Improving Access to Finance to Unlock SME Growth Potential in Emerging Markets: South Korea Example

Introduction

Small and Medium Enterprises (SMEs) are vital drivers of economies in numerous countries, especially in emerging markets like South Korea. SMEs form the majority of businesses worldwide and significantly contribute to contemporary economic growth, job creation and global economic development (Siu, 2005; Nieto and Santamaria, 2010; Mugisha, et al., 2020). Despite their immense importance, SMEs often face obstacles in accessing financial support from sources such as equity financing, traditional banks, venture capitalists and business angels which sets them at a disadvantage compared to larger organizations. Consequently, they often resort to alternative means of financing such as personal savings, contributions from family and friends, and internal funds to initiate and sustain their entrepreneurial ventures.

SMEs face several obstacles in securing financing from investors. A primary factor contributing to this challenge is the relatively low returns offered by SMEs, which makes investment in them less appealing, especially in today's highly competitive global market. Moreover, many SMEs are seen as having limited financial transparency and weak internal controls, elevating the risk and uncertainty associated with investing in them. The absence of an extensive credit history and collateral assets further diminishes their attractiveness to potential investors and lenders (Mugisha, et al., 2020). Adding to the difficulty is the marginalization of SMEs by various stock markets, which impose complex documentation and regulatory requirements, acting as barriers to equity finance. These hurdles make it arduous for SMEs to access the necessary capital from the investor community.

There are numerous studies that have examine access of financial support to SMEs growth and innovation in emerging economies. For example, Pham, et al., (2023) investigated the innovation outcomes on access to finance for SMEs in Vietnam; while Kato (2021) stated that despite proliferation of SMEs in emerging markets, access to sustainable financing for the survival and growth of SMEs is still low and scanty. Further, the International Finance Corporation (IFC) estimates that 65 million organisation, accounting for 40% of formal micro, small and medium enterprises in emerging markets, have an unmet financing need of $5.2 trillion annually, which is equivalent to 1.4 times the current level of the global micro, small and medium enterprises lending (World Bank, 2023). While bank loans are the most available source of external source of finance for many SMEs, however, SMEs finds it difficult to obtain finance from traditional banks.

South Korea, one of the Asian tiger’s economic successes has created a large industry of SMEs who act as the backbone of the country’s economic performance (Tierno, 2019). Korea has some of the most supportive and vibrant policies for SMEs, including an abundant supply of government-backed loans, due to their role as an engine of growth for employment. Support for SMEs is poised to remain strong as the country undergoes a strategic shift toward inclusive and innovation-led growth (Tierno, 2019). However, critics suggest that government’s data and programmes point to poor performance among SMEs.

This book chapter seeks to examine the critical role access to finance plays in enabling growth and expansion for SMEs in emerging market economies with a focus on South Korea. This chapter evaluates the unique financing barriers SMEs face in emerging markets compared to developed economies. Also, the chapter critically discusses how lack of funding sources for SMEs hinders their growth prospects. The rest of the chapter provides a critical overview of SMEs operation in South Korea, overview of emerging Markets and SMEs, SMEs financing gaps in emerging markets with a focus on South Korea. This is followed by a discussion on the risk assessment capabilities, collateral requirements for SMEs lending and the role of government in providing finance to SMEs via grants and other regulations/policies. Further discussion was carried out on the comparison for financing for SMEs in south Korea and Italy.