SME Training and Productivity:
Korean Experience
Kye Woo Lee
KDI School of Public Policy
([email protected])
April 28, 2014
IDB in Mexico
1
Rapid Growth per Capita GDP in Korea:
The Human-made Miracle
Never before have the lives of so many people undergone so rapid an
improvement in one generation.
Robert Lucas, Jr., “Making a Miracle”Econometrica, 1993 (pp. 251-252)
2
Annual Growth Rates of Real per capita income:
Rapid Growth Rate in Korea (%)
State
(1965-1990)
State
(1965-1990)
Argentina
-0.3
Japan
4.1
Brazil
3.3
Korea
7.1
Chile
0.4
Singapore
6.5
Colombia
2.3
Hongkong
6.2
Mexico
2.8
Taiwan
6.8
Uruguay
0.8
Indonesia
4.5
Costa Rica
1.4
Thailand
4.4
Venezuela
-1.0
Malaysia
4.8
Average –
Am
Latin
1.2
Average -
Asia
E.
5.6
3
II. Sources of Rapid Economic Growth in Korea 
Total Factor Productivity Growth / Knowledge Accumulation
Suh and Chen (2007) World Bank
4
Education’s Contribution to Growth in Korea
Researchers
Contribution
(%)
Study period
Study Method
Bae, J.K. (1968)
12.6
1957-1960
Denison
Lee, Y.K (1971)
14.6
1962-1968
Schultz
Tolley (1973)
5.0
1962-63;1968-69
Denison
Bae, J.K. (1978)
11.7
1960-1974
Denison
Kim, Y.B et al (1980)
7.8
1960-74
Denison
Song, W.S. (1981)
3.5
1955-1979
Denison
Kim, K.S. (1983)
0.4
1963-1981
Denison
Kim, Y.C. et al(1983)
5.0
1963-1981
Denison
Lee, S.K. (1989)
13.5
1975-1987
Denison
Average
8.2
Park, E.W. (2000)
5,115*
1969-1996
Chavas and Cox
5
Training Policies in Korea
• Meeting the Demand for Skilled Workforce
Through Skills Training
(1960s and 1980s)
• Productivity Improvement in SMEs Through
Skills Training
(1990s-2000s)
6
I. Meeting the Demand for Skilled Workforce by
Trg (1960s and 1980s)
• Training
Strategy was aligned with National Development
Policies/Strategies
- Training Strategy overcame the Mismatch/Time-lag between
National Development Plan and Education Policies
in meeting the demand for skilled workforce:
- Technical and Vocational Training met half the demand for
skilled workforce
• Training Strategy placed emphasis on
the training by Private Enterprises (vs. Public Training Institutes)
- Subsidies for training by Private Enterprises (1967-74)
- Compulsory In-Plant training (1974-76)
- Training Levy System (1976-1994): expansion of public trg. inst.
- Training Levy-Grant (Rebate) System (1995 ): Trg. markets
7
Trainees of Vocational Competency
Development Scheme (1,000 persons)
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
1998
1999
2000
2002
2004
2006
2008
2010
Total Trainees
Trainees of VT for the Unemployed
Trainees of Upgrading VT
Trainees of Initial Training
Source: Quoted from Sung-Joon Paik (2012)
8
II. Productivity
Improvement in SMEs
Through
Skills Training
(1990s-2000s)
9
Role of SMEs in Korea
•
•
•
•
#of Enterprises:
99.9%
Export:
50%
Output:
50%
Employment: 88%
• SMEs: Enterprises hiring 300 workers +
•
Total
manuf
manuf skilled
# of workers
3,120k
324K
100%
22.3%
13.6%
10
Bottlenecks of SMEs
-------------------------------------------------------(Survey 2003)
• Skilled HR Shortage…………………………………………….22%
• Domestic Demand Shortage……………………..15%
• Finance Difficulty………………………………………15%
• Product Price Decline…………………………….13%
• Wage Increase……………………………………….13%
• Transport Cost Increase………………..8%
• Export Difficulty……………………….5%
• Semi Taxes……………………………….5%
• Regulations…………………………3%
• Technical competitiveness…2%
• Labor Dispute…………………..1%
----------------------------------------------------------- (Survey 2011)
• Rate of shortage: SMEs: 3.4% (1.5% in 2003); LEs:1.3%
• Share: Manuf 41%; Hotel, Restaurants 9%; Transport: 9%
• Shortage rate: R&D: 5.4%, Eng/Technicians: 4.7%; Skilled: 3.9%
• Area: Jeju 4.8%
11
Skilled HR Shortages (2012)
• Skilled HR Shortages at SMEs
250 K
• Unemployed workers:
800 K
• Youth unemployed workers:
340 K
___________________________________
• Skills shortages met by unskilled workers
• Physical investment increase productivity: 3.6%
• Human investment increase productivity: 8.4%
(21st Century Skills for 21st Century Jobs: U.S.
government, 1999)
12
Government Efforts to Solve HR
•
•
•
•
Apprenticeship training (1950)
Subsidy for Enterprise training (1967)
Compulsory training by enterprises (1974)
Public + Enterprise training based on training
levy (1976)
• Enterprise training based on Levy-Rebate
(1995) --applied to firms w/100+ workers
• Asian Financial Crisis (1997/8)
• Levy-Rebate system applied to all enterprises
13
Special Provision for SMEs in Training Levy-Rebate
(1995 Law)
• Training levy rate: 0.1-0.7%,
depending on size and industry of enterprises
• Training levy-rebate rate favored SMEs:
Large Enterprises (LE)
80% of training costs and up to 120%
of total annual training levy
SMEs
100% of training costs and up to 270%
of total annual training levy
• Justification: Equity
- SMEs financial situation; lower wage +benefits
- poaching SME-trained workers by LE
14
- greater employment generation role
Regressivity under Levy-Rebate (2001)
SMEs
Large
Total
Training Levies Rebated( rate)
25%
30%
Enterprises Participating in Training
21%
78%
Workers Participating in Training
12%
38%
Workers Paying levy
4.5m
2.4m
6.9m
Workers Receiving Training Rebate
0.2m
0.9m
1.1m
15
Pilot Training Consortiums Project
•
•
•
•
Period: June 2001 – June 2002
Location: 3 cities (Busan, Incheon, Kwangjoo)
Host: KCCI (Korea chamber of commerce+industry)
Objectives:
- prevent further aggravation of unemployment
(2%  8%)
- improve productivity of SME workers (100% vs. 40%)
- enhance SME competitiveness
16
Pilot Training Consortiums Project(2)
• Method and Content
- planning/organization of Training Consortiums
- @TC: 30 SMEs of same industry + area
- @TC; autonomous operating committee (w/ members from
SMEs + gov + HR experts +unions) decides on training policies
and programs
- for @TC : Gov’t finances 2 Training Managers’ (TMs’ )
salaries and operating costs
- TMs conduct survey of training needs in @TC member
enterprise
- TMs plan workers trg program + select trg suppliers
- TMs monitor + evaluate training programs and outcomes
* about 70% of member SMEs are with 50 workers or -
17
Outcome of the Pilot Project
TCs Before Pilot
(June 2001)
TCs After Pilot
(June 2002)
Cf: all SMEs in
Korea
Training Levies
Rebated( rate)
24%
48%
25%15% for
all SMEs
Enterprises
Participating in
Training
11%
50%
21%57% for
all SMEs
Workers
Participating in
Training
3,087(planned)
6,573 (actual)
12%10%
decline.
0
3
0
# of SMEs in Total
3 TCs
0
90163197
557732
Not from the
same industry +
area
# of SMEs in @ TC
30 (planned)
Average 240 (actual)
0
2
# of TC
# of TM in a TC
0
18
Outcome of the Pilot Project (2)
• Increase in productivity (responses of 81% of SMEs)
(wastage and defective outputs declined, machinery
utilization factors rose, etc.)
• Declined poaching and scouting of workers
• Prevention of Unemployment
Pre-project
Post-Project
Change
SMEs
Participating
In training
4850
4931
81 (+1.7%)
SMEs
Non-participating
In training
4960
4524
-436 (-8.8%)
19
Outcome of the Pilot Project (3)
• Demand-driven training
- pre-service  in-service training
- in-plant training allowed (about 50% of trg)
- expand Pilot TC to two other modalities:
Large enterprise TC
Training institute TC
• Enhanced competition in training markets
-TC has freedom to choose the most suitable training
institute in the market through competition
• Public-Private Partnership strengthened
20
Outcome of the Pilot Project (4)
• Training probability Increases with rebates (grants)+
• Probability of wage increases rises with rebates (grants)+
• In Sum, the TC Pilot was a success
• Compared with
- Retraining of the unemployed with less than 50%
employment rates in OECD countries (30% in Korea)
- In-service training in Sweden (through regulatory
enforcement), France+LA (through levy system),
Mexico+Poland (through general taxes), Chile (through
21
tax incentives)
22
23
24
25
26
Mainstreaming of Pilot
• The TC Program of Korea (Evolution) 1/2
27
The TC program: Evolution (2/2)
2008
2009
2010
2011
2012
# of TCs
(Cum.)
83
96
102
134
158
Workers
Trained
(‘000)
281
231
231
252
272
# of SMEs
122
(‘000)(multi.)
111
106
121
115
Levies
70
Rebated
(KW$billion)
78
74
123
139
28
Issues of the Mainstreaming of Pilot
• Impact is less than magnificent
• Regressivity remains b/t Large + SMEs
- 18% of SME workers are trained;
but only 4% of SME workers are TC trained workers
- TC trained workers are 24% of SME trained workers
- 76% of trained SME workers are non-TC SMEs workers
- average number of workers trained is
2.2 workers per TC member SME (5.5%);
26 per non-TC SME (23-38%);
116 per large enterprises (97%)
29
Regressivity Remains (2007)
SMEs
Large
CF.
Training Levies
Rebated( rate)
28%
(25% in 2001)
34%
(30% in 2001)
Enterprises
Participating in
Training
13%
97%
(21% in 2001)
(78% in 2001)
Workers
Participating in
Training
18%
96%
(12% in 2001)
(38% in 2001)
Workers
Paying levy
6.6m
(4.5 m in 2001)
2.4m
(2.4 m in 2001)
9.0 m total
(6.9 m total in 2001)
Workers
Receiving
Training Rebate
1.2m
(0.2 m in 2001)
2.3m
(0.9 m in 2001)
3.5m (multiple
counted)
Multiple counted
Multiple counted
30
31
32
Growth of TC Program during Pilot and Mainstreaming
Periods
Average Annual Increase
2001-2002
(Pilot Period)
2002-2007
(Mainstreaming )
Number of TC-member SMEs
3.00 fold
2.16 fold
Number of Workers Trained
2.50 fold
1.97 fold
Amount of Training Levy
Rebated
1.91 fold
2.11 fold
33
Training and Levy-Rebate (2010-2012)
Rate of Workers’
Participation in Training
(%)*
2010
2011
2012
Enterprises’ LevyRecovery Rate
(%)**
2010
2011
2012
SMEs
25.3
21.1
18.6
35.9
26.9
24.7
LEs
87.0
59.5
62.0
27.0
18.7
15.7
Total
41.9
31.3
31.0
30.9
22.4
19.1
*workers participating in training programs x 100 ** Training Rebate received X 100
Total workers
Training Levy paid
34
Productivity of SME as % of LE in Industry (mine+manuf.)
70%
60%
54.5%
53.0%
50%
49.3%49.4%
49.1%
47.5%47.8%47.6%
50.0%49.4%
47.7%
46.6%
43.8%
40%
40.3%
39.4%
38.9%39.2%
35.4%
34.7%
34.2%
33.6%
33.3%
33.1%
32.2%
31.4%
30%
20%
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
35
Issues with Mainstreaming of TC
• Less than magnificent expansion/progress
• Causes may be some changes introduced in
the system
36
Gov’t Policy Changes Introduced at the
Mainstreaming Stage
1. TCs are organized mostly by
- public training institutes or
(large enterprises )
with their own training institute for SMEs located around
the training institutes (or supplying goods to the large
enterprise)
– Chairperson of the Operating Committee of a TC is the head of
training institutes, not TC members
– TMs report directly to the head of training institutes, not to the
TC members
– Gov’t provide financial assistance to the training institute, not to
the TC members (80% of personnel costs; 100% of operating
costs; up to $0.1 b for trg. prog. Development @ TC)
– Supplier-driven training (training institute-driven training)
– MOLabor directly designs strategic training programs for SMEs
and contract out with training institutes
37
Gov’t Policy Changes Introduced at the
Mainstreaming Stage (2)
2. TMs and Training Requirements :
– Minimum Training Requirement of 2400-4800 cumulative dayworkers per year per TC.
– A worker is judged trained if a 18 hours+ course is completed
– Therefore, the minimum training requirement is de facto
1,067 net workers {=2,400/(18/8)}
– Assuming average size of a TC member SME is 40 workers, this
means that 3 TMs have to take care of 190 SMEs
{=1067/(40*0.14)} since 14% of 40 worker of the SME are
trained on average.
– 3 TMs will take about 3 months to visit the same SME again
(190 sme/ (3tmx15days x 2 sme)
38
Gov’t Policy Changes Introduced at the
Mainstreaming Stage (3)
3. Training levy rebates will be made on:
- 100% for institutional training;
- 40% for in-plant training  corrected: $35K@TC flat
4. Training carried out with outside training institutes are not
eligible for rebating of training levies; and
no additional training institutes are approved other than
training institutes that organize TCs
5. The majority of Gov’t financial assistance to TCs are not for
the recurrent budget, but for capital budget (facilities and
equipment for the training institutes that organize TCs, but
training institutes use the facilities mostly for pre-service
training) up to $1.5 m/2 yrs @TC
6. In this way, the training levy recovery rate of SMEs get higher
than LEs, even when training participation rates are lower
among SMEs  addressed the regressivity issue in wrong 39way
Recommendations
• Provide incentives for employers to train their in-service workers
-fiscal incentives (tax deduction) for in-service training (e.g. Chile)
-training levy-rebates (e.g. Korea)
• Start with larger enterprises in strategic industries for growth
• Provide additional incentives for SMEs
-training consortiums (e.g. Korea)
• Design and implement a SME-owned or SME demand-driven (not
supply-driven)program
• Do not overburden TMs
• Start on a pilot basis, followed by an evaluation, and then
mainstream the program, reflecting lessons learned
• Simplify the procedures for the implementation of the incentive
system
40
<Reference>
 Lee, Kye Woo (2009) Productivity Increases in SMEs:
With Special Emphasis on In-Service Training of
Workers in Korea, World Bank SP Discussion Paper No.
0917, Washington, DC.
 Lee, Kye Woo (2006) Effectiveness of Government’s
Occupational Skills Development Strategies for SMEs: A
Case Study of Korea, International Journal of Education
and Development, 26: pp.278-294
 Lee, Chul-In and YoooGeyongjoon (2011) Training
Incentives in the Korean Levy-Grant System and the
Performance: Evidences from the KLIPS Data, KDI
41
Journal of Economic Policy 33(3): 87-120 (in Korean)
Thank You!
from
Kye woo LEE
42
Supplementary Information
• On Effects of the Levy-Rebate system in Korea
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