Chapter 5. Globalization of Japan's small business sector
Section 1. Globalization issues in the small business sector
1.Features of SMEs with operations overseas
6% of SMEs have operations overseas, compared with over half of all large enterprises (Fig. 4-80). Some SMEs have no strategic need for overseas operations. However, many feel a need to expand overseas but have abandoned the idea due to a scarcity of managerial resources (Fig. 4-81).
A comparison of all SMMs with SMMs that have expanded overseas shows that while manufacturers with annual sales of under JPY1 billion account for 80% of all firms, fewer than 10% of firms with overseas operations have annual sales of under JPY1 billion, and conversely, over 80% have annual sales of over JPY1 billion. In addition, almost 40% have annual sales in excess of JPY5 billion (Fig. 4-82). With regard to size of workforce, over 50% of firms have fewer than 10 employees, while under 20% have 50 or more employees. However, firms with fewer than 50 employees account for under 20% of firms with overseas operations, over 60% of which have 100 or more employees (Fig. 4-83). In other words, SMEs which adopt the strategy of expanding overseas are comparatively large compared with SMEs in Japan in general.
2.Problems encountered by SMEs with overseas operations
The majority of SMEs which have expanded overseas consider their moves to have been successful (Fig. 4-84). The main labor and personnel issues faced by firms that have expanded overseas, regardless of their success or failure, have a strong tendency to be quantitative in nature, e.g. shortages of suitably skilled local staff and increases in personnel costs. However, firms which have successfully expanded overseas tend to have overcome qualitative problems concerning, for example, the quality of workers and supervisors, whereas the majority of firms which have failed have been unable to resolve these problems, and on occasion, a firm's success or failure in this regard has the potential to determine the success or failure of its operations overseas (Fig. 4-85). However, issues of quantity and quality are two sides of the same coin, and as in practice it is impossible to resolve quantitative problems without addressing qualitative factors, overcoming shortages of suitably skilled personnel is generally the main personnel problem faced by firms that expand overseas. Moreover, production problems too are a manifestation of personnel-related problems concerning the quality of the production control abilities and production know-how of employees, and so recruiting talented personnel is also important in a broader sense (Fig. 4-86).
3.Tackling problems associated with domestic production operations
Many of the SMEs attempting to maintain their domestic production operations are boosting their competitiveness not only on the price side, but also in non-cost terms, e.g. by upgrading their quality and technology and improving their flexibility in order to compete with overseas firms which in many cases have the advantage when it comes to price (Fig. 4-87).
Section 2.Response of the small business sector to globalization
Japan's small business sector has responded to economic globalization in all kinds of ways. Some firms have moved their production operations overseas, and some are maintaining their domestic operations while introducing foreign technology and procuring supplies overseas. Some are furthering cross-border specialization and expanding exports and imports, while others are actively doing business with foreign-affiliated firms in Japan. In an internationally open business environment of expanding business opportunities, it will become increasingly important that firms take a good, hard look at business risks and their own managerial resources, and that they select the most appropriate strategy for internationalizing their businesses.
Conclusions:Small and Medium Enterprises in Need for Change and Display of Entrepreneurship
1.The following have been the main themes of this year's white paper. Firstly, globalization and the changing structure of the Japanese economy have led to changes in the traditional pattern of inter-firm relations, with subcontracting relationships within Japan becoming more fluid and the degree of cross-border specialization increasing. The state of the business activities of individual SMEs has come to have a more direct impact on business results, and this has engendered growing differentials between firms. As the economy has stagnated and financial institutions have grown more reluctant to lend, the differentials between firms have grown more evident, and SMEs must change if they are to survive in this new environment.
Secondly, SMEs which have undertaken business conversions or developed new products and technologies and moved into new fields, for instance, and SMEs which offer high value-added goods and services to meet market and consumer needs have enjoyed a relative improvement in their business results. Furthermore, one way in which the small business sector grows is through the establishment of new firms and businesses, and this has to be encouraged in order to revive the Japanese economy.
Thirdly, there is therefore an even greater need for SMEs to demonstrate their entrepreneurial spirit and grow by independently expanding into new fields and creating new added value. The self-help efforts of small firms should thus be supported and a suitable business environment developed. In this respect, there are numerous similarities between the small business policies of Japan and the countries of the West.
2.Below we briefly consider the points which consequently need to be addressed if SMEs are to change and use their entrepreneurship to develop their business activities
Firstly, small firms will have to demonstrate greater independence and originality in order to develop their own identities. SMMs in particular have traditionally played a largely fixed and stable passive role as manufacturing subcontractors, but as inter-firm relations grow more fluid, firms will find that in order to grow, they must actively plan and develop new products and technologies to propose to parent firms, develop end products themselves to meet market needs, establish independent ventures, expand into new fields, and undertake business conversions. They will in addition have to act independently to win customers and develop markets for their products. Major changes are taking place in the distribution sector, too, and rather than adopting a passive position, small and medium distributors will have to adopt clearer business strategies to better understand consumer needs and to create new needs. It should also be pointed out that there will be an increased need for support for businesses at the start-up stage similar, for example, to the financial support offered by business angels in the U.S.
Secondly, in order to respond to the above challenges, firms will have to improve their financial structures and management strengths, and they will also need to employ a variety of management techniques and resources. This can be achieved to an extent by individual firms using only their own resources, but there are limits to SMEs' managerial resources, and from the perspective of efficient management, it is difficult for an SME to expand its managerial resources across the board. There are, however, a variety of effective ways in which firms can adapt and reinforce their management strengths in the future. They can, for example, cooperate with firms in other industries and form partnerships with academia and government, or else enrich their managerial resources whilst at the same time systematizing distribution. Other options open to them include making effective use of outside managerial resources by actively outsourcing, and pursuing growth through expansion overseas or forming partnerships with foreign affiliated firms in Japan. All these responses are basically types of °»networking°…, and their ability to form and participate in such networks is one of the advantages that SMEs enjoy. Moreover, commercial and industrial agglomerations provide an effective environment for networking of this kind.
Thirdly, as inter-firm relations change and the business environment faced by the small business sector grows harsher, there needs to be a recognition of the significance of the market and the importance of the fact that SMEs themselves will be evaluated by the market. A large and independent small business sector has traditionally been considered to be an important feature of a healthy market economy, but in future, it has to be recognized that it is not only the output of SMEs-i.e. their goods and services-but also the firms themselves which will be evaluated in the marketplace, and the market's evaluation of them will have an impact upon their growth. There will consequently have to be changes in management. In this sense, the importance of the independent small business sector envisaged under the Small and Medium Enterprise Agency Law, whose fiftieth anniversary it is this year (see Part 3), will grow in importance.
3.Pessimism surrounding the state of the Japanese economy has grown since the start of 1998. Financial institutions are growing increasingly reluctant to lend, and conditions in the small business sector remain harsh. As this booklet describes, many SMEs face financial problems, and the Japanese Government is currently putting all its effort into providing financial and other means of support for the small business sector. As this year's white paper shows, in order to help SMEs to change and show greater entrepreneurship, the Government too is acting swiftly to put in place supportive measures to support the self-help efforts of SMEs and encourage the development of a suitable environment for the small business sector.
Fiscal 1998:Main features of the Government's small business policy
The small business sector accounts for over half of all industrial activity. It is not only a major source of employment and a mainstay of regional economies, but due to its mobility and flexibility it is also a seedbed for innovation. The small business sector therefore has a major role to play in the creation of new growth industries and correction of the high-cost structure of the Japanese economy through economic structural reform.
The business environment in which the small business sector finds itself is changing with enormous speed; international competition is intensifying and the distribution structure is undergoing rapid change. SMEs will have to take firm action to restructure themselves by, for example, converting to new businesses and developing new markets. SMEs faced a slump in demand in fiscal 1997 due to uncertainty over the future outlook for the Japanese economy, and the recovery in output in the small business sector lagged markedly as a consequence of the economy going through a transitional period of structural conversion. Moreover, the collapse of major financial institutions since last fall has seen financial institutions tighten their small business lending policies, and the effects of a deterioration in the credit-creation function of the Japanese financial system are evident.
Given these trends, the Government is employing measures to develop the small business environment in order to help SMEs respond to the changes in the economic environment and develop new business ventures.
2. Planned measures
(1)Measures to revitalize the small retail sector in city center shopping areas, etc.
Firstly, the Government is pursuing a comprehensive package of measures to revitalize city center shopping centers and the small and medium retailers found in city center shopping centers in particular. To counter the recent °»hollowing out°… of city center shopping areas and commercial agglomerations caused by the diversification of consumer needs and the shift of urban functions to the suburbs, support is being provided for the renewal of shopping areas through town management techniques, with due attention paid to the initiative of municipalities and local residents. The focus of policy has shifted from a narrow approach (assisting individual stores and shopping areas) to a comprehensive, broad-based approach (developing the infrastructure of city centers as a whole), and the enactment of the °»Law on Integrated Measures for the Maintenance and Improvement of City Centers and the Revitalization of Commerce, etc.°… (tentative name) will prioritize support measures for regions taking comprehensive action to revitalize city centers implemented by the ministries concerned acting in concert.
(2)Developing and strengthening small business financing and the credit insurance system for small business
Secondly, the Government will strengthen small business financing and the credit insurance system for small business. Since the latter half of fiscal 1997, a tendency has emerged for private financial institutions to reduce assets in anticipation of the early introduction of corrective measures. The effect of this has been to make financial institutions more reluctant to lend, which has created financing difficulties for the small business sector. In order not to jeopardize sound SMEs with stable businesses and venture enterprises with good growth prospects, all possible measures will continue to be taken in fiscal 1998.
(3)Maintaining and developing human resources essential to manufacturing
Thirdly, measures will be adopted to maintain and develop human resources of fundamental importance to manufacturing. In order to maintain and develop the human resources underpinning the fundamental processing technology which-through the provision of parts and trial products-has been the source of Japan's industrial development, °»Product Creation Councils°… will be established. These will comprise representatives of local industry, vocational training bodies, educational institutions and local governments. With the support of the ministries concerned acting in concert, internship programs will be introduced to allow young people to experience industry firsthand. In addition, skilled engineers and technicians will be employed to offer wide-scale technical guidance, systematization of skills and techniques learnt on the job for manual-based learning will be encouraged, and assessment and treatment of engineers and other skilled workers will be improved.
(4)Support for managerial reform of SMEs
Fourthly, support will be provided for managerial reform in the small business sector. In order to ensure a swift and flexible response to the current dramatic changes in the business environment, support will be offered to coordinators, who are crucial to the creation of networks for making active use of outside managerial resources. In addition, support will be offered to encourage the total overhaul of the business operations of SMEs and the strategic introduction of information systems designed to lead to business expansion. Furthermore, the enactment of the °»Law Concerning Limited Partnerships for Small Business Investments°… (tentative name), which will legally secure the limited liability of members of investment partnerships other than executive members, will provide support to the rising generation of venture businesses by facilitating the channeling of funds through investment partnerships from pension funds and overseas investors to venture enterprises.
(5)Strengthening and revitalizing the foundations of the small business sector
Fifthly, measures will be promoted to support small enterprises. Small enterprises account for around 80% of all businesses in Japan, and they play a crucial role in regional economies. In order to continue to strengthen their sound management and allow them to adapt to the rapidly changing economic environment, support programs will be introduced centering on societies and chambers of commerce and industry.
Sixthly, measures will be promoted to support the formation of organizations by SMEs to meet actual circumstances. This will be achieved by reviewing policies concerning the organization of SMEs and integrating existing support programs in order to respond to the new needs of SMEs and the changes arising from economic structural reform due to deregulation, etc.