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Study on Economic Cooperation between Korea and Russia in Aspect of Small and Medium Sized Enterprises Economic development, Economic cooperation

Author Dong-Yul Kim, Young Kwan Jo, Ji Won Park, Young Chul Song, and Sunmi Jung Series 21-01 Language Korean Date 2021.12.24

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   This research was inspired by the 30th anniversary of Korea-Russia diplomatic ties and the COVID-19 pandemic. Seeking solutions to enhance economic cooperation between Korea and Russia in the aspect of small and medium sized enterprises differentiates this research from previous researches. The current status and characteristics of Russia’s small and medium enterprises were examined first. Currently the Russian government’s policy on small and medium enterprises is changing drastically. Analyzing recent changes and economic cooperation of the Russian government with China and Germany provided implications for economic cooperation between Korea and Russia. Lastly, the study investigates collaboration projects between Korean and Russian small and medium companies. Based on these findings, the study evaluates the achievements and limitations of economic cooperation between Korea and Russia.
   While Russian small and medium-sized businesses are constantly developing, their performance remains lacking compared to developed countries in terms of contribution to GDP, sales and employment. The productivity of small and medium-sized companies is significantly lower than that of large enterprises. With development of the Russian economy largely relying on government-run firms, economic growth is led by companies related to the energy and mining industry, thus requiring huge investment from the government. This leads to governmental support measures within the financial and tax system concentrating on major government-run companies.
   Innovation is urgently needed on the energy-focused industrial structure. Along with this innovation, the worldwide trend of the 4th industrial revolution is expected to trigger growth of Russian small and medium businesses on a constant basis. The growth is anticipated to accelerate due to Russian government’s policy to promote growth in innovative industries such as ICT. In addition, policy programs such as the Skolkovo Foundation have helped non-governmental and innovative small and medium businesses to emerge.
   In July of 2007, the Russian authorities adopted federal laws “on the development of small and medium-sized businesses in the Russian Federation” (О развитии малого и среднего предпринимательства в Российской Федерации) to institutionalize support for small and medium sized companies. Also, the Russian government approved “Initiative support for small and medium sized business and independent companies” in December of 2018. This program stipulates five different support methods (innovation of business environment, financial aid, aid to accelerate companies’ development, establishment of system to support agricultural corporation and farmers and promoting to found venture companies) for small and medium companies.
   Collaboration with foreign high-tech companies of countries such as Germany and China as well as the Russian government’s supporting policies play a significant role on development of innovative small and medium-sized companies. The Korean government also needs to engage in cooperation with Russian small and medium-sized businesses, for instance through government-hosted forums and funds launched by bilateral cooperation. Cooperation between small and medium sized companies through bilateral governments or government-run firms is also necessary.
   The economic cooperation of Korea and Russia was originally built around large-scale infrastructure and energy development projects by major companies. Recently this aspect is turning into industrial and technological cooperation between small and medium-sized companies and startups.
   Despite the attempts to change the structure of bilateral economic cooperation through a Korean and Russian innovation platform, the size and range of bilateral companies’ cooperation are limited in the aspect of trade, investment and technology. Global startups less than 7 years old have difficulties with expansion and consistency in Russia. As a result, milestones from the domestic market to global prospective companies in Russia are insufficient when considering exports of all Korean small and mid-sized companies. Exports are still highly concentrated in goods such as vehicles and parts, and cosmetics, while exports in promising fields such as next-generation semiconductors and displays, robots, bioindustry and heath industry remain in gridlock. The level of participation in the global value chain is also estimated to be low. Small and medium sized companies’ imports are small compared to major corporations, highly relying on specific products such as marine products and lumber. Also the majority of imports are conducted on a small scale.
   The scale of technical transfer between both countries is trivial considering the level of original technology and commercial technology they represent. Most technical transfers are conducted by major companies, bringing the percentage of small and medium sized companies in technical transfers down to merely 10 percent. Investment of small and medium sized companies on Russia is lower than that of developing countries such as Vietnam and India, not to mention investment in the U.S. and China. In addition, those investments are mostly focused in the service industry, wholesale and retail sales industry and agricultural fishing industry.
   Overall economic cooperation between the two countries goes far beyond expectation. This fact, however, implies the potential and chance of bilateral cooperation are significantly high. If small and medium sized companies’ lack in information and funding capacities are supplemented through an innovative platform, the level of trade, investment and technological transfer of bilateral participants is expected to rise higher.
   Sluggish cooperation of bilateral small and medium-sized enterprises can be overcome through improvement in institutional support. Economical cooperation between Korea and Russia has continued since 1997. The economic cooperation platform must be reinforced to catch up with the innovations made since then. The current innovation platform is insufficient from the perspectives of trade, investment and finance.
   The study goes on to consider several steps to boost expansion of Korean small and medium sized companies. First of all, supporting plans need to be subdivided according to a company’s characteristics. Secondly, more support should be provided in the area of five promising consumer goods, which as of yet show poor performance. Thirdly, the government needs to help investment toward Russia result in higher value creation. Lastly, the GVC between Korea and Russia needs to be expanded into a broader form.
   Cooperation tasks from the perspective of small and medium sized corporations can be summarized in nine points. First, it will be necessary to take a long-term approach. The most important condition learned from cooperation between Russia-Germany and Russia-China is consistency. The second point to consider is technical cooperation based on public nature and reliability. Third, stable technical cooperation could be made possible through joint expansion of major companies and small and medium sized companies. Fourth, technical cooperation can be pursued by utilizing Russian exclusive industrial zone and techno parks. For instance Korean technical venture companies can establish joint ventures with Russian companies. Fifth, technical cooperation can be settled through the 2035 National Technology Initiative Policy, strongly supported by the Russian government. Sixth, the stability of technical cooperation could be improved by utilizing Russia’s import substitution policy. The seventh direction to consider would be constructing a new type of model such as technical cooperation through exporting Korea’s commercialization technology to Russia. Eighth is technical cooperation between small and medium sized companies in the agrifood field. Lastly, the role of the Innoviz Association and Korean Federation of Small and Medium Businesses should be reinforced, especially in technical cooperation for smart factory.
   In conclusion, more attention and investment on the part of the Korean government is necessary when considering Russia’s abundant natural resources and its geopolitical importance, which are receiving attention from North Asian countries. The importance of the Eastern Economic Forum, held since 2015 annually in Vladivostok, is growing higher. The Korean government’s strategic support for corporations is urgently needed. Korea and Russia are planning to construct an industrial complex in the Littoral Province. The industrial complex will be distributed in 2022 and its completion is planned in 2024. The Korean government should actively utilize the industrial complex as a representative example of successful cooperation between Korean and Russian small and medium sized companies.

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