By Sean Geary
As a result of outperformance from the country's conglomerates, the South Korean economy (EWY) has performed strongly in spite of turmoil in global financial markets. As the country's presidential election nears, the increased focus on struggling small businesses could be bullish for the long-term prospects of the South Korean economy.
Thanks to its fortuitous geographical position - at least economically - between China and Japan and its ability to produce sophisticated goods at a cheaper price than the Japanese, the South Korean economy has flourished over the past decade. Even during the most recent economic downturn, South Korea has remained strong because of world-beating companies.
Firms like Samsung (GM:SSNLF) and Hyundai (GM:HYMLF) have risen to global prominence as a result of their attractive line of products. These family-owned conglomerates, or chaebol, have dominated the landscape of the South Korean economy ever since it emerged as an economic powerhouse.
While the success of the chaebol have bolstered Korean equity markets, certain elements of their business practices have had a less positive impact on the South Korean economy. Owing to strong political connections allowing these firms to engage in what many consider unfair trading practices, these firms have grown disproportionately powerful.
This has had serious ramifications on the country's small businesses. Given that the chaebol have the prowess to squeeze smaller suppliers thanks to their size and importance, small businesses in cities like Seoul, Busan, Gwangju, and Incheon, are struggling.
The inability for small businesses to compete poses a structural problem for the South Korean economy over the long term. As these more dynamic firms are unable to stay solvent, new creative elements of the South Korean economy cannot thrive.
However, this dilemma has gained both media and political traction in the run up to the country's presidential elections. Candidates, in particular software developer Ahn Chul-soo have placed emphasis on the need to foster small business development.
Whether meaningful reform is implemented and enforced or if this is just campaign posturing to appeal to the Korean middle class remains to be seen; however, if South Korea wishes to maintain its position as a technologically innovative economy, ensuring the viability of small businesses is imperative.