Corruption and infighting dog growth sharing in Korean government poicies aimed at empowering small businesses

Corruption and infighting dog growth sharing

Government initiative spawns big problems in small business sector

Dec 30,2013

The government’s economic policies aimed at empowering small businesses, particularly mom-and-pop stores, to compete against conglomerate-backed larger businesses have turned out to have unpleasant side effects. Some organizations advocating the protection of small businesses are embroiled in controversy over collectivism, corruption and striving for hegemony.
A growing chorus of voices contend the original goal of achieving shared growth between large and small businesses has fallen by the wayside.
So-called product suppliers are small private supermarkets that have exclusive contracts with major retailers. They not only receive products from major retailers like E-Mart and Lotte Mart at 10 percent to 20 percent less than other small neighborhood stores, they receive support in such areas as management and business know-how.
An estimated 300 product supplier supermarkets are spread out across the country.
However, mom-and-pop stores and other small shops see them as an arm of the conglomerates, a smaller incarnation of the super supermarket (SSM), which is operated by large corporations.
As the conflicted situation deepened, major retailers signed an agreement with the Korea Supermarket Cooperative Association (Kosamart) in October stipulating they would supply goods only through Kosamart instead of directly to small supermarkets.
But Kosamart’s demands didn’t stop there. With more than 20,000 members, the supermarket association wanted to charge for the use of its distribution centers.
And that is not sitting well with major retailers.
“The reason the association wants us to pay for use of their distribution centers is because the centers that were built with government subsidies have become useless,” said a spokesman for a large retail company who asked not to be identified. “If they demand excessive payments, we will have no choice but to raise the price of the supplied goods.”
The retailers are not the only ones feeling uncomfortable with the supermarket association throwing its weight around. Independent product supplier owners who receive goods from retailers are also walking on eggshells.
“Small businesses in the neighborhood often blame me for their poor sales and criticize me for making a profit by selling large retail corporations’ PB [private brand] goods at cheaper prices,” said 52-year-old Choi Kyung-san, who operates a business in Yongsan, central Seoul.
“I do understand their position, but I think it is going too far when they try to block my business.”
Conflicts are even brewing between representatives of small merchants in regard to setting up a legal organization.
Currently, the move to establish a legal organization representing small merchants is largely led by Park Dae-choon, chairman of the Korea Federation of Bookstore Association and Choi Seung-jae, president of the Cooperative of Internet Culture Contents Provider in Korea.
The two committees have engaged in a tug of war with fierce accusations throughout this year.
Experts point out that behind the fierce turf war is 1.1 trillion won ($1.05 billion) in financial support by the government once a legal representative group is established. Each group wants this government funding as their own.
“Initially, we planned to issue the establishment approval by the end of this year, but we cannot make any decision now, as the mutual interests have been intertwined among these small business groups,” said a spokesman for the Small and Medium Business Administration (SMBA). “At the bottom of the fierce fight between the two forces lies the 1 trillion won budget for small businesses.”
Meanwhile, Kim Kyung-bae, chairman of Kosamart, was summoned Dec. 19 in a police investigation of alleged corruption.
Taking advantage of his chairman position, Kim allegedly supported an unqualified cooperative to receive an unfair subsidy in the construction of the Gyeonggi Northern Logistics Center in Uijeongbu, North Gyeonggi, where a total 8.2 billion won is invested, including 2.8 billion won from the local government and 5.4 billion won from private sources.
“Kim allegedly received 2.8 billion won of subsidy from the government by inflating the number of cooperative members to 120 using forged signatures,” said a police official.
The chairman also has been investigated by police in May for allegedly embezzling 316.54 million won in education fees for small businesses subsidized by the Small Enterprise Development Agency under the SMBA.
“Although the Small Business Association is a support group for small business owners, not a for-profit organization, fighting for individual interests is continuing as the strife over hegemony intensifies,” said Lim Chae-woon, professor at Sogang University and the chairman of the Korea Distribution Association.
“The greed of some representatives and organizations for small business owners that are taking advantage of the slogan can put a damper on efforts to create shared growth between large corporations and SMEs,” said Park Joo-young, an entrepreneurship and small business professor at Soongsil University.
While representatives of small merchants abuse their power and the conflict continues to expand, major retailers went to the Constitutional Court to challenge local government restrictions that limit their business days.
The Constitutional Court on Thursday declined to consider the case, saying local governments have the right to limit business days or hours of major retailers as well as SSMs as they see fit.
BY KIM YOUNG-MIN, KIM JUNG-YOON [kjy@joongang.co.kr]