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The government and the Grand National Party decided Wednesday to give W4.3 trillion (US$1=W1,189) in emergency financial aid to small- and medium-sized companies to help them overcome losses from a currency derivative product called KIKO (knock-in, knock-out), designed to cushion them against minor foreign exchange rate fluctuations. The government will also expand credit guarantees to these businesses by another W4 trillion, thereby raising the total amount of assistance to W8.3 trillion.
KIKO allows businesses to sell dollars at a fixed won-dollar rate if the exchange rate stays within the range set in the contract. Businesses make a profit if the won stays within the set range, but if the won veers beyond the set limit, businesses must purchase dollars on the market and sell them back to their creditor banks at a lower price. The government and the GNP decided to provide W1.5 trillion in funds to smaller businesses and expand their debt guarantees by another W200 billion.
We must prevent a situation where promising small- and mid-sized businesses are forced into bankruptcy due to a short-term liquidity crunch. But there are serious worries that the nearly W10 trillion set aside to help them could be abused. It has happened before.
Small- and mid-sized companies make up 99 percent of all businesses, 88 percent of total employment and 50 percent of added value in the Korean economy. Since the Asian financial crisis, big conglomerates underwent painful restructuring, but small- and mid-sized firms were protected by the government and bypassed this process of weeding out weak companies, which has left some weak ones still standing. As a result, the number of SMEs that are unable to pay the interest on their debt through their operating profits rose from 0.7 percent in 1997 to 16 percent in 2005. The overall operating profit rate for small- and mid-sized businesses fell from 5.62 percent in 1997 to 4.3 percent in 2006. Over the same period, the overall operating profit rate for all Korean businesses was 6.32 percent.
A recent survey by the Industrial Bank of Korea of 140 SMEs that have remained in business for more than 30 years shows the secret to their success was to avoid excessive expansion while coming up with new products each year made using their own technology. This should be used as the standard for government assistance to such firms.
A total of 74 percent of all SMEs in Korea have developed a subcontractor relationship with major business conglomerates, and many of these big businesses cut payments to small- and mid-sized subcontractors while even making them shoulder the burden of rising raw materials costs and wages. In these circumstances, hefty government aid packages for SMEs will not help. Findings by the Korea Development Institute show that only 0.13 percent or 75 out of 56,472 SMEs back in 1994 grew into bigger companies 10 years on. That shows just how poor the environment is for small firms.
The government should use this opportunity to select the truly promising SMEs and create an environment where they can cooperate with big businesses and grow to become pillars of the Korean economy.
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