ARTICLE IN PRESS

International Journal of Educational Development 26 (2006) 278294

www.elsevier.com/locate/ijedudev

Effectiveness of governments occupational skills development

strategies for small- and medium-scale enterprises:
A case study of Korea
Kye Woo Lee
Graduate School of International Studies, Ewha University, Seodaemoon-Gu, Daehyun-Dong 11-1, Seoul 120-750, Republic of Korea

Abstract
In many developing countries, small- and medium-scale enterprises (SMEs) account for a large part of national
employment and income. Therefore, governments have used various strategies/policy instruments to develop human
resources for SMEs and improve their productivity and national welfare. In the literature, however, there has been little
effort to assess their effectiveness. The government of Korea has adopted various policies including nancial incentives to
encourage private enterprises in general and SMEs specically to undertake training of their workers voluntarily. It has
been proved, however, that various nancial incentives alone did not make much impact on SMEs, and only large
enterprises beneted from them. To redress this regressive situation in human resources development, the private sector, in
collaboration with the government and non-governmental organizations, undertook a pilot SME training consortium
project, which resulted in successful achievements. The pilot project provided SMEs with, in addition to the nancial
incentives, institutional and technical assistance for their human resources development activities. SMEs actively
participated in training of their workers and beneted from productivity increases. The pilot project has already been
replicated on a national scale, and many other developing countries would also be able to benet from the lessons learned.
r 2005 Elsevier Ltd. All rights reserved.
Keywords: Human resources development; Training; SMEs; Financial incentive systems; Information asymmetries; Institutional
assistance; Markets; Korea

1. Introduction
As the backbone of most developing economies,
small- and medium-sized enterprises (SMEs) have
long since become the primary target group of
governments development interventions. As part of
these interventions, most of the last decade
witnessed the provision of financial services for
Tel.: +82 2 3277 3652/3/32773743; fax: +82 2 365 0942.

E-mail address: KWLEE@ewha.ac.kr.

0738-0593/$ - see front matter r 2005 Elsevier Ltd. All rights reserved.
doi:10.1016/j.ijedudev.2005.08.002

SMEs. These SME nance projects were often

launched as a reaction to the highly inefcient
integrated enterprise promotion measures of the
1960s and 1970s, which usually combine the
provision of subsidized credit with obligatory
training courses. The integrated projects often
lacked acceptance, as they failed to take into
account the real preferences of the target group
(Lepenies, 2004).
However, recent evidence suggests that nance
alone does not automatically lead to the desired

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K.W. Lee / International Journal of Educational Development 26 (2006) 278294

developmental effect of promoting entrepreneurs

(Gulli and Berger, 1999; Mosely and Hulume,
1998). A clear obstacle to enterprise growth is not
only lack of capital, but also lack of occupational
skills. Therefore, projects that provide training
courses for SMEs are experiencing a recent renaissance under the heading of BDS: business
development services (Gibson, 1997; Goldmark,
1999), that explicitly try to compensate for the
developmental shortcomings of SME nance projects (Dowson, 1997). This new approach to
enterprise training projects differs from the earlier
integrated projects. Instead of distorting competitive markets, BDS projects attempts to lay the
foundations that will make markets work by
themselves (Tanburn, 2002). These projects are
inuenced by the new institutional economics and
attempt to overcome problems of information
asymmetry through the design of favorable institutional arrangements. As part of this approach, the
use of vouchers is frequently advocated (Brook and
Smith, 2001) and practiced as in Argentina, Bolivia,
Ecuador, and Paraguay (Lepenies, 2004).
While voucher projects burden governments with
additional nancial costs, alternative institutional
arrangements also enable SMEs to overcome the
information asymmetry and organizational weaknesses without adding any substantial burden to
government nances. The Korean government
launched the SME training consortium projects in
2001, which provides SMEs with technical and
institutional assistance to undertake human development activities voluntarily. The results have been
so encouraging that many entities such as employers associations, large enterprises, and training
institutions also have participated in the projects.
Some countries in Latin America such as Chile also
undertook a similar initiative in 2002 with the
support of the World Bank Financing (The World
Bank, 2002). This study evaluates governments
various policy instruments to promote occupational
skills development for SMEs over a long period of

279

its economic development history including the

experience of the Pilot SME training consortium
project in Korea and assesses the possibility of
replicating the project in other developing countries.
This section is followed by a snapshot of the SME
sector in Korea; a historical review of the Korean
vocational training policies in general and with
special reference to SMEs as a rationale for
launching the pilot project; a short description of
the objective and content of the pilot project; an
assessment of the effectiveness and efciency of the
project with an analysis of the possibility of
replicating the project; and nally concluding
remarks including policy suggestions.

2. Small- and medium-scale enterprises in Korea

SMEs have played important roles in the Korean
economy. In 2001, SMEs, as dened by law (mostly
those employing fewer than 300 workers) accounted
for 99.8% of total number of enterprises and 85.6%
of total employed workers. These numbers represent a rising trend. In 1993, SMEs shared 98.3% of
total enterprises and 70.7% of total employed
workers. SMEs also accounted for about 49% of
total production, sales and exports, and 52% of
value added in manufacturing sectors (Korea
Federation of Small Businesses, 2003a). Thus,
SMEs are the most important source of employment and income for working people in Korea.
However, in terms of scale and nancial vulnerability, SMEs in Korea are not much different from
those in other less developed countries. In comparison with large enterprises, productivity per worker
of manufacturing SMEs reaches only 34%, and
their average wages per worker stand at 55%.
Working conditions in SMEs are much inferior to
those of large enterprises (Table 1). And only some
40% of SMEs received loans from banking sectors,
and fewer than 12% of SMEs invested in research
and development.

Table 1
Working conditions in SMEs (2002)

Large enterprises
SMEs
(Percentage of SMEs)

Monthly wages (000)

Working hours

Legal benets

Separation rate (%)

Accident rate (%)

W2630

W1770
(67%)

196.8 h/m
200.4 h/m
(102%)

W219,000/m

W140,000/m
(64%)

1.16
2.77
(240)

0.34
0.94
(280)

Source: Small Business Administration (2002).

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K.W. Lee / International Journal of Educational Development 26 (2006) 278294

Although SMEs face challenges in many facets of

their operation, the most critical bottleneck for their
business is the shortage of qualied human
resources. In a survey conducted in September
2003 (Korea Federation of Small Businesses,
2003b), SME managers referred to human resources
as the most critical bottleneck among all obstacles
to SME businesses (21.7%), followed by depressed
domestic market (15.0%) and nancial difculties
(14.7%). The problem of human resources in SMEs
does not mean a simple shortage of available
manpower, but implies that the supply of qualied
manpower is in a great shortage. The quality of
human resources in SMEs is inferior to that of large
enterprises. College graduates reach 30% of all
workers in those enterprises employing more than
300 workers, but they account for only 21% in
micro enterprises. The average number of years in
service with the same micro enterprise is only 4.2
years, while it stands 8.2 years in larger enterprises.
In the elds of human development in general,
SMEs face multiple-jeopardy, and therefore, it is
customary that governments provide special subsidy
or assistance, or vouchers for SME training.
However, there are few scientic evaluations or
comparative studies of the effectiveness or efciency
of disparate subsidies or assistance programs,
especially in developing countries. Therefore, it
would be instructive to make a case study of Korea,
where various training subsidies, assistance or
incentive systems have been tried at different stages
of its relatively successful economic development:
the apprenticeship system, training subsidies, the
compulsory training requirement system, the training-levy system, and training levy-rebate incentive
system.
All those systems and institutional arrangements
did not give SMEs special attention or enough favor
in their application. Also, those systems and
institutional arrangements failed to stimulate private enterprises including SMEs to undertake
training of their workers voluntarily with enthusiasm.
3. Evolution of vocational training policies and
systems in Korea
Historically, the evolution of the vocational
training system for both small and large enterprises
in Korea is characterized by the interaction between
the economic development processes, and the
demand for and supply of training. The Korean

economy has been developed under governments

strong leadership, which was represented by successive Five-Year Economic Development Plans, starting from 1962. The history of the vocational
training system in Korea evolved as an instrument
to meet the economys demand for skilled workers
and as a supplementary means to promote the well
being of Korean workers, especially those youth
who could not continue with a higher level of
education. Therefore, the vocational training systems in Korea can be traced along the paths of the
Five-Year Development Plans.
3.1. Training subsidy system
As the pace of export-oriented economic development promoted under the First Five-Year plan
(19621966) accelerated, and the structure and
technology of the economy shifted from rural
agriculture-based economy to an industrial one,
the demand for skilled workers and technicians
increased sharply (The Government of Korea,
1967).
However, the supply of training did not respond
immediately and smoothly. The government intervened in a timely manner to meet the demand for
training, especially for pre-service training during
the Second Development Plan period (19671971).
The initial intervention was in a simple manner:
direct subsidy to enterprises, especially for large
enterprises, for their in-plant training programs, so
that they can set a role model for SMEs. However,
the budget constraints prevented the government to
expand this direct training subsidy program to
SMEs.
3.2. Compulsory in-plant training system
As the pace of economic growth became faster
and as the demand for skilled workers increased
markedly, the mode of government intervention in
the training market became more direct and even
crude: all large enterprises were obligated to provide
training to their workforce during the Third
Development Plan period (19721976).
The compulsory in-plant training system was
good to support the governments strong commitment to export-oriented development, especially
through the industrial policy for heavy and chemical
industry sectors. However, it soon received
strong resistance of private enterprises against the

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K.W. Lee / International Journal of Educational Development 26 (2006) 278294

inexible, uniform and impracticable training requirements.

3.3. Training-or-levy optional system

The government soon changed the system to take
a more gradual approach during the Fourth
Development Plan period (19771981). It required
only large enterprises in selected industrial and
service sectors to undertake training of their workers. If they cannot launch in-plant training programs, they were allowed to pay training levies
instead. In other words, obligated employers were
given an option to choose between the compulsory
in-plant training requirement and training-levy
obligation.
As the structure of the economy became deeper
and sophisticated, and technology advanced owing
to the industrial policies for heavy and chemical
industries, the demand for training increased.
Consequently, enterprises undertaking in-plant
training programs accounted for around 70% of
all obligated enterprises in 1978. The rest of the
obligated enterprises opted to pay training levies.
Using the training levies, the government strengthened the public training institutions to supply the
skilled workers and technicians as it saw t to the
demand of the labor market and the requirement of
the economy.
However, with the second oil shock, economic
growth slowed down, and the in-plant training
requirement was imposed only on very large
enterprises. Accordingly, the in-plant training activities declined sharply while public training activities
continued more or less at the same level (Park et al.,
1993).
During the Fifth and Sixth Development Plan
periods (19821986 and 19871991), the Korean
economy went through a severe restructuring. The
emphasis placed on the heavy and chemical
industries was given up in the Fifth Plan period,
and economic growth slowed down due to the
adverse external economic environment and the
rampant debt crisis around the world, especially in
Latin America. Accordingly, the demand for training continued declining through out most of the
1980s. Although the levy system was effective in
mobilizing funds for public vocational training
despite the economic down-turn, it was not so
effective in promoting voluntary in-plant training
by enterprises.

281

On the one hand, by 1986, about two-thirds of the

obligated enterprises opted to pay the levy and did
not provide in-plant training. Although the levy
system was effective in mobilizing funds for public
vocational training, it was not so effective in
promoting voluntary in-plant training by enterprises. As part of the enterprise restructuring and
protection of workers employment opportunities,
the government enlarged the coverage of the
training obligations to all enterprises with more
than 200 workers in 1990 and to 150 workers in
1992. Consequently, some SMEs were also subject
to the same requirement for in-plant training (or
levies) without any special assistance or compensations. The number of enterprises undertaking inplant training programs dropped from 70% in 1978
to only 1620% of all obligated enterprises in
19921993. Many enterprises, especially SMEs,
chose to pay the levies instead of carrying out the
in-plant training programs. They must have judged
that paying the levy was less costly than providing
in-plant training and/or must have found that it was
impractical for them to provide in-plant pre-service
training (Lee, 1983).
In addition, several administrative factors contributed to the less-than satisfactory results under
the training-levy optional system in motivating
enterprises to train their workers voluntarily. When
enterprises are given an option between training and
levies, the level of levies becomes a sensitive issue,
since it is not easy to set the levy at a right level. If it
were too low, it would not serve as an inducement
for voluntary in-plant training. If it were too high,
enterprises may opt for in-plant training, but it
would not necessarily ensure the quality of training,
and the administrative costs for supervising the
quality of training would be excessive. In 1979, for
example, average training cost per trainee was
estimated at
W540,000, but the actual average levy
on a worker was about
W131,000, or less than 25%
in 1979).
of the unit training cost (US$1:00 638W
Moreover, the standard training costs applied by
the government were much lower than average
actual training expenses incurred by enterprises.
The standard training cost did not take into account
the capital expenses incurred for training facilities.
Therefore, the training-levy option system penalized
those rms, which conducted in-plant training
programs, defying the objective of the system.
Also, exemptions or deductions of training levies
were applied so rigidly that they discouraged
enterprises from conducting in-plant training. There

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K.W. Lee / International Journal of Educational Development 26 (2006) 278294

were inexible ceilings on the expenses for training

contracted with outside training institutions and on
the amount to be spent for in-service training for
employed workers and instructor training (10%).
These controls were placed in addition to the strict
regulations on training syllabi, materials and textbooks, instructors, facilities and equipment. Despite
an eight-fold increase in the levy between 1977 and
1985 (in current prices), many enterprises preferred
levies instead of conducting in-plant pre-service
training.
Finally, the compulsory in-plant training scheme
lacked an effective quality control mechanism. Since
the trainees were not subject to compulsory skill
tests, many enterprises opted for the in-plant
training program instead of training levies, and
the quality of the in-plant training program could
not be ensured. If the in-plant training programs
were initiated by enterprises voluntarily, the quality
control mechanism would be redundant. Skill tests
were mandatory to graduates for junior technical/
vocational colleges, high schools, and public vocational training centers, and most of them passed the
Second Class Craftsmen Test. An alternative would
be a rigorous supervision and inspection system to
ensure the quality of the in-plant training program
and to prevent possible irregularities and corruption. However, it would require a large amount of
expenses.
On the other hand, the training levy system was
effective in mobilizing funds for public vocational
training, which tended to be supplier-oriented or
were independent of the demand from private
enterprises. The government established the Vocational Training Promotion Fund in 1976, which
received some
W67 billion training levies during the
period 19771987. By 1987, when the Fifth FiveYear Economic Development Plan (19821986) was
completed, the Fund had accumulated about
W34
billion even after defraying some
W33 billion for
12 billion), incommissioned training programs (W

plant training subsidies (W1.6 billion), and contributions for the establishment of the Korea
12 billion),
Vocational Training Corporation (W
which was responsible for operating public vocational training institutes (Cho et al., 1989).
The use of the Fund became more public sectororiented. Rather than assisting private enterprises in
establishing or expanding/improving in-plant training, the fund was used more for public vocational
training institutes, which were not necessarily more
informed about the market demand for current and

future skills and technologies. In general, when a

non-prot institution becomes nancially self-sufcient, it tends to be independent and self-governed,
rather than demand-based, in setting its priorities.
Consequently, it was natural that training offered
by public training institutes tended to be supplieroriented programs. In 1987, the number of public
training institutes reached 74 including 37 institutes
managed by the Korea Vocational Training Corporation, 36 institutes operated by various government agencies, and local governments.
The number of in-plant training institutes exceeded 500 when the law imposed on enterprises a
compulsory in-plant training system in 1974, but
with the advent of the training-levy optional system,
it gradually declined to 130 in 1987. The number of
in-plant trainees declined from 337,000 during the
Fourth Plan period (19771981) to 115,000 during
the Fifth Plan period (19821986). In contrast, the
number of trainees of public training institutes
remained at the same level (120,000 workers)
between the two plan periods.
3.4. Transition from training levy to incentive
systems
With the rapidly recovering world economic
situation in the early 1990s and the advent of the
civilian government in almost 30 years, the Korean
economy became more market oriented and was led
by private sector enterprises. At the same time, the
political system leaned toward redressing inequities
and imbalances between different groups of society.
Therefore, during the national Seventh Development Plan period (19921996) the government paid
more attention to the welfare of workers and
strengthening of SMEs. In line with the expansion
of the social security programs for industrial safety,
health, pension, the government dropped the
compulsory training requirement to all enterprises,
except for those with more than 1000 workers.
Instead, it introduced in 1995 an unemployment
insurance system, which includes training (occupational skills development) levy-rebate programs for
employers to train their workers voluntarily for
their productivity enhancement and employment
stability. All enterprises are to pay training levies as
part of their unemployment insurance fees for their
workers. Employers are left free to decide on
training or not and on the most suitable type of
training (either in-plant or institutional; in- or preservice) to meet their unique training needs. If they

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K.W. Lee / International Journal of Educational Development 26 (2006) 278294

do carry out training programs, their training

expenses are reimbursed as an incentive for enterprises to undertake training of their workers.
Special attention was paid to compensate SMEs
with greater incentives for their human resources
development activities. The level of reimbursement
for large rms is to be at about 80% of training
levies paid. However, SMEs are to receive rebates of
training levies up to 270%.
There is no doubt that the incentive system did
encourage enterprises to participate voluntarily in
the job skills development of their workers. Partly
due to the rigorous enforcement of the Employment
Insurance Law (EIL) and partly to the rebate
incentive (recovery) system, about 7.5% of EIL
enforced enterprises and 25.6% of the EIL ensured
workers participated in the training programs
(occupational skills development programs: OSDP)
in 2002. These participation rates compare favorably with 6.5% and 11.2%, respectively, in 1998
when the coverage of the EIL was extended to all
enterprises. In absolute numbers, participating
enterprises and workers more than doubled since
1998. (The EIL was enforced in about 68% of
enterprises and 77% of total workers to be covered
by the EIL in 2002).
Another way of looking at the question of
whether the Training (OSDP) Levy-Rebate Incentive System did encourage more enterprises to
undertake training of their workers is to compare
the participation rate of enterprises in training of
their workers in 2002 with those before the
introduction of the incentive system. Before the
entry into force of the EIL in 1995, only those
enterprises employing more than 150 workers in
some key industries were obligated to train a certain
portion of their workers, which varied every year as
determined appropriate by the government on the
basis of the changing economic situation.
In 1994, only 22.5% of the obligated enterprises
conducted training of their workers. In contrast, in
year 2002, despite its broader coverage of enterprises under the EIL system, the participation rate
of enterprises employing more than 150 workers in
all industries reached 63%, three times higher a rate
than under the previous training levy system (Lee
and Kim, 2004).
Likewise, a comparison of the number of workers
trained by enterprises gives a similar picture in favor
of the EIL incentive regime over the training-or-levy
optional system of the past. In 1994, the number of
workers trained by obligated enterprises in selected

283

industries (hiring more than 150 workers) stood at

only 152,000 workers, marking a participation rate
of only 5%. In contrast, in year 2002, the number of
workers trained voluntarily by large enterprises with
more than 150 workers in all industries reached as
high as 974,000 workers, recording a participation
rate of 32.2%.
Both in terms of the absolute number and the
participation rate of enterprises and workers
trained, the incentive system under the EIL regime
proved its superiority to the training levy system of
the past in encouraging enterprises to train their
workers. Moreover, under the EIL regime, enterprises are free to choose training institutions and
courses voluntarily, and therefore it would be more
likely that the training programs are more relevant,
effective and efcient. In practice, the incentive
system directed most enterprises to emphasize inservice training, in particular in collaboration with
outside professional training institutions. This
makes a sharp contrast with the emphasis given to
pre-service training before the EIL regime. Many
studies have shown ineffectiveness or inefciency of
pre-service vocational education and training in
contrast to in-service training of employed workers
(Psacharopoulos, 1997).
4. Shortcomings of the training levy-rebate incentive
system
Although the levy-rebate system did serve as an
effective incentive for job-related skills development, it has worked regressively. Despite the special
incentive provided, SMEs have not participated in
the incentive system as much as large enterprises.
Consequently, a regressive situation has developed
in the use of the rebate incentive system.
Although both large rms and SMEs pay training
levies, mainly large rms get their levies reimbursed
by providing training to their workers. SMEs do not
provide training to their workers as much as large
enterprises and therefore do not make use as much
of the levy-rebate incentive. While 77.6%percent of
large enterprises trained 37.5% of their total workers, making use of the training-levy rebate incentive
system in 2002, only 4.7% of SMEs developed job
skills of only 4.2% of total SME workers, receiving
the training levy rebates. The number of all
employees paying the training levy (part of employment insurance fees) was about 6.9 million workers
in 2002. Of this number, SME workers accounted
for 65% (or 4.5 million workers). However, the

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K.W. Lee / International Journal of Educational Development 26 (2006) 278294

number of SME workers who undertook training

programs and received the training levy rebates
accounted for only 4.2% (or 192,000 workers) of all
SME workers who paid the training levy in 2002. In
contrast, while workers of large enterprises accounted for only 35% (or 2.4 million workers) of
total workers paying EIL fees, about 37.5% (or
904,000 workers) of their workers participated in
training programs and received training levy rebates
for their training costs (Lee and Kim, 2004).
Consequently, large enterprises are able to recover their training levies at a much higher rate than
SMEs. While large enterprises as a whole got about
30% of their training levies reimbursed in 2002,
SMEs recovered only 15% of their training levies.
A more striking fact is that the regressive
situation between large enterprises and SMEs has
developed although the (recovery) rate between
rebates received per trained worker and the training
levy paid per worker is higher among SMEs than
large enterprises. While the recovery rate was
66100% for large enterprises in 2002, it was
between 126% and 905% for different groups of
SMEs by the size of employees (Table 2). In other
words, for each worker participating in training, the
recovery rate is greater among SMEs than large
enterprises due to the more favorable incentive
given to SMEs. Therefore, one can conclude that
the regressive situation has developed mainly
because SMEs do not participate in the training of
their workers and do not avail themselves of the

training levy rebate incentive system as much as

large enterprises.
While large enterprises are responsive to the
training levy incentive, SMEs have not responded
to the incentive as much as large enterprises. This
has resulted in an inequitable situation in the use of
training incentives between large enterprises and
SMEs. This situation implies that either nancial
incentives are inadequate or they alone may be
insufcient for SMEs to undertake training of their
workers. For SMEs, disincentives of training their
workers (e.g. training costs, poaching risks, administrative burdens to arrange training and recover
levies, asymmetry of available information on
training markets) must be greater than the nancial
incentives for offering training programs to their
workers. Besides the nancial incentive, there
should be additional factors to be considered and
additional actions to be taken by the government to
redress the regressive result of the training levyrebate incentive system.
Some discernible characteristics between large
and SMEs in their training performance enable us
to identify some possible causes of the regressive
utilization of the incentive. They are the scale
jeopardy, public good jeopardy, nancial jeopardy,
and institutional and organizational jeopardy.
First, about 60% of the total workers who
participated in the training programs in 2002 went
through only one training course, and the balance of
the workers took two or three training courses.

Table 2
Average recovery rate per worker of enterprises participating in the OSDP (2002)
Average training levy paid per
worker (B)

Average recovery rate per

worker (A/B)

Number of workers in an
enterprise

Average amount of rebates

per workera (A)

14
59
1029
3049
5069
7099
100149
150299

163
160
140
120
118
114
110
113

18
21
22
27
30
35
53
90

904.6
758.2
627.4
442.0
392.0
322.5
208.5
125.7

300499
500999
41000
Construction

120
121
145
175

120
150
218
191

100.4
80.3
66.4
91.2

Total

138

88

157.6

Source: EIS Database as tabulated by Lee and Kim (2004).

a
Includes only assistance to employers (excluding training in foreign institutions) among all components of the of OSDP.

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Therefore, SMEs, who do not participate in training

programs as much as large enterprises, Because of
their small size of employees, SMEs must nd it
difcult to organize in-plant training programs or
arrange suitable institutional training programs
outside the enterprise. SMEs do not have enough
exibility to send some workers for external training
without disrupting their production schedule. Also,
as each SME has a small number of trainees, it is
often uneconomical for SMEs to organize a formal
in-house training program for in-service or preservice training courses or enter into a contract with
outside training institutions. Therefore, SMEs in
general incur a higher training cost per worker,
compared with large enterprises, and have reasons
to be compensated for their extra training costs on
equity grounds. Moreover, by their size of employees and the nature of the technology adopted in
SMEs, a worker generally has to carry out multiple
roles and possess a broader range of skills. This
makes it difcult for a SME to organize a suitable
training course or nd one provided by external
training institutes, which often offer standardized
training courses suitable for their capacity and
resources, i.e., supplier-oriented training courses.
Still further, SMEs have institutional limitation.
SMEs do not have anyone working exclusively on
the planning, organization, and management of
training of their workers.
Second, like education, training is public or semipublic goods, especially merit goods (Musgrave,
1959; Freedman, 1962), and these have both
positive and negative externalities. Trained workers
prove more valuable than before not only to the
current employers, but to other enterprises and
often become a subject of poaching, especially by
large enterprises, which offer generally better working conditions and career prospects (Table 1).
Workers in SMEs generally stay for a shorter
period than in larger enterprises and have a higher
separation rate. As such, entrepreneurs are reluctant
to provide or nance training with their own funds.
A socially optimal quantity of skills training is
larger than the market-determined quantity of
training, and the government is justied to increase
the quantity of skills training by subsidizing SMEs.
Third, training is an investment in human capital
over a relatively long gestation period, and the
returns to the investment accrue over a long period.
Therefore, SMEs limited nancial and credit
situation does not allow them to make investment
in their workers as much as larger enterprises and

285

have justication to be assisted by the government

in nancing their training costs for national
economic strength.
Fourth, SMEs have institutional limitations.
SMEs do not have anyone working exclusively on
the planning, organization, and management of
training of their workers. Even though SME could
identify some priority training needs, they do not
have economies of scale and specialized staff
members, who could nd out suitable outside
training institutions, negotiate with them, enter into
a contract for institutional training programs,
monitor their training processes, evaluate the
training effectiveness, and/or handle the cumbersome processes for the reimbursement of their
training expenses. These factors contributed to the
low level of SMEs participation in the job skills
development program. SMEs are in general constrained by their capacity to adjust to the changing
market conditions (demand, technology, prices,
etc.) due to their nancial, human, and knowledge
constraints, and therefore are disadvantaged in
launching training programs for their workers in
time (Booth and Snower, 1996; Lepenies, 2004).
Fifth, enterprises have been responsive to the
incentive system in terms of choosing the type of
training. When the government deregulated the
training system between 1995 and 1999, enterprises
have radically shifted their priorities from preservice training for new entrants to the labor market
to in-service training of employed workers. The
share of in-service training soared from 66% in 1994
to 78% of total trainees in 1996, to 97% of all
trainees in 1999, and to 98% in 2001 (Ministry of
Labor, 2003). This shift is indicative of the priorities
placed by enterprises to adapt their workers to the
industrial restructuring, changing technologies for
high value-added products, and shortening product
cycles. In fact, this trend had been accelerating each
time when the coverage of the training requirement
was extended to SMEs in 1989 (enterprises with
more than 200 workers) and in 1992 (enterprises
with more than 150 workers). There was a sharp
jump in the share of in-service training. This implies
that SMEs place greater emphasis on in-service
training than pre-service or transfer training. However, SMEs have had difculties in making arrangements for training of their workers with public
training institutes since they in general focus on preservice training and do not offer in-service training
programs for enterprises, especially for SMEs. In
contrast, large enterprises often organize and offer

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K.W. Lee / International Journal of Educational Development 26 (2006) 278294

in-service training programs in plant for their own

workers.
Sixth, employers have been also responding to the
incentive system by emphasizing institutional training instead of on-the-job or in-plant training.
Enterprises favor institutional training courses,
especially standardized institutional training
courses. Rebates are made at a higher rate for
institutional training courses than for on-the job or
in-plant training courses, and there is a ceiling in the
total grants made for on-the job training. In 1999,
47.4% of enterprises undertaking enterprise training
courses carried them out under contracts with
outside training institutions. This proportion rose
to 53.2% in 2000.
However, the rate of external institutional training went down to 45.8% of enterprises in 2001 and
to 46.8% in 2002 (Lee and Kim, 2004). This change
reects the trend of SMEs, which have been
increasingly participating in in-service training
programs, but in the form of in-plant or on-thejob training more than institutional training. This
mode of training would be more compatible with
their production technology and comparative advantage of small size and teamwork. It also can
avoid poaching of their workers by other entrepreneurs during the external institutional training
courses through contact with workers from other
enterprises. Although about 51.6% of all enterprises
chose in-plant training in 2002, about 80% of SMEs
relied on in-plant training, of which 71% used
supervisors and experienced peers as informal
trainers (Korea Small Business Administration,
2002), since they do not have a specialized trainer.
Therefore, for promotion of training by SMEs,
special provision should be made for their in-plant
training, such as mobile training or visiting plants
for training.
Seventh, administrative and managerial workers
participated in training at a higher rate than
production-related workers since more skilled workers can have a higher level of learning efciency.
This tendency reects employers recognition that
returns to training are higher among administrative
and professional workers than production-related
workers, which was supported by empirical studies
(Groot, 1995). With a small number of administrative and managerial workers, SMEs are also
disadvantaged in participation in training of those
workers whose training will bring in higher returns.
Finally, a greater proportion of male workers
underwent training than female workers. While

15.5% of male workers participated in training,

only 8.9% of women workers took training courses.
Since female workers in general have a higher
incidence of separation and a shorter career due to
marriage, childbirth and child rearing, employers
tend to eschew female workers in selecting trainees
(Lee et al., 2001). Since women share a greater
portion of total employees among SMEs (31%)
than in large enterprises (27%), SMEs tend to use
the training incentive system less actively than large
enterprises. Therefore, for promotion of workers
training by enterprises, it would be effective to
provide greater incentives for enterprises to select
female workers more often as trainees. This will also
help induce more qualied women into enterprises.
SMEs have a tendency to participate in workers
skill training at a much lower rate than larger
enterprises. The training levy-rebate incentive system proved to be inadequate for SMEs to participate actively in training of their workers. Additional
or different types of incentives should be devised for
SMEs to compensate for their disadvantages in
undertaking their workers training. Besides nancial constraints, they have institutional and informational weaknesses, which cannot be adequately
compensated by the training levy-rebate incentive
alone.
On the basis of extensive eld studies of the SMEs
training voucher projects in Latin America, Lepenies (2004) came up with a similar, but a rather
limited nding. He found that even though nancial
aids (training vouchers) were provided for SMEs,
training providers controlled the market demand,
and competition among training providers was
limited. Lepenies argues that because of information asymmetries inherent in training markets, there
is a strong need for introducing institutionalized exante and ex-post voice in a voucher project.
However, he came short of proposing a practical
solution and failed to recognize a broader range of
SMEs institutional constraints other than information gaps in training markets.
To help solve the institutional/informational
constraints in SMEs, a new incentive system has
to be found so that more SMEs can participate
actively in training of their workers. An effective
alternative has already been tested on a pilot basis by
the Korea Chamber of Commerce and Industry
(KCCI) with nancial support from the World
Bank/ASEM and the Korean government in
20012002. Since it has resulted in successful achievements, it has since been replicated by other entities.

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5. A pilot project for SME training consortiums

(TCs)
5.1. Origin of the project
The pilot project was conceived in the wake of the
recent Asian nancial crisis. The nancial crisis
quickly spread to the real sectors of the economy,
which in turn devastated the labor market in 1998.
The Korean government was desperate to lower the
high unemployment rate in the short run, and
encourage enterprises to raise their rate of return to
their investment in the long run. It was against this
background that the Korean Chamber of Commerce and Industry (KCCI) prepared a pilot project
for SME training consortiums (TCs) in 1999 and
applied, through the government to the World
Bank/Asia and Europe Economic Meeting: ASEM)
for a grant to test the pilot project.
The project was initially implemented only in
Busan city, which was hit hardest by the economic
crisis, from June 2001 through December 2002.
With the sign of promising prospects, the Ministry
of Labor provided additional funds to the KCCI for
implementation of the project in two other cities
(Incheon and Kwangjoo) in September and extended the pilot to June 2002. The Ministry of
Labor also funded the SMEs Training Consortium
Project scheme with three more entities (one SMEs
association; and two large enterprises and their
cooperating SMEs); however, this study precludes
them from the pilot project.
5.2. Objectives of the project
The project aimed at preventing further aggravation of unemployment and improving productivity
of already employed workers of SME by helping a
group of SMEs to organize themselves for management of in-service training of their workers and
retraining of unemployed workers.
The pilot project focused on SMEs because they
were hit hardest by the Asian crisis, held greater
capacity for employment, and their productivity
was lower. To stem a further deterioration of
unemployment, SMEs needed to hold on to their
current workers and increase their employment.
However, SMEs would not be able to do so without
improvement of their workers productivity and
skill level. Training of workers was key to their
productivity improvement. Despite the training
levy-rebate incentive actively in offering training

287

programs to their workers. The challenge that the

government faced was how to encourage SMEs to
provide training programs for their workers, so that
they can also take advantage of the training levyrebate incentive.
5.3. Project activities and processes
The project consists of four phases: (i) planning
and organization of a training consortium, (ii)
training-needs survey and training program development, (iii) training service provision and monitoring and (iv) outcome evaluations. The focus of
the activities was that each local chamber of
commerce and industry helps a group of some 50
SMEs to organize themselves into a training consortium (TC) for management of their training
activities by nancing and seconding two training
managers. Each TC formed an operating committee
(OC) to manage its training tasks. The OC was
composed of representatives of TC members, local
Chamber, Ministry of Labor eld ofce, and training
experts, and met periodically for the planning and
management of the training affairs of the TC
members. The objective was to encourage SMEs to
organize themselves to launch skills training programs
for their workers voluntarily and in partnership with
other stakeholders. In this way, SMEs would commit
themselves for training of their workers.
The two training managers (TMs) played key
roles for the TC. They established an information
network among TC members (e.g., home page and
email systems); conducted training-needs survey of
each member SME through interviews with managers and workers, and through job analysis;
planned and programmed training activities of
member SMEs; contracted outside training institutions for training of workers; collaborated with
training institutions for development of training
programs and materials; monitored their training
activities; and conducted an evaluation study upon
completion of major training courses on behalf of
the member SMEs. The objective was to provide a
group of SMEs with training specialists nanced by
public funds to relieve the organizational, informational, and nancial constraints that SMEs face in
developing their human resources.
5.4. Results of the project (2001 2002)
The output of the project was impressive. The
number of TCs that were organized was greater

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than the planned targets, and the number of

employees trained under the project far exceeded
the number initially identied by employers. The
training institutions, together with TMs, developed
training programs and materials in a broad range of
skills. The trained workers improved their productivity, contributing to their enterprises by the
improvement of their job performance, reduction
in work stoppage and defective products, savings
in maintenance and repair expenses, and enhancing
factory machinery utilization factor. The only
unsatisfactory result was retraining of jobless
workers, who failed to achieve the targets for
completing the training courses and getting employment.
5.4.1. Organization and operation of TCs
Originally, the project aimed to organize 90member SMEs into three TCs. However, the project
actually started with 163-member SMEs in three
TCs, one in each Chamber area. By the end of 2002,
TC members increased to 732 SMEsan increase of
four and half times. The 557 member SMEs in June
2002 had a total of 14,043 workers with 65% of
them being production workers. About 70% of the
member SMEs were those with less than 50 workers
and were located in the industrial zones developed
by the government.
Despite the increases in the number of member
SMEs, only one TC was maintained in each area
throughout the project implementation period. This
enabled each TC to enjoy economies of scale.
However, each TCs operational effectiveness was
gradually lowered to less than optimum. A TC
contained too many and diverse member SMEs
belonging to different industrial associations. As a
result, TMs could not provide individualized advice
and attention to each member. Also, a TC lost
homogeneity and solidarity among member SMEs.
The organization of training courses became difcult to accommodate the small number of trainees
for each of the diversied courses. In retrospect, it
would have been better to organize each TC by
SMEs belonging to the same trade association, as
originally planned, and the ratio between each TM
and the number of SMEs of each TC should have
been maintained.
5.4.2. Outputs of training
While the outputs of the in-service training of
employed workers exceeded planned targets substantially, the retraining of jobless workers attained

results only more or less comparable to international standards.

In the retraining courses for the jobless, a total of
879 persons were enrolled; however, only 509
trainees (58%) completed training courses that
lasted up to three months. This rate is comparable
to other OECD countries (Dar and Gill, 1998).
Female trainees were about 34%, which is a
comparable share of female unemployment (37%)
in the three chamber areas. All certied trainees
were placed in the SMEs where they were provisionally hired, before undergoing institutional
training courses, on condition that they would
successfully complete training. Reasons for obtaining the less than the impressive results were
numerous: insufcient stipends during retraining
and inadequate selection of trainees, who lacked the
aptitude and commitment for retraining; poor
liaison between trainees and prospective employers;
and the rapidly changing economic situation and
aggravating employment prospects, etc. Just as preservice vocational education is not a good instrument for preventing youth unemployment problems
(Psacharopoulos, 1997), retraining may not be an
effective policy instrument for relieving unemployed
workers.
In the in-service training courses for workers
already employed in SMEs, a total of 6573 persons
were trained. This number far exceeds the number
of workers, identied initially by employers, as
requiring in-service training (3087), and accounts
for almost half the total number of workers in all
member SMEs of the three pilot TCs (Table 3).
Another notable fact is that about 50% of all
trainees were workers with more than 10 years of
service with the member SMEs.
Training programs and materials have been
developed by contracted training institutions and
the TMs of the TCs. Altogether, 65 training
programs were developed on the basis of the
analyses of 140 job categories, 147 modular training
syllabi and texts were developed for 14 job
categories, and 13 programmed learning materials
Table 3
Output of in-service training for employees (2002) (unit: person)

Actual trainees
Planned trainees
Actual/target (%)
Source: KCCI.

Total

Busan

Incheon

Gwangju

6573
3087
213

2353
871
270

1837
1573
117

2383
643
371

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289

were prepared for trainees to study themselves on a

computer.

workers stayed longer with the same SME, and

consequently, SME productivity was enhanced.

5.5. Impacts of the project

5.5.2. Financial benefits to SMEs

The project accorded substantial nancial benets to member SMEs by helping them organize
training of their workers and then get reimbursement of training expenses from the training levy
(a part of the unemployment insurance) funds.
Before the initiation of this pilot project, SME
had rarely provided training opportunities for their
workers, and therefore had not been able to get
their training levy reimbursed. Only large enterprises provided training to their workers, and they
alone recovered their training levies.
However, with the advent of the pilot project,
many member SMEs have actively provided training opportunities to their workers with the help of
their TMs seconded by the local Chamber to their
TC and have been able to get parts of their training
levies reimbursed. In fact, since the organization of
the TC, the number of TC-member SMEs providing
training services to their workers and get reimbursements of the training expenses shot up at an
amazing rate of 410% and 211% in Busan and
Incheon Chamber areas, respectively. This increase
contrasts sharply with the decrease of 20% on
average for all sizes of enterprises nation-wide
(Table 4).
Consequently, the proportion of TC-member
enterprises offering training to their workers increased from 11% to 50%, an increase of 451%.
This compares with an increase from 21% to 57%
or an increase of 271% for all sizes of enterprises
nation-wide.
The SMEs members training levy recovery rate
(the ratio between the amount of reimbursements to
TC-member SMEs for training of their workers and
the training levy paid by member SMEs) increased
from 24% of total paid training levies to 48%,
which compares favorably with 14.6% for all
SMEs nation-wide. The recovered training levy,

The project promoted SME workers productivity, solving the most critical SME problem of skilled
manpower shortage, and provided preferential
nancial benets to SMEs by enabling them to get
their training levies reimbursed at a rate higher than
actual job skill development expenses for their
workers. In addition, the project also helped the
government and training institutions to change their
training policy towards a demand-driven system;
developed new working relationships between
SMEs and training institutions; and promoted
partnership between private sector associations
and public/non-governmental organizations.
5.5.1. Promotion of SME productivity
This project enhanced the capability of SME
workers and promoted SME productivity. For
example, in the welding course, trainees scored only
65 points average in a skills test before the course;
however, they scored 93 points average after the
course (Busan Chamber area).
At an ex-post evaluation through interviews with
member SMEs, employers revealed that workers
job performance and productivity improved sharply
after training (81% of total responses); savings in
maintenance and repair expenses resulted (67% of
responses); factory machinery utilization factor
increased (88% of responses); wastage or defective
products reduced (72% of responses) (Incheon
Chamber area). Also, many employers indicated
that workers job-attitude changed most noticeably
(88% of responses) (Gwangju Chamber area).
Interestingly, the practice of poaching or scouting
workers by other enterprises had declined substantially since all SMEs of the same trade and area
joined the TC. Industry-wide collective action
reduced the risks of training and poaching. Thus

Table 4
Number of TC-member SMEs participating in training levy rebates (unit: number of SME)
Area

Before project (JanuaryMay 2001)

After project (JanuaryJune 2002)

Increases in percent

Busan TC
Incheon TC
Gwangju TC
All enterprises nation-wide

31
56
110
27,276

127
118
172
21,686

m410%
m211%
m156%
.20%

Source: Korea Labor Institute and KCCI.

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K.W. Lee / International Journal of Educational Development 26 (2006) 278294

Table 5
Busan TC members training levy recovery rates (unit: Won)

Total training levy payments

Total rebates
Recovery rate (%)

2001(JanuaryDecember)

2002 (JanuaryDecember)

Increases

116,138,630
28,129,250
24.2

95,990,480
46,489.050
48.4

20,147,110
18,359,800
200

Source: KCCI/Busan.

i.e., reimbursement of training expenses, in the

Busan TC area increased by
W18 million (Table 5).
The regressive outcome of the training levy-rebate
system has been effectively redressed.
5.5.3. Demand-driven training systems
This project enabled TC-member SMEs to meet
their training needs, especially their in-service
training needs. The project demonstrated the needs
for, and feasibility of, shifting the emphasis of
training from pre-service training only toward inservice training of SME workers on the job. While
demographic and economic growth rates have
stabilized, reducing the supply of and demand for
young trainees, the need has increased for already
employed workers to adapt their job skills to
restructured industry, changing technology, and
shortening product life cycles.
Before this project, large enterprises could conduct in-service training in their own training
facilities. However, SME had not had nancial or
managerial capacity and staff to establish and
operate their own or joint-training facilities. Until
the TC was organized, training in SME had
depended entirely on public training institutions,
which had provided mainly pre-service training of
youngsters for possible hiring by SME, but no inservice training.
Training took place mostly in contract with
outside training institutes; however, a substantial
number of training courses were conducted in-plant
of a member SME, using their own machines, tools,
equipment, and materials. In these cases, the SME
often closed down their production lines for several
days to involve all workers in the training courses.
The training institutions took their training instructors and equipment to the plant in a mobile training
vehicle. This means that micro-enterprises or SMEs
often prefer to train all their workers at the same
time and in-plant, rather than sending their workers
one by one to training institutions at different times.
This mode of training met the special needs of
micro-enterprises and SMEs, since they prefer to

protect their unique technical know-how and

promote teamwork and solidarity among their small
number of workers. Because of the small number of
total employees, it was also not practical for SMEs
to train only a few of the employees. SMEs did not
have adequate substitutes for their workers sent for
training, and thought that training would disrupt
their production schedule.
This project also motivated the Ministry of Labor
to change its training policy toward a demandoriented training system and aided its decision to
provide nancial supports for a replication of the
project scheme with two more local chambers in
September 2001, then later with three more employers associations in January 2002.
5.5.4. New working relationships between SMEs and
training institutions
The project promoted market-oriented selection
of training institutions. In theory, TCs had freedom
to choose the most suitable training institution
available in the competitive training market. In
practice, TCs hired vocational training institutes
(VTIs) of the KCCI for most training courses; TCs
preferred KCCI-sponsored VTIs on account of their
merits and KCCIs grants for their TMs. Likewise,
some other training institutes were also contracted
on the basis of their merits (e.g.: auto repair and
maintenance training institutes, accounting, and
motivation training institutes). Since the selection
of training institutions are based on their merits in a
competitive training market, more training institutions are expected to join the market, and keener
competition is expected in the future; hence
improved quality of training.
The TMs of each TC provided useful services to
member SMEs, who normally lack in training
specialists and information on the needs for training
and training markets. They recommended to each
member SME the training priorities to be addressed
and the training institutions to be contracted,
administered the training-levy rebate documents
and processes, monitored and supervised training

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services, and evaluated the result of training on

behalf of member SMEs. TMs lled the organizational and managerial, as well as informational,
gaps prevalent in a normal SME.
Most courses lasted from 130 d, and the subjects
of training courses were not conned to technical
skills, but also included management, accounting,
tax administration, and motivation skills of middle
and high level managers. This is a good sign that
was not noted in the past since public training
centers did not offer such courses. Studies abroad
indicate that among many types of enterprise
training, economic-administrative training yields
much higher wage gain than technical training
(Groot, 1995).
While most SME members of the Busan TC were
located in the newly established industrial zone on
the outskirt of the city, most training institutions
were located on the opposite side of the city. This
long distance discouraged both employers and
workers of SME to participate in training programs
offered at the training institutes. With the progress
of this project, an industrial association of the
member SMEs (the machinery manufacturers association) offered a building and other spaces for the
establishment of a new training facility right in the
industrial zone. This geographical proximity enabled the member SMEs to participate in the
training programs actively and enthusiastically.
This also encouraged training institutions to consult
with their client SMEs closely and more often for
the development of training programs, which
became greatly relevant and demand-oriented.
5.5.5. Strengthened partnerships between public and
private entities
This project strengthened the partnership among
central and local government agencies, local and
national chambers of commerce and industry,
training institutions, training experts, academics,
and SMEs for training and human resources
development.
Representatives of the government (Ministries of
Labor and Industry, provincial and municipal
governments) developed a new relationship with
the private sector by becoming members of the TC
Operating Committee and advising the TC regarding training. TC also periodically held consultation
meetings and seminars to monitor, evaluate, and
develop the project further, and improve/simplify
government procedures and processes related to
SMEs training programs. Such close consultations

291

and collaborations between the private and public

sectors concerning training and human development
had no precedents in Korea. As a result of such
practice, for example, the training rebate ceilings for
SME were lifted from 200% to 270% of the training
2.5 million; training expenses were
levy, or
W1.5W
reimbursed at the time of governments approval of
training programs, contrary to the past practice of
ex-post reimbursement upon completion of the
training programs; and the lead time required for
submission of a training plan for governments
approval was shortened substantially.
5.6. Transferability of the project
As in Korea, many developing economies are
based on small and medium-sized enterprises, which
offer employment for the majority of the labor
force, but whose productivity remains at a low level,
delaying a take-off of the economy.
Like Korea, almost all countries in this time of
globalization are vulnerable to the economic and
nancial crisis that attacked the Asian economies in
1997. This project can help prevent such economic
crises by promoting productivity and protability of
SMEs, or, at least can alleviate much of the negative
consequences of such economic crisis. This project
would prove useful for many developing countries
in preparation for economic opening and liberalization.
The replication record of the pilot project within
Korea has been remarkable. By 2004, there were
altogether 19 TCs organized by three different types
of entities. The rst type is four TCs organized by
business associations. The second type is three TCs
organized by public training institutions. The third
type is 12 TCs organized by large business concerns
(it is called Chaebol in Korean) such as Samsung,
Hyundai, Daewoo, etc. (Table 6) (Chang, 2004).
The pilot project, which started with the Busan
Chamber of Commerce and Industry, was replicated by two other chambers (Incheon and Gwangjoo) in the same year (2001). In addition, the
Machinery Industry Association also launched a TC
in the Daegu area. Since the organizing entities are
employers associations, which cover a relatively
large area, the TC members are quite heterogeneous
by industry and location wise. These business
associations have sufcient motivation to provide
efcient training services to their members since the
shortage of skilled manpower (or low productivity)
is the priority problem facing their members. At the

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Table 6
The current training consortiums (TCs) by type
Beginning in

2001

2002/2003

2004

Total

Business association

KCCI (3); Mech.

Industry

Daewoo shipbuilding;
Samsung Electr.
6

Daegu Politechnic College

Hyundae Heavy; Hanjin; KT;
Volvo Cons.; Samho Heavy
6

Hanbaek; Pohang Voc trg. Ins

Hundae Mortor; Ssangyong; GM;
SDI; Yuhan
7

3
12

Public trg. institution

Large enterprise
Total

19

Source: Chang (2004).

same time, the TCs can help solve the poaching

problems among their member enterprises and
enable them to get their training costs reimbursed.
The public training institutes in Daegu, Masan
and Pohang cities also organized SMEs located in
their vicinity into TCs for training purposes.
Although these SMEs are geographically close each
other, they are more likely to belong to different
industries. The public training institutions have
business interest in organizing SMEs into a TC, so
that they may be able to provide better service to
them and retain a steady ow of trainees from those
member SMEs as their clients.
Since those SMEs organized by a big business
concern sell their products to the concern as parts
and supplies, they are often vertically integrated
with the concern technically. Therefore, they are
more homogeneous geographically and by the
nature of industry. The Chaebols have strong
incentives to improve the quality of their products,
which depends on the quality of the human
resources of the SMEs providing parts and supplies
for the nal products. Indeed, this type of TCs
expanded most rapidly in the last two years.
By July 2003, altogether there were 3435 SMEs
organized into 12 TCs, and 165,327 workers
completed their training. TCs have expanded at a
remarkably rapid rate. Between 2002 and 2003, the
number of SMEs organized into TCs increased at
263%, and the number of workers who completed
training rose to 154%. The rst group of six TCs,
which started organizing 442 SMEs in 2001
expanded their member to 1595 SMEs by July
2003. During the same period, the number of
trainees increased from 26,520 workers to 103,892
workers. The second group of six TCs, which
started organizing 1840 SMEs in 2002, completed
training of 61,436 workers by July 2003 (Ministry of
Labor, 2003).

6. Conclusions
Traditionally, it has been thought that, due to
their small scale and the failure of training markets,
SMEs have been inactive in investing in their human
resources. In the past, various policy instruments to
make SMEs active in developing their workers
capability did not work well. Some countries used
government regulations or levies to force SMEs to
invest in their workers development through inplant or public training institutions. Others used
taxes to nance training externally or publicly. Still,
others used nancial incentives to reward enterprises investing in their workers. Nothing worked
well for SMEs. Financial incentives alone were not
only insufcient, but also created inequitable situation between large and small enterprises.
The pilot project reviewed in this paper, however,
demonstrated that once SMEs were given institutional/technical assistance, in addition to nancial
incentives, they were willing to make adequate
investment in their workers and were able to
improve their productivity in an effective and
sustainable manner. On the one hand, all industrial
enterprises were required to take a collective action
to develop their workers occupational skills and
make nancial contributions to an industry-wide
common fund. On the other hand, SMEs were given
a generously high level of reimbursements of their
investment in human capital. They were assisted by
their own private associations to organize themselves for development of their workers and were
given free services of TMs to be in charge of the
tasks of training their workers. TMs were entrusted
to select external training institutions on a competitive market basis for quality training service; form
strong partnership with relevant stakeholders; and
learn from their own and peer organizations
experiences.

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K.W. Lee / International Journal of Educational Development 26 (2006) 278294

SMEs responded to the nancial incentive system

for training only when some employers associations
or self-help organizations like TCs gave them
organizational and technical assistance for training
of their workers. This new form of assistance, which
was offered initially by KCCI, was replicated by
other employers associations and large enterprises
with some nancial support by government. The
inequities resulted from the nancial incentives for
training were redressed by raising the level of
nancial incentives for SMEs markedly, by organizing them for training purposes, and by providing
them training management services.
It was a result of a governments late realization
that training is a public or semi-public good, and
provision of such goods should be nanced publicly
and not entirely privately. In addition, SMEs have
inherent non-nancial and institutional limitations
or bottlenecks in undertaking in-plant training and
reclaiming their training expenses and levies. It took
a long time for the Korean government and
industries to learn this lesson. However, other
governments in the world need not go through the
historical trial and error processes of the Korean
government and can learn it in a difcult way. Now,
they can do a leap-frogging on the basis of the
Korean economys experiences and lessons.
A caveat should be mentioned as a direction for
future research. The evaluation of the pilot project
has concentrated on the assessment of its effectiveness in terms of SMEs participation and recovery
rates and productivity increases. While the former
indicators are quantitative they are input or intermediate indicators rather than output-based indicators, while the latter indicators are outcome-based
but are mostly qualitative. Moreover, the evaluation
does not fully take into account the cost-side.
Although it is self-evident that the SME TC system
has greater effectiveness than other historical systems, it may incur higher total economic costs due to
the wider coverage of SMEs. Therefore, a more
rigorous and scientic evaluation of the system
taking into account both costs and benets or
effectiveness, together with a control group, should
be conducted with the passage of more time and
accumulation of greater data of the SME TC system.

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