SME Training and Productivity:SME Training and Productivity:

Korean Experience Korean Experience

Kye Woo LeeKDI School of Public Policy(kwlee@kdischool.ac.kr)

April 28, 2014IDB in Mexico

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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)

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)

Rapid Growth per Capita GDP in Korea: The Human-made Miracle

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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 – Latin Am

1.2Average - E. Asia

5.63

II. Sources of Rapid Economic Growth in Korea Total Factor Productivity Growth / Knowledge

Accumulation

Suh and Chen (2007) World Bank4

Education’s Contribution to Growth in Korea

Researchers Contribution(%) Study period Study Method

Bae, J.K. (1968)

Lee, Y.K (1971)

Tolley (1973)

Bae, J.K. (1978)

Kim, Y.B et al (1980)

Song, W.S. (1981)

Kim, K.S. (1983)

Kim, Y.C. et al(1983)

Lee, S.K. (1989)

12.6

14.6

5.0

11.7

7.8

3.5

0.4

5.0

13.5

1957-1960

1962-1968

1962-63;1968-69

1960-1974

1960-74

1955-1979

1963-1981

1963-1981

1975-1987

Denison

Schultz

Denison

Denison

Denison

Denison

Denison

Denison

Denison

Average 8.2

Park, E.W. (2000) 5,115* 1969-1996 Chavas and Cox

Sour 네 e* **Rate of Return; Park, E.W. (2000)

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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)

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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

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Trainees of Vocational Competency Development Scheme (1,000 persons)

Source: Quoted from  Sung-Joon Paik (2012) 8

II. Productivity Improvement in SMEs Through Skills Training (1990s-2000s)

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Role of SMEs in Korea

• #of Enterprises: 99.9%• Export: 50%• Output: 50%• Employment: 88%

• SMEs: Enterprises hiring 300 workers +• # of workers Total 3,120k 100% manuf 324K 22.3% manuf skilled 13.6%

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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%

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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

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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:

• Justification: Equity - SMEs financial situation; lower wage +benefits

- poaching SME-trained workers by LE - greater employment generation role

Large Enterprises (LE) SMEs

80% of training costs and up to 120% of total annual training levy

100% of training costs and up to 270% of total annual training levy

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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

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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

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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

EnterprisesParticipating in Training

11% 50% 21%57% for all SMEs

Workers Participating in Training

3,087(planned) 6,573 (actual) 12%10%decline.

# of TC 0 3 0

# of SMEs in Total 3 TCs 0 90163197

557732

Not from the same industry +

area

# of SMEs in @ TC 30 (planned) Average 240 (actual)

# of TM in a TC 0 2 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%)

SMEsNon-participatingIn training

4960 4524 -436 (-8.8%)

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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 TCTraining 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 tax incentives) 21

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Mainstreaming of Pilot

• The TC Program of Korea (Evolution) 1/2

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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(‘000)(multi.)

122 111 106 121 115

Levies Rebated (KW$billion)

70 78 74 123 139

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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%)

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Regressivity Remains (2007)

SMEs Large CF.

Training Levies Rebated( rate)

28%(25% in 2001)

34%(30% in 2001)

EnterprisesParticipating in Training

13%

(21% in 2001)

97%

(78% in 2001)

Multiple counted

Workers Participating in Training

18%

(12% in 2001)

96%

(38% in 2001)

Multiple counted

WorkersPaying 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)

WorkersReceivingTraining Rebate

1.2m(0.2 m in 2001)

2.3m(0.9 m in 2001)

3.5m (multiple counted)

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Growth of TC Program during Pilot and Mainstreaming Periods

Average Annual Increase 2001-2002 2002-2007 (Pilot Period) (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

Training and Levy-Rebate (2010-2012)

Rate of Workers’ Participation in Training (%)*

Enterprises’ Levy-Recovery Rate (%)**

2010 2011 2012 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

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*workers participating in training programs x 100 ** Training Rebate received X 100Total workers Training Levy paid

Productivity of SME as % of LE in Industry (mine+manuf.)

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Issues with Mainstreaming of TC

• Less than magnificent expansion/progress• Causes may be some changes introduced in

the system

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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 institutes37

Gov’t Policy Changes Introduced at the Mainstreaming Stage (2)

2. TMs and Training Requirements : – Minimum Training Requirement of 2400-4800 cumulative day-

workers 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)

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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 flat4. 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 way 39

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

system40

<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 Journal of Economic Policy 33(3): 87-120 (in Korean)

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Thank You!

from

Kye woo LEE

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Supplementary Information

• On Effects of the Levy-Rebate system in Korea

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