The Debate on Excess-Profit Sharing

|Korean Peninsula

The ROK government set up the private organization “Commission on Shared Growth for Large Corporations and Small and Medium Enterprises” (December 2010) in order to continue strengthening the side-by-side growth of large corporations and small and medium-sized enterprises, via the construction of mutualistic relationships between large corporations and small and medium-sized enterprises, as well as the nation’s competitive power. The main work for this committee includes the calculation and publication of shared growth indices that take into consideration the evaluation of performance in the efforts of large corporations on shared growth and the evaluation of performance in promotion broken down by large corporation for small and medium-sized enterprises, and the selection of compatible business categories for small and medium-sized enterprises. Although a private organization, as it was created by the strong resolve of the president, it is a fact that it has potent force (power of influence).

Here, the former president of Seoul National University and economist who is head of the committee has created a controversy where the “excess-profit sharing” he proposed as a concrete measure has embroiled not only the worlds of finance and academia, but gone as far as the world of politics. The main drift of the system is “after setting aside as a fund the excess profit, which is the difference between the target profit at the beginning of the financial year and the actual profit at the end for each company, we will use that in support for small and medium-sized enterprises which have contributed to the excess profit”.

To this proposal have come not only calls of dissatisfaction and criticism from large corporations, but also a polarizing debate within public opinion. The chairman of the ROK’s largest business group made the criticism that the “excess profit” concept was not a concept within economics. Moreover, from the world of finance have come numerous criticisms including that such an idea belongs to someone who doesn’t know about business management and ignores the reality of the sharp increase in global sourcing and global delivery of goods, and that it has zero possibility of realization. From the world of academia also came the criticism that it was an anti-market socialist system of sharing.

The cause of the controversy lies in the choice of the term “excess profit” and the lack of explanation. It appears that the sudden making of the proposal—without prior explanation regarding the precise concept for the initial excess profit, how to measure the degree of contribution of small and medium-sized enterprises to the generation of that profit (benefit), and why profit sharing is necessary—is the cause of the controversy. So the committee changed the term “excess-profit sharing” to “creative shared growth project” and explained it is a system for sharing with the small and medium-sized enterprises which have taken part in the value chain not the excess profits of large corporations, but the outcomes (surplus) from large corporations and small and medium-sized enterprises.

Benefit sharing already exists between large corporations and the small and medium-sized enterprises participating in the supply chain. The original profit sharing system is a concept for rectifying the harmful effects that monopoly of demand causes, and appears to be a market-friendly system for the shared growth of large corporations and small and medium-sized enterprises. That is, it is a system to prevent “demand-monopolistic exploitation” of a number of suppliers (SMEs), which are component manufacturers, by the large-corporation demand-monopolists in areas such as the setting of unit price and settlement of payments for the maximization of their own profits. For instance, Japan’s automobile manufacturers give back to the component manufacturers, doing things including reflecting in the unit price part of the benefits from the cost-cutting and improvement of quality of the component manufacturers.

However, in order for this system to function well, reform of related systems will also be necessary. For example, the reform of the staff evaluation system centered on the short-term results of large corporations will be necessary. Under an evaluation system centered on the short-term results of large corporations, the managers and executives of large corporations are bound to prioritize the short-term economic outcomes of large corporations over shared growth with component manufacturers. Accordingly, an incentive system will be necessary to yield medium-to-long-term benefits via the collaboration of large corporations and small and medium-sized enterprises.

Above all in the ROK’s case, where the disparities between companies are great, profit sharing is a system to continue actively pushing ahead for the sake also of the cultivation of small and medium-sized enterprises. Moreover, regarding shared growth via profit sharing, for the ROK with its high youth unemployment rate the heightening of the competitiveness of small and medium-sized enterprises—through raising the competitiveness and returns of small and medium-sized enterprises, and not just raising the competitiveness of large corporations—will lead to a solution of the youth unemployment problem where eyes have been on the large corporations only.

[Translated by ERINA]