The Software Industry Promotion Act was aimed at protecting small and medium-sized enterprises and reducing the monopoly of large companies, but it has been poorly implemented and has had a negative impact on the Korean IT industry. The current legislation, which restricts the participation of large corporations, needs to be reformed to address the adverse effects of foreign companies dominating the market.

The software industry is becoming a key driver of national economies in the 21st century and an important pillar of the information society. Accordingly, countries have established various legal and institutional mechanisms to foster the software industry, and Korea followed suit by enacting the Software Industry Promotion Act in 2001. As the software industry plays an important role in the overall national economy in a rapidly changing environment with technological advancements, these legal measures are more than just regulations. The main objectives of the Software Industry Promotion Act were to increase national competitiveness, foster small and medium-sized enterprises, and ensure economic stability and flexibility.
Representative Yoo Seung-hee’s point that ‘government agencies that violate the Software Promotion Act should be given clear sanctions and measures should be taken to enforce its implementation’ is a reminder of the purpose of the Act. However, recent reports that the majority of government agencies have failed to comply with the Software Promotion Act, which has been in effect since 2012, have raised questions about its effectiveness. The fact that only one of 49 government agencies, including the Korea Communications Commission and the Ministry of National Information Society Strategy and Policy, is in full compliance with the Act shows how serious the government’s non-compliance is. So why is the Software Industry Promotion Act not being fully implemented? Let’s take a look at what the Act is, how it has been amended, and how effective it has been.

The Software Industry Promotion Act: What is it and how has it worked?

The Software Industry Promotion Act was enacted in 2001 as an institutional framework for Korea, an information technology (IT) powerhouse, to develop its IT industry in the medium to long term. Korea has an industrial structure that is highly dependent on conglomerates, which has been a serious problem in the process of economic development. With large corporations dominating the industry, small and medium-sized enterprises (SMEs) have had little opportunity to grow. The Software Industry Promotion Act was enacted with the aim of promoting the growth of small and medium-sized enterprises and reducing the dependence on large enterprises to secure structural diversity in the industry.
The specific goal of the Act is to improve the IT market structure, which is dominated by large corporations, and to create a resilient and stable national industrial structure by enabling the participation of SMEs. In particular, the 2012 Enforcement Decree included regulations to limit the participation of large enterprises, which is intended to expand opportunities for SMEs and prevent large enterprises from monopolising the market.

Why is the law poorly enforced?

However, years after the law was enacted, it has been repeatedly violated by government agencies and even private software companies. This is not just a problem of the law, but also because the law does not reflect the structural limitations and realistic conditions of the domestic software industry.
First, there is the heterogeneity of the industry structure. Large companies already have sufficient technology and capital, which gives them an advantage in achieving large-scale results quickly, even for small businesses. On the other hand, small and medium-sized enterprises have difficulty competing with them due to a lack of capital and human resources. In this situation, the promotion laws aimed at protecting SMEs are actually restricting the participation of large companies and causing them to lose the market to foreign companies.
Secondly, the law does not apply to foreign companies, which has led to an imbalance in the domestic market. As regulations on large enterprises have been tightened, foreign companies have filled the void. This creates a vicious cycle in which domestic companies are losing market share, as they are unable to compete. As a result, laws designed to protect SMEs are leading to an overall weakening of the domestic industry.
Third, there is a blurring of roles between large and medium-sized enterprises. As SMEs dominate the market on behalf of large companies, they are more likely to be reduced to subcontractors. This creates another imbalance in the form of predation of smaller companies by larger ones.

How to improve the Software Industry Promotion Act

To address these issues, we need a legislative solution that goes beyond simply restricting the participation of large companies and encompasses the entire industry ecosystem. The government needs to prevent large companies from monopolising the industry, but at the same time provide more support for SMEs to become self-sustaining. SMEs don’t need regulation, they need institutional support to be competitive. In addition to strengthening the competitiveness of the domestic software industry, a strategic approach to international co-operation and market opening is needed to prevent foreign companies from taking over the market.

Positive changes brought about by the Software Industry Promotion Act

Despite these setbacks, if properly implemented, the Act will have a number of positive outcomes in the medium to long term. Firstly, the industry structure will be decentralised, allowing SMEs to participate in the market. Second, the IT industry will become more flexible, allowing it to respond effectively to rapid changes in the national economy. In addition, the growth of SMEs will promote competition in the domestic market and increase consumer choice. They will be able to choose from a wider range of IT products and services, not just those from large companies like Samsung and LG.
In the end, the improvement and proper implementation of the Software Industry Promotion Act will play an important role in creating a healthy ecosystem for the national industry and achieving balanced growth between large and small businesses.