The growth and structural improvement of the service industry in Korea are recognized as significant factors for sustainable growth of the Korean economy as a whole. OECD(2008) suggested Korea should enhance productivity of service industry, which has stagnated at approximately the 60% level of the manufacturing sector in recent years. Perhaps the reason of such stagnation is that the service sector is mainly comprised of SMEs. In general, SMEs suffer from a shortfall of resources. An initiative for innovation becomes necessary to overcome those resource constraints. Given that, the innovation of service industry is crucial not only for the further development of Korean economy, but also for SMEs.
The determinants and underlying characteristics that bolster innovations in the service industry are in many respects different from those in the manufacturing sector. Thus, this study attempts to identify appropriate determinants for the innovation of the service industry. To that end, the hypotheses on the relationship of innovation performances with their determinants, such as firm, network, sector and institutional characteristics are established and tested against a dataset. Some practical policy implications to effectively promote innovative activities of Korean SMEs are derived from the results of the theoretical propositions and empirical analyses.
The dataset used in this study for empirical analysis is adopted from The Korean Innovation Survey 2006 on the Service Sector constructed by the STEPI (Korea Science and Technology Policy Institute). It contains 2,184 firms that have been operating with more than 10 employees in the 20 different business areas of the service industry during the period 2003~2005. Of the firms, this study focused on only 1,980 SMEs. This study, to enhance analytical effectiveness, reclassified the 20 business areas into eight sub-sectors of distribution, transportation, telecommunication, financial and insurance service, information technology, research and development, management consultancy, and media communication. This was also recently done by a World Bank survey for worldwide database of services policy.
The Oslo Manual revised by the OECD(2005) emphasizes the importance of innovative activities of service and low-tech manufacturing industry. It further adds marketing and organizational innovations as two components of non-technological innovation. The definition of service innovation in this study also includes both technological and non-technological aspects.
Theoretical argument and data analysis of this study show that most variables representing all firm, network, sector and institutional properties affected innovation performance of Korean service SMEs. Descriptive statistics show a relatively larger share of SMEs and weaker innovation performance in the service sector,vis-à-vis the manufacturing sector. Entrepreneurs thus far have been relying on more on imitation, rather than innovation when starting business. As a result, the growth of service SMEs had its limit: Their life span was relatively shorter than manufacturing SMEs and large enterprises. Innovative activities of service SMEs are more distributed on process innovation rather than product innovation, and are more distributed on non-technological innovation such as marketing and organization innovation, rather than technological innovation. However, the proportion of market-first innovation in whole innovation is larger than that of manufacturing sector, which implies that service innovation has recently been burgeoning as a new source of innovation. Just as support policies for innovation have not been as effective as in the manufacturing, so service firms have not implemented a system for rewarding innovators appropriately. In general, two sources lead the initiation for innovation in service SMEs : marketing experts and the network SMEs possess. Innovation lead by marketing experts occurs during the service delivery process. Networking with an external source is one of the main drivers for service innovation.
Cross-tabulation analysis confirmed that innovation increases as firm size gets larger. The proportion of innovative firms in the large size category with more than 300 employees is 19.7%p and 36.1%p larger, respectively, than those of the medium size category with 100~300 employees and the small size category with less than 100 employees. Regarding export orientation, the level of innovation is largest for firms with low export proportion(55.6%), compared with firms with high share of export(43.2%) and no share at all(31.2%). Innovation activities of the knowledge and technology intensive services and business service industries are mostly vigorous.
From the regression analysis, a few determinants such as firm, network, sector, and institutional properties are proved to affect innovation performance in the Korean service SME sector. For the logistic regression analysis, independent variables include firm properties (ratio of number of full-time workers to industrial average(firm size), number of full-time workers with an MA or higher degree(%) (MA degree), number of full-time workers being exclusively dedicated to R&D activities(%) (R&D staff), intensity of IT investment, compensation system), network properties (network, share of export in sales (export), share of FDI in equity capital(FDI)), sector properties (required level of expertise for service delivery, product life cycle), and institutional properties (importance of innovation support policy). Dependent variables are whole, technological, and non-technological innovation. The regression model turns out to be significant at the 1% of significance level. Most of the independent variables are significantly affecting three categories of innovation performance. Exceptions are MA degree, export, and R&D staff. MA degree does not exert any influence on performance of any category of innovation. R&D staff does not affect non-technological innovation. Export seems to have a non-linear relationship with the innovation performance.
Noticeably important implications for preparing SME policy for the service industry can be drawn from these analyses. SME policy should focus on both the promoting determinants such as firm, network, and sector properties as well as reinforcing framework conditions of institutions and policies. As in any other business firms, firm-related factors such as differentiation and competitiveness are the most important determinants that affect growth of service firms. Because these determinants are truly endogenous to the firm, service SMEs should make their own efforts to foster the level of firm-related factors. Thus SME policy should be more focused on the sector, network and institutional factors. However, several firm-related factors need to be taken care of by SME policies. Institutional bottlenecks blocking growth of SMEs toward medium or large enterprises should be removed. SMEs are to be encouraged to increase information technology investment and to set up compensation systems for innovation efforts. Due to the externality of education and training, the government also needs to put more resources on fostering service talents.
As for the sector factor: considering the diverse nature of service industry, SME policy on the service sector should be sector-specific to be effective. In some cases, policy support needs to be concentrated on knowledge intensive industries. Policy efforts would be very helpful in such fields as training experts related to service delivery and generic technology fields including information technology for the rapid innovation especially in the areas of which competition is fierce and life cycle is short. As for the development of the service industry, high quality human capital is absolutely crucial. Regarding the institutional factor, fostering human capital for the service industry is necessary focusing on global capacity and multi-skilled personnel. Supporting service-oriented research, education of service science, promoting service education courses in MBA programs, and building information and global infrastructure of the service SMEs are pressing tasks for SME policy. In addition, promoting the commercialization of innovation results, it is recommended to reinforce innovation financing, reforming sector-specific regulations, and improvement of intellectual property institution. Professional service areas such as legal and accounting, management consultancy and advertisement are absorbing high quality manpower but their innovation performances are not sufficient. Therefore policy measures to expedite regulation reform including removing entry barrier and preemptive market opening. Removing sector-specific regulatory barriers and opening market for foreign firms are essential to develop the service industry. In this respect, the 2008 OECD’s recommendations to the Korean government to remove hurdles especially in telecommunication, finance, and business service sectors may carry significant implications for the further development of the service industry in Korea.

Generally, the social responsibilities of corporations are divided into economic, legal, ethical, and charitable responsibilities. Originally, Corporate Social Responsibility (CSR) placed emphasis on ethical responsibility, but the rise of the concept of sustainability from the 2000s had an immense impact on industrial profits, business survival and growth. Discontinuing past perspectives centered simply on the right and responsibility to offer protection, a new emphasis was placed on social responsibility viewed from more strategic angles. CSR is variously defined depending on the scholar's or institution's objectives. But Carroll's 1979 model is the most generally accepted, and recently CSR is being consolidated and comprehended by a Social Responsibility Business Certification System (ISO26000). Deleting the “C” (Corporate) from CSR, the International Standardization Organization is creating a certification system that includes all social responsibilities applicable not only to industries but to organizations. It is defining CSR as a balanced approach with which to handle objectives beneficial to the economic, social and environmental problems of people, regions, communities and societies.
Results of the survey conducted by the Federation of Korean Industries targeting 350 large Korean industries showed that industries that have introduced ethical guidelines have grown to 93.5% in 2007, compared to 62.0% in 2005. Also, expenditures for social contribution activities by domestic industries have surpassed 1 trillion KRW in 2002, showing steady two-digit increases and above annually, while SRI (Socially Responsible Investing) funds invested in industries engaged in CSR activities are rapidly growing both domestically and abroad. But contributions and other CSR activities by domestic small and medium-sized firms remain few. This shows a great difference from the U.S., where CSR activities are vigorous, so much that the US Chamber of Commerce published a survey of CSR companies made up of 5 members or less. This is because small and medium-sized firms have not set up adequate strategies for CSR.
If small and medium-sized firms engage in activities for the local society, they could garner a reputation in the region and open up opportunities for business expansion in their own country and internationally. Because small and medium-sized firms differ from large firms in terms of industrial environment and scale, it is highly likely that they differ in CSR activities, as well.
Therefore, a necessary stance for elevating CSR levels of small and medium-sized firms includes not only actual studies, but also a grasp of how CSR activities impact business activities and industrial performance. CSR studies conducted to date have been limited to the relationship between social responsibilities such as ethical responsibilities and the performance of firms. And most have taken place in North America and Europe.
Most studies on CSR deal simply with the effectiveness of the CSR activities themselves. But understandings of concrete dimensions like economic, legal, ethical and charitable responsibilities, and substantial analyses of the mechanisms between CSR activities and the performance of firms have largely been disregarded.
Based on the related theories and existing studies of CSR, this study attempts to address the following research objectives. First, substantial analyses of CSR activities by small and medium-sized firms in the Daegu region were carried out for the purpose of comparing them to those of large firms. Second, it attempts to analyze the influences of CSR activities on their primary business activities like human resources, marketing, production, and technological innovation at small and medium-sized firms. This gives us an understanding of the importance to SMEs of using CSR activities in a strategic manner. Finally, instead of analyzing the simple relations between CSR of small and medium-sized firms and firms' performance, this study analyzed these relations controlling the endogeneity which may exist. In so doing, it provides an opportunity to study the mechanisms operating between CSR activities by small and medium-sized firms and their performance.
For the purpose of this study, we conducted a questionnaire-based survey of department managers, middle-managers, and staffs at 530 small and medium-sized firms in the Daegu region. Eventually, the survey data of 203 firms were collected after eliminating questionnaires with perfunctory or unreliable responses. CSR activities were measured in the CEO's mind and systemic implementation for ethical management, equal opportunity hiring, labor-management relations, customer relations, environment, etc. Business activities were divided into the fields of human resources for optimal business performance, differential marketing, production management for top effectiveness, and innovative technology capability and measured using a 5-point scale. To measure firms' performance, the ratio of net income to net sales and the return on total asset (ROE) were employed as measurement variables based on average over a 2-year period. The control variables such as number of years in operation, firm size, whether or not they were a venture company or manufacturing company, and stock ownership rates of the CEO were used in the multiple regression models.
Major results are follows. First, it was found that just like large firms, the number of regional small and medium-sized firms that also understand the necessity and justifiability of CSR activities are currently expanding. But, firm size and the CEO seems to limit possibilities for CSR activities. Second, CSR activities, which positively influence business activities, appear as determination to carry out ethical business practices, ethical business systems, and activities related to labor-management relations and customer relations. CSR activities on different types of business activities were shown to be different. Third, unlike the palpable effects of CSR activities on business activities, neither consistently positive results for firms' performance nor moderating effects for business practices were found. Finally, even using 2SLS (two-stage least squares) did not reveal a significant relationship between CSR activities by small and medium-sized firms and the performance of the firms.
We could not find substantial evidence that the CSR activities of small and medium-sized firms effect the performance of the firms. But measurement indexes for CSR effectiveness are being developed for big companies and participants in the capital market are utilizing those measurement indexes, making decisions pertaining to their investments and producing systemic devices for officially assessing company values. Therefore, this type of study must be continued in the future.
There were several limitations to the carrying out of this study. Because the subjects of analysis were limited to small and medium-sized firms in the Daegu region, the results cannot be applied to small and medium-sized firms as a whole. Second, the variables for CSR activities used in this study could not consider the totality of CSR activities. Third, there was also a limitation in its inability to adequately reflect theoretical bases and structural relations in respect to relations between the differing variables. Therefore, future studies must seek to overcome the limitations of this research.

It is a well known fact that the marketing activities of a company play a pivotal role in surviving in the current competitive business world. There is, however, no certainty or logical explanation of the correlation between corporate marketing activities and their business performance. Especially small and medium-sized enterprises(SMEs) do not have enough empirical analysis on the correlation between the measurement of marketing activities and their business performance.
This study, mainly based on Kotler’s marketing performance model, shows what factors affect their performance in the context of input level. Existing studies mainly focus in explaining the relations between specific environments such as market orientation, new product development, innovation capabilities and SMEs business performance. The purpose of this study is to find and analyze a mechanism that explains the relation as a process between internal and external environmental factors and the organization's internal capacity. It also provides some implications for the marketing practitioners of SMEs to enhance their marketing management capability and ution quality as well.
Samples are from SMEs located in Seoul and the surrounding areas. Four latent variables in marketing environmental factors are composed of competitor orientation, marketing oriented organization, top manager‘s marketing orientation, and marketing strategic orientation. In particular, we assume that the marketing capacity will directly lead to better firm performance between the marketing environment and performance variable besides the expected significant effect of the mediating variable. In the research model, marketing capacities as parameter including market research and marketing management serves as a dependent variable of the marketing environment and an independent variable of marketability. A set of hypotheses for the model was constructed to analyze the impact of the independent variable on the dependant variable with the viewpoint of marketing research. The following hypothesis are proposed:
H1 : Competitor orientation will positively influence marketing capacity.The measurement factors of competitor orientation which is one of the market orientations (Narver and Slater, 1993) contain 3 items such as ⅰ) Amount of competitor information, ⅱ) Response of competitor, and ⅲ) Competitor recognition.
H2 : Marketing oriented organizations positively influence marketing capacity.To assess marketing oriented orientation, a questionnaire composed ofⅰ) Phase marketing organization, ⅱ) Organization marketing department, and ⅲ) Cooperation between departments, was sent out to SMEs.
H3 : CEO's marketing orientation will positively influence marketing capacity.This extraneous variable is composed of ⅰ) Processional knowledge ⅱ) Understanding of marketing by the CEO and ⅲ) Leadership of the CEO.
H4 : Marketing strategic orientation will positively influence marketing capacity.Marketing strategic orientation is measured by ⅰ) Organizing strategies, ⅱ) Share of marketing strategy, ⅲ) Degree of marketing experience, ⅳ) Marketing mindset, and v) Marketing education and training.
H5 : Marketing capacity will positively influence marketing performance.Marketing capacity which is assessed from excellent previous studies (Vorhies and Mason, 2009) is measured by ⅰ) Market research ability, ⅱ) Development program, ⅲ) Application of market information ,ⅳ) Professional market research, ⅴ) Segment of market, and ⅵ) Program management.
A web-based e-mail questionnaire was sent to, and direct interviews were conducted with not only the manager level including CEOs, but also marketing staff and other division's employees of sample firms. Of those, 228 responses were used in the analysis. The fitness of the model was assessed using confirmatory factor analysis (CFA), and reliability and validity were tested. To hypothesize and analyze the causality effect, this study uses the AMOS program, which identifies interrelationships among variables through structural equation modelling. The results showed that all factors are significantly affecting the marketing capacities of SMEs except for the marketing oriented organization. This analysis also shows that there is high causal relationship between marketing capacities and marketing performance. From the hypothesis testing result, a main path for the business performance is "market orientation & marketing strategic orientation  marketing capacity  marketing performance". In other words, Small and Medium Enterprises competitor orientation and marketing strategic orientation for the marketing capacities were significant factors affecting the results. Here are the conclusions the estimation model derives from this study in detail:
Firstly, there is high correlation between the competitor orientation of organization as a environmental factor and marketing capacities.
Secondly, a marketing oriented organization is not statistically significant in affecting marketing capacities. This result can be interpreted in two ways. One is that a self-marketing organization is not complete in terms of performance, especially in the short term period, as the organization of the system lacks organizational resources, due to the nature of SMEs, the other demonstrates the fact that the marketing organization and by default, capacity and performance of activities leading to performance-based empirical analysis from the correlation, is not relevant.
Thirdly, since factor analysis shows high path coefficient between one factor that is a combination of marketing strategic orientation and marketing capacities, the hypothesis is accepted. Hypothesis testing on CEO's marketing orientation was excluded because of low goodness-of-fit.
Finally, the hypothesis on the positive influence of marketing capacities on marketing performance is accepted.
In conclusion, this study shows that in order for SMEs to obtain high marketing competency, they must have systematic marketing strategic orientation environment with marketing-oriented mindsets. These are pre-conditions to be met. Marketing organization measured with the fame of marketing organization or organization power has no influence on marketing capacities in SMEs. This result proves, in part, empirically that the marketing performance model for global or big companies in our country can be of little use for SMEs. Medium-Small size companies’ marketing capacities narrow down to the managing power of the marketing program built around information gathering on customers and competitive companies and utilizing its power. This implication differentiates this study from other precedent studies focusing on the conventional 4P's.
In other words, focusing on building marketing capacities in line with the integrated concept of valuing ‘on-spot’ market information, is much more important for SMEs than making separate marketing efforts under the conventional concept of price, product, channel, promotion, although their marketing efforts, size-wise, is relatively small. This empirical study also indicates that these companies create competitive cultures and pay systematic attention to marketing strategy and marketing staff resources to increase their capacities. In addition, the indirect effects of the mediating factors suggested to verify the role of marketing capacity and then adding the direct path between the marketing environment and business performance which is respectively an extraneous variable and an experimental variable. As a result, it did not show statistically significant results. Accordingly, you can see a significant mediating effect of marketing capacities. This is also consistent with the previous studies (Matsuno, et al., 2002; Kim, 2006; Lee, Jung, 2009; Hean K. et al., 2007), of market orientation, innovation, business performance information, technology innovation, and entrepreneurship with business performance that were carried out with empirical research.
After dividing samples into 2 groups, the manufacturing industry and the service industry, an additional analysis shows that marketing strategy is statistically significant between them. As the t-test results show, marketing strategic orientation is of a statistically significant level factor, and adopt the hypothesis within the significance levels of 5%. The result showed that the level of marketing strategic orientation levels is higher in the service industry (3.31) than the manufacturing industry (3.1) using a 5 point Likert scale. But other hypotheses (gap of competitor orientation so on) are rejected.
In conclusion, this study is placed emphasis on the role of marketing capacity, which is the kernel to lead business performance as well as to manage the process from the environment to substantial outcomes. The contribution of this paper shows a conceptualized and operationalized the marketing environment and capacity relatedness as a sequential process concept to access business performance. The paper presents an integrative framework and provides supportive evidence on the effects of competitor orientation, marketing strategic orientation culture of internal organization, and marketing capacity after due consideration of SMEs nature and special circumstances.
The limitation of this study is that the samples for developing the marketing performance-measuring model are limited to only SMEs with more than 10 employees located in Seoul and the capital area instead of doing a nation-wide sample. Nation-wide large sampling is difficult because the definition and scope of Medium-Small Size Company is arbitrary. After considering each sample companies’ characteristics and classification, a ion of samples representing the whole population should be done. Further study in this aspect is necessary.

Few attempts have been made to investigate the influences of and differences between survival and growth factors from an integrated perspective, whereas prior research has focused on the determinants of survival or growth respectively for new SMEs and venture firms. Do determinant factors of a firm's survival also play an identical role in the growth of the firm? Conversely, are there factors which influence positively on a firm's survival or deter a firm from growth?
Using a group of more than 8,000 samples, we examined empirically whether determinant factors of survival and growth are identical in ventures. First of all, we analyzed survival factors by investigating whether firms in surveys conducted by the Small and Medium Business Administration in 2003 and 2004 survived until 2008. We investigated growth factors by analyzing the growth of those surviving venture firms during the four years after the previous surveys. This distinctive approach provided us with a new perspective to understand the determinant factors of growth.
The factors we considered influencing survival and growth of venture firms were categorized based on firms’ characteristics, such as organization, manager, technology, marketing and finance. Size and age of firms were the measures of organizational characteristics while ownership of founder and knowledge level of CEOs were those of managers characteristics. The capacity for technological innovation and investment in R&D were the proxy for assessing technological capabilities. Marketing characteristics were measured in terms of networking capacity with large firms and the level of globalization. Finally we used profitability and debt to equity ratio to assess financial characteristics.
We analyzed the determinants of survival using binary logit model, where we divided sample firms into two categories, survival group and extinct group. Survival factors were sifted out through characteristics that were common to currently existing firms at the time of the 2003/2004 surveys. We investigated the determinant factors of growth using multiple regression model, where we computed growth rate of sales for each venture firm between 2003 and 2007, and used the growth rates as a dependent variable in regression analysis. Determinant factors influencing growth of venture firms were analyzed based on the firm characteristics mentioned above.
The empirical results are summarized as follows. First of all, the hypothesis with regard to organizational characteristics, was partly supported, in that their effects on survival and growth were contrary to each other. We measured organizational characteristics by business history as well as size of firms using total assets and the number of employees. Business history measured by the number of years since incorporation, in particular, has a positive relationship on survival while it has a negative effect on growth rate in line with the hypothesis. Since start-up companies have the most considerable disadvantages in their early stages, chances of survival are substantially increased as business years roll on. The growth rate, meanwhile, slows down as years roll on, since start-up companies diverge from enterprising management in their early stage and intend to pursue stability. The size of ventures turns out to have a positive effect on survival, offsetting the disadvantages of startup by benefits from economies of scale, although size does not have a significant relationship with growth rate.
Manager characteristics mostly work as a survival and growth factor. Founder ownership which is closely related to agency cost also turns out to be a survival and growth factor with statistical significance. It is interpreted as that founder ownership has a positive impact since potential agency cost between owner and manager would decrease when a founder owns and runs a venture. Academic background as a proxy for knowledge level of CEO is a survival factor, albeit statistically insignificant as a growth factor. We understand that the higher knowledge level a manager has, the more embedded technology and knowledge he or she is likely to have. High knowledge level would enhance a firm's viability in the face of shocks in the external environment as shown in prior research.
The empirical result also indicates that the capacity for technology innovation measured by the number of registered patents and patent applications turns out to have a positive effect on survival and a negative effect on growth. Although this study has the limitation that we narrowed the capacity for technology innovation down to the number of patents, the findings on growth rate is surprisingly different from our expectation beforehand. Meanwhile, the growth of ventures is positively related to R&D investment while R&D investment is not related to survival. It occasionally happens in the field that R&D investment adds to the burden on cash flow and rather threatens a firm's survival when the investment does not lead to sales. Therefore, further research may need to distinguish R&D investment by sales.
The impact of marketing on the survival and growth of venture firms was verified based on the networking capacity with large firms and the level of globalization. Networking capacity with large firms measured by weighted supply contracts did not work as a growth factor but worked as a survival factor. It seemed that supply contracts to big enterprises provided only stable sales for survival but they guaranteed neither high return for growth nor rapid sales growth. Globalization was measured by the experience of foreign market entry, where we expected that the level of globalization would have positive impact on growth since venture firms which entered overseas market would have new market opportunities. The empirical result, however, did not present a statistically significant relationship between growth and the level of globalization of venture firms.
Finally, it is hypothesized that financial characteristics such as profitability and debt to equity ratio would influence the survival of venture firms. The deficiency of financial resources was expected to become a risk factor for the survival of venture firms, when firms did not have sizable internal capital and could not utilize external capital market. Debt to equity ratio is negatively related to survival while profitability has no significant effect on it. High debt to equity ratio might lead to financial distress threatening survival since the increased burden of interest payments might aggravate cashflows and high debt to equity ratio made it difficult to find new sources of finance.
Prior research has separated survival factors and growth factors without considering any linkage between them. This study is meaningful in that we empirically verified survival factors and growth factors intended for a group of ventures with an integrated approach. We started the research from the question of whether factors contributing to survival of firms would also have identical impact on growth as well. Thus we exam ined deterministic factors for survival and growth and hypothesized the relationship between the factors and their impacts on survival and growth of venture firms respectively. Using time series data of 8,000 sample firms, we sifted out factors such as founder ownership, which have a positive impact on survival and growth simultaneously. Unique factors such as firm age and capacity for technological innovation by proxy of the number of patents, are presented as determinants which have a positive impact on survival and a negative impact on growth. In addition, factors which have influence not on growth but on survival and vice versa are verified based on the empirical findings. The results provide managers in venture firms and policy makers with managerial implications. Furthermore, this research lays the groundwork for further study by investigating the survival and growth of ventures from a comprehensive perspective and contributes to develop new research models leading to extending related theories. There are, however, a few problems that remain to be explored since we limited survival factors and growth factors to internal characteristics of venture firms out of a variety of organizational characteristics.
This research concludes that the characteristics of both external environments of an organization as well as internal management characteristics need to be taken into account to fully explain the determinants of survival factors and growth factors of venture firms for theoretical expansion as Romanelli (1989) suggested earlier.

This study investigates the impact of tax incentives such as R&D tax credit and reserve on R&D spending among small and medium-sized companies. Tax incentives often intend to achieve specific economic objectives, one of which is to encourage firms to invest more in R&D. Since 1994 the tax incentives for R&D in small and medium-sized firms had been kept without any changes for fifteen years. The tax incentives for R&D in large firms had diminished in the early to mid 2000s. However, the tax policy for R&D was changed to give more tax incentives to major companies in 2008 and to small and medium-sized firms in 2009 to help expand their growth potential. In spite of increased government’s monetary support through tax incentives and the major changes of tax policies, there has not been a study that analyzes the effectiveness of tax incentives for R&D among small and medium-sized enterprises.
There were two changes in tax incentives for small and medium-sized firms between 2005 and 2009. Until 2006, small and medium-sized firms could deduct the greater amount of either 15% of the year’s R&D expenditure or 50% of R&D expenditure which exceeded the average spending occurred during the immediately preceding four business years. In addition, they could reserve 3% of sales revenue. However, reserve for R&D was abolished in 2007 and therefore the tax incentive for R&D was curtailed between 2006 and 2007. In 2009, tax incentives were boosted unlike the previous years. Tax credit rate on the year’s R&D expenditure increased from 15% to 25% and reserve for R&D came into effect again. In short, tax incentives were cut down in (2007∼2008), but were expanded in (2009). I hypothesize that R&D spending of small and medium-sized firms would increase (or decrease) as tax incentives for R&D expand (or are cut down).
I use 1,525 firms-years collected from Korean stock market between 2005 and 2009. For the purpose of this study, small and medium-sized manufacturing companies which invest more than 50 million Korean won per year in R&D are chosen, unlike some of the previous studies that included medium-sized and large companies that invested no money into R&D, which might have produced misleading results. Most tax incentives for R&D are targeted to encourage manufacturing companies to increase R&D investment, so the sample of the study includes companies that fall into manufacturing industry. In addition, I use R&D data collected from annual reports instead of Balance Sheets and Income Statements in order to measure R&D expenditures more accurately. To analyze the impact of changes in tax incentives on the firms' R&D expenditure, control variables such as R&D expenditure of the previous year, operating cash flow (scaled by beginning of year total assets), leverage ratio, Tobin's q ratio, profitability (measured by return on asset), size (measured by natural log of total assets), export rate, and industry dummy variables are incorporated into the multiple regression analysis model.

This paper is the first analysis to investigate the role of SMEs' government-supported financing to mitigate the excessive impact of business cycle. The financial crisis initiated from the USA in 2007 has given the lesson that the relation between the real estate sector and the financial sector can form a vicious cycle after a financial crisis. To eliminate the cycle, the government put a large amount of public funds into financial institutions to stabilize the financial market.
This bad experience forces G20 and BIS to design the financial landscape to separate the contagion from financial crisis to real estate crisis. Considering the discussion in global meetings up to now, the main concern to keep the vicious cycle from starting is to expand the capital requirements.
SMEs face more a difficult situation to have access to financial institutions in either in the financial crisis or in the depression of the business cycle. In many countries, the most difficult problem to manage SMEs in the normal times is to get a loan from public financial institutions.
This paper is to analyze the possibility that an institution to provide government-supported financing can play a great role in supplying a credit line to SMEs in a financial crisis. In Korea, it is known that some kinds of credit guarantee institutions including KODIT, KIBO and KOREG, and SBC can play a counter-cyclical role in suppling loans to weak SMEs.
In the 2007~2009 financial crisis, as shown in tables and figures of the paper, the national banks in Korea decreased the increment of loans in spite of the increase of SMEs' total loans and accelerated the impact of the credit crunch generated from the contagion of the American financial crisis. To mitigate the severe credit shrinkage to SMEs, government-sponsored financial institutions actively increased the supply of loans and credit guarantees. These roles made a big contribution to Korea's fast economic recovery from the deep depression, compared to other countries. This financial crisis demonstrates the importance of the second credit lines, such as government-sponsored financial institutions, in the case of a sudden credit crunch of private financial institutions.
This paper investigates whether financial institutions to provide government-supported financing to SMEs have performed the asymmetric role that they increase credit guarantees and the loans in periods of reduced economic activity, but decrease them during periods of growth. KODIT and SBC among the four government-supported financial institutions have a long history. Hence the asymmetric role of KODIT and SBC in the business cycle is investigated by using annual data. The reason to use annual data is that although KODIT publishes data monthly and quarterly, SBC only publishes annual data.
The period for available data is 1976 to 2008 for KODIT and 1979 to 2008 for SBC. Since the period is short, the empirical analysis might have the small sample problem. To minimize the small sample problem, this paper tries to limit the number of independent variables to increase the degree of freedom. The empirical method used in this paper to limit the number of independent variables is that, deciding the determinants of growth rate of real GDP, the variables to denote the asymmetric effect of the increase or decrease of government-supported fund are included in the regresssion.
The asymmetric effect of government-supported financing institution in the business cycle is measured as follows: first, to identify whether the growth rate of guarantee is positive or negative; second, divide the time series of growth rate into series of positive growth rates and series of negative growth rates, following Mork (1989), Dotsey and Reid (1992), Cover (1992); third, investigate the relation between positive growth rate of KODIT's guarantee and economic growth rate, and the relation between negative growth rate of KODIT's guarantee and economic growth rate, with control variables in the regression; fourth, taking the same procedure with the third step for positive and negative growth rate for SBC's loan; finally, the results in the regression for two institutions can be compared. The special remark in the growth rate of KODIT and SBC is that the positive growth rate series consist of dummy variables 0 or 1 in which positive values become 1, and the negative growth rate series also consist of dummy variables 0 or 1 in which positive values become 1.
In , equations, CG(1) and CG(2), are to identify determinants of growth rate of real GDP. In equation CG(3), growth rate of credit guarantee in the period of positive growth rate in KODIT has a statistically significant effect on negative impact on the current growth rate, and on positive impact from the first lag period. It takes more than two years in making the positive contribution of credit guarantees to the real economic growth.
But in equation CG(4), the growth rate of credit guarantee in the period of negative growth rate in KODIT has a statistically insignificant and negative impact on the growth rate of GDP.
The sign of government-supported financing guarantee variables in CG(3) and CG(4) except the statistical significance of coefficients is consistent with the asymmetric impact to stabilize the business cycle.
CUSUM test for equations in is shown to be stable in

. There is no structural break in the period analyzed.
In

, any statistically significant variables are not found in equations SBC(1) and SBC(2). In the equations SBC(3) and SBC(4) to analyze the asymmetric impact of SBC's loan, the growth rate of loans both in the period of positive growth rate and in the negative growth rate has a statistically insignificant impact on the growth rate.
The sign of government-supported financing loan variables in SBC(3) and SBC(4) except the statistical significance of coefficients is consistent with the asymmetric impact to stabilize the business cycle.
CUSUM test for equations in is shown to be stable in

with no structural break.
This paper shows that the Korean government-supported SME financing system has made a minor or major contribution in mitigating the pro-cyclicality in the financial system and is essential in the contribution of economic growth. But empirical analysis in this paper is not sufficient in supporting the evidence on the role of counter-cyclicality in the Korean government-supported SME's financing system.

Does Public Credit Guarantee Contribute to Economic Growth? : Evidence From Korea

• - Hea-Jin Lim (Korea Fair Trade Mediation Agency)
• - Eui-Jong Kwon (Korea Credit Guarantee Fund)
• - Seung-Hoon Yoo (Seoul National University of Science and Technology)

초록보기 논문다운받기

[Abstract]

The credit guarantee program holds a key post in financing small and medium enterprises (SMEs) in Korea. However, it has been criticized for providing excessive credit guarantees after the Foreign Exchange Crisis of 1997. The economic effect of public credit guarantees has been examined in a variety of different theoretical frameworks, although empirical evidence has been rather hard to come by. The purpose of this paper is to examine the causality between public credit guarantees and economic growth, and to obtain policy implications from our results. This paper examines the long-run and short-run causality issues between public credit guarantees (PCG) and economic growth in Korea by using the co-integration and vector error-correction models (VECM). The overall results show that there exists bi-directional causality between PCG and economic growth. This means that economic growth has negative effects on PCG supply and increasing PCG has positive effects on economic growth. That is, a policy for increasing public credit guarantees is likely to contribute to economic growth for Korea, and in the long-run, economic growth curtails the need of a public credit guarantee supply. These results reveal that the role and the size of the credit guarantee can vary according to the growth stage of financial market's class structure in each country.

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