A Shift in SME Policy: From Protection to Growth

Summary

Small and medium-sized enterprise (SME) policy should shift away from a protection- and subsidy-centered approach toward one focused on boosting productivity and supporting growth. In 2023, the labor productivity of manufacturing SMEs was only one-third that of large firms, showing that the core problem facing SMEs is not simply their smaller scale, but the productivity gap. Accordingly, policy financing and R&D support should be tied not to simple survival assistance, but to technological innovation, automation, digital transformation, and market expansion. Ultimately, policy must move beyond viewing SMEs merely as weak players, create conditions for labor flexibility, deregulation, and scale-up, and evaluate policy performance not by “how much support was provided,” but by “how many strong firms were created.”

SMEs are the foundation of the Korean economy. In terms of both the number of firms and employment, SMEs account for the overwhelming majority of the Korean economy. Yet whenever SME policy is discussed, the repeated approach has largely been the logic that “because they are small, they must be protected.” The government has supported SMEs through policy financing, subsidies, tax support, public procurement, adjustments to 납품단가, regulation of large firms, and various protective devices. To be sure, SMEs do have weaker financing capacity, greater difficulty securing workers, and greater vulnerability to business-cycle fluctuations and changes in transactional relationships, so some degree of policy supplementation is indeed necessary.

However, when protection is prolonged and support becomes habitual, SMEs do not grow stronger in the market; they become dependent on policy. Protection may be necessary, but protection alone does not help firms grow. The goal of SME policy should not be to keep small firms small, but to enable SMEs to grow into mid-sized firms and mid-sized firms into global firms. The key is not support for survival but support for growth—not distributing more subsidies, but raising productivity, lowering barriers to market entry, and creating an institutional environment in which firms can expand in scale.

Recent labor productivity statistics in manufacturing clearly illustrate this problem. According to the Korea Productivity Center’s 2025 Labor Productivity in Manufacturing by Firm Size and Industry, total labor productivity in manufacturing in 2023 was KRW 213.70 million, down 5.7% from the previous year. Labor productivity was KRW 422.50 million in the large-firm sector and KRW 138.50 million in the SME sector. The labor productivity of manufacturing SMEs was only 32.8% of that of large firms. This shows that the essence of the SME problem lies not simply in being small in scale, but in the productivity gap. When productivity is low, it is difficult to raise wages, recruit strong talent, and sustain investment in technology. In turn, labor shortages and technological deficiencies lead back to stagnant productivity. SME policy should be redirected toward breaking this vicious cycle.

Is SME protection functioning as a ladder for growth?

SME protection policies begin with good intentions. Compared with large firms, SMEs have weaker financial capacity, are more vulnerable to downturns, and have less bargaining power in business relationships. That is why the government has supported SMEs through policy financing, R&D support, expanded public procurement, and regulation of unfair trade practices. But good intentions do not always produce good results. If policy does not operate in a way that strengthens firms’ self-sufficiency and productivity, support can become not a ladder for growth but a fence of dependency.

First, protection-centered policies can weaken firms’ incentives to grow. If firms receive more support and benefits by remaining below a certain size, while growing brings more regulation and costs and less support, then firms have an incentive to maintain their current status rather than expand. In a structure where more benefits go to firms that do not grow, rather than more opportunities going to firms that do, the dynamism of the economy as a whole is bound to weaken.

Second, support centered on subsidies and policy financing carries the risk of selection failure. It is difficult for the government to perfectly judge which firms have high growth potential and which technologies will succeed in the market, and it is equally difficult for policymakers’ judgment to replace the market’s daily evaluation by consumers, investors, and entrepreneurs. Policy financing may be supplied in a timely manner to firms that need it, but it may also prolong the life of weak firms and delay necessary market restructuring.

Third, regulatory protection also has limits in improving SME competitiveness. Restrictions on large firms’ market entry, protection of specific industries, and administrative adjustment of supply prices may reduce some burdens in the short term, but over the long term they may weaken the pressure on SMEs to improve their competitiveness in technology, quality, price, and service. For firms to grow, they must become stronger through competition, not by avoiding it.

Support has increased, but productivity has stood still

The core of SME policy should be productivity improvement. The fact that the labor productivity of manufacturing SMEs remains at only one-third the level of large firms shows where SME policy should focus. As of 2023, labor productivity in large manufacturing firms was KRW 422.50 million, while that of SMEs stood at only KRW 138.50 million.

More important is the long-term trend. From 2011 to 2023, labor productivity in manufacturing increased at an average annual rate of 0.9%; over the same period, it rose 0.7% for large firms and 1.1% for SMEs. On the surface, the growth rate for SMEs appears slightly higher than that for large firms, but SME labor productivity was 31.2% of large firms’ level in 2011 and still only 32.8% in 2023, meaning the level gap remains large. This suggests that while SME support policies have expanded quantitatively, they have not been sufficiently successful in structurally narrowing the productivity gap. Productivity rises not with the scale of subsidies, but when technological innovation, capital investment, management efficiency, workforce utilization, market expansion, and reduced regulatory costs are combined.

Policy financing should teach firms how to fish, not just hand them fish

Policy financing is necessary for SMEs. Providing liquidity to firms facing high interest rates, weak domestic demand, and changing export conditions has some policy significance. But if policy financing is used only as survival funding, the structural competitiveness of SMEs will not improve. Helping firms experiencing temporary financial difficulties is different from continually keeping low-growth firms alive. The former serves to cushion economic shocks, while the latter leads to inefficient allocation of resources.

Policy financing should be evaluated not by “support performance” but by “growth performance.” It should not be considered an achievement simply to show how much was provided to how many firms. The key indicators should be whether sales increased after support, whether productivity improved, whether private investment was attracted, whether exports expanded, and whether the quality of employment improved. If we do not assess whether government-supported firms actually became stronger in the market, policy ends up as nothing more than budget execution.

In particular, given the productivity gap facing manufacturing SMEs, policy financing needs to focus more on productivity-enhancing investment than on simple operating funds. Policy finance should be linked to investments that increase firms’ added value, such as automation equipment, process innovation, smart factories, AI-based quality control, energy efficiency, digital transformation, overseas certification, and technology commercialization. SMEs should not merely borrow funds to endure; they should be able to use those funds to create higher added value.

It must be technology for the market, not technology for the lab

SME R&D policy should also be redesigned on the same principle. R&D should not end with technological development inside a laboratory, but should lead to products and services that can be sold in the market. Carrying out government projects, submitting reports, filing patents, and producing prototypes are all important, but what SMEs need is not the ability to perform government-funded projects; it is the ability to commercialize technology and survive in the market.

The productivity gap in manufacturing reflects gaps in technology and capital investment. In major manufacturing sectors such as electronic components and communications, electrical equipment, and automobiles and trailers, the fact that SME productivity remains around 30% of large firms’ level reflects not merely a lack of support, but accumulated differences in technology, facilities, workforce, organizational management, supply-chain position, and global sales channels. Accordingly, R&D support should move from a project-selection-centered approach to one centered on commercialization outcomes, and performance indicators should place greater weight on post-development sales, investment attraction, global certification, export contracts, and integration into supply chains with large domestic firms and global companies. Government support, too, should function not as a mechanism that replaces the market, but as seed funding that works with private investment to accelerate market entry.

Without flexible labor regulations, labor shortages cannot be resolved

One of the greatest difficulties on the ground for SMEs is labor shortages. Young people are reluctant to take jobs at SMEs, and SMEs are unable to recruit talent. But this problem cannot simply be blamed on young people’s expectations or firms’ wage levels. SME labor shortages are a complex issue involving productivity, wages, working conditions, geography, industrial structure, and labor regulation, and the fundamental solution is not simple hiring subsidies but higher productivity. Firms must be able to grow and raise added value so that wages can increase, working environments can improve, and talent can be attracted.

But when labor regulations are rigid, SMEs lose flexibility in workforce management. Uniform labor regulations designed with large firms in mind can place excessive burdens on SMEs. The 52-hour workweek system, the minimum wage, the Serious Accidents Punishment Act, and various labor-management obligations impose substantial administrative and cost burdens on SMEs, contrary to their intended purpose. Worker safety and rights are important, but applying the same institutional framework to every firm in the same way is not always appropriate. More flexible institutional design is needed, taking into account firm size, industry characteristics, regional conditions, and labor-market circumstances.

Hitting large firms will not revive SMEs

One recurring temptation in SME policy is the mistaken belief that regulating large firms will revive SMEs. Of course, unfair transactions between large firms and SMEs must be dealt with strictly. Forcing down supply prices through abuse of superior bargaining power, stealing technology, and imposing unfair contract terms all violate the principles of a market economy. A free market works only when contracts, property rights, and fair trading order are protected.

However, correcting unfair conduct and attacking large firms are two different things. Regulating large firms, blocking their business expansion, and artificially redistributing their profits do not strengthen the fundamental competitiveness of SMEs. On the contrary, such measures may weaken the cooperative ecosystem between large firms and SMEs. Many SMEs grow as suppliers to large firms, enter overseas markets through the global supply chains of large firms, and accumulate technological capabilities through joint development with them.

The productivity gap in manufacturing also demonstrates this point. In industries where the gap between large firms and SMEs is wide, what matters is not simple redistribution or protection, but technology transfer, supply-chain upgrading, joint R&D, stronger quality-management capacity, and support for entering overseas markets. The way to help SMEs thrive is not to make large firms weaker, but to create an environment in which SMEs can become stronger.

SME growth must be solved through scale-up

The greatest challenge in Korean SME policy is scale-up. Scale-up policy is different from simple startup support. Startups have increased, but there are still not enough firms that grow; many firms receive support, but not many become market leaders. Because the path for SMEs to become mid-sized firms, and for mid-sized firms to become globally specialized firms, is narrow, SME policy will remain stuck at survival support unless this bottleneck is addressed. If startup support is a policy that helps with ideas and initial market entry, scale-up is a policy that comprehensively improves the capital, talent, technology, markets, and regulatory environment so that proven firms can grow rapidly.

Scale-up requires larger funding, specialized talent, overseas market expansion, M&A, technology protection, and intellectual property strategies, and tax, finance, regulation, and labor policy must also change together. Tax incentives for investment should be strengthened, excessive tax burdens in business succession should be eased, and the sharp increase in regulation and costs that occurs when SMEs grow into mid-sized firms should be buffered. In particular, family business succession is not simply a transfer of wealth, but a transfer of technology accumulated over a long period, business relationships, skilled workers, and local jobs. Thus, while illicit succession and tax avoidance must be prevented, institutions that make even normal business succession unduly difficult should be rationalized.

SME policy: from a fence of protection to a springboard for takeoff

SMEs are not merely weak players in need of protection; they are agents of innovation, the foundation of employment, the core of regional economies, and a future growth engine of the Korean economy. If SMEs continue to be viewed only as objects of protection, policy will struggle to move beyond the framework of subsidies and regulatory protection. But if they are seen as agents of growth, then autonomy matters more than support, competitiveness more than protection, growth more than survival, and productivity more than subsidies. The fact that the labor productivity of manufacturing SMEs remains at 32.8% of that of large firms shows that the SME problem is not simply one of insufficient support, but a structural problem created by the interaction of productivity gaps, technology gaps, capital investment gaps, labor-market rigidity, regulatory costs, and scale-up barriers.

Now SME policy should be evaluated not by “how much support was provided,” but by “how many strong firms were created.” The solution lies not in expanding subsidies or strengthening protective regulation, but in boosting productivity and creating an environment for growth. Policy financing and R&D support should be designed so that they flow to firms with growth potential and so that technology leads to products and services that can be sold in the market. If the Korean economy is to regain its dynamism, it must recognize SMEs not as weak players, but as agents of growth, and shift policy away from the government’s protective shield and toward promoting productivity, market entry, and scale-up.

-- The views expressed in this contribution are the author’s personal opinions and do not reflect the official position of the East Asia Foundation.

About the Author

Gwang yong Go (Policy Director, Center for Free Enterprise (CFE))

Gwang yong Go currently serves as Policy Director at the Center for Free Enterprise (CFE). He graduated from the Department of Public Administration at Hankuk University of Foreign Studies and earned a master’s degree in public administration. He is expected to receive a doctoral degree in public administration from Korea University Graduate School. After serving as a researcher at the Korea Institute of Public Finance, he taught subjects such as local autonomy and public financial administration at Hankuk University of Foreign Studies and the Institute of Information Science Education at Kwangwoon University. He also oversaw regional development strategies and policies responding to local extinction at the Gochang Food Industry Institute. He currently serves concurrently as a director of the Korean Regional Economics Association and a director of the Korean Public ESG Association. His major research areas are central-local government relations, local autonomy and local public finance, regional development policy, regulation, and public-sector reform.

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Original title: 중소기업 정책의 전환: 보호에서 성장으로

Author: Gwang yong Go

Date: 2026-06-30

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=1&idx=29219