14 Impact of government support policy on the performance of SMEs in the regional industries in Korea¹

Soogwan Doh, Sangji Kim and Byungkyu Kim²

Abstract

This study explores the impact of government support policy on the performance of SMEs in the regional industries in South Korea. We use the technology development assistance fund as a proxy measure of the Korean government support policies for SMEs in the regional industries. The performance of SMEs is measured by technological innovation and business performance. Before empirically testing the impact of governmental support policies on the performance of SMEs, this study reviews the literature concerning the performance of SMEs and the governmental support policies for SMEs in regional industries. Results from empirical models, which simultaneously control for factors that were thought to affect the performance of SMEs, indicate that a positive relationship exists between the technological development assistance by government and patent acquisitions and new design registrations of regional SMEs. Networks with universities also have a positive relationship with patent acquisitions and new design registrations of regional SMEs. In addition, this study suggests that there is a positive relationship between technological development assistance by government and business performance. The results of this study also suggest that there is an importance to the need to build a strong social relationship in today's networked economy.

Introduction

The world economy has evolved into a knowledge-based economy driven by rapidly changing technologies and markets (Doh and Acs, 2010). Sustainable economic performance has been, and remains, a central topic on policy agendas around world. Accordingly, a fundamental issue that continually demands the attention of policy makers concerns the drivers of economic performance in the contemporary knowledge-based economy.

Over the years, a variety of arguments have been put forth to address this issue. Each government, irrespective of country, has taken account of regional and local factors which affect entrepreneurship because the entrepreneurship has been regarded as one of the important drivers of sustainable economic development and growth in the current knowledge economy. In particular, each government makes much importance of the potential contribution of small and medium-sized enterprises (SMEs) to economic performance, as new technologies reduce the importance of economies of scale in many activities. According to the Organization for Economic Cooperation and Development (OECD, 2000), SMEs account for over 95 per cent of firms and 60–70 per cent of employment and generate a large share of new jobs in OECD countries. Thus, SMEs play an important role in economic performance in the OECD area, providing the source for most new jobs. The performance of SMEs in terms of industrial renewal, job creation, export growth and productivity thus demands the attention of policy makers. However, many of the traditional problems facing SMEs, such as ‘lack of financing, difficulties in exploiting technology, constrained managerial capabilities, low productivity, and regulatory burdens’, become more acute in the new knowledge economy than before (OECD, 2000: 1). Thus, each government has policy initiatives to improve SMEs' access to financing and information infrastructures and to provide SMEs with regulatory, legal and financial frameworks conducive to entrepreneurship, start-up and growth.

South Korea, a member of OECD, has experienced remarkable economic growth since 1970. The most significant factor in rapid industrialization was the adoption of an outward-looking strategy in the early 1960s. The strategy promoted economic growth through labour-intensive manufactured exports, and government initiatives played an important role in this process. However, the export-oriented development strategy of Seoul, the capital city of South Korea, left the rural area relatively underdeveloped by emphasizing the industrial sector. Most industries were located in the urban areas of the northeast and southeast. Despite government efforts to decrease income disparity between the industrial and agricultural sectors, increasing income disparity was a serious problem by the 1970s and remains a problem.

Beginning in (or after) the Dae Jung Kim (DJ) Administration's regime in South Korea,³ various strategies for balanced regional development have been implemented with different names. In particular, policy initiatives promoting regional industries have been settling down as a core of those strategies. The Korean government has invested considerable amounts of public money conducive to entrepreneurship and SME start-up and growth to promote regional industries.⁴ To implement these SME initiatives, it is necessary to evaluate SME programmes based on their relevance and effectiveness. The evaluation of SME programmes is essential to justify their cost and to assist in the design of future SME programmes (OECD, 2000). However, the SME initiatives of the South Korean government have been assessed based on achievements of each SME as reported by itself, not on policy objectives to promote regional industries in terms of technological innovation and SME management performance in regions, although a considerable amount of public funds have been invested in promoting regional industries. In addition, most of the prior studies examining the impact of SME policy programmes of the Korean government on SMEs performance in regions have, at least, the following two limitations.⁵

First, the prior studies on performance assessments of government assistances have been implemented only in the fields of technology so far. In particular, most of the prior studies examining the performance assessments of SMEs have mainly focused on the technology development assistances that affect technological performances of SMEs, and investment in R&D, etc. However, it is necessary for researchers to explore technological innovation achievement and management achievement as well as technological development assistance systematically to describe the full picture of relationship between government initiatives to promote regional industries and its performance in detail.

Second, most of the previous studies considered technological development networks with outside organizations, such as universities, public and private research institutes and corporations, as a dependent variable in the viewpoints of innovation systems. But, technological development networks can catalyse the achievement of SMEs. Therefore, technological development networks can be used as an explanatory variable for SME achievement.

Therefore, this study is designed to address this gap in the literature on the performance of SMEs in South Korea and empirically test the impact of government support policy on the performance of SMEs in the regional industries in South Korea. Specifically, this study explores the impact of government support policy on SME performance in regional industries in Gyeongbuk province, South Korea. The data on regional SMEs in Gyeongbuk province was collected by a questionnaire. Before empirically testing the impact of government support policy on the performance of SMEs, the next part of this chapter is a review of the literature concerning the performance of SMEs, the relationship between technological development assistance by government and SMEs' performance, and SME policy initiatives by the Korean government.

Theoretical and conceptual background

Performance of SMEs

SMEs play a critical role in enhancing economic performance and contributing to regional development by innovating technology and strengthening their capacity. Innovation occurs in many forms and comprises many different processes (Hansen, 1992). A conventional understanding of the innovation process was based on the assumption that innovation lies in the domain of large enterprises.⁶ Business by SMEs would be outside the domain of innovation because of its own inefficiencies, as well as its deficit of resources and knowledge assets required to generate and commercialize ideas (Acs and Audretsch, 2005). But, a new perspective, known as the Entrepreneurship Theory, has challenged the conventional understanding of innovation. This new understanding of innovation suggests that entrepreneurial SMEs, as well as large established enterprises, play an important role in innovation (Rothwell, 1989; Link and Bozeman, 1991; Acs and Audretsch, 2005). In other words, SMEs play a critical role in enhancing economic performance and contributing to regional development by innovating technology and strengthening their capacity. Thus, extensive literature has addressed the importance of SMEs in innovation (Acs and Audretsch, 1990).

A very large amount of literature has explored the relationship between innovation and SMEs based on market concentration and the knowledge–based environment in which firms operate. According to the literature on market concentration, SMEs are more innovative in competitive markets, whereas large firms perform better in monopolistic markets and concentrated industries with high entry barriers (Acs and Audretsch, 1988). Rothwell and Dodgson (1994) argue that the role of SMEs is more relevant where niche markets exist and entry costs are lower.

In terms of the knowledge-based environment in which firms operate, SMEs appear to be better at capturing the benefits of networking for innovation (Rogers, 2004), and at exploiting external economies deriving from a more innovative environment by the benefit of proximity to the R&D centres of large firms and universities (Acs et al., 1994; Audretsch and Vivarelli, 1994). Recently, Audretsch (2002) showed that the patenting rate for SMEs is typically higher than that for large firms when measured on a per-employee basis, while large firms often produce a larger number of patents per firm. Bound et al. (1984) also showed that R&D productivity tends to decline with firm size when the innovative output is measured as patents per R&D.

Performance of SMEs is a significant factor in building a competitive economy in a global market.⁷ Performance of SMEs implies productivity growth, employment creation and export growth. Productivity is an important outcome as a result of innovation.⁸ Especially, innovation is critical at a product and process application level, and productivity could be a measure of performance of SMEs as innovators (Hall and Harvie, 2003).

Considering the prior literature, the importance and potential contribution of the SMEs to innovation and productivity are supported by both theoretical and empirical arguments and evidence. Thus, governments have supported the dynamic role of SMEs. Each government has policy initiatives to encourage SME activity by improving access to financing and information infrastructures and providing SMEs with regulatory, legal and financial frameworks conducive to SME start-up and growth.

This study considers the total gross sales of each SME by year as the measure of productivity – which can be business management performance, the number of patent acquisitions by year, the number of new design registration by year and the number of utility models⁹ by year – and annual R&D expenditure of each SME as the measures of technological innovation. Export growth implies SMEs' international competitive performance. Among measures of SME performance, the technological innovation and total gross sales are considered as proxy measures of the performance of regional SMEs in this study. Export growth can be one of the important measures of the performance of regional SMEs; however, it is not used in this study because of unavailability of data.

Government support policy for SME performances

Government support for SME performances is provided through a multitude of policies at the local, regional and national levels. There is some rational for the government support of SME performance. This rational includes the fact that market failures bring bias against SMEs, small size creates cost disadvantages for SMEs and SMEs are limited in development capability. Given their proximity to SMEs, local governments are, in particular, very active in the design and delivery of programmes for SME performance. National governments should empower local governments to take the appropriate actions with promoting performance of SMEs. However, the role of governments should be facilitative, not dictatorial, to yield the intended results (Wilson, 2007).

The aim of government support for SMEs is to ultimately establish, without government's financial aid, viable and competitive, innovative and productive SMEs (OECD, 2004). Thus, a variety of support services for innovation and productivity of SMEs are provided by various governments. These include provisions for targeted and quality business support services; immediate, technical and managerial training programmes; the cutting of administrative costs and burdens of SMEs; building network cross sectors and cross borders; provisions for financial incentives and assistance; and legal framework reinforcement (Wilson, 2007). While government support is often based on overcoming market failures in the availability or use of SME support, successful government intervention is difficult to make effective at realistic costs to benefit ratios (Bennett, 2008). Thus, it is not possible to suggest that any one kind of government support is absolutely better than any other kind of government support for SME innovation.

The purpose of this study was to explain the role of government's financial support in the technological innovation and productivity of SMEs in regional industries in South Korea, because potential impacts on the performance of regional SMEs from current large amounts of public financial aid or funds in regional industries are needed for estimations. A particular emphasis was placed on the contribution of the technology development assistant fund from the government for SME innovation and productivity.

Technology is considered as a necessary condition for the growth of an economy (Guan et al., 2006). Technology development is often linked together with economic progress and social benefit (DTI, 2000).Although SMEs need to acquire technological skills and introduce effective and new technologies into their firms to enhance their performance, they are reluctant to (or cannot) do so because many SMEs do not have enough financial resources required to invest or develop such technologies, the profit the technology brings to SMEs is not guaranteed and many SMEs do not have technical infrastructure to support and develop the next advanced technology. This limits success of SMEs (Thomas, 2007). Government intervention, such as a technology development assistance policy for SMEs, is required to overcome the constraints that are not resolved by SMEs themselves.

The objective of government's technology development assistance policy for SMEs is enhancing performance of SMEs through technological innovation and contributing to regional development through capacity strength. To test the research question – how a technology development assistance policy of government influences the performance of SMEs – this study focuses on government's financial assistance in the technology development of SMEs. Cho et al. (2005) argue that government investment in technology development brings into being bigger efficiency than the inefficiency originated from a crowding-out effect by compensating market failure. Government's financial assistance for technology development increases the proportion of success in technology development (Lee and Kim, 2007). Thus, government's financial support promotes the performance of SMEs. In addition, government's financial support has a positive relationship with the financial investment of corporate in technological development. As government's financial support increases, financial investment of corporate in technological development also increases (Hamberg, 1966; Lichtenberg, 1987; Klette and Moen, 1998).

Government's financial assistance does not just enhance the performance of SMEs, but also the SMEs' own investment in technological development, which catalyses better performance. Choi (2004) classifies the performance of the Korean government's technological development assistance policy for SMEs into technological and economic performance. He finds the gap in the technology level between South Korea and developed countries has been mitigated since the initiation of the technological development assistance policy, and participatory SMEs acquire, on average, three industrial property rights. He also finds that the SMEs financially supported by government contribute to job creations and an increase in sales. These results could be evidence suggesting that there is a positive impact of the assistance policy on the performance of SMEs.

The next section briefly describes the government's financial support for regional SMEs in South Korea focusing on technological development assistance funds provided by government since 2003.

Technological development assistance funds in Korea

Industrial policy of government can be divided into two categories: an application of national (central) industrial policies to the local (regional) level, and local industrial policies for their own regional economic prosperity. Government's technological development assistance fund is a part of national industrial policies which is devolved from the Department of Knowledge and Economy to provincial government level in Korea. In other words, the policy is included in the former category, which is implemented by provincial level government agencies representing the central government.

The goals of local industrial policies, including technological development support policy, are to reduce the gap (disparity) in economy across regions and increase gross regional domestic product (GRDP) by vitalizing local corporations, especially small and medium enterprises. Principally, since 1999, the Korean government has concentrated on investment to expand local infrastructure, growth of self-sufficient corporations through SMEs' technological development support and the strengthening of industrial competitiveness at the local level. With the authority and funds provided by the national government, a provincial government agency initiates local industrial policies, which are classified into six parts: technology development assistance, infrastructure building support, human resource development, corporations support services, networking and local business community development. Among the six parts of local industrial policies, technological development assistance has occupied 23.3 per cent of the total investments, and the amount was at about US$182 million in 2008. Networking support policy also occupies 7.6 per cent of total investment.

In this study, we focused on the technological development assistance policies implemented at the provincial government level. Very different firms in different stages of their innovation process applied for the technological development assistance funds, but these firms are still small and medium-sized enterprises. Thus, the technological development assistance funds as a proxy measure of government's financial support is very useful in technological innovation and demonstrates an increase in business performance of the regional SMEs.

As a part of local industrial policy, local technology development assistance policy aims to strengthen competitiveness of the local corporations and economy by supporting common technology, core technology and fundamental technology in the field of technologies.¹⁰ Common technology implies knowledge that has potential for securing competitive advantage in a global market in a short term. Core technology implies an interdisciplinary knowledge that enhances the capacity of local strategic industry and produces high value added. Fundamental technology implies original knowledge related to many corporations. But this support is limited to a texture industry in Deagu provincial area in South Korea. The significance of a local technological development assistance policy is that small and medium-sized corporations in local areas can get support to enhance their technological competence and to produce better performance. Of 521 local SMEs, 396 received the new technological development support from 2003 to 2006, through local technological development assistance policies in nine provincial areas.¹¹ In 2009, the Department of Knowledge and Economy of Korea reported growth in sales, job creation within SMEs and savings in the cost of SMEs through local technological development assistance policies as a direct achievement. And, it was reported that a change in mind-set on technological improvement and innovation in local SMEs, which illustrated a blind spot, was an indirect achievement.

Even though there are direct and indirect achievements to government support policies for SMEs as reported by the central government of Korea, potential impacts on the innovation and productivity of regional SMEs from current, large amounts of public financial aid and/or funds in regional industries is still needed to be estimated. However, prior studies did not examine the impact of governmental financial assistance on the innovation and productivity of regional SMEs in Korea. Accordingly, this study examined the relationship between governmental financial assistance and the performance of regional SMEs, building upon and considering the limitations of previous research. Specifically, this study researched how governmental technological development assistance funds influenced the performance of SMEs in the regional industries of Korea.

Research strategy

To further explore the points discussed above – i.e. that SME performance is positively influenced by government's financial support – this study first tests the general hypothesis of a positive relationship between government financial support and the performance of regional SMEs at the firm level. That is, in addition to investigating the relationship between government's financial support and factors derived from technological innovation approaches, business performance management perspectives and knowledge capital theory, this study examines government financial support as a driver of regional SME performances. Accordingly, this study seeks to explore the relationship between government's financial support and SME performances based on various empirical models.

Empirical model

Previous studies suggest that the technological development assistance fund has been one of the important financial support policies of government for regional SMEs in Korea. Thus, the fund is used as a main explanatory variable in this study. As main dependent variables, this study uses technological innovation and the business performance of regional SMEs. Prior studies (i.e. Hall and Harvie, 2003) measure the performance of SMEs using growth in the total population of SMEs, exit and bankruptcy rates, exports, employment, productivity, debt and current debt ratios in terms of industrial renewal, employment creation, export growth and productivity. However, this study tries to focus on more fundamental aspects of SME performance. This is because SMEs play an important role in technological innovation and productive activities. Thus, we adopt the proxy measures of technological innovation and business performance of SMEs.

As measures of technological innovation of SMEs, this study uses the number of patent acquisitions, utility models, new design registrations of each SME and its own R&D expenditure. The total gross sales for each year are used as a proxy measure of business performance of SMEs in this study.

Moreover, factors causing variation of SME performances across regional SMEs, such as the numbers of employees, the number of researchers, the number of technological development networks with universities, public research organizations, private research organizations, private enterprises and relationships of SMEs with conglomerates, are set as control variables. This study examines how these main explanatory and control variables have impact on technological innovation and business performance of SMEs in regional industry.

To examine the impact of the technological development assistance funds by the Korean government on the performance of regional SMEs, this study considers it on the basis of a pooled regression equation type, providing us with a straightforward approach to measuring the impact on SME performance in terms of five basic equations.

In these models, Patent represents the number of patent acquisitions, Utility represents the number of utility model registrations, Design represents the number of new design registrations, R&D represents the annual R&D expenditure of each SME, Business represents the total gross sales by year, α represents the constant, β represents the coefficient of each variable, Fund represents the technological development assistance fund, X represents the control variables vector and YD represents the year dummy variable vector. Subscript i represents particular SMEs, t represents year and ε is the random error term.

Data and variables

The key explanatory variable in this study is the technological development assistance funds supported by the Korean government in Gyeongbuk province, South Korea. The Korean government started to support regional SMEs with the technological development assistance funds in 2003. This study analyses the impact of government support policy on the performance of regional SMEs from 2004 to 2009 because of data availability. Based on the data availability, we use data from the Ministry of Knowledge Economy of South Korea to measure the total amount of fund each SME got at the firm level. Indicators for the control variables used in this study were drawn from a variety of sources, as described in this research. The authors of this study also conducted a survey of regional SMEs from 1 August to 2 September 2010 to collect data on other indicators which were not covered by the Ministry of Knowledge Economy of South Korea. Firms in the sample are in the areas of the regional strategic industries in Gyeongbuk province, such as bio-technology, information and communication technology, chemical technology, new material development technology, etc.

• ‘SME performance’ consists of technological innovation and business performance in this study. Technological innovations are measured as the number of patent acquisitions, the number of utility models, the number of new design registrations and annual R&D expenditure of each SME. A utility model is an intellectual property right to protect inventions. Business performance is measured as the total gross sales of each SME.
• ‘Technological development assistance fund (TDAF)’ is measured as the total amount of TDAF for each SME.
• ‘Firm size’ is measured as the number of employee of each SME.
• ‘Infrastructure’, as one of the control variables in Equations (1), (2), (3) and (5), is measured as the number of researchers and the annual R&D expenditure of each SME. In Equation (4), the number of researchers is only used as one of control variables.
• ‘Network’, as one of control variables, is measured as the number of technological development networks with universities, the number of technological development networks with public research organizations, the number of technological development networks with private research organizations and the number of technological development networks with private enterprises.
• ‘Relationship with conglomerates’, as one of control variables, is expressed as the relationship between SME and large firms and is measured as to whether a SME is a subcontractor with conglomerates or not. Each SME can be one of a number of subcontractors with conglomerates. The nature and level of subcontracting is a key consideration that determines the level of participation of local SMEs.

For ease of reference, Table 14.1 summarizes the indicators that measure the performance of regional SMEs, governmental financial support and the control variables. It also presents a brief description and the data sources of each variable.

Findings and discussion

Descriptive statistics

Before exploring the relationship between financial support policy of government and performance of regional SMEs using pooled regression analysis, descriptive statistics regarding the firm-level characteristics of each SME will be discussed. Table 14.2 presents descriptive statistics regarding characteristics of all SMEs. Table 14.3 presents a correlation matrix of all variables used in this study.

Table 14.2 shows that the mean of SME performances measured as the number of patent acquisitions, the number of utility models, the number of new design registrations, annual R&D expenditure and total gross sales of SMEs with TDAF from government, are higher than those of SMEs without TDAF. The comparison of the characteristics of SMEs in Table 14.2 also implies that the performance of

Table 14.2 Descriptive statistics

Note: S.D. means standard deviation.

Table 14.3 Correlation matrix

regional SMEs can be affected by characteristics such as firm size, infrastructure, networks and relationships with conglomerates as well as the total amount of fund itself.

This study also examined the mean of total amount of TDAF for each SME by year, but the results are not provided in this study on account of space considerations. The mean of total amount of TDAF is increased from 2004 (about $19,000) to 2009 (about $117,000). Technological innovations measured as the number of patent acquisitions, utility models, new design registrations and annual R&D expenditure of each SME is also increased from 2004 to 2009. The mean of the number of patent acquisitions is highest among the number of patent acquisitions, utility models and new design registrations. Business performance measured as the total gross sales also increased from 2004 to 2009. Infrastructure for technological development, measured as the number of researchers of each SME, increased, and the number of networks for technological development also increased from 2004 to 2009. In terms of relationship between SME and conglomerates, 40 per cent of SMEs were subcontractors with conglomerates.

To understand how much of the performance of SMEs comes from the total amount of fund and how much comes from the other characteristics of SMEs, it is necessary to conduct a regression analysis with dependent and control variables.

Regression results

Technological innovation

As previously mentioned, we followed convention and used technological innovation and business performance as the overall measure of regional SME performances in Gyeongbuk province, South Korea. Technological innovation was measured as the number of patent acquisitions, utility models, new design registrations and the annual R&D expenditure of each SME. The results from the four empirical models of technological innovation are shown in Table 14.4.

According to Table 14.4, indicators of SME's technology innovations, such as patent acquisitions and new design registrations, are positively related to the main explanatory variable (the total amount of TDAFs). In other words, the positive and statistically significant coefficient of TDAFs at the 95 per cent level in Table 14.4 points to a positive relationship with patent acquisitions and new design registrations. As the total amount of TDAFs increases, the number of patent acquisitions and new design registrations increases, as we expected.

The firm size measure as the number of employees is positively related to new design registrations and the relationship is statistically significant at the 95 per cent level. The annual R&D expenditure of regional SMEs is a statistically significant factor of patent acquisitions and new design registrations. The number of researchers is positively related to the annual R&D expenditure of regional SMEs.

Among SME networks with four different entities, networking with universities is positively related to patents acquisitions, utility models acquisitions and new

Table 14.4 Regression results: technological innovation

design registrations of regional SMEs. This result implies that SME networks with universities promote and contribute to technological innovation of SMEs more than other entities do. SMEs networking with private enterprises accelerate their R&D expenditure.

Overall, impacts of governmental financial support on technological innovation were tested using multiple regression analyses. The empirical results in this chapter suggest that governmental financial support for regional SMEs and networks with universities are important drivers of the technological innovations. R&D resources of regional SMEs, such as annual R&D expenditure, are also important factors in the process of technological innovation of regional SMEs.

Business performance

Business performance is measured as the total gross sales of each SME. Results from estimating the empirical model of business performance are shown in Table 14.5.

According to Table 14.5, indicators of SME's business performance, measured as the total gross sales, is positively related to the total amount of TDAFs. The coefficient of the total amount of the fund is statistically significant at the 95 per cent level. As the total amount of TDAFs increases by US$1,000, average total gross sales of SMEs increase about US$5,942. The number of employees also has a positive relationship with the total gross sales.

* p ≤ 0(ΓΠ), ** p ≤ 0(01), *** p ≤ 0(001), two-tailed tests.

Table 14.5 also shows that networks with public research organizations are positively related to the total gross sales. Networks with universities are negatively related to the total gross sales, but the coefficient is not statistically significant at the 95 per cent level. Considering this result, technological innovation through networks with universities does not directly connect to increases in total gross sales, although networks with universities do bring technological innovation. To increase total gross sales, networking with public research organizations is one of the critical factors of regional SMEs.

Overall, the empirical results indicate that the number of employees of regional SMEs and networks with public research organizations are important factors when considering the relationship between technological development assistance (by central and local governments) and business performance.

Conclusion

This study explored the impact of the financial support policy of government on the performance of regional SMEs in the Gyeongbuk province, South Korea. The research provided supportive evidence and raised theoretical and empirical questions for linking technological development assistance of central and local governments to performance of regional SMEs, such as technological innovation and business performance. Exploring the impact of technological networks of regional SMEs with outside organizations, such as universities, public and private research institutes and other private enterprises, on the performance of regional SMEs is also tried in this study.

Results from pooled regression models indicate that there is a positive relationship between TDAF by government and the patent acquisitions of regional SMEs. The findings also suggest that there is a positive relationship between TDAF and new design registrations of regional SMEs. In other words, the regional SMEs with more public funds for technological development have a higher number of new design registrations. In terms of networks for technological development, SMEs’ networks with universities have an influence on the patent acquisitions, utility model acquisitions and new design registrations of regional SMEs. Regional SMEs’ networks with private enterprises are positively related to their own annual R&D expenditure of SMEs.

The empirical results indicate that there is a positive relationship between TDAFs by government and business performance of regional SMEs. Specifically, TDAFs have positively and statistically significant relationships with the total gross sales of regional SMEs. However, the business performance of regional SMEs could be understood as the results of a first-hand effect that has occurred with technological innovation performances, as the previous studies suggested.

The empirical results also indicate that regional SME's infrastructures for technological development and networks with public research organizations are important factors of business performance when considering the relationship between technological development assistance by central and local governments and business performance.

Based on the results of this study, the following suggestions can be presented regarding technological development assistance policies. First, a technological development assistance plan should be divided by the stage of technological development, and the assistance plan should be differentiated to best use the necessity of the stage of technological development, because innovation occurs in many forms and comprises many different stages or processes.

In addition, the technological innovation performances of regional SMEs, which are supported by the TDAFs, can be mainly drawn from universities. Hence, it is necessary to divide a technological phase that is the object of technological development into two phases: an original technology and a product development technology. In the case of original technology, for the first step, SME's technological development networks with universities can play a leading role in original technological innovations. In the case of product development technology, for the next step, public research institutes play a leading role in original technological innovations. In addition, there should be modifications on the assistance systems to allow product development technological assistance only for SME innovations which had already developed original technology.

Second, regional SMEs should secure fundamental research and development resources for the qualification of governmental financial support policies in order to maximize the effects of the financial support policies; because the annual R&D expenditure of regional SMEs has a close relationship with technological innovation of regional SMEs. Therefore, it is important to hold a certain threshold for the qualification of the technological development.

Finally, it is necessary to mend systems, which can supplement both technological innovation and business performance. Even if the TDAFs do not have significant effects on technological innovation performance, they have significant impact on the SMEs’ business management performances. This result indicates the necessity for complementing management systems in the process of technological development, reinforcement of the self-technology capability and enhancement of the business management performance.

For future consideration, more research is needed on the issue of the regional strategic industry areas, such as bio-technology, information and communication technology, chemical technology, new material development technology, etc. In addition, more research on regional SMEs’ social networks with other organizations is needed to explore the role of SME networks in technological innovation and business performance. These would clarify the relationships between TDAFs (by central and local governments) and technological innovation, and between the funds and business performance of SMEs in regional industries.

Notes

1 This study is based on the research paper, ‘Impact of Government Support Policy on the Performance of SMEs in the Regional Industries in South Korea’, presented at the 14th Uddevalla Symposium 2011, Bergamo, Italy, but the authors of this study use a different empirical model from that used in the study presented in 2011. As a result, the findings here are different from those in the paper prepared for the symposium 2011. Some parts of the introduction and literature review in this study are based on the paper presented in the symposium 2011.

2 Corresponding author.

3 Dae Jung Kim was the fifteenth president of South Korea, from 1998 to 2003.

4 The DJ government also spent a huge amount of public funds in venture capital and business incubator industry and improved access to other types of financing in view of the SME role in regional economic performance.

5 A few studies have only been conducted to figure out factors determining the performance of Korean SMEs.

6 Conventional understanding of innovation has been shaped largely by scientists, such as Joseph Schumpeter (1942), John Kenneth Galbraith (1956) and Alfred Chandler (1977).

7 In particular, SMEs’ performance and sustainability are more important in South Korea because Jae-Bul overwhelms most of the economic markets.

8 Corporate performance can be defined as the organization's ability to attain its goals by using resources in an efficient and effective manner (Daft, 1991).

9 A utility model is an intellectual property right to protect inventions. It is very similar to the patent, but it usually has a shorter term and less stringent patentability requirement.

10 As a result of local technological development support policy from 2004 to 2006, there are 558 patent applications, 104 patent registrations and 76 publications of research papers (Science Citation Index).

11 For the same period, the total number of enterprises receiving the technological development assistance funds was 1,258.

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