Policy Recommendations for SMEs and a Venture-Friendly Defense Industry Ecosystem in Korea

The Moon Jae-In administration first promulgated a policy to support the Korean defense industry in the era of the Fourth Industrial Revolution (4IR) in its 2017 national agenda. In accordance with this, the Korea Defense Acquisition Program Administration (DAPA) announced 2018-2022 Defense Industry Development Master Plan in 2018 which features SME and venture-friendly policies. The government’s policy agenda aims for the establishment of the defense industry ecosystem that enhances both SMEs and venture firms’ compatibility and lowers entry barriers for commercial companies with the capability to create 4IR technologies. However it is difficult to say that industrial ecosystem of the Korean defense industry is healthy. According to the 2017 KIET survey, the production ratio of large defense firms is almost 80 percent, compared to the 20 percent of SMEs’. This ratio is almost same as it was five years ago. It means that the Korean defense industry mainly relies on a small number of large defense firms that manufacture weapon systems. If this kind of gap continues in the future, the Korean defense industry will become an unbalanced ecosystem overreliant on a handful of major contractors able to integrate their weapon systems with expensive imported subsystems and parts. To make matters worse, the government is not close to reaching its policy goal of nourishing defense SMEs and venture companies in the near future. Using the results of the 2019 KIET survey, this paper studies issues in the defense industry through an analysis of the Korean defense industry ecosystem and provides some policy recommendations for building an SMEs and venture-friendly defense industry ecosystem in Korea.