Second and third generations refuse family business succession

“Running a manufacturing business in Korea is madness.”

A CEO of a sizable manufacturing company in Korea described the challenges of running a manufacturing business in the country in these stark terms. Factors such as burdensome inheritance taxes, rising minimum wages, and labor shortages due to the declining appeal of manufacturing have made the business environment increasingly difficult, with little hope for improvement. "At least I’ve made some money from this business, so my children are willing to take it over,” the CEO said. “But I know many CEOs who are grappling with whether to sell their businesses because their children say, ‘Don’t leave us with a struggling business that doesn’t make much money; just sell it and give us the cash.’”

This sentiment was echoed by manufacturing CEOs interviewed for a recent series by The Dong-A Ilbo titled “The Shuttered Growth Plate of the Manufacturing Ecosystem.” One CEO, who has been running a manufacturing business since the 1970s and owns a factory in both Korea and Indonesia, said, "I didn’t go overseas because I wanted to, but because Korea’s harsh manufacturing conditions pushed me out. Many small and medium-sized manufacturing CEOs operating in Indonesia say they would never consider running a factory in Korea again.”

While some first-generation small and medium-sized business founders persevere despite harsh conditions, the second and third generations often take a different stance. With worsening domestic manufacturing conditions, many opt not to take over family businesses, instead closing them or selling them to private equity firms. For instance, membership in a second-generation textile factory owners’ group in northern Gyeonggi Province has dwindled from 60 members a decade ago to just 12 today.

According to the Korea Federation of SMEs' “2024 Survey on the Status of Family Business Succession,” the most common reason for not planning to pass on a business to their children—or for being undecided—was “because the children do not want it” (38.8%). The second most common reason was “because I don’t want to burden my children with the heavy responsibility of running a business” (26.9%).

The aging of first-generation SME founders is accelerating, with 23.8% of SME CEOs now aged 60 or older, including 25,000 in their 70s or older. The Korea Small Business Institute estimates that without a smooth succession of these businesses, around 320,000 companies may close over the next decade, resulting in approximately three million job losses—a significant national loss.

Current SMEs are appealing for solutions to challenges such as surging labor costs, regulations on extended working hours under the 52-hour workweek policy, stringent rules on hiring foreign workers, and excessive inheritance taxes that complicate family business succession.

Small and medium-sized enterprises account for 97.7% of all manufacturing businesses in Korea. If these companies lose their competitiveness, the low-growth trajectory of the Korean economy may worsen further. If their struggles are dismissed as merely their own problems, even the remaining SMEs in Korea may decide to leave the country one by one.