
|11. Overdraft|30|14|10|27|81|4.5|
|12. Finance for Users of SME Products|0|1|a|1|2|4.0|
|13. Finance for SMEs wilh labor-management<br>conflicts|<br>0|3|0<br>_|0<br>|3|4.0|
||14 Fundsforplannedship-building|0|0|0|0|0|-|
|15. Support for defense industry|0||0|0|0|-|
|16. Import finance|1|2|4|1|8|4.6|
|17. Parent firm|0|4|2|2|3|4.6|
|Total|125|83|75|115|398||
|N|42|20|20|40|122|1|
|Sources Aggregated into Classes|||||||
|Collective (CWC) 3,4,6,7,13-15|13|15|10|8|46|4.2|
|Semi-Collective<br>(SCWC) 5.8,9|20|13|15|12|60|4.2|
|Private (PWC) 1,2,10,11,16|92|50|48|92|282|4.5|
|Users(12)|0|1|0|1|2|4.0|
|Parent Firm (17)|0|4|2|2|8|4.6|

**Avenge** usefuiness on P **scae** of<sup>I Oow)</sup><sup>**to5 (hish).**</sup>

74
# Table V.9

# Use and Usefulness of Credit Guarantee Systems

|||Fre|quency Menti|oned||Usefulness|
|---|---|---|---|---|---|---|
||Woven<br>Textiles|Auto<br>Parts|Electric<br>Parts|Factory<br>Automation|Total||
|1. Bank's repayment guarantee|17|10|7|12|46|4.73|
|2. Credit Guarantee Fund's<br>credit guarantee|19|15|10|19|63|4.69|
|3. Credit guarantee by<br>|3|7|6|15|31|4.96|
|Technology Credit Guarantee<br>Fund|||||||
|4. Parent firm's credit guarantee|0|2|3|1|6|5.00|
|Total in each sector|39|34|26|47|146||
|Out of Possible sector total (N)|42|20|20|40|122||

* Average usefulness on a scale of 1 (low) to 5 (high).

75
# Table V.10 Alternatives to Receiving a Given Type of Financial Support

||Woven Te<br>I_________|xtiles<br>...|Auto P<br>_______|arts|Electroni<br>_________|c Parts|Facto<br>Automati|ry<br>on|Tot|al|
|---|---|---|---|---|---|---|---|---|---|---|
|Reponse|Number|%|Number|%|Number|%|Number|%|Number|%|
|Give up.project|7|17|1|_5_|0|0|4|10|12|10|
|Wait until funds avail.|7|17|5|26|0|0|7|18|19|16|
|Seek alternate source of<br>finance|28|66|13|69<br>_|14|100|29|72|86|74|
|Total|42|100|19|100|14|100|40|100|117|100|

76
# **Table VI.1**

# **Governance Investigation: Oversight Agencies**

# Institution

# 1. SME Bank

# 2. Citizens National Bank (CNB)

# 3. Korea Credit Guarantee Fund (KCGF)

Oversight Agencies Ministry of Finance Economic Planning Board Office of Audits Office of Bank Supervision Ministry of Finance Economic Planning Board Office of Audits Office of Bank Supervision Ministry of Finance Office of Audits

# 4. Korea Trade Pro:notion Corporation (KOTRA)

Ministry of Trade and Industry Economic Planning Board Office of Audits 5. Korea Trade Assoc. (KTA) 6. Korea Trade Co. (KTC) Ministry of Trade and Industry

# Korea Trade Association

7. Korea Academy of Industrial Technology (KAITECH) 8. Small and Medium Industry Promotion Corp. (SMIPC) Ministry of Trade and Industry Economic Planning Board Office of Audits Ministry of Trade and Industry Economic Planning Board Office of Audits 9. Korea Electronic Parts

- and Components Assoc. (KEPCA)

Central Headquarters of Small and Medium Industry Cooperatives 77
# Table VI.2

# Governance Investigation: Good Governance Features*

|Type of support<br>provided|Agency|Hierarchical<br>control|**Human**<br>resource<br>policy|Voice|Market<br>test|._I|
|---|---|---|---|---|---|---|
|PUBLIC:<br>Finance (3)|SME Bank<br>**CNB**<br>**KCGF__**|4.0<br>_<br>_<br>_|4.3|1.2|2.8||
|Marketing (3)|KTC<br>**KOTRA**<br>**KTA**|2.3<br>_<br>_<br>_<br>_|3.5<br>_<br>_<br>_|1.7<br>__|3.3<br>_<br>_<br>_||
|Technology (2)|**KAITECH**<br>**SMIPCI**|3.1|3.2|2.2|**1.0**||
|**Private**<br>Association (1)|KEPCA|1.7<br>_|1.5<br>.|5.0|4.0||

Strength of Characteristics of good governance based on a scale of 1 (low) to 5 (high).

_78_
**Policy Research Working Paper Series**

|**Title**|**Author**|**Date**|**Contact**<br>**for paper**|
|---|---|---|---|
|WPS1384 Fiscal Decentralization and<br>Intergovemmental Finances In the<br>Republic of Albania|David Sewell<br>Christine**I.**Wallich|November 1994|G. Langton<br>38392|
|WPS1385 Fiscal Federalism Dimensions of Tax<br>Reform In Developing Countries|RobinBoadway<br>Sandra Roberts<br>Anwar Shah|November 1994|0. Jones<br>37754|
|WPS1386 EU Bananarama 1II|Brent Borrell|December 1994|G. Ilogon<br>33732|
|WPS1387 Fiscal Decentraiizauion<br>and the Size<br>of Government: An Extension with<br>Evidence from Cross-Country Data|Jaber Ehdaie|December 1994|C. Jones<br>37699|
|WPS1388 Does Voice Matter? For Public<br>Accountability, Yes|Samuel Paul|December 1994|B. Moore<br>35261|
|WPS1389 Ruble Overhang and Ruble Shortage:<br>Were They the Same Thig?|Patrick Conway|December 1994|L Suki<br>33974|
|WPS1390Regional Integration and the Baltics:<br>Which Way?|Piritta Soma|December1994|J. Ngaine<br>S7947|
|WPS1391 Where in the Wold is Population<br>Growth Bad?|JeltKling<br>Lant Pritchett|December 1994|S. Fallon<br>38009|
|WPS1392 Some Economic Consequences of<br>the Transition from Civil War to Peace|Jean-Paul Azam<br>David Bevan<br>Paul Collier<br>Stefan Dercon<br>Jan Gunning<br>Sanjay Pradhan|December 1994|C. Jones<br>37699|
|WPS1333 The Interhce of Trade, Investment,<br>and Coinpetition Policies: Issues and<br>Challenges for Latin America|J. Luis Guasch<br>Sarath Rajapatirana|December 1994|J. Troncoso<br>37826|
|WPS1394 Macroeconomic Reform and Growth<br>in Africa:_Adjustment in Africa_<br>Revisited|Lawrence Bouton<br>Christine Jones<br>Miguel Kiguel|December 1994|R. Marfin<br>39026|
|WPS1395 A Typology of Foreign Exchange<br>Auction Markets in Sub-Saharan<br>Africa|Janine Aron<br>Ibrahim Elbadawi|December 1994|R. Luz<br>39059|
|WPS1396 Foreign Echange Auction Markets<br>In Sub-Saharan Africa: Dynamic<br>Models for Auction Exchange Rates|Janine Aron<br>Ibrahim Elbadawi|December 1994|R. Luz<br>39059|
# Policy Research Working Paper Series

|Title|Author|Date|Contact<br>for paper|
|---|---|---|---|
|WP31397 Are Private Capital Flows to<br>Developing Countries Sustainable?|U n Dadush<br>Ashok Dhareshwar<br>Ron Johannes|December 1994|J. Queen<br>33740|
|WPS139B The Cost of Air Pollution Abatement|Raynond S. Hartman<br>David Wheeler<br>Manjula Singh|December 1994|E. Schaper<br>33457|
|WPS1399 How Important to India's Poor is the<br>Urban-Hural Composition ot Growth?|Martin Ravalllon<br>Gaurav Dant|December 1994|P. Cook<br>33902|
|WPS140D Technical and Marketing Support<br>Systems for Successful Small and<br>Medium-Size Enterprises In Four<br>Countries|Briln Levy with<br>Albert Berry, Motoshige Ito<br>Linsu Kim, Jeffrey Nugent,<br>and Shujilro Urta|December 1994<br>h,<br>|D. Evans<br>38526|
|WPS1401 Colombia's Small and Medium-Size<br>Exporters arid Their Support Systems|Albert Berry<br>Jose Escandon|December 1994|D. Evans<br>38526|
|WPS1402 IndonesiWs Small and Medium-Size<br>Exporters and Their Support Systems|Albert Berry<br>Brian Levy|December 1994|D. Evans<br>38526|
|WPS1403 Small and Medium-Size Enterprise<br>Support Poricies in Japan|Motoshige Itoh<br>Shujiro Urata|December 1994|D.Evans<br>38526|
|WPS1404 The Republic at Korea's Small and<br>Medium-Size Enterprises and Their<br>Support Systems|Linsu Kim<br>Jeffrey B. Nugent|December 1994|D. Evans<br>38526|