Trap of Regulation
The Software Industry Promotion Act is creating unexpected side-effects, instead of promoting the growth of smaller System Integration (SI) firms. The government banned their larger counterparts’ participation in the bidding for public-sector projects so as to ensure fair competition. However, this is blocking big businesses from making inroads into overseas e-government markets, which amount to US$160 billion a year in size.
According to the Ministry of Security and Public Administration, Samsung SDS, LG CNS, and SK C&C have won no deals at all since the implementation of the act in January last year due to the above reason. Under the circumstances, the SI companies associated with conglomerates have scaled down their SI divisions to stop their government procurement business in the local market.
The problem is that they cannot find their way abroad, due to the regulations in the domestic market. They are required to have business records in Korea to be able to do business in overseas markets.
Before the implementation of the law, large SI companies fared pretty well abroad, based on the government projects they won. Specifically, their e-government system exports reached US$420 million in 2013, recording an 8,000-fold growth in 10 years. The cumulative exports since 2004 amounted to US$1.3 billion, too. The outstanding accomplishments can be attributed to the companies’ 20 year-long cooperation with the government, which led to the accumulation of abundant expertise and systemic refinement.
However, things have become completely different since last year. “The SI firms can do nothing in the local public-sector market, which means they have no way to go abroad,” said a high-ranking official of the government, adding, “How can they do their business in overseas markets with their business results being zero in the domestic market?”
In the meantime, market research firm Gartner has estimated the size of the global e-government market at US$160.8 billion as of 2010. International companies such as IBM, Accenture, Deloitte, and PWC are sharpening their competitive edges to increase their presence there.