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Dissonance hinders aid to small businesses

Mismatch remains in views of what small exporters need


Ahn Yong-joon opened his auto frame manufacturing company TLtek in 2000, using former business connections to form contracts with car companies in Japan. Looking beyond doing business locally, he set his sights abroad from the start.

“There is no other choice than to export,” Ahn said, considering the limited size of the local market.

A decade later, nearly 60 percent of his $26.4 million in sales in 2011 came from exporting to Japan, Europe and GM factories worldwide ― a 16.5-fold expansion leading Ahn, company president, to employ 180 workers among his three factories here and one in China.

Opening to trade has shifted from beneficial to necessary as Korea’s 10 free trade agreements have made trade easier not only for Korean businesses but also for companies abroad to take advantage of Korea’s market.

“SMEs’ need to adjust to globalization is inevitable,” said Kim Eun-sung, head of the regional industry promotion team at the state-run Korea Trade-Investment Promotion Agency, or KOTRA. “Because of the limited size of the South Korean market, Korea and its SMEs should fully harvest the benefits of FTAs. In order to do so, we must first globalize SMEs.”

Despite the popular perception by policymakers, academics and seasoned business owners that globalization is inevitable and trade is a necessity, quasi-government organizations like the Korea International Trade Association and KOTRA face several challenges in aiding small businesses, including a stubborn audience: The proportion of SMEs that are trade-oriented is relatively small ― and even fewer wish to open up to trade.

Only 38 percent of SMEs here were exposed to trade in 2006, according to a survey conducted by Lee Joon-ho, senior research fellow at the Korea Small Business Institute. Of the remainder which didn’t trade, more than 60 percent of owners said they didn’t feel the need to internationalize, or open up to importing or exporting, primarily because “they do not or cannot perceive any threats from globalization,” Lee reported, adding that this trend seems to continue today.

“When you open your country with an FTA ... that means that anybody can import, much more easily than before, products which are not produced inside of this country,” Lee said in an interview with The Korea Herald. “The items become competitive. Many Korean companies are not aware of that situation.”

Part of the reason, Lee suggests, is that SMEs don’t directly experience the pressures of globalization. Many of those small businesses are second- or third-tier producers, only supplying materials and parts to bigger local businesses that finish the product to export.

“(Government agencies) don’t provide much policy or incentives for SMEs” to globalize, he said.

The SMEs’ lack of awareness poses further problems for exporting producers such as TLtek, which need special paperwork to take advantage of the tariff-cutting benefits of free trade agreements. To qualify for the cuts, Ahn must provide certificates of origin for the materials in his products to verify that at least a certain proportion originated in Korea. But since his smaller suppliers deal strictly with local businesses such as his, they don’t understand the procedure. His company thus spends significant time and money teaching those suppliers what to do, detracting focus from expansion. 
Korean and Bangladeshi workers construct an automobile component at TLtek’s factory in Ansan, Gyeonggi Province. (Elaine Ramirez/The Korea Herald)
Korean and Bangladeshi workers construct an automobile component at TLtek’s factory in Ansan, Gyeonggi Province. (Elaine Ramirez/The Korea Herald)

“Since the smaller companies that supply mine don’t benefit from the FTA, they are often ignorant about FTA procedures and feel burdened to follow the required steps ... It is difficult for us to educate all our suppliers.”

In order to aid trade, Ahn says, that is where government agencies could do well to step in ― educating smaller businesses that supply to exporting companies.

Such a system in fact exists. For Lee Ki-hun, CEO of Neo MetroKhan, the companies he contracts out to produce IT accessories he designs were taught by customs officials how to coordinate the documentation, which he says is considerably simpler for IT products.

Indeed, KITA, KOTRA, the independent Korea Federation of Small and Medium Businesses and others boast a wealth of services to assist in trade. CEO Lee calls KOTRA’s regular market information and trade fair email notices “useful spam” to help him keep abreast of global market situations. KOTRA charges a business 20-30 percent of the expense of the service it provides and covers the rest. Similarly, KITA’s new “one-stop” online trade assistance service called TradeSOS was launched July 30 for businesses to get one-on-one help for their specific problems and look up solutions to past cases.

“Nowadays, I think the government assistance available is great,” Ahn said, particularly compared to the system he observed in Japan.

But while there is a plethora of services available to aid those small businesses, he sees that the fundamental problem impeding their full utilization is that businesses are usually too busy and short-staffed to find them.

“There is no bridging system to connect KOTRA with companies ... Most often, businesspeople don’t have time or personnel to visit with or contact KOTRA,” Ahn said, evidenced by his suppliers that haven’t asked for government help regarding the certificates of origin.

After receiving a 30 million won ($26,600) government start-up loan, Ahn no longer approaches agencies like KOTRA for assistance because he finds the help they provide to be too general and does not meet his acutely industry-specific needs.

Lee also says that many small businesses complain that they had been unaware of the services available. “(Government agencies) are providing a whole bunch of policies and programs for SMEs to export to foreign countries,” he said. “Many of them are complaining, ‘I didn’t know there was that kind of program.’ It means that it is not very well known to the SMEs.”

CEO Lee happened upon a newspaper ad for KOTRA one year after launching his company, and it took Ahn over seven years to hear about the agency through the Korea Die Mold Industry Cooperative, an independently run support system he depends on instead. Such public organizations could have helped Ahn when his company was still fledgling, he said, but he only learned about them when such assistance was no longer necessary.

To close this information gap, Lee says agencies should be more active in approaching small companies that could benefit from its help.

“The government should pursue. They have to provide information and advertise what we have ... but it’s not happening.”

Furthermore, there is a clear dissonance between what aid small businesses believe they need and what the government thinks they need in order to globalize, he said. While the government easily identifies SMEs’ key problems as internal, or structural, the businesses themselves see their biggest hurdles as external, such as creating trade relationships with companies abroad ― a conflict of ideas that leads to an imbalance in related program and policy implementation, he said.

“The government has a tendency of thinking that they know what is wrong with small and medium enterprises,” Lee said. “SMEs may need practical information but the government provides more formal services to SMEs.

“From the aspect of SMEs, sometimes those programs are not really useful for them. There’s a discrepancy between perceptions about the needed export-supporting policies between government officials and SMEs.”

CEO Lee says the biggest challenge for small IT exporters like his own is gaining market access, which is why he participates in trade fairs and overseas exhibitions to meet buyers.

“It’s not easy to expose what we are doing to the market ... so I think this kind of fair is a meeting point for sellers and buyers (to come) together,” he said during KITAS 2012, an exhibition in Seoul for small IT businesses held in July.

On the other end, KOTRA’s Kim says the most common obstacle SMEs face when preparing for global activity is their difficulty with language barriers. “No matter how great a product is, it is impossible to sell it without communication.”

While CEO Lee and Ahn did not identify it as their biggest problem, they agreed that language was a factor vital to their companies’ survival.

The problem is further exacerbated by SMEs’ fierce competition with larger local companies ― not only for market share, but for employees as well.

With language skills in high demand at big globalized companies, multilingual young workers who sign on at small companies switch to jobs at bigger firms after just a few months of working, Kim said.

Along the same line, Ahn says he struggles to find qualified young workers in Korea to fill his labor-intensive positions as well as the office positions, both of which require long hours though for competitive pay.

He must fill the labor-intensive openings with migrant workers such as those from Bangladesh or other South Asian countries who may not speak Korean or share the same work ethic as their Korean peers, according to his experience. Furthermore, such workers willing to do the job are in such high demand in his industry that they can easily move from one company to another in favor of marginally better working conditions, affecting the stability of his labor force. Ahn says the government protects those workers well by enforcing salary minimums, but doesn’t help companies retain them.

As for his office positions, he attributes the lack of interest to not only the long hours― Ahn himself works 12 hours a day plus Saturdays ―and unfavorable location of his factory in Ansan, Gyeonggi Province, but also the local stigma attached to working for a small business. Despite his own company’s success, ambitious, qualified young people (and their parents) especially aspire to work under well-branded names such as Samsung or Hyundai and don’t give a second thought to working for lesser known companies like his, even if they might earn invaluable work experience there, he said.

“I opened a new office near the subway station to get younger workers just for design, but even then not many applied to work here, probably because we are a small company,” he said.

Ahn suggests that the government could help by educating young people about working in his industry to put it in positive light.

Even though a recent study showed that 25 percent of college graduates have given up on finding jobs, Kim says this youth employment shortage is widespread among small businesses.

“The problem is hard for KOTRA or the government to help SMEs to solve. SMEs should find their own solutions to the problem but they have a difficult time finding the right one.”

Lee attributes this problem of youth disinterest in part to the working mentality in Korea that does not fully embrace entrepreneurialism. Compared to in the U.S., where venture capital is comparatively easy to get, starting a business in Korea requires a wealth of experience and personal connections. Even Ahn and CEO Lee had their beginnings in former Daewoo Motor and Samsung Electronics, respectively, and both said they would not have attempted to start their own businesses if it were not for their already existing business connections.

In the long run, Lee suggests that fostering entrepreneurialism and raising awareness about the imminence of globalization will require a change in mentality through education.

“It’s important to educate (students) at an early stage ...(about) how big, how large, how wide the world is, what is going on outside of this country, why it’s important to be a global entrepreneur,” he said.

For now, trade-promotion agencies must still figure out how to effectively reach out to SMEs in need of trade assistance. Lee says the most reasonable course of action to attain KOTRA’s goal of getting SMEs to go global is aggressively educating them on the changing conditions in the marketplace.

“We need to advertise, educate what’s going to happen to them. You (SMEs) need to prepare yourselves.”

By Elaine Ramirez  (eramirez@heraldcorp.com)

Intern reporter Lee Jin-yung contributed to this article. ― Ed
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