The proposal that large firms be compelled to “share” their profits with suppliers was just one of many ideas put forth for a “fairer” economy near the end of the President Lee Myung-bak administration. Such proposals especially gathered steam with the general leftward shift of the political landscape after Park Won-soon’s victory in the Seoul mayoral election in October 2011. — John.
By John Power
The concept of profit-sharing has been controversial since its announcement in early 2011 by Chung Un-chan, a former prime minister and current head of the Commission on Shared Growth for Large and Small Companies.
Chung, appointed by a President Lee Myung-bak desperate to shake off his pro-big business image, rankled conglomerates by proposing that some of their “excess” profits be directed toward the growth of small and medium-sized businesses. After complaints that the commission was trying to force profit-sharing, and a boycott of related negotiations by the Federation of Korean Industries, Chung and his colleagues earlier this month agreed on a watered-down system, renamed “cooperation benefit sharing.”
Under the system, which is voluntary unlike the earlier proposal, large companies may share their profits with suppliers based on prior agreements. The commission will then grade large companies on their support for smaller firms, with high-scoring companies benefiting from government incentives such as advantages in winning public orders. While avoiding the uproar of the initial proposal, big business representatives complained the measures were vague and agreed to without them. To many businesses and supporters of the free market, the idea of any such commission at all is worrisome.
Economic Reform Research Institute researcher Wi Pyoung-ryang, however, believes the commission is a necessary counter to chaebol dominance.
“Of course, the organization is positive and necessary in the Korean economic structure in order to narrow the profit gap between large and small companies, and revitalize small companies,” Wi told Voice.
While he “can’t judge” yet whether profit-sharing should be compulsory, Wi also believes that certain industries should be left to small and medium-sized businesses. As part of its mandate, the commission has “recommended” that conglomerates stay out of, or withdraw from, certain industries such as tofu and cardboard boxes.
“Some business territories should be left for small companies for short terms such as three-five years. With this, small companies can have their competitiveness,” said Wi.
|Chairman Chung Un-chan of the Commission of Shared Growth Between Large and Small Companies (Yonhap News)|
Oh Jeong-suk of the Small & Medium Business Corporation said that small businesses are currently facing a number of stern challenges in the current environment.
“There are three different types of difficulty, one is the financial problem. The second is the lack of manpower. The third one is marketing. Korea’s market is so small and we have go abroad to sell our products,” said Oh, who stressed that he was speaking in a personal capacity only.
Accordingly, Oh believes that small companies need to be given a chance to grow out from the shadow of large conglomerates.
“Thing is, many chaebol dominate all our industry. It is such a big dominance compared to other nations so I think government will play a role in that,” said Oh, adding that he would support forced profit-sharing “if it is necessary.”
“The chaebol make some of sort of franchise … every corner, every street and they open a small bakery store and then they can be able to profit from them. So there is no place to go for small business owners and self-employed in these times; so the government has to get involved to balance small business and the chaebol.”
Those representing big businesses are less enthusiastic about being told in what areas they should or shouldn’t expand.
Industries suitable for SMEs may not be unilaterally designated, but refer to business sectors that SMEs have a competitive edge over large companies, for example, customized suits, house beer, special glass, special vehicles etc,” said a high-level source within FKI who did not wish named.
“In addition, suitability on the market is determined by consumers. As technology develops, an industry that used to be suitable for large companies can also turn into a field suitable for SMEs and vice versa. Therefore, it is impossible to say that some businesses are suitable only for large companies and others are only for SMEs.”
Kwon Hyuk-cheol, the head of the market economy research team at the Center for Free Enterprise in Seoul, said that consumers will suffer if businesses are restricted from certain industries.
“Regardless of big business or small business, the one that best serves the consumer will survive. If a big business offers a product at a cheap price, that is a big benefit for a consumer. In order for businesses to best serve the needs of the consumer, competition is by all means necessary,” he said.
Kwon also questions the common assumption that big business can only expand to the detriment of smaller players.
“People say that when a big business advances, a small business is bankrupted but that is only reporting one side. It is true that small business in direct competition with big business will face challenges. However, through such competition, a small business with a competitive edge will grow and develop.
Furthermore, the advantage of learning to reorganize resources for increased efficiency should not be overlooked,” he said.
While even the KFI said “that the Commission of Shared Growth will play an important role in enhancing competitiveness of domestic industries and in strengthening and developing the national economy for all Korean citizens,”
Kwon doesn’t believe it has any legitimate function.
“The presence and activities of the Commission on Shared Growth for Large and Small Companies are entirely unnecessary. Big and small businesses alike should voluntarily strive for their growth. To force businesses to grow is a laughable matter. I do not think the Commission on Shared Growth for Large and Small Companies is more interested in the growth and development of small businesses than that of the big businesses,” he said.
But moves to restrict the growth of conglomerates in favor of small businesses haven’t just come from the commission on shared growth. The Democratic United Party recently announced a plan to ban affiliates of the top 10 chaebol from making investments in companies above 40 percent of their worth.
Some, such as civic group Citizens’ Coalition for Economic Justice, even believe such measures should go further.
“Target companies should be large companies whose total assets are more than 5 trillion won,” said a spokeswoman for CCEJ who did not wish to be named.
“However, the DUP only argues about the top 10 conglomerates. Secondly, we also argue that the investment limit (be) 25 percent, which is also different from the DUP’s proposal. The DUP argues for 40 percent. We (also) strongly argue that cross-holding should be prohibited, we mean a total ban.”
Ultimately, the question of whether to intervene in the market can be about practicality as much as ideology. Yonsei School of Management professor Shin Dong-youb recognizes the merits of profit-sharing but wonders about its feasibility.
“Profit-sharing in this form has a lot good purposes but it has a lot problems too so it should be examined quite carefully because profit sharing asks companies to reduce their profits so that others, for example suppliers and smaller companies, can increase profits,” Shin said.
“The general purpose itself is good but the practical way to make this kind of thing is quite a tough challenge.”