Developing Competitive SMEs in Korea KIF-World Bank Workshop, Seoul A April 4, 2013 il 4 2013 Hamid Alavi World Bank Group
SOME OBSERVATIONS ABOUT SMEs They account for half of value added and nearly 80 percent of 1 jobs Most competitive SMEs have developed through supplier 2 networks with Chaebols Except those in Chaebol netw ork m ost others are in low Except those in Chaebol netw ork, m ost others are in low 3 value added activities, and in services, despite SME policies of 1 9 8 0 + They are generally less productive than larger companies Th ll l d ti th l i 4 4 and most remain small over time… rate of informality high Only a sm all portion ( 1 percentile) grow and account for O y a s a po t o ( pe ce t e) g o a d accou t o 5 5 the bulk of value added and jobs Rate of business entry is low 6 7 SMEs face different constraints com pared to large firm s or those in Chaebol netw ork. Finance is am ong m any constrained and som etim es not to m ost im portant one… 2
SMEs are predominantly involved in low-added activities across a large selection of industries. 3 2 . Situation Analysis of SMEs ( B)
SME Productivity • SME labor productivity below other • Material share of informal sector countries in the economy SME Labour Productivity (US$’000) Share of Informal Sector to GNI 120 % 103 60 53 100 93 Korea 27.5 50 85 78 76 80 36 36 40 40 65 31 55 60 30 51 42 20 14 13 40 9 10 15 20 0 0 0 Source: World Bank from various sources Source: Schnider (2002) 4
Young and high growth firms are main contributors to gains in value added and employment • New firms accounted for 90% of net job creation • Top 1 percentile mfg firms accounted for: – 70% of additional GDP f – 46% of new jobs created • Top performers are in all sub-sectors Change in Value Added 2 0 0 0 -2 0 0 5 Change in Em ploym ent 2 0 0 0 -2 0 0 5 70000 60000 50000 00 ‐ 2005 40000 nge in Value Added, 200 30000 20000 10000 10000 Chan 0 ‐ 10000 ‐ 20000 Percentiles 5 Source: World Bank based on Economic Census 2001 & 2006 and Census of Establishments & Enterprises 2005, DOSM 5 2 . Situation Analysis of SMEs ( D)
Competitive sectors register more high growth firms • Competition encourages firms to innovate and renew technologies Rubber Wood Wood Elect. El t Equipment Communication Apparel Equipment Paper Vehicle Textile Tobacco Tobacco Office Office Petroleum Equipment Source: World Bank based on Census of Establishments and Enterprises 2005, DOSM 6 6
The rate of business formation in Korea is robust, but lower than in high income countries Average Entry Density 1/ (2011) 4.5 4 3.5 3 Korea Korea 2.5 2 1.5 1 5 1 0.5 0 Malaysia East Asia Europe & Latin Middle East South Asia High Pacific Central America & & North Income Asia Caribbean America 1/ Entry density: no of newly registered over working age population Source: Development Research Group, World Bank 7
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Entrepreneurship attitudes influenced by low perceived capabilities and fear of failure • High media attention but only 5% had intentions to start business Entrepreneurial Attitudes and Perceptions in Korea and Selected Countries Emerging markets Developed countries (%) (%) (%) (%) Malaysia Brazil China Chile Germany Japan Korea UK US Media attention for 88 81 77 46 49 59 61 52 68 entrepreneurship entrepreneurship High status to successful 69 79 77 71 77 52 71 77 76 entrepreneurs Entrepreneurship as a good 56 78 70 87 53 28 68 51 65 career choice Perceived opportunities 40 48 36 65 29 6 13 29 35 Perceived capabilities Perceived capabilities 24 24 58 58 42 42 66 66 42 42 14 14 29 29 52 52 60 60 Fear of failure 45 33 32 22 34 33 33 30 27 Entrepreneurial intentions Entrepreneurial intentions 5 5 27 27 27 27 38 38 6 6 3 3 10 10 5 5 8 8 Source: Global Entrepreneurship Monitor , 2010 9
SOME OBSERVATIONS ABOUT SME POLICIES AND PROGRAMS SME policy in the 1960s was one of protection and promoting 1 SMEs within a vertical structure of large businesses Following WTO and when Korean growth model was exposed to Following WTO and when Korean growth model was exposed to 2 external shock of financial crises, SMEs viewed as source of job creation and growth Policies have shifted form protection in 1 9 6 0 s to 3 com petitiveness and prom oting start ups and innovation Strategy should be evidence- based w ith a strong M&E Strategy should be evidence based w ith a strong M&E 4 4 c o m ponent and flexible as realities change and outcom es are evaluated. ( M&E built in) SME strategy should be about facilitating entrepreneurship 5 and enabling small firms to grow Governments try to through money at the problem. Too many y g y p y 6 6 Programs, impact and effectiveness hard to measure. Focus should be on addressing market/information imperfections Only a handful of high impact programs needed each led by a 7 single agency… Another agency coordinates and monitors 10
Guiding principles The programs under the implementation plan are developed based on the The programs under the implementation plan are developed based on the following guiding principles are: (a) demand driven (a) demand driven, (b) based strongly on public-private partnership, with SME programs owned by the government and delivered by the private sector, (c) (c) reduce budgetary burden by tackling market imperfections and reduce budgetary burden by tackling market imperfections and information asymmetries, and thereby creating markets for SME service delivery, (d) ease of monitoring and evaluation – Only six high-impact programs ( ) g y g p p g rather than 290! (e) evidence-based (impact through M&E) and therefore subject to adjustment ("live Masterplan"), and (f) simultaneous implementation of the programs to reinforce each other. 11 11
Consistent with Clear The support strategic accountability accountability must deal with a must deal with a direction of the for Programs market failure government Serve as a catalyst for local Must represent markets and Principles p value for money value for money capacity for capacity for commercial service providers Involve Private Avoid Results must be sector in substituting measurable and administration public money for measured measured and delivery d d li private money . 12
Background on Malaysia SME Masterplan “Transformation “SMEs as the “Bottom through reinvigorating engine of growth 40%” the private sector” and innovation” SME MASTERPLAN 2011-2020 ( SME Corp. & World Bank) Phase 1 Phase 2 (Sep 2010 (Sep 2010 – Apr 2011) Apr 2011) (May 2011 – Sept 2011) (May 2011 Sept 2011) • Current Status of SMEs; • Key Performance Drivers and Factors Key Performance Drivers and Factors Inhibiting Growth; • Action Plans & Monitoring • Impact of Government Initiatives; and Mechanism • Moving Forward: Policies, Strategies and New SME Development Framework and New SME Development Framework 13
Current Status of SMEs SME MASTERPLAN 2011-2020 Productive and competitive Low productivity of SMEs SME SMEs Business formation lower than Intensify rate of business high income countries high income countries formation Small no. of firms account for Increase number of high g bulk of gains in GDP & employ growth firms Intensify formalization Material share of informal sector 14
SULIT Six key Drivers of SME performance Regression analysis showed: g y Innovation and Technology • Innovation and technology: highest impact on TFP & employment growth Human Capital Human Capital • Skills, finance, market access and to a lesser extent infrastructure and regulations also Access to Finance important on TFP, wages & employment growth. Access to Markets • Impact differs by size of establishments Regulations and Bureaucracy Critical to enhance all these drivers Critical to enhance all these drivers Infrastructure and Security simultaneously as shortcomings from any one factor can weigh down on Source: World Bank based on Malaysia Productivity and performance prospects performance prospects Investment Climate Surveys (PICS) 2002 & 2007 15 SULIT
Government initiatives • SME development framework under NSDC has enhanced coordination across 16 has enhanced coordination across 16 Initiatives ministries and 60 agencies • RMK9: RM26 billion (11 6% of DE) spent on • RMK9: RM26 billion (11.6% of DE) spent on 500 programs • In 2011, RM5.9 billion for 219 programs In 2011, RM5.9 billion for 219 programs • Big programs were on financing • Too many small programs Assessment Assessment • Assistance mainly Government dependent Assistance mainl Go ernment dependent • Difficult to assess impact of programs due to lack of monitoring and evaluation (M&E) g ( ) 16
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