KDI 정책포럼
The SME-Suitable Industry Reservation Policy: Economic Effects and Policy Direction
2022.08.03-
김민호 연구위원
프로필
- 1. Introduction
- Even after reaching the ten-year milestone since the adoption of the SMEsuitable industry reservation policy, or the reservation policy, in 2011 with the specific aim of protecting SME business territory, this policy has not generated informed debates on its policy effectiveness.
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- Restrictive policies that impose entry or expansion limitations on large enterprises in order to protect SMEs are relatively uncommon in advanced countries.
- Given its abundant workforce, India adopted a protective measure for SMEs by reserving certain products exclusively for their production to ensure employment security. However, amid emerging trade liberalization and changing consumer preferences, India took steps to dismantle the policy starting in the early 2000s and eventually eliminated all items from the reserved list in 2015.
- This study analyzes the reservation policy’s contributions to enhancing SME competitiveness through its protective measures and offers implications for its future operation.
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- The policy’s objective is to improve the competitiveness of SMEs through protective measures.
- Upon receiving an application for designating an SME-suitable industry or product filed by small and medium-sized business organizations (associations, etc.), the Korea Commission for Corporate Partnership (KCCP) initiates a fact-finding process and its working committee’s review. Then, the KCCP conducts deliberations, determines the designation, and issues official recommendations to market participants. - At the time of its introduction in 2011, the policy designated a wide range of industries and products: multiple foods and beverage products, including gim (dried seasoned seaweed), kimchi, dubu (tofu), noodles, sundae (black pudding), and eomuk (fishcake), as well as various manufacturing areas and products like ready-mixed concrete (RMC), laundry soap, and antifreeze.
- Using the Mining and Manufacturing Survey from 2008 to 2018 by Statistics Korea, this study identifies establishments that manufacture SME-suitable products and analyzes the economic effect on those producers after the policy’s adoption.
- The Mining and Manufacturing Survey provides representative datasets on Korean manufacturing establishments with ten or more employees, excluding those with fewer employees.
- Unlike the prior studies limited to the markets for packed tofu or ready-mixed concrete, this study analyzes the economic effects on the overall manufacturing industries, including those designated as SME suitable.
- The policy’s objective is to improve the competitiveness of SMEs through protective measures.
2. Changes in the Share of SMESuitable Product Producers- Since the introduction, large enterprises have experienced a decline in production and employment, but not much has changed for SMEs.
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- The 2008-2018 shipment data shows that the share of reserved products made by large enterprises decreased by more than half, from 1.2% to 0.5%, while the share by SMEs remained about the same from 7.9% to 7.6% (Table 1).
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- The shipment value of reserved products manufactured by large firms fell more than half from 7.3 trillion won in 2008 to 4.2 trillion won in 2018, while that by SMEs slightly rose from 39.3 trillion won to 57.5 trillion won in the same period. However, other products also experienced a similar rate of increase.
- From 2008 to 2018, large enterprises posted a loss of 42% in the shipment value of reserved products but a gain of 31% in other product shipments.
- Over this period, SMEs posted 46% and 52% gains in the shipment values of reserved and other products, respectively.
- The shipment value of reserved products manufactured by large firms fell more than half from 7.3 trillion won in 2008 to 4.2 trillion won in 2018, while that by SMEs slightly rose from 39.3 trillion won to 57.5 trillion won in the same period. However, other products also experienced a similar rate of increase.
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- In 2008, 10.6% of all manufacturing establishments with 10+ employees were manufacturers of SME-suitable reserved products. These companies contributed 15% of the total value added and 12.5% of the total number of employees. A decade later, in 2018, the proportion of reserved product producers had not changed much, but their contribution to the total value added and the total number of employees decreased to 10% and 10.9% (Table 2).
- By establishment size, the decrease in the share of value added and employment was primarily attributed to the decline in the proportion of largee nterprises.
- In 2008, 10.6% of all manufacturing establishments with 10+ employees were manufacturers of SME-suitable reserved products. These companies contributed 15% of the total value added and 12.5% of the total number of employees. A decade later, in 2018, the proportion of reserved product producers had not changed much, but their contribution to the total value added and the total number of employees decreased to 10% and 10.9% (Table 2).
- 3. Effects of the Reservation Policy on Business Performance
- This paper aims to empirically examine the economic effects of the reservation policy at the establishment level to assess whether the policy has achieved its intended objectives. Furthermore, it analyzes the impact of the policy on the overall industry and provides implications based on the findings.
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- Notwithstanding insignificant changes in production and employment by smaller producers of reserved products, this study employs statistical methodology to analyze the impact of the policy on both establishments and the industry as a whole.
- It discusses implications for its future implementation.
This study identifies SME producers of the initial list of reserved products in 2011 and examines the policy‘s effect on their business performance and production activity.-
- The samples for analysis are constructed by combining industry and product data from the Mining and Manufacturing Survey and identifying manufacturers of reserved products.
- The author obtained the 2008~2018 data from the Mining and Manufacturing Survey of Statistics Korea’s Microdata Integration Service (MDIS). - The sampled business establishments are divided into the treated group of reserved product producers and the control group of others.
-To enable comparisons within similar industries, the analysis excludes the 3-digit industries where the reserved products are not included.
- SME policies are typically implemented for specific purposes, such as financial support, and are directed at specific firms. However, the reservation policy is unique in that it targets all SMEs belonging to selected industries.
- Because this policy intends to protect SMEs and secure their competitiveness, its effect at the establishment level is analyzed using SMEs with less than 300 workers.
- The analysis also excludes those producing newly designated products after 2013, which accounts for approximately 0.6% of all establishments.
- The samples for analysis are constructed by combining industry and product data from the Mining and Manufacturing Survey and identifying manufacturers of reserved products.
- Business performance indicators include production output, value added, labor productivity, and total factor productivity. Indicators for production inputs take into consideration employment, tangible assets, per employment labor cost, and direct production cost. Also, the analysis employs the difference-in-difference (DID) method.
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- Labor productivity is real value added per employee. Total factor productivity represents production efficiency and measures the extra value created by a firm using capital and labor inputs.
- Per employee labor cost can be interpreted not only as an input indicator but also as a proxy variable for the human capital of a business establishment.
- By applying the DID method, the author controls the effects of an establishment’s unique unobservable characteristics on dependent variables. Also considered is a yearfixed effect.
According to the analysis, the reservation policy fulfilled its protective role by reducing the likelihood of SMEs exiting the market. However, improving their performance or competitiveness yielded limited outcomes. (Table 3).-
- After reserving a catalog of suitable products for SMEs, their probability of market exit decreased significantly. Still, they did not show meaningful differences from other product producers for most performance and input indicators.
- Nevertheless, reserved product producers showed a 1.3% drop in labor cost per employee after designation.
- It is likely that reserved product producers might not have raised the wage for existing employees or provided low wages for new hires.
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In addition, this study analyzes the policy effect by focusing only on products that fall under more stringent recommendations: business transfer and reducing business size. The results show that this policy has a negligible impact on business performance. Instead, it leads to a decrease in the number of employees and per-employee labor costs, without a significant impact on the survival of the product producers.-
- Four recommendations are available under the policy: entry and expansion restrictions, business transfer, and reduction in business size. The last two are more stringent in the sense that they advise large businesses to transfer or downsize in a market where they are already operating.
- The outcomes of the policy’s stringent measures indicate that it is difficult to conclude that the reservation policy positively influenced the competitiveness or protection of these SMEs.
- 4. Effects of the Reservation Policy on Industries
- Presented so far covers the effect of the reservation policy on SMEs involved in the production of reserved products. This section will examine the broader impact of the policy on related industries.
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- This section conducts an industry-level impact analysis by considering the production activities of both large firms and SMEs.
- At the 5-digit industry level, this section sets industries of reserved products and others as treated and control groups, respectively.
- As in the earlier analysis of the establishment-level effect, this analysis excludes the 3-digit industries where the reserved products are not included.
- The industry-level analysis uses the same performance and production inputs (dependent variables) as the establishment-level analysis. Industry-level productivity was calculated by aggregating establishment-level estimates.
- The industry analysis finds that the reservation policy did little to the overall performance of the industries to which the reserved products belong.
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- [Figure 2] represents the policy effects on related industries each year, with 2011 as the base year of its introduction.
- The recommendations remain in effect for up to six years, expiring from 2017 onward.
- [Figure 2] represents the policy effects on related industries each year, with 2011 as the base year of its introduction.
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- There are no significant differences found between the control and treated groups in terms of production output, value added, employment, and tangible assets. The treated group shows an uptrend after recommendations start expiring in 2017.
- Productivity does not show notable changes in trend as well.
- There are no significant differences found between the control and treated groups in terms of production output, value added, employment, and tangible assets. The treated group shows an uptrend after recommendations start expiring in 2017.
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- Even though the reservation policy may positively affect the production activity of SMEs during the protection period, this influence does not extend to related industries as the production of large enterprises contracts during the same period.
5. Policy Recommendations for Moving Forward- Considering the lack of significant impact on the performance of SMEs despite the strong measure of restricting the expansion or entry of large enterprises, it can be concluded that the effectiveness of the policy operation is low.
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- With similar objectives and means, Korea implemented another reservation policy for over 20 years, from 1982 until its termination in 2006, as doubts about its effectiveness grew.
- In the absence of empirical discussions on the effects of its previous policy, the government introduced the reservation policy as part of a new policy narrative for promoting shared growth between SMEs and large firms.
- The two main goals of the current policy are protecting SME business territory and securing their competitive advantage. The first goal has been met to some extent as it helped SMEs remain operational in the market, but enhancing their performance or competitiveness proved futile.
- What is more, it turned out to be of little help to the growtho f relevant industries.
- The reservation policy for SMEs needs to consider the potential downsides: hindering industrial growth, reducing efficiency in investment and resource allocation due to uncertainty over the selection of reserved products, and adverse effects on consumer welfare.
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- While the policy may benefit smaller producers by providing them with a safeguarded market, the overall growth of associated industries is likely to be undermined.
- Martin et al. (2017) find that the dismantling of India’s Small Scale Reservation Policy led to increased employment and production in the region, driven by the growth and entry of businesses that were restricted by the reservation policy. - The products reserved for SMEs, though not many, involve a wide range of industries. This creates uncertainty as it implies that almost any industry can potentially be designated as SME-suitable and subjected to market regulations. This uncertainty poses a significant challenge to the policy.
- The greater the uncertainty about the market, the less incentivized businesses are to engage in that market and invest in domestic production facilities. - A policy that restricts production activity in a specific business area solely based on firm size may inadvertently undermine the efficiency of resource allocation in the broader economy.
- Another negative consequence is that SMEs have an incentive to stay small, as policy protection for SMEs is no longer available for those growing into large enterprises.
- Enterprises of all sizes should be encouraged to contribute to job creation and industrial growth.
- While the policy may benefit smaller producers by providing them with a safeguarded market, the overall growth of associated industries is likely to be undermined.
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- Other considerations should include restricting consumer choice and welfare, losing opportunities for shared growth through partnerships between SMEs and large enterprise, and potential reverse discrimination against domestic companies when importing foreign products.
- On the one hand, the reservation policy should be gradually phased out by suspending new applications. On the other hand, supporting the growth of competent SMEs should be set as a goal of the shared growth policy by establishing effective measures to regulate anti-competitive and unfair practices.
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- Policy implementation strategies for the shared growth among small, medium, and large-sized companies came amid the interplay of multiple factors. One is criticism of the Lee Myung-bak administration’s deregulatory corporate agenda that resulted in a reckless expansion of conglomerates since its inauguration in 2008. Others are escalating polarization between SMEs and large firms and unfair trade practices, such as large firms’ requests to lower unit prices for suppliers.
- Improving the effectiveness of the shared growth policy that has been under implementation for over ten years requires revisions through substantive reviews of existing policies as well as beneficiary-centered evaluations of performance and outcomes.
- Recent disruptions in global supply chains have highlighted the importance of a resilient and robust corporate ecosystem. In addition, strong partnerships and networks between firms have emerged as key to winning the global competition.
- The effectiveness of existing policies like the win-win world (Sang Saeng Nuri) and the partnership profit-sharing initiative should be examined, together with providing full support for independent technological development and cooperation between SMEs and large companies.
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- The policy direction should focus on the two aspects. Firstly, the government needs to strengthen public remedial measures that can be instituted by the Korean Intellectual Property Office and the Korea Fair Trade Commission. Secondly, a fair competition ecosystem should be fostered by strengthening the system of intellectual property creation and protection.
- Efforts should be made to address improper practices like technology theft, idea duplication, and the pirating of services developed by startups. Manipulation of price competition by acquiring technical data from subcontractors as a delivery condition and inducing OEM partners to manufacture similar products must also be rectified.
- In an effort to bring out the full potential of SMEs to innovaet, the European Union is actively pushing for the Intellectual Property Action Plan, which intends to strengthen the system for creating and protecting intellectual property (European Commission, March 2020).
- The policy direction should focus on the two aspects. Firstly, the government needs to strengthen public remedial measures that can be instituted by the Korean Intellectual Property Office and the Korea Fair Trade Commission. Secondly, a fair competition ecosystem should be fostered by strengthening the system of intellectual property creation and protection.
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