Fan, Wei, and Michelle J. White, 2003, “Personal Bankruptcy and the Level of Entrepreneurial Activity,” Journal of Law and Economics, Vol. XLVI (October).
Kang, Dongsoo and Taek Yoon, 2003, Insurance as a Financial Assistance Vehicle to Small and Medium Sized Enterprises, July (Korea Development Institute).
Kang, Jongku and Hyungkwon Chung, 2006, “An Analysis of the Effect of Policy Support for Small Medium Enterprises (SMEs)” (Seoul: Institute for Monetary and Economic Research).
Kim, Joon-Kyung and Chung H. Lee, 2003, “Korea’s Direct Investment in China and Its Implications for Economic Integration in Northeast Asia,” KDI Journal of Economic Policy, Vol. 25, No. 2, pp. 171–206 (Korea Development Institute).
Lim, Kyung-Mook, 2005, An Analysis on Changes of Equipment Investment Patterns of Korean Firms Using Micro and Macro Data, December (Korea Development Institute).
Petersen, Mitchell A. and Rajan, Raghuram G., 1997, “Trade Credit: Theories and Evidence,” The Review of Financial Studies, Vol. 10, No. 3, pp. 661–91.
World Bank, 2005a, Best Practices—Principles and Guidelines for Credit Reporting Systems, available via the Internet at www.worldbank.org, “Credit Reporting Systems” section (Washington).
Prepared by Kenneth Kang and Song-Yi Kim.
Here, we follow the Korean National Statistics Office (KNSO)’s definition of a SMEs as a company with 300 or fewer employees.
FDI in Korea amounted to around 8 percent of GDP in 2005, well below the OECD average of 14 percent.
For all loans (household and corporate) in Korea, the share of loans backed by real estate and credit guarantees is estimated to be around 59 percent. In the United States, the share of corporate loans secured by collateral is 38 percent. In Japan, the share of loans secured by real estate or third-party guarantee is 63 percent (FSS of Korea, Bank of Japan, and U.S. Federal Reserve Board).
Another possibility would be to allow CGFs more flexibility in setting their fees to support promising but cash-poor SMEs. For example, instead of receiving a payment fee, CGFs could accept in return an option on future profits or limited equity in exchange for guarantee. See Kang (2006).
Some domestic banks have already established SME workout units along these lines but the number of companies under workouts remains low.
For example, in the event of a loan default, the debtor would be subject to the criminal code only when he or she is found to have committed a criminal act.
Although most countries have some type of registry, usually over fixed assets such as real estate or vessels, only 30 countries, including Canada, New Zealand, Spain, and the United Kingdom, have registries that allow registration across all types of assets (see World Bank, 2005b).
As an example, in Canada, the Netherlands, New Zealand, the United Kingdom, and the United States, the fees, taxes, stamp duties are very small, and registration takes only one or two days (see World Bank, 2005b).
According to the World Bank, more than three-quarters of collateral enforcement takes place outside of bankruptcy. For example, in Australia, the creditor would appoint a receiver to serve notice to the borrower and then seize and sell the underlying assets. As long as the debtor cooperates, the courts are not involved and enforcement is typically completed within 10 days. In Spain in 2000, after allowing debtors and creditors to enforce collateral outside the courts, Spain was able to reduce the time for enforcing collateral from more than one year to three months (see World Bank, 2005b).
They include: the Protection of Communications Secrets Act (1993); the Telecommunications Business Act (1991); the Medical Service Act (1973); the Real Name Financial Trade and Secrecy Act; the Use and Protection of Credit Information Act (1995); the Framework Act on Electronic Commerce (1999); and the Digital Signatures Act (1999).
Although export credit insurance is more widely used, credit insurance for smaller domestic firms is used as a way of expanding SME’s access to bank financing.
They include: KCGF which provides credit insurance to SMEs with an annual turnover of below W15 billion; Seoul Guarantee Insurance Corporation (SGIC) which covers companies with a turnover above W15 billion, while the Korea Export Insurance Corporation (KEIC) provides insurance for exporters.
One model might be to follow the example of Coface, one of the top-3 companies worldwide in receivable management and credit insurance. Coface began as a French state-owned enterprise and was fully privatized in 1994. In addition to credit insurance, it also provides credit information to facilitate business-to-business trade.
In particular, expanding FLC to cover SME loans issued by nonbanking institutions, such as mutual savings banks (MSBs), would help to bring their loan classification and provisioning in line with commercial banks and limit the risk of regulatory arbitrage across different sectors.
For example, according to a MOFE survey of SMEs and creditors, 71 percent of SMEs responded that their accounting is highly transparent, compared to only 3.9 percent by financial institutions (see Ministry of Finance and Economy, 2004b).
Another possibility would be to lower the minimum asset threshold requiring companies to file audited financial statements to below the current level of W7 billion or by requiring external audits of loans above a certain size. Although SMEs would incur higher costs, the direct cost might be offset by the benefits from a lower borrowing charge and wider access to financing. Further simplification or standardization of financial statements could also help reduce this cost.
Korea Venture Capital Association (KVCA).
According to KVCA, because foreign VC funds are required to be domiciled in Korea, they are unable to take advantage of various tax treaties as commonly done in other countries.