This blog post examines the impact the Korean Software Industry Promotion Act will have on the future of the domestic IT industry and its effectiveness.

The Software Industry Promotion Act That Doesn’t Work Properly

The software industry has established itself as a core driving force of the 21st-century national economy and a crucial pillar forming the foundation of the information society. Accordingly, countries worldwide have established various legal and institutional frameworks to foster their software industries. Korea, aligning with this global trend, enacted the ‘Software Industry Promotion Act’ in 2001. Given that the software industry plays a vital role across the entire national economy within a rapidly changing environment driven by technological advancement, such legal frameworks carry significance beyond mere regulation. The primary objectives of the Software Industry Promotion Act were to enhance national competitiveness and secure economic stability and flexibility through the cultivation of small and medium-sized enterprises.
“Government agencies violating the Software Promotion Act must face definitive sanctions and enforcement measures,” as pointed out by Representative Yoo Seung-hee, serves as a timely reminder of this law’s fundamental purpose. However, recent reports since 2012 indicate that the majority of government agencies are not properly complying with the Software Promotion Act, raising questions about the law’s effectiveness. The fact that only one out of 49 government agencies, including the Korea Communications Commission and the Ministry of Information and Communication, is fully complying with the Promotion Act demonstrates how serious the government’s failure to implement the law is. So why isn’t the Software Industry Promotion Act being fully implemented? First, let’s examine the content of the Software Industry Promotion Act, its amendment process, and its effectiveness.

Software Industry Promotion Act: What is it, and how has it evolved?

The Software Industry Promotion Act was enacted in 2001 as the institutional foundation for South Korea, an IT powerhouse, to develop its IT industry over the medium to long term. Korea possesses an industrial structure highly dependent on large corporations, which has posed serious challenges during its economic development. While large corporations led the industry, small and medium-sized enterprises (SMEs) found it difficult to secure growth opportunities in comparison. The Software Industry Promotion Act was enacted with the purpose of promoting SME growth, reducing dependence on large corporations, and securing structural diversity within the industry.
The specific goal of the Promotion Act is to improve the large-corporation-centric IT market structure and activate SME participation to create a resilient and stable national industrial structure. This was intended to establish a foundation capable of flexible responses even during economic crises. Notably, the 2012 enforcement decree included provisions restricting large corporation participation, designed to further expand opportunities for SMEs and prevent market monopolization by large corporations.

Why isn’t the law being properly enforced?

However, years after the law’s enactment, both government agencies and private software companies repeatedly fail to comply with it. Many point out that this goes beyond mere legal issues, stemming from the law’s failure to reflect the structural limitations and practical realities of Korea’s software industry.
First, it stems from the heterogeneity of the industry structure. Large corporations already possess sufficient technological capabilities and capital, giving them an advantage in rapidly achieving large-scale results even in small-scale projects. Conversely, SMEs struggle to compete due to insufficient capital and manpower. In this context, the Promotion Act, intended to protect SMEs, is instead limiting the participation of large corporations and leading to the market being taken over by foreign companies.
Second, the law’s inapplicability to foreign companies is exacerbating market imbalance. While regulations on large corporations have tightened, foreign firms have filled the void. Consequently, domestic companies are being pushed out of competition, losing market share in a vicious cycle. Ultimately, legislation intended to protect SMEs is leading to the overall weakening of domestic industry.
Third, there is ambiguity in the roles between large corporations and mid-sized companies. As mid-sized companies take over the market in place of large corporations, small businesses face an increased risk of becoming mere subcontractors. This creates another imbalance, where mid-sized companies end up preying on small businesses.

Improvement Measures for the Software Industry Promotion Act

To address these issues, we need legal alternatives that go beyond simply restricting large corporations’ participation and instead encompass the entire industrial ecosystem. The government must prevent monopolization by large corporations while simultaneously expanding support systems enabling SMEs to become self-reliant. What SMEs need is not regulation, but institutional support to build competitiveness. Furthermore, to prevent foreign companies from dominating the market, a strategic approach is needed that combines strengthening the competitiveness of the domestic software industry with international cooperation and market openness.

Positive Changes the Software Industry Promotion Act Could Bring

Despite these drawbacks, if the Software Industry Promotion Act is properly implemented, several positive outcomes can be expected in the medium to long term. First, as the large-corporation-centric industrial structure becomes more dispersed, SMEs’ participation in the market can become more active. Second, flexibility within the IT industry can be secured, enabling effective responses to rapid changes in the national economy. Furthermore, as SMEs grow, competition within the domestic market will intensify, broadening consumer choice. Consumers will gain access to a wider range of IT products and services beyond those offered by large corporations like Samsung and LG.
Ultimately, improving and correctly implementing the Software Industry Promotion Act will play a crucial role in fostering a healthy ecosystem for the national industry and achieving balanced growth between large corporations and SMEs.