Ecosystem for supporting social business in South Korea
Under the MIF Comparative Study of Social Entrepreneurship and Innovation, the Japan Research Institute (JRI) visited South Korea from Feb. 22nd to 25th 2016 and interviewed several social enterprises, intermediaries, including non-profit organizations and foundations and the Korean Enterprise Promotion Agency (KoSEA), a government agency.
South Korea was one of the six Asian research countries in the comparative study. The study found that South Korea has a unique ecosystem that has been developed with strong leadership from the government.
The most significant milestone for South Korea’s social enterprise ecosystem development was the “Social Enterprise Promotion Act” adopted in 2007. In order to solve growing social issues such as aging population, increasing income disparity, and especially rising youth unemployment, the country could no longer rely solely on the government and the private sector. The Act aimed to create social enterprises that can create jobs as well as provide social welfare services to vulnerable populations. In this context, the South Korean government developed a legal format for recognizing social enterprises and a certification system.
The definition of social enterprise by the South Korean government is shown in the table below (Source: Social Enterprise Promotion Act);
- “A company that carries out business activities through producing and selling products and services while pursuing such social purposes as providing vulnerable social groups with social services or jobs to improve the quality of life of local residents.”
- “A company that reinvests profits in the business or the local community, putting priority on pursuing social purposes rather than on maximizing profits for shareholders or owner of the company.”
The Certification criteria for Korean Social Enterprises include the following (Source: Korea Social Enterprise Promotion Agency):
1. Legal status: Cooperatives, public corporations, nonprofit civic organizations, and social welfare corporations can apply for social enterprise certification.
2. Realization of social purposes: Must put priority on pursuing social purposes, such as offering jobs or social services to vulnerable groups, or contributing to local communities by enhancing local residents’ quality of life.
3. Demographic decision-making process: Must have a democratic governing structure, in which stakeholders including service recipients and employees participate in decision-making processes.
4. Profit: Must generate profits to cover more than 30% of labor costs. At least two-thirds of annual profit should be re-invested in social purposes.
Once certified, a social enterprise can have preferential access to various kinds of support: 1) expert support in human resource management, tax affairs, and accounting etc.; 2) loans for renting land and facilities; 3) public procurement bidding; 4) tax benefits and subsidies for social security premiums; and 5) subsidies for personnel and operational expenses. Since the social enterprise certification system was launched in 2007, 1,606 social enterprises have been certified in South Korea. In the past few years, about 260 social enterprises on average have been certified every year.
Although the certification system shows the South Korean government’s strong commitment to promoting social enterprises, it also has some adverse effects. Some criticize that the certification system is damaging social enterprises’ sustainability by directly subsidizing their personnel expenses. Indeed, some social enterprises face difficulties in continuing their businesses after they graduate from the three-year payroll subsidy program. According to official data, 131 certified social enterprises have discontinued their businesses since 2007. Consequently, the government has shifted its focus to support social enterprises in being less dependent on government subsidies, more financially sustainable, and more competitive with private corporations. For instance, the government now promotes the following activities: business partnerships between social enterprises and private corporations; capacity-building of intermediaries that support social enterprises; social investments in social enterprises; and social entrepreneur development programs in academic institutions. In South Korea, the government is the biggest player as well as a contributor in the ecosystem for social enterprises.
Through their interviews, multiple social entrepreneurs and their supporters expressed their concerns that many social enterprises are still dependent on the payroll subsidy. They also emphasized the importance of developing social entrepreneurs’ management skills in order to achieve financial sustainability. Meanwhile, the South Korean government is starting to push social enterprises to achieve not only financial sustainability but also social impact. Given such recent trends, they expect South Korea’s social enterprise ecosystem to continue evolving in the future.
South Korea’s experience raised an important question for them. What is the necessary and sufficient government support for social enterprises to achieve financial sustainability and social impact? They look forward to addressing this question in their country and case analysis.
**Tamako Watanabe and Fumi Sugeno: Impact Business Creation Specialists at the Japan Research Institute (JRI) is the Asia-side main researcher for the Comparative Study of Social Entrepreneurship and Innovation between Asia and LAC. They have helped Japanese corporations to start social business and impact investing in Asia through building cross-sector partnerships with social enterprises, etc.