Does government support make small and medium-sized enterprises reluctant to grow? Evidence from South Korea

Abstract

This paper investigates whether government support for small and medium-sized enterprises (SMEs) in an emerging economy creates their reluctance to grow, which is analogous to the Peter Pan Syndrome. We test our hypotheses by regression analyses on a sample of 2,779 firms from a unique Korean Innovation Survey dataset from 2005 to 2007. Our empirical results show that SMEs tend to hinder their growth as they approach SME eligibility thresholds beyond which public support ceases. Such a tendency intensifies as SMEs grow closer to the employment-size-contingent SME eligibility threshold and as they receive more public support. In addition, the likelihood of the Peter Pan Syndrome is conditioned by both firm- and industry-specific characteristics. As government support for SMEs based on size-contingent eligibility criteria has a detrimental side-effect, other merit- or effort-based criteria should be considered. It is also desirable to reduce the opportunity cost involved in graduating from SMEs.