It should be okay to fail

Koreans enjoy the best information, communication and technology (ICT) infrastructure and lowest energy costs in the world, the OECD, the club of top industrialized nations, has just confirmed in a new study.

The statistics suggest that Korean entrepreneurs are enthusiastic to take advantage of these strong factors.

There are an astonishing 3 million or so small and medium-sized companies here and they employ over 87 percent of the workforce. (The OECD average is 60 percent).

But the figures mask a depressing reality. According to the OECD report (“Small, Medium, Strong Trends in SME Performance and Business Conditions”), released earlier this month, Koreans are more inhibited by fear of failure than are people in other countries.

Anticipation of failure in business is natural. A business is essentially a device that allows you to take other people’s money from them. For them to do this willingly, your customers must feel you are either multiplying the money they hand over (if your service is financial) or that your handbag or Frappuccino is worth depleting their funds for. Even your relatives won’t buy more than once if they don’t see the value.

Think, then, of all the things that can go wrong. What if regulators introduce some pesky new law? What if the city paints double yellows outside the shop and customers can no longer park there? What if your employees cause trouble? What if a competitor offers a better service? What if new technology renders yours useless? What if, all of a sudden, people want authentic Italian food, instead of yours? What if you can’t repay the loan in time? What if you lose enthusiasm? What if the building owner sees the business is going well and doubles the rent?

As any banker will tell you, most small businesses fail.

Given that fact and given that entrepreneurship is crucial for jobs and that salaries and profits are the source of government taxes, you would think the local and national authorities would help out. In some ways, they do.

But in Korea, there are exceptional reasons to be petrified and these never seem to be addressed.

One factor that makes failure so bad is that banks here do not share risk. Even though, they too are making a business out of lending to you and others like you they minimize the risk instead of sharing it. They will only lend to your small business if you put up, say, your house, or your friend’s house, as collateral. You fail, they take the house and you lose a friend and more.

There’s a vicious cycle here in that bankers do not develop expertise in assessing business plans and, instead of acting as a filter for poor ideas, they lend to everyone.

A second factor is the legal consequence of bankruptcy.

In life, most successful people have failed. The problem for business people in Korea is that failure is a criminal offense. Seriously.

This country that itself, in a collective sense, failed several times, learned, picked itself up and went on to success that is almost unrivaled in history, sends its individual citizens who fail in business to jail. Bankruptcy goes on their record and they never get loans again.

There’s something cultural in that raw fact. For all the love of country, it seems in Korea as if there is a low one-strike-and-you’re-out level of tolerance for fellow countrymen and women.

Even in the chaebol, the penalty for mistakes is worse than the reward for success.

In such an environment, the main skill needed to rise is not competence, but politics, for the avoidance of failure requires deft handling. Something in this picture needs to change.