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Economy

Can South Korea's conglomerates hatch small businesses?

South Korean President Park Geun-hye, center, attends an opening ceremony for a creative economy center in the city of Gumi, North Gyeongsang Province, in December.   © Photo by Yonhap News Agency

SEOUL -- The South Korean government has turned to the all-too-powerful chaebol, the family-controlled conglomerates that dominate the country's economy, for help in tackling a major policy challenge.

     The administration of President Park Geun-hye has launched a program meant to nurture startups that heavily leans on industrial behemoths like Samsung and Hyundai groups. The program calls for 17 "creative" hubs to be set up across the nation.

     In December, Park attended the opening ceremony for one of the centers, located in Gumi, a city in North Gyeongsang Province. "I feel happy like a parent attending the wedding of a son or daughter," Park said.

     The center for creative economy and innovation in Gumi as well as the other 16 hubs are meant to provide technical and financial assistance to startups. The first zone opened in Daegu in September; the last one is slated to open by the end of June.

     The creative economy center program is a key policy initiative meant to free South Korea's economy from the control of sprawling business empires like the SK group, primarily involved in chemicals, petroleum and energy; LG, mostly known for its electronics products; and Lotte, a consumer brand known for foods, beverages, shopping centers and hotels, among other businesses.

     Reducing the chaebol's dominance has been a leading economic policy challenge for successive governments since 1997, when the country was battered by the Asian currency crisis.

     But little headway has been made, and that has to change. Fast. There are signs that the country's exports -- a big part of South Korea's growth strategy -- are losing their competitiveness. Of course, the lion's share of these exports are being turned out by the chaebol.

     If you've gotten this far, you might be wondering what exactly Park wants the chaebol to do and why special zones are needed for startups to get the kind of support that venture capitalists lavish on young companies in Silicon Valley. Here is the answer: Park has put a chaebol in charge of each hub and wants the economic behemoths to compete with one another in nurturing new businesses.

     The Samsung group, known for the smartphones turned out by its electronics unit, is in charge of two hubs, the Daegu and Gumi centers. Hyundai Motor is responsible for a zone in Gwangju, a city in the southwestern part of the country. Lotte has been assigned to a center in Busan.

     The conglomerates are to provide assistance in their main areas of business.

     The policy is being implemented as the South Korean won gains strength. A strong currency hurts exports. Hyundai Motor, for one, is struggling to compete with its Japanese rivals, who are turning cartwheels now that the Bank of Japan has drastically weakened the yen. And Samsung's share of the Chinese market has been seriously eroded.

     South Korea's overall exports in 2014 dipped 1.5% to 603 trillion won ($555 billion), falling for the second consecutive year, according to the Korea International Trade Association.

     The economy's ability to create jobs is weakening, and there are growing concerns about how the country's workforce will be able to support a rapidly aging population.

     South Korea's working population is expected to start shrinking two years from now. If it is to keep the economy afloat, each worker will have to become more productive.

     Japan, which has been trying to meet this very challenge since the 1990s, recently decided that to manage the feat, the central bank would have to start printing gobs of yen and handing it out to the financial sector.

     Park is taking a different approach, yet there is much skepticism about it, especially since it counts on the support of the very groups that already wield undue influence over the economy.

     Some of the skepticism comes from the fact that the chaebol themselves have been major impediments to startups and other small companies trying to get off the ground in South Korea.

     Their dominance is so overwhelming that they can easily exploit subcontractors and other small companies. They have been criticized for refusing to sign contracts for products and services they have ordered. Subcontractors sometimes have to make due with little payment. The chaebol have also been accused of stealing technologies from subcontractors by forcing them to hand over specifications.

     Just like with the Bank of Japan's quantitative easing policy, there is no guarantee Park's plan will actually work.

     In addition, the 17 centers are staffed mainly by government employees and conglomerate executives. Kim Jin-han, a former senior executive at Samsung Electronics, has been appointed to head the Gumi creative collective.

     This casts doubts on the hubs' ability to promote innovative ideas or foster entrepreneurship.

     One skeptic in the administration says all the conglomerates will do is come up with symbolic "achievements" at just the right time. The program will fizzle when a new government takes power, the official predicts.

     If there is criticism from within the government, it's a sure bet that there are howlers outside of it. The country's main opposition New Politics Alliance for Democracy castigates the Park administration for its "completely failed economy policy." 

     Signs of economic pain are growing. In August, the number of nonregular workers surpassed 6 million for the first time. But even if Park's creative economy drive triumphs, it will take time.

     There's no such thing as an overnight success.

     So ... can it start producing tangible results before Park's term is up in three years?

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