The persistent economic difficulties and poverty in North Korea have forced the ruling communist regime to adopt an open-door policy. The Kaesong Industrial Complex (KIC) – the second free economic and trade area in the North and an outcome of Seoul’s sunshine policy towards this country – is designed to attract South Korean small- and medium-sized enterprises (SMEs) and develop the area as an export-oriented base. This project promotes inter-Korean economic cooperation, combining the South’s capital and technology with the North’s abundant land and cheap labour. Despite its promising start in 2003, the actual performance of the project has been disappointing. Moreover, the renewed inter-Korean political hostility and the demise of the sunshine policy have made the KIC’s mid- to long-term future uncertain. This study investigates the major reasons for weak participation of South Korean SMEs in the KIC and highlights the necessity of mid-course amendment of its plan, objectives and the relevant development strategies.