Korea Institute of Finance
Seoul, Republic of Korea, April 3, 2013

Thank you very much for that thoughtful introduction.

Thanks to all of you for taking part in this important conference.

On behalf of the World Bank, it’s an honor to be the partner of the Korea Institute of Finance in sponsoring this gathering.

And, personally, it’s a pleasure to join you again, recalling the discussions we enjoyed together two years ago – when our conference explored issues in micro-lending and micro-finance.

The World Bank Group has been working ever-more-closely with Korea, across a wide range of issues.

We’re especially pleased that our new office here in Seoul will soon be opening.

That facility will focus primarily on infrastructure, information technology and the financial sector.

It will help promote a continuous knowledge-exchange among all development partners in the region.

As our President, Jim Yong Kim, said when he announced the creation of that new office:

I quote: “Korea’s experience in sustainable development, providing efficient infrastructure and services to improve the lives of its people – combined with its transition to a dynamic knowledge economy – provides lessons that can benefit many other developing countries.” Close quote.

Sharing our knowledge about building prosperity is our goal at today’s conference, as well.

Our topic today – the role of Small and Medium-Sized Enterprises (SMEs) in revitalizing the economy – could scarcely come at a more important time.

As many countries struggle to recover from the global financial crisis and prolonged economic slump, there’s an increasing focus on the potential for SMEs to help lead a robust recovery.

This conference brings together some of the leading scholars and practitioners on private-sector-led development.
That priority is central to the work of the Network that I lead at the Bank.

To frame today’s discussions, I’d like to begin by offering some thoughts about three areas:

• First: about the urgency of “getting our act together” in SME development — Vibrant SMEs are absolutely indispensable.

• Second: Innovation is absolutely essential in driving the growth of SMEs — They are the boosters for growth.

• And third: I will offer some thoughts on how Korea might be able to build on its strong record of success in promoting private sector growth – by considering some international lessons that may help develop your SME sector.

• On this point: I will touch on the role of productivity and the speed of change required.

So, first, on the urgency of the need to jump-start job growth.

Let’s consider the powerful potential of SMEs as an engine of economic renewal.

SMEs are the “unsung heroes” of every country’s economy.

Here in the East Asia region: The SME sector accounts for more than 70 percent of employment in Korea, Thailand, Malaysia, the Philippines and Indonesia.

SMEs generate between 30 and 40 percent of those countries’ GDP.

That pattern holds true in the world’s higher-income economies, too: SMEs account for more than two-thirds of the employment – and more than half the GDP – in the countries of the OECD.

Energized by a spirit of entrepreneurship, SMEs are driven to find a market niche – and they are zealous about creating “the next new thing.”

SMEs are also labor-intensive, so they have strong potential for creating jobs.

Promoting SMEs has now become an essential factor in our economic thinking, because they can generate jobs on a vast scale.

On that score, we can’t afford to delay: The world confronts a job-creation challenge that’s truly daunting.

The global slump has had a devastating impact on jobs.

Although much of East Asia – including Korea – has come through the economic shock relatively well, many countries have suffered a painful contraction.

Globally, about 200 million people are unemployed, according to the Bank’s “World Development Report 2013.”
That’s a painful increase of 27 million people since the global financial crisis began.

Beyond the jobless: Another 1.5 billion people are only “marginally employed” – in informal enterprises or in casual jobs.

Moreover: The jobs challenge will intensify, because a demographic surge is approaching.

Within the next 15 years, the world economy will need to create 600 million jobs for new entrants into the labor force.

The private sector will have to create 90 percent of those jobs, because the public sector is just about maxed out.

We’re in a race against time. It’s absolutely critical that we find a way to revive job growth.

And SMEs will be a major part of any solution.

So that’s my first point: about the urgency of strengthening the SME sector. There’s no time to lose.

That brings me to my second point: about the importance of focusing on innovation and productivity to propel SME development – and about some of the “boosters” that economies can adopt to drive growth.

To be sure, each country must create its own model of development, suited to its particular conditions. There are no cookie-cutter solutions.

Some countries have developed “boosters” – additional pro-growth factors that contribute to stronger innovation.

Those boosters aren’t always based on economic policy: Some of them are non-economic and cultural factors.

For example, countries like the United States and Australia have a young work force, thanks to continuous waves of immigration, which give their innovation systems a high-speed tempo.

Germany and the Nordic countries have a history of labor-management cooperation that promotes workplace cooperation, attention to quality and constantly higher levels of technical training.

Singapore has a tradition of effective government, with a high-performance public sector.

China has had enormous state-directed infrastructure investments, helping speed goods and people to market.

These have all been “boosters” for private sector strength.

Other countries, without such “boosters” – and limited by structural problems, like labor-market rigidity – have found it harder to adapt.

Countries and companies are likely to face stern challenges.

I’ll raise with you one such challenge, and that is: that we are in an era of intensifying disruption – when small competitors can burst on the scene, empowered by digital connections to far-away markets, and are liberated from constraints like strict hierarchies and slow corporate decision-making.

“Disruptive innovation” is challenging traditional organizations, which struggle to keep pace with fast-moving product cycles.

Innovation, in fact, requires some creative chaos. Unstructured thinking and non-hierarchical behavior help liberate creativity.

Economic progress is a continuous pattern of “creative destruction,” as the economist Joseph Schumpeter famously said –
and that requires some “churn,” as old ideas die and new ones are born.

Think of the new products that have become “category killers.”

Digital photography has practically destroyed the traditional photo-film industry.

Blogs and Twitter feeds and free online “content” are killing the business model of print journalism.

Tablets and Kindles and other screens for “easy reading” are disrupting the economics of publishing printed books.

Are the “category killers” of tomorrow likely to come from top-down corporate decision-makers – or are they likely to come from independent-minded entrepreneurs who can out-hustle the sluggish corporate titans?

Corporations trying to keep up with their new, disruptive rivals might consider becoming disruptors, themselves.

They need to learn how to speed ideas from the concept stage into design and production, and how to speed new goods to new markets. The metabolism of companies must accelerate.

To speed up decision-making, traditional firms must break down old “silos” and challenge old hierarchies.

That may be uncomfortable for firms that hold fast to top-down decision-making.

Yet in a relentlessly competitive landscape, entrepreneurial start-ups are likely to outmaneuver weary corporate behemoths.

Companies and countries with a spirit of continuous innovation will be well-positioned to prosper in the economy of the future – and agile SMEs will be among the leaders of tomorrow’s innovation and job creation.

So that’s my second point: about promoting economic ecosystems that can spur innovation – with start-ups and SMEs as the catalysts of new ideas, new products and new jobs.

And that brings me to my third point: about how Korea can build on your record of success in creating the next wave growth from SMEs– by adapting relevant lessons from international experience.

Korea’s transformation, over the past 50 years, stands out as a role model for all of today’s
developing economies.

Korea’s per capita income soared from just $ 67 in the early 1950s to more than $ 20,000 today.
In your rise to become the world’s 13th-largest economy, Korea offers lessons to other nations who want to follow your example.

Beyond that: As Korea seeks to take its economic performance to the next level, there are lessons that Korea can learn from other countries’ experience, as well.

Those lessons are especially important for Korea’s SME sector – which has a vast potential for stronger productivity and increased job growth.

Employment in Korea’s SMEs now accounts for as much as 94 percent of the country’s labor force.

By contrast, just 6 percent of employment is in your country’s network of chaebols.

And the chaebols’ proportion of jobs is dropping: It has fallen by about one-third since 1995.

Another trend raises concerns, as well: Overall, Korea’s national productivity growth seems to have hit a plateau. It’s actually slightly lower today than it was in 1997, at the time of the Asian financial crisis.

Finding ways to boost productivity growth is crucial.

And the place where productivity growth, as well as employment growth, can accelerate swiftly is in the SME sector – especially with SMEs in Korea’s service sector.

I’ve always believed that – if the concept of productivity is too difficult for some to grasp – it may be easier
to think of this process as reducing the per-unit cost of production.

Everyone “gets” that.

Reducing waste, reducing the cost of labor, to produce a greater output at lower cost, translates into persistent cost reductions.

That, by implication leads to greater productivity, and thus stronger competitiveness.

Raising the productivity of Korea’s SMEs will be a key factor, as Korea aims to fulfill President Park’s priority of strengthening the SME sector – to help take Korea to the next stage of development.

One very hopeful factor is Korea’s continued commitment to funding research and development – especially in SMEs in the high-tech sector.

R&D expenditures by SMEs have grown about five-fold since the Asian financial crisis of 1997, and the SME sector accounts for about one-quarter of the total R&D expenditure by all firms in Korea.

Almost half of all Korean researchers are working in SMEs. There’s a notable economic divergence, however, within the performance of Korea’s SME sector.

Those SMEs that are linked to chaebols are doing very, very well. By contrast: Those SMEs that are not included in the chaebol system find it difficult to thrive.

One step to explore, to help foster the dynamism of SMEs, is helping more of them become closely connected to the chaebols.

Adopting a more inclusive approach to SMEs would plug them in to expanded opportunities with larger networks – and, at the same time, the chaebols could benefit from SMEs’ capacity for innovation.

In the search for stronger linkages with large-scale partners, Korea’s SMEs can also explore opportunities beyond connections to domestic chaebols.

They could also develop links with global supply chains – seeking their optimum position globally, in networks where they can enjoy faster growth.

So, to promote SMEs as a driver of Korea’s economic revitalization, you might always keep a question in the forefront of your minds:

Does Korea have included SMEs – or excluded SMEs?

If they’re able to contribute their energies to more inclusive networks, SMEs’ productivity will strengthen and their potential for job growth will increase.

There’s another question that should also be top-of-mind: What kind of SMEs is Korea developing, and what is their trajectory?

The character of firms varies widely in the economic landscape.

There’s almost a taxonomy of companies – as if they belonged to entirely different species.

There are the lumbering elephants that move slowly – but, by virtue of their size, they tend to dominate the terrain, at least for the moment.

There are scurrying mice that move quickly – but, given their small scale, they’re always vulnerable to changing conditions.

There are placid turtles, whose pace is so slow – and whose range is so limited – that they seem almost immobile.

And then there are the SMEs that every economy wants to have: the gazelles – which can accelerate fast, can change direction quickly, and can outmaneuver potential rivals as they sprint toward success.

Fostering the growth of gazelle firms is essential – because it’s not just the size of SMEs that counts.
Success requires that small firms have the capacity to make decisions quickly and change course with agility.

If SMEs can outmaneuver their rivals, they can seize new markets, diversify their product offerings, acquire other firms and become tomorrow’s economic victors – all the while, increasing the economic ecosystem’s vitality and increasing job creation.

So as Korea’s policymakers and business executives track the growth of your country’s SMEs, they should ask themselves:

Are we succeeding in developing more gazelles – or are we just creating more turtles?

In the race for global advantage: Place your bets on the gazelles.

Tomorrow’s winning economies will be the ones that generate those fast-paced competitors.

Continually questioning your competitiveness and refining your growth strategy is another essential step – because building competitiveness is a never-ending story.

Just as Korea’s competitiveness today is not the same as it was 10 years ago, your competitive position will be different 10 years from now.

So continuously re-visiting your strategy, your assets and your liabilities is essential – along with continuously refining your approach to competitiveness.

Throughout this process, accelerating the pace of private sector innovation will be critical – because that’s the key to job creation in a perpetually competitive world.

For Korea, and for all our member countries, the World Bank remains a strong development partner who can deliver leading-edge thinking – as our original lending bank has evolved into a “knowledge bank,” and is fast becoming a “solutions bank” for our clients, our member countries and our partners.

Together, as we develop sound policies and implement innovative solutions to support the private sector’s ability to create good jobs – and thus drive stronger development for the long run – the Bank is pleased to continue building our ever-closer partnership with Korea . . . which is a role model in building competitiveness.

My Bank colleagues and I are delighted to be here with you today, to share ideas about SMEs and about private sector development – partnering with you to exchange knowledge and explore best practices.

I’m looking forward to joining you for an energetic dialogue throughout today’s conference.

Thank you very much.