Growing a small business in any country can be a difficult project. Growing a small business in Korea is even more difficult. And while many policymakers discuss the possible reasons, nobody wants to say why. Officials speak about new growth engines, increasing foreign investment, or developing new technologies. But no one wants to speak about the elephant in the living room, that is to say the traditional Korean chaebol. But to put it bluntly, common Korean chaebol practices are strangling the domestic small and medium IT industry.
With a combination of unnecessary secrecy, restrictive and binding agreements, vertical and horizontal monopolies and even illegal, mafia-style tactics, large and well-connected companies in Korea are holding back the nation's economy.
Korean government officials and lawmakers are happy to report recently that Korea has reached a new economic level where the per capita income for the average Korean is US$20,000 and are eagerly discussing how to bring the per capita income level to the next higher bracket, US$30,000. It is prudent to say that the burgeoning small and medium IT businesses in Korea are one possibility to achieve such growth, because the small business of today is the large business of tomorrow.
At least, that is the theory, and in a fair and equitable market this would be the truth. But when large international corporations use shady business practices to control their potential competition and prevent them from growing, the entire country loses out. In trade shows around South Korea businesses have an opportunity to show their goods and offer their services to visiting representative buyers from Korea and abroad. One who visits such an event can see a throng of small tech businesses, and can at first become optimistic about Korea's future. But closer questioning reveals a more depressing trend. When asked about their company's current customers, company representatives suddenly begin to speak in quiet, conspiratorial tones.
They confide that their product has been bought by a major chaebol company, but they aren't supposed to talk about it or give details. In fact, they say, it would be better if it wasn't mentioned at all. The older brother company doesn't want to make their relationship public, and in fact told them not to put any information about their relationship on their company's web site. The secrecy and discomfort of such confessions are thick in the air.
In addition to excessive secrecy, large companies in Korea restrict small and medium companies from doing business with any other company. At the Korea IT Show a few months ago, one buyer from Europe expressed frustration to reporters at his failed attempts to find successful business relationships with small and medium IT companies in the Korean show. He said that most of the companies he spoke to already had exclusive distribution deals with large Korean chaebol and were unable to make additional deals with the European businesses he represented. The small companies were explicitly shut out from potentially profitable international business by their existing restrictive business deals with their Korean older brothers.
A third way that monstrous Korean companies restrict the growth of the economy is by horizontal and vertical monopolies. Most Koreans are most familiar with a horizontal monopoly under the term convergence. Companies that are already doing well in wired telecommunications business expand their business into related markets, such as Internet service providing and wireless telecommunications. Vertical monopolies are established by companies buying up their suppliers of raw materials and also buying up their distributors. For instance, if a company owned the entire manufacturing process of cellular handsets, from making the plastic all the way to selling the completed phones in its own brand-name stores, that company would have a vertical monopoly. Such practices are standard operating procedure on the peninsula.
The most shocking practice by Korean chaebol, however, is often a complete disregard for the laws of the land. Not content with using legal means to oppress their potential competitors, Korean companies also resort to illegal accounting practices to lie to their shareholders about their true profits. They also break the law for petty things, such as hiring thugs to perform revenge hits on people who offended their son.
The secrecy, the restrictive agreements, the monopolistic practices, and especially the illegal gangster tactics must stop if Korea ever wants to see a thriving small and medium IT business sector. And it may be that only a healthy and growing IT business sector can be the answer to achieving the next level of wealth for the nation's economy.