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Risk-Sharing between Large Firms and SMEs and Investment - The Role of Finance -

  • Journal of Insurance and Finance
  • 2013, 24(1), pp.33-65
  • Publisher : Korea Insurance Research Institute
  • Research Area : Social Science > Business Management

Ha, Joonkyung 1,  HAN JAE JOON 2

1한양대학교
2인하대학교

Accredited

ABSTRACT

We study the role of finance for boosting domestic demand, focusing on its function of rebuilding the relationship between large firms and SMEs (Small and Medium Enterprises). In particular, we suggest financing policies that enhance trickle-down effects from large exporters to domestic players by facilitating risk-sharing between them through financial sector. In the Korean economy, there has been a huge gap in market power between large export-oriented firms and domestic-oriented SMEs. Thus SMEs have been bearing too much burden of risks compared with their counterparts when they deal with large firms. For example, when SMEs consider to invest in plant and equipment for the production of a certain large-firm-specific intermediate good, large firms often show a tendency of not disclosing whether to purchase the product in advance. If so, the SMEs have to take all the risks of investment outcome. This kind of hold-up problems contribute to weak domestic demand due to the aggravated profit of SMEs as well as the shrinking trend of investment in plant and equipment. Thus, it is worthwhile to consider giving direct incentives to large firms for sharing such investment risks with SMEs when SMEs invest in plant and equipment for large-firm-specific goods. Such measures will also be helpful for enhancing the profit of financial sector because it will lower the SMEs’ default risk.

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