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SMEs in Japan
A new growth driver?
A report from the Economist Intelligence Unit
Sponsored by
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Cover_final.pdf 12/1/2010 5:33:15 PM
SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 1
Contents
Preface 2
Executive summary 3
1. Introduction 5
SMEs in Japan’s economy 7
2. Challenges: Finance and human capital 9
Finding fnance 9
The HR conundrum 10
Case study: Kamijima Heat Treatment—A tradition of skill 11
The evolution of SME policy 12
3. Opportunities 1: Internal balance, external growth 13
The importance of internationalising 14
Case study: Cubic—Small hotels, big ambitions 17
Case study: Horiba—From SME to titan 17
4. Opportunities 2: Innovation and technology 18
Driving SME innovation 19
Case study: Sanwa Dengyo—The China connection 21
5. Conclusion 22
SMEs in Japan
A new growth driver?
2 © Economist Intelligence Unit 2010
Preface
SMEs in Japan: A new growth driver? is an Economist Intelligence Unit report, sponsored by Microsoft.
The Economist Intelligence Unit’s editorial team conducted research for this paper and wrote the report
independently. The fndings and views expressed in this report do not necessarily refect the views of the
sponsor. Gavin Blair was the author of the report and David Line was the editor. Amie Nagano and Takato
Mori were the lead researchers and editors of the Japanese translation. Gaddi Tam was responsible for
design.
We would like to thank all interviewees for their time and insights.
December 2010
© 2010 The Economist Intelligence Unit. All rights reserved. All information in this report is verifed to
the best of the author’s and the publisher’s ability. However, the Economist Intelligence Unit does not
accept responsibility for any loss arising from reliance on it. Neither this publication nor any part of it
may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording or otherwise, without the prior permission of the Economist
Intelligence Unit.
SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 3
Executive summary
M
ore than 99% of all businesses in Japan are small or medium-sized enterprises (SMEs); they also
employ a majority of the working population and account for a large proportion of economic output.
While most of these companies are not as well known as Japan’s giants, they form the backbone of the
service sector and are a crucial part of the manufacturing and export supply chain.
The health of this enormous sector is therefore crucial to the health of the economy overall. But SMEs
are among the most pessimistic of Japanese businesses, having been hit hardest by the recession that
followed the fnancial crisis of 2008. And because many are reliant on the domestic economy, in which
demand will dwindle as the population ages and shrinks, their prospects are uncertain.
Against this background, how realistic is it to expect SMEs to become the new growth drivers of Japan’s
economy? What pressing challenges do SMEs face in expanding their businesses? How are they faring in
the bid to fnd growth in new markets and through new products and services? Have they been successful
in internationalising their operations and profting from innovation? And are government policies to
support the sector helping?
This briefng paper, SMEs in Japan: A new growth driver?, sponsored by Microsoft, discusses these
crucial issues. It is based on interviews with senior executives at SMEs in Japan, government offcials and
other experts, and a review of relevant literature published both in Japan and by supra-national bodies
like the IMF, OECD and World Bank. Its key fndings include:
•
Japanese SMEs face particular problems securing fnance. That banks are more reluctant to lend to
small companies than big ones is not surprising. But such is the vulnerability of the sector, as many as a
quarter of those who received emergency credit guarantees during the recent recession would have gone
out of business without them. Japanese banks’ continued risk-aversion and a reliance on fxed assets for
collateral put many SMEs at a disadvantage when looking for funds. Banks need more effective ways of
measuring SMEs’ business value, while SME owners need better accounting to explain it.
SMEs in Japan
A new growth driver?
4 © Economist Intelligence Unit 2010
•
Finding the right employees is problematic, but tough economic times present an opportunity.
Japan’s workforce has tended to favour the security of employment at large corporations, and attracting
experienced and skilled workers can be diffcult for SMEs. However, the cloud of the recent recession has
brought two silver linings for SMEs: new entrants to the workforce are showing more interest in working
for small companies, and larger businesses that are reluctant to fre workers can transfer the knowledge of
experienced staff through employee loan programmes.
•
Growth requires the right mix of human capital—and a willingness to collaborate. While many
Japanese SMEs take pride in the skills of their master craftspeople in niche industries, to grow successfully
and scale their businesses requires the right balance of various types of human capital, including
entrepreneurs and administrative staff. And while many lack the resources to expand alone, cooperation,
even between apparent rivals in the same feld, can be a key to growth.
•
Japanese SMEs lag their developed-market peers in tapping international markets. With a shrinking
domestic market, many Japanese SMEs must internationalise to expand. While some are seeking to
leverage external markets, as a sharp rise in exports in the years running up to the “Lehman Shock”
showed, in general they have been comparably slow in making this shift. SMEs that are reluctant to
globalise cite lack of access to information about overseas markets, lack of capable management resources
in Japan, and diffculty securing fnancing as the main reasons.
•
Japanese SMEs spend comparatively little on innovation. While Japan as a whole spends a lot on R&D
in comparison with other developed economies, its SMEs do not. Lack of access to fnance and risk-aversion
are the principle reasons. Interviewees suggest successful innovation requires the right mix of policy
support and helpful bureaucratic structures to encourage entrepreneurialism, which is often hampered
by bureaucratic hurdles. Putting in place the means to easily commercialise intellectual property is also
crucial.
•
While policy towards SMEs has evolved, access to assistance is often diffcult. Policy has evolved
to target SMEs as potential growth leaders, and central and local government programmes to support
SMEs fnancially, organisationally, and in their bids to internationalise and innovate are plentiful. But
poor publicity and complicated application procedures hinder their adoption and reduce their impact. In
addition, some interviewees suggest policy measures need to focus less on fnancing SMEs and more on
encouraging their growth and development.
SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 5
1. Introduction
J
apan’s small and medium-sized enterprises (SMEs), like their counterparts around most of the globe,
were hit even harder than larger companies by the worldwide economic crisis. Not only were SMEs
affected worse, but they had been struggling to cope with weak domestic demand even before the events
referred to in Japan as the “Lehman Shock”.
Surveys of sentiment among small business owners show how tough conditions have been, for how
long. The Bank of Japan’s quarterly Tankan survey of business sentiment—the most closely watched
such indicator nationwide—has rarely shown positive readings from small business respondents in
recent years, and was still mired in negative territory in the third quarter of 2010, by which time larger
enterprises had returned to a positive outlook (Figure 1). A similar survey on conditions that includes
Key points
n SMEs account for an overwhelming majority of total enterprises in Japan, and a large part of employment and
value added, making their health crucial to that of the economy as a whole.
n Tough conditions for SMEs predate the recession of 2008-09, refecting longstanding problems with the
domestic economy.
n Japan’s SMEs were hit hard by the fnancial crisis—particularly those in the export supply chain.
Figure 1
Tankan, business conditions diffusion index, all industries
%, quarterly
-50
-40
-30
-20
-10
0
10
20
30
Q3 Q2 Q1
2010
Q4 Q3 Q2 Q1
2009
Q4 Q3 Q2 Q1
2008
Q4 Q3 Q2 Q1
2007
Q4 Q3 Q2 Q1
2006
Q4 Q3 Q2 Q1
2005
Q4 Q3 Q2 Q1
2004
Q4
2003
NB: Calculated by subtracting the percentage of enterprises that answered “bad” from the percentage that answered “good” when questioned about business
conditions in the present quarter. The Tankan defines “small” enterprises as those with capital of between ¥20m and ¥100m; “medium” as those with capital of
¥100m-¥1bn, and “large” as those with capital exceeding ¥1bn.
Source: Bank of Japan
Small Medium Large
SMEs in Japan
A new growth driver?
6 © Economist Intelligence Unit 2010
businesses with capital of less than ¥20m (excluded in the Tankan) also shows sentiment at these
businesses has been poor for a long time (Figure 2).
The contrast with SMEs in many other Asian economies, which have rebounded to dynamic growth
and banished the memory of the fnancial crisis, is stark. While all small businesses face problems with
fnance, HR and management, Japan’s SMEs also face a raft of domestic challenges that are testing their
resiliency and ingenuity to the limits.
And while Japan’s SMEs may not be as well known as its corporate titans, their health is vital to the
economic wellbeing of the country, not least because they account for an overwhelming majority of total
enterprises and employment, and a considerable part of the value added in the economy. (In this Japan
is hardly unusual; in most developed economies
SMEs are similarly important, as Figure 3 shows).
The health of this sector, comprising more than 4m
enterprises, is therefore of major importance for
the health of the overall economy.
For this briefng paper, SMEs in Japan: A new
growth driver?, Microsoft commissioned the
Economist Intelligence Unit to examine the state
of the SME sector in Japan, how it is responding to
the challenges it faces, how effective government
policy has been in supporting small and medium-
sized businesses, and what more could be done to
aid them.
The paper also assesses whether, in the face of shrinking domestic demand, Japan’s SMEs are
internationalising successfully and tapping into the growth engine of fast-growing Asian economies. In
light of the crucial role SMEs play in both developing and monetising new ideas, the paper also looks at
innovation in the country’s small businesses and assesses whether today’s SMEs can become tomorrow’s
Figure 2
Business conditions diffusion index for SMEs, all industries
-60
-50
-40
-30
-20
-10
Q3 Q2 Q1
2010
Q4 Q3 Q2 Q1
2009
Q4 Q3 Q2 Q1
2008
Q4 Q3 Q2 Q1
2007
Q4 Q3 Q2 Q1
2006
Q4 Q3 Q2 Q1
2005
Q4 Q3 Q2 Q1
2004
Q4 Q3 Q2 Q1
2003
Q4 Q3 Q2 Q1
2002
Q4 Q3 Q2 Q1
2001
Q4 Q3 Q2 Q1
2000
Q4 Q3 Q2 Q1
1999
NB: Index caclutated by subtracting percentage of enterprises that answered “worsened” from percentage answering “improved” when asked about business
conditions in comparison with previous quarter.
Source: Organisation for Small & Medium Enterprises and Regional Innovation, Japan (SMRJ).
All SMEs Medium-sized enterprises Small enterprises
Figure 3
SMEs contribution to total, 2007
(%)
Number of enterprises Total employment Value added
France 99.8 60.5 56.0
Germany
a
99.5 60.4 53.6
Japan
b
99.7 69.0 53.0
c
South Korea
b, c
98.9 71.0 45.5
UK
a
99.6 54.1 51.0
US
d
98.9 57.9 na
a
Value added at factor cost
b
2006
c
Excluding services
d
2004-05
Source: OECD, Structural and Demographic Business Statistics; Japan METI/Ministry of Internal Affairs
SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 7
multinationals—the next Nintendos, Panasonics or Uniqlos.
Rather than attempting a comprehensive survey of this enormous and varied sector, this paper sets
out to identify some of the key issues facing these companies, how they may be addressed, and what
the outlook is for Japanese SMEs—primarily as a means of generating discussion on these issues among
all stakeholders. The fndings are based on interviews with various small-business owners, experts and
offcials, conducted in October and November 2010, augmented with a review of the existing relevant
literature.
What is an SME?
The defnition of what constitutes an SME varies
between countries: this paper uses the defnition
according to the Small and Medium-sized Enterprise
Basic Act and used by Japan’s Ministry of Economy,
Trade and Industry (METI). This classifes as SMEs
businesses in the retail or services sector with less
than ¥50m (US$600,000) in capital, those in the
wholesale sector with less than ¥100m (US$1.2m) in
capital, and those in manufacturing with less than
¥300m (US$3.6m) in capital. In addition it restricts
the defnition to those in retail with fewer than 50
employees, those in services or wholesale with fewer
than 100 employees, and those in manufacturing with
fewer than 300 employees.
Figure 4
Definition of SME
Industries
Capital size
(¥m)
Number of
employees
Manufacturing and others 300 or less 300 or fewer
Wholesale 100 or less 100 or fewer
Retail 50 or less 50 or fewer
Services 50 or less 100 or fewer
Source: METI
SMEs in Japan’s economy
SMEs are prevalent across the Japanese economy,
constituting the lion’s share of enterprises in all
sectors. SMEs are most numerous in the retail,
services and restaurant/lodging industries (Figure
5), but among the most productive are those in
the manufacturing sector. While many of those in
the services sector are wholly reliant on domestic
demand, a large proportion of SME manufacturers
are essential suppliers to Japan’s famous large
exporters.
The signifcance of SMEs in the export supply
chain explains in part why the sector was hit
so hard by the recession of 2008-09. A study
commissioned by METI’s SME Agency showed that
the approximately ¥700bn (US$8.3bn) in declines
Figure 5
Composition of SME sector in Japan (% of enterprises)
Retail 20%
Service industry 18%
Finance and insurance 1%
ICT industry 1%
Transportation 2%
Education, learning support 3%
Health, welfare 4%
Wholesale 6%
Real estate industry 7%
Manufacturing 11%
Restaurants,
lodging industry 15%
Construction 12%
Source: Derived from Ministry of Internal Affairs and Communications (Japan),
“Establishment and Enterprise Census”, 2006
SMEs in Japan
A new growth driver?
8 © Economist Intelligence Unit 2010
in new vehicle exports suffered by the domestic automobile industry between the third quarter of 2008
and the frst quarter of 2009 caused a decline in production at SMEs of some ¥400bn (US$4.8bn).
1
Similarly, SME suppliers to the major electronics exporters were severely affected due to drop-offs in
exports in that sector. Numerous other SMEs that do business with the major exporters and their suppliers
were hit both directly and indirectly by the knock-on effects of the slowdown.
Many of Japan’s SMEs were carried along by the export-led pre-Lehman boom—and suffered heavily
when it ended. With domestic demand anaemic, can they prosper from new sources of growth, what
challenges do they face in trying to do so, and are the government’s numerous policies to support them
having the desired effect?
1
SME Agency, 2010 White
Paper on Small and Medium
Enterprises in Japan
SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 9
2. Challenges: Finance and human capital
A
lthough SMEs share many of the challenges of larger companies, they are also affected in distinctly
different ways by the same issues. Finance and human capital are at the core of every business and
are the predominant factors that determine whether an SME can break out of the sector to become a
larger enterprise. The experience of SMEs with regard to these two crucial issues is to a large extent what
sets them apart from bigger businesses.
Finding fnance
Rarely having the kind of fnancial reserves that can see them through severe economic slowdowns, SMEs
are typically dependent on banks and other creditors if times get tough. When credit dries up, as it did
during the recent fnancial crisis, SMEs are hit even harder, as lending institutions tend to view them as
higher-risk debtors than large companies.
As lending by major banks plummeted during the recession, the government stepped in with an
Emergency Guarantee Program that increased lending to SMEs from regional banks and state-affliated
fnancial institutions (see Figure 6). Illustrating the vulnerability of much of the sector, a quarter of those
who received these guaranteed loans reported they would have gone out of business without them.
Even during more stable economic times, fnancing smaller enterprises is a challenge. Partly this is due
to risk-aversion at Japanese banks and a reluctance to lend without substantial fxed assets as collateral.
“SMEs tend not to own very many fxed assets,” says Naohiro Nishiguchi, director of the Innovation
Network Corporation of Japan (INCJ)—part of a government revitalisation initiative that draws on public
and private funds to foster next-generation businesses. “The lending system should move towards one that
places more emphasis on the business value of the intellectual property owned by the SME,” he suggests.
Aqua Science Corporation of Yokohama, a manufacturing frm with 22 employees that has developed a
steam syringe device for industrial cleaning used during the process of manufacturing semiconductors,
Key points
n Although many policies have helped SMEs secure fnance through the recent recession, banks’ risk-aversion
and a reliance on fxed assets for collateral put many SMEs at a disadvantage.
n There are positive signs that the workforce is more open to opportunities at smaller businesses, and that
larger businesses can help transfer knowledge through employee loan programmes.
n Policy has evolved to target SMEs as potential growth leaders, with central and local government schemes
promoting entrepreneurialism and innovation. But awareness of many policies among SME owners remains
low.
SMEs in Japan
A new growth driver?
10 © Economist Intelligence Unit 2010
has a business structure that deliberately avoids the ownership of costly fxed assets like factories. The
company’s president, Yoichi Isago, explains that these can pose a serious risk to cash fow given volatile
cycles in the market.
Aqua Science has nonetheless been successful in securing fnancing, partly owing to the strength of
its intellectual property, but it has had to be creative—turning to overseas investors despite its small size.
Mr Isago explains that he has tapped venture capitalists and partners from Taiwan, Korea and the US, as
well as Japan, to secure fnance, based on the strength of the company’s core product. “People saw the
potential market value of the technology in hand,” he says.
One reason for investor confdence may have been because Aqua Science, which was spun off from a US
parent company in 2003, had proven technology and an established business model. But Mr Isago also
compares the risk-averse Japanese mindset with the business culture elsewhere. In Japan, he says, “the
culture is more focused on not making mistakes instead of one that promotes achievements.” Whereas
businesspeople in China, Korea and Taiwan “are committed to their missions,” he says. “They accept risks
for future gains.”
For its part, the government is trying to make credit guarantee requirements for SMEs more fexible,
says Ichiro Takahara, director-general of the SME Agency at METI. He explains that fnancing problems
are multifaceted: SME owners often lack the ability to explain their businesses to potential lenders,
while many private banks are unable to judge the growth potential of the business of SME applicants.
To this end, METI has launched a committee to evaluate accounting standards at SME businesses and is
promoting “relationship banking”, with closer partnerships between SMEs and fnancial institutions.
It has also introduced a training programme for fnancial institutions to study national and prefectural
governments’ SMEs programmes.
The HR conundrum
“The key for growth, whether for Japan [in general] or SMEs, is getting the right human-capital
portfolio,” says Mr Nishiguchi. This may be easier said than done: human resources are always a challenge
for SMEs, particularly in Japan where there has traditionally been a strong bias amongst the workforce
Source: SME Agency, 2010 White Paper on Small and Medium Enterprises in Japan. Reprinted with permission.
17
18
19
20
21
22
23
24
Q4 Q3 Q2 Q1
2009
Q4 Q3 Q2 Q1
2008
Q4 Q3 Q2 Q1
2007
-8
-6
-4
-2
0
2
4
6
Year-on-year change %, right axis Outstanding lending ¥trn, left axis
Figure 6
Outstanding lending to SMEs by government-affiliated financial institutions, etc
SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 11
towards larger, stable employers. But there are signs that this has been changing in recent years.
Scott Callon, president of Ichigo Asset Management, a Tokyo-based investment management company,
believes there has been a shift in attitudes towards start-ups amongst Japan’s workers. He says he found
few problems attracting quality personnel even in the early days of his company.
Keisuke Yui, president of Cubic—a business with eight employees that provides consulting services
to fnancially troubled capsule hotels, as well as running its own new style of “transit hub” hotel in
Kyoto—agrees that there has been a change in the bias towards working for major corporations. But he
concedes that the fnancial crisis has made some more cautious again about taking the risk of entering a
new venture.
In every crisis there lies opportunity, however. Hidemi Kamijima, president of Kamijima Heat
Treatment, a metal-processing company in Tokyo’s Ota Ward with 45 employees, has noted an expansion
of the pool of available labour as a result of the recession. He reports that the adverse employment
conditions are resulting in an increasing number of new graduates—a group currently facing particularly
high rates of unemployment—showing interest in his business.
Another silver lining of the current tough times noted by Kamijima is the Japanese practice of “leasing”
workers (shukko) from bigger companies who are loath to make long-term employees redundant. “This
channel offers a good opportunity for us to get the kind of human capital that is otherwise diffcult for a
small company like ours [to attract]—with an added bonus of only having to pay a part of their pay, if they
are leased,” says Mr Kamijima. (See also the case study below.)
Mr Kamijima has used his personal networks, rather than formal channels, to help his company beneft
from this kind of human-capital transfer. But such benefts may not be open to all SMEs without policy
guidance. Indeed, some interviewees suggest policies that encourage the transfer of human capital may
Case study: Kamijima Heat Treatment—A tradition of
skill
The Kamijima Heat Treatment plant is located in the back streets of
Tokyo’s Ota Ward, known as the city of craftsmanship, or monozukuri
no machi. Like many SMEs in Japan’s manufacturing supply chain,
Kamijima is a niche business built on artisanship, a tradition it carries
on today. As well as the modern vacuum furnaces for metal heat
treatment, Kamijima’s skilled workforce also use the older salt bath
method, a practice that is gradually dying out.
The labour-intensive salt bath method means that productivity
is low, but there is still a need for it when treating larger precision
components, keeping the factory’s 45 employees busy. “We get
orders from all around Japan despite being known for taking time and
being expensive,” jokes the company’s president, Hidemi Kamijima.
The shrinking market and the diffculty of maintaining the high
levels of craftsmanship–it takes decades of on-the-job training
to master the skills–are the major challenges for the specialist
factories in the sector. “Even the heat treatment work that does not
require high-grade skills is coming to us these days as the level of
craftsmanship in other factories is suffering,” says Mr Kamijima.
The company has been able to maintain its skilled workforce
through a fexible approach: taking young interns, investing heavily
in training for existing workers and getting non-manual senior
workers through “leasing” arrangements from larger companies.
Even then, the future is uncertain for Kamijima. Business is only
80% of what it was before the economic downturn, says Mr Kamijima,
and he foresees his niche business increasingly chipped away by
improving machine technology. “The work that can be done by our
craftsmanship only will defnitely shrink,” he says. Nevertheless,
he is hopeful about the company’s new business areas—conducting
experiments on heat treatment for the R&D departments of large
companies, and providing manufacturing solutions to the aerospace
industry through a consortium established by the Tokyo Metropolitan
Government (see p12 and p14).
SMEs in Japan
A new growth driver?
12 © Economist Intelligence Unit 2010
be preferable to ones that merely dole out money. One idea is for salary subsidies (for a limited period)
that could encourage the movement of senior employees from large companies to SMEs, with the added
incentive that to maintain salary levels beyond the subsidy time limit, transferees would have to help
grow the business.
Currently, however, many SMEs must rely on their own small pool of human capital. Mr Nishiguchi
points out that many of Japan’s SMEs are family owned businesses. And while this can be a merit in terms
of the ability to make quick decisions, it can be a drawback if the management draws only on family
resources.
Almost certainly linked to the familial nature of many SMEs, they are making more use of female
and older workers than large enterprises. According to data from the Ministry of Internal Affairs and
Communications Employment Status Survey, SMEs use slightly more female workers, and nearly six times
more workers aged over 65, than big businesses do—a practice that will almost certainly be adopted more
widely given Japan’s demographic challenges.
The evolution of SME policy
Japan’s Small and Medium Enterprise Agency was established in 1948
to promote the sector, and SMEs have been increasingly recognised
by the government as an important sector for the economy.
Nevertheless, despite recent progress made on policies to promote the
sector’s development, many argue more could be done.
On the legislative front, the Small and Medium Enterprise Basic Law
was amended in 1999 to redefne SMEs as a source of economic growth
and dynamism for Japan—a radical shift from the notion of SMEs as
a disadvantaged group, as they were classifed when the original law
was passed in 1963.
Then, in 2003, the law on establishing a company was changed,
allowing a new kind of enterprise, the kakunin kaisha, to be formed for
only ¥1. Until that time, a minimum of ¥10m in start-up capital was
required to start a traditional kabushiki kaisha—the reason the listed
capital of so many companies founded before then was exactly that
amount. The Nikkei newspaper reported that by January 2005, more
than 20,000 such new enterprises had been formed.
The central government took numerous measures to assist SMEs
as they suffered through the recent recession, principally in the form
of loan guarantees and direct assistance through state-affliated
fnancial institutions. In addition, the tax rate for profts above a
certain level at some SMEs (with capital below ¥100m) has been
lowered recently from 22 to 18%—a measure that is due to expire in
March 2011, although the government is looking into extending it.
Although this emergency support was crucial in helping many SMEs
survive, some argue a more considered strategy is now necessary.
Naohiro Nishiguchi, director of the Innovation Network Corporation
of Japan (INCJ), suggests the government needs to commit itself to
foster accelerated growth of SMEs, with a view to transforming them
into new growth engines. He argues that rather than just providing
fnancial assistance for SMEs, the focus should be on breaking what
he describes as Japan’s “vertical hierarchical structure, [to] move
towards a horizontal system where companies of all sizes have similar
access to effective business resources.”
Recognising the importance of the sector, local governments have
begun to take concrete steps to stimulate growth among SMEs, in
particular through industry-specifc and geographical clustering.
For example, in 2009 the Tokyo Metropolitan Government created a
consortium called the Advanced Manufacturing Association of Tokyo
Enterprises for Resolution of Aviation Systems (AMATERAS). This
draws together 10 companies with different engineering expertise
to provide integrated manufacturing solutions for the aerospace
industry in Japan and overseas. Meanwhile, the Fukuoka Prefectural
Government is planning to establish an association to help local SMEs
link directly to their counterparts in Asia, to parts of which Fukuoka is
geographically closer than it is to Tokyo.
Whilst there are also numerous other forms of assistance and
initiatives aimed specifcally at SMEs, lack of awareness of such
programmes is a key problem. Ichiro Takahara, director-general at
the SME Agency, concedes that publicising various support measures
is one of the agency’s biggest priorities. “There are many cases when
people are simply not aware of the available measures,” he says.
SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 13
3. Opportunities 1: Internal balance, external
growth
I
t is obvious that for Japan to engineer a sustainable recovery from its recent recession, its SMEs must
be able to seize opportunities for growth. This in turn means ensuring they have the right internal
structure to scale up their businesses, the ability to tap markets outside Japan as domestic demand
stagnates, and the means to proft from innovation.
This is easier said than done, especially as many SMEs suffer from an inability to marshal their own
resources effciently for growth—particularly human capital. Mr Nishiguchi identifes three sets of
human capital that are vital for scaling businesses up. One consists of the ideas/know-how people
(who typically earn the most respect in many small businesses as masters of their craft). But the other
two—entrepreneurs and administrative support staff—are equally crucial. While maintaining this kind
of balance may seem obvious, it can get lost in the day-to-day bustle of running a small business, when
stepping back to look at the bigger picture may seem an unaffordable luxury.
The importance of maintaining a balance of each type of employee is reiterated by Atsushi Horiba,
the current president of Horiba—a supplier of high-tech analytical solutions to the automotive,
semiconductor, medical and environmental industries that has grown from a small business to a
multinational corporation with over 5,000 employees (see also the case study on p17).
“Pride in craftsmanship is not enough to scale up your business,” says Mr Horiba, who insists a
“balancing act” is the key. He explains how Horiba’s own corporate culture was formerly so focused on the
technology side of the business that it “treated technicians as stars and the others like secondary actors”.
Mr Horiba made efforts to change this, to ensure that the sales and administration personnel were also
valued in the business and had the means to become stars in their own right.
The challenges faced by SMEs reliant on highly skilled, niche craftsmanship are frankly explained by Mr
Kamijima, who acknowledges that the kind of skills necessary for the delicate salt-bath heat treatment in
Key points
n To grow successfully and scale their businesses, SMEs need to balance various types of human capital:
technical experts, entrepreneurs and administrative staff.
n Cooperation, even between apparent rivals in the same feld, can be a key to growth and can help overcome the
potential hurdle of limited resources.
n With a shrinking domestic market, Japanese SMEs must internationalise. While some are seeking to leverage
external markets, in general they have been comparably slow in making this shift.
SMEs in Japan
A new growth driver?
14 © Economist Intelligence Unit 2010
which his company specialises are increasingly being threatened by more modern methods. “Retaining
craftsmanship is important but not suffcient to sustain business,” he says, echoing Mr Horiba.
To overcome the potential hurdle of limited resources and avoid getting too narrowly focused on in-
house technical skills, Mr Horiba advises SMEs to actively look for alliances with other companies, even
competitors. Japan’s larger corporations—sometimes apparent rivals from the same felds—have a long
and deep tradition of cooperating with each other in a variety of different capacities; a practice that SMEs
could emulate to their beneft.
“Becoming a part of a win-win team is particularly important for SMEs,” says Mr Horiba. Recalling,
with some pride, when Horiba forged a technical alliance with Hitachi back in 1959, he describes the
arrangement as being between “a fea and an elephant, but on an equal footing.”
Kamijima, for its part, has benefted from joining a consortium of businesses launched in 2009 by
the Tokyo Metropolitan Government—the Advanced Manufacturing Association of Tokyo Enterprises
for Resolution of Aviation Systems, or AMATERAS. This draws together 10 companies with different
engineering expertise to provide integrated manufacturing solutions to the aerospace industry—both in
Japan and, importantly, in key overseas markets.
The importance of internationalising
In light of Japan’s persistently sluggish domestic economy and demographic profle—with an ageing and
shrinking population—its companies, including SMEs, should be making the most of growth opportunities
outside their domestic market. To be sure, many are doing so: Aqua Science’s Mr Isago explains his
company takes a “borderless approach”, taking advantage of the fast-moving and enticing growth
markets in Asia’s developing markets in particular.
Indeed, many of Japan’s SMEs have come to rely more on international markets. While exports account for
a lower percentage of sales at SMEs than at larger enterprises, the rates of export growth in the years running
up to the Lehman Shock was actually faster at smaller frms. According to Bank of Japan fgures, exports
accounted for 4.4% of SMEs’ sales in 2002, but this had risen to 7.4% by 2008. Large enterprises saw their
exports grow from 23.7% of sales to 27.8% over the same period. In sales volumes, SMEs saw exports double
to ¥5trn (US$60bn) while those for big companies grew a more modest 37% to ¥71.6trn (US$860bn).
However, in comparison with their counterparts in other developed economies, Japanese SMEs are
laggards in terms of internationalisation. A recent report on the internationalisation of SMEs by the
European Commission (EC)notes that despite an identical correlation in the EU and Japan between size of
company and the degree to which it is internationalised, the level of international activity by EU SMEs is
“considerably higher” than by their Japanese counterparts.
2
According to the EC report, some 58% of EU SMEs that employ between 101 and 250 people export,
compared with 30% of Japanese SMEs in the range of 101-300 employees (Figure 7). (More recent data
cited by the SME Agency, post-fnancial crisis, show only 18.4% of Japanese SMEs of 201-300 employees
export, with lower proportions in all smaller enterprise sizes.
3
)
One obvious explanation for this discrepancy is that European SMEs have the beneft of trading within
the rich and proximate EU internal market. But even excluding those that trade only within this market,
2
European Commission,
Internationalisation of
European SMEs, 2010. This
defnes “internationalised” as
“either exporting, importing,
investing abroad,
co-operating internationally,
or having international
subcontractor relationships”.
3
SME Agency, 2010 White
Paper on Small and Medium
Enterprises in Japan
SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 15
Source: European Commission, Internationalisation of European SMEs, 2010
0
10
20
30
40
50
60
101 up to 300 employees (up to 250 for Europe) 21 up to 100 employees Up to 20 employees
Japan EU27 extra Internal Market trade EU27 all export UK only
Figure 7
SMEs engaged in export in Japan and the EU, by size
(%)
and including the UK, which shares some characteristics with Japan of a large island economy—albeit one
that enjoys EU trade privileges—shows a similar discrepancy. Figures for FDI are comparable: in the EU27
even of enterprises up to 20 workers, some 2% invest abroad, whereas in Japan this is only 0.3% (Figure
8).
Source: European Commission, Internationalisation of European SMEs, 2010
0
5
10
15
20
25
101 up to 300 employees (up to 250 for Europe) 21 up to 100 employees Up to 20 employees
Japan EU27 UK only
Figure 8
SMEs in Japan and the EU that invest abroad, by size
(%)
Given Japan’s shrinking domestic market, the relatively lower internationalisation of its SMEs is a
cause for concern, especially considering the opportunities that Asia’s burgeoning economies present.
While some Japanese SMEs like Aqua Science have not been afraid to dive in, many are not ready to
take the plunge, regardless of the opportunity. According to the SME Agency’s research, SMEs that
are reluctant to globalise cite lack of access to information about overseas markets, lack of capable
management resources in Japan, and diffculty securing fnancing as the main reasons (excluding the
excuse that they are preoccupied with the domestic market).
4
Another issue is that of language. Despite considerable resources dedicated to foreign language
learning in Japan, the average level of English remains signifcantly lower than in many comparable
4
Ibid.
SMEs in Japan
A new growth driver?
16 © Economist Intelligence Unit 2010
countries. As Ichigo’s Mr Callon—a fuent Japanese speaker—concedes: “There can be a language issue:
there isn’t as deep a pool of English speakers in Japan as there is in Hong Kong or Singapore.” However,
he maintains it is possible to get a workforce internationally functional, “because there are a lot of
incredibly hard-working and dedicated Japanese with a solid educational background in English.”
The government is certainly aware of the need to get Japan’s SMEs to internationalise. Mr Takahara of
the SME Agency notes that competition is increasing for SME manufacturers that produce high-quality
niche products, requiring that many businesses face up to the global dimensions of the international
economy. He also concedes that while Japan’s manufacturing SMEs have tended to focus on the technical
quality of their products, they have not made the most of international markets. “It’s diffcult to earn with
equipment [alone],” he says. “We have a weakness in system exports. For this, we can learn a lot from
countries like Germany, France and Korea.”
Currently the government offers internationalisation assistance to SMEs via several channels,
including Japan Chambers of Commerce, JETRO, the Organisation for Small and Medium Enterprises
and Regional Innovation, as well as offering direct funding assistance for some overseas operations
(for instance via the Fiscal Investment and Loan Program). Yet, as mentioned above, lack of awareness
and complicated application procedures hinder the take-up of such programmes. According to research
commissioned by the SME Agency, only 39% of Japanese SMEs that are globalising have used any
globalisation assistance (including government and private-sector support).
SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 17
Case study: Cubic—Small hotels, big ambitions
Cubic, a small Tokyo-based capsule hotel business with just eight
employees, may not be the stereotypical SME in that it has used
lessons learned in turning around its own business to give advice to
other struggling hotels. But it is atypical in other ways—including its
president’s international ambition and commitment to innovation.
Having enjoyed working in venture capital, Keisuke Yui came to
the capsule hotel business reluctantly when his father passed away
unexpectedly just over a decade ago. His father’s business had,
unbeknownst to him, accumulated debts of ¥500m (US$6m). After
the bank greatly reduced the debt in a refnancing arrangement as
part of the mass disposal of non-performing loans taking place at
the time, Mr Yui was able to see a way out.
He turned the business around, “mainly by improving the
service, and targeting women and overseas guests,” and paid off
the debt. He then put the know-how he and his staff had acquired
to use by sending them to struggling capsule hotels. Now Cubic has
consulting contracts with a number of hotels, on a no-results no-
fee basis, whereby the operators don’t pay unless their earnings rise
above a certain point.
Mr Yui also developed a vision for transforming the capsule hotel
into a new category of accommodation with high-end service and
amenities, stripped down to the bare essentials. The frst of these is
the 9h (“nine hours”) hotel in Kyoto, which opened in 2009.
Despite the small size of his operations, Mr Yui is already frmly
focused on expanding his vision beyond Japan. Having attracted a
good deal of global media interest for the sleek minimalist design
of his frst “transit hub” hotel, he is currently talking to potential
partners in locations including London, Rotterdam, Moscow, New
York and Hong Kong.
However, to expand into an international operator, he expects
to have to form a new company with partners such as property
companies taking a stake in the business. “This is still essentially a
family company, with shares held by family members,” says Mr Yui.
“There’s a limit to how far that kind of company can go.”
Case study: Horiba—From SME to titan
Since its establishment in 1945 by Masao Horiba (the current
president’s father), while he was still a student, the Horiba Group
has grown steadily to become a multinational giant. With its roots
in scientifc research, the company makes high-tech instruments
and systems for manufacturing, healthcare, R&D and environmental
monitoring across 37 companies in 22 countries. The group now has
over 5,100 employees and in 2009 had sales worth US$1.24bn. As a
former SME that went global, Horiba offers some useful lessons.
Atsushi Horiba, the current president, explains that while the
company was built on craftsmanship, its entrepreneurial spirit
drove it to look for markets far beyond its base in Kyoto from its
early days. As well as establishing its own operations overseas,
Horiba expanded through a series of acquisitions of foreign
companies. Mr Horiba says the company’s aggressive stance in
moving abroad has allowed it to enjoy the frst-mover advantage
that in turn has enabled the company to excel in Japan and globally,
despite its relatively small size.
At Horiba, differences that are often seen as risks in Japan’s
corporate culture are affrmed as virtuous diversity. “Japanese
companies tend to be too homogeneous. Just like pure gold is
soft and susceptible to damage, homogenised organisations can’t
endure even a simple impact,” Mr Horiba suggests. He thus not
only manages various nationalities, but also insists on sending
his Japanese employees abroad to give them opportunities to
“experience differences and the related challenges of dealing with
unfamiliar things—something they would tend to miss out if they
were to remain in Japan.”
Currently around 3,000 of the group’s 5,100 employees are
non-Japanese, including the heads of three of its four key business
divisions. In addition, 90% of the board members, 30% of the
management and 15% of non-managerial Japanese employees have
in-depth experience abroad, with overseas stints of between three
and 20 years.
Another key to growth is the willingness to take risks. “Corporate
capacity depends on willingness to make mistakes or take risks, and
the company’s ‘regenerative strength’; its ability to turn failure into
success,” Mr Horiba says. This attitude helps keep innovation alive.
“Delivering a hit [innovation] at the frst attempt rarely happens.
Even for us, with good human capital, technical know-how and a
global network, the success rate is around 20-30%,” he concedes.
SMEs in Japan
A new growth driver?
18 © Economist Intelligence Unit 2010
4. Opportunities 2: Innovation and technology
“A
s in any country, up-and-comers like SMEs tend to be drivers of innovation and change, so they’re
extraordinarily important for the economy,” says Ichigo’s Mr Callon. Indeed, smaller companies
are generally expected to be more innovative and nimble than big lumbering corporations. However, data
show that while Japan as a whole continues to lead the way in R&D, its SMEs are investing proportionally
less in innovation than those in other countries.
According to the OECD’s Science, Technology and Industry Scoreboard 2009, Japan invested 3.4% of its
entire GDP in R&D in 2007—the highest level amongst the G7 nations and well above the OECD average
of 1.9%. In fact, Japan accounted for around 20% of all the growth in R&D spending in OECD countries
between 1997 and 2007. And while 78% of R&D in Japan is fnanced by private business—compared with
an OECD average of 54%—SMEs accounted for only 6% of this, one of the lowest shares in the OECD area.
Another study by the OECD that aggregates data on the innovation performance and policies of SMEs
in its member states similarly shows Japan lagging its peers in all aspects of innovation (Figure 9). These
fndings should be a major concern for a sector that is expected to be a future growth engine for the
Japanese economy.
The International Monetary Fund’s Japan Country Report 2010 sheds some light on the causes of this
discrepancy between the healthy R&D spending of the country as a whole, and the low share occupied by
SMEs. The study found that, “For larger frms, manufacturers and exporters, R&D spending is driven by
proft expectations and not affected by cash fow or fnancing structure.” But for SMEs, service-sector and
non-exporting frms, “fnancing constraints hinder R&D spending, and, by extension, innovation”.
5
The
diffculty faced by Japan’s SMEs in accessing fnance during times of economic uncertainty is undoubtedly
going to have repercussions for future innovation and growth.
The government cannot be faulted for a lack of policy options to stimulate innovation at SMEs: the
OECD notes the presence of 17 programmes to encourage small business innovation, including research
Key points
n While Japan as a whole spends a lot on R&D in comparison with other developed economies, its SMEs do not.
Lack of access to fnance and risk-aversion are major reasons.
n Government policies to support innovation are plentiful—but poor publicity and complicated application
procedures hinder their adoption.
n Putting in place the means to commercialise intellectual property—both within Japan and in foreign
markets—is crucial.
n Focusing on Japan’s cultural strengths—such as high service standards—could be fruitful for SMEs looking to
differentiate themselves in an increasingly competitive global marketplace.
5
IMF, Japan: Selected Issues,
IMF Country Report No.
10/212, July 2010
SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 19
and development support through subsidies or contract grants, and support for technological application
development, such as patent fee reductions, loan guarantees, capital investment loans and loans for
facilities.
However, in common with other support measures for small businesses, part of the problem is not
so much lack of policy options as low take-up of those on offer, whether as a result of low awareness or
because SME owners fnd the application procedures onerous. The OECD notes in its summary of Japan’s
SME innovation policies that its programmes “suffer from a lack of applications, and [have] been found to
be administratively diffcult to implement. In particular the methods of application are too complex.”
6
Mr Isago of Aqua Science agrees this is a problem. “Public measures may be available but access is
bad,” he says, citing diffculty in fnding information, a lack of fexibility in eligibility and burdensome
application procedures—topped by lack of clarity in decision-making. “I want to know who is saying and
ensuring that Japan is going to be the innovation-oriented nation,” he says.
Driving SME innovation
Money alone, even with plentiful government support, cannot drive invention or conjure the
entrepreneurial spirit needed for starting and growing new ventures. Japan is often characterised as
having a very risk-averse culture, though this would appear to stand in stark contrast to the actions of its
companies that became global leaders in the second half of the twentieth century.
“Innovation is really the only thing,” suggests Cubic’s Mr Yui: “You can’t just keep moving forwards
with kaizen,” referring to the Japanese notion of continual gradual improvement, which has been a
corporate mantra at giants like Toyota. “At some point things have to shift to a completely new platform.
That’s innovation.” Though Mr Yui believes any number of companies have the potential to be “game
changers”—for instance in the electric vehicle sector—he thinks that the lack of a “Silicon Valley-type
community of venture capitalists” willing to take risks on new ideas hampers innovation in Japan.
Mr Nishiguchi of the INCJ also suggests that while there are plenty of inventions and inventors in
Japan, the kind of innovation required to commercialise intellectual property (IP) is lacking. “The
situation is detrimental to growth,” he says simply.
Note: Data is percentage of respondents in national SME surveys: France 2005-06; Germany 2004-06; Japan 2002-04; South Korea 2002-04; UK 2007.
Source: Derived from OECD, SMEs, Entrepreneurship and Innovation, 2010
0
5
10
15
20
25
Product innovation Process innovation Firms with new-to-market
product innovations
Firms collaborating
on invoation activities
France Germany Japan UK South Korea
Figure 9
Innovation performance of SMEs
(%)
6
OECD, SMEs, Entrepreneur-
ship and Innovation, 2010
SMEs in Japan
A new growth driver?
20 © Economist Intelligence Unit 2010
Mr Nishiguchi believes that Japan must learn not only to develop and fnd global markets for its own
IP, but look for it abroad and bring ideas back to be commoditised at home. “Countries that just nurture
IP won’t beneft from tax income or employment,” he concludes. This is essentially what Aqua Science
Corporation’s Mr Isago accomplished. Leaving the US frm he was working for, he persuaded them to let
him take technology that the company had ceased developing. Having focused on R&D for the past eight
years, he is now taking the technology out to the global market.
Mr Callon doesn’t believe Mr Isago is one of a kind, or that the country suffers from a lack of
entrepreneurial spirit. “There’s overwhelming human talent in Japan, but sometimes it’s trapped by
bureaucratic restrictions; we need to think how to allow that talent to fourish in more entrepreneurial
ways,” he says. Mr Callon suggests that, despite improvements, barriers to entry for new companies and
higher penalties for failure are what hold many entrepreneurs back. The fact that Japan ranks 98th of
183 economies for starting a business in the International Finance Corporation’s latest “Doing Business”
rankings suggests how diffcult it is for Japan to beneft from its entrepreneurial talent. (It ranks frst for
closing a business, however.)
7
Mr Callon also points out that the labour market can still be infexible. “In other countries you can try
a start-up at 32, and if it doesn’t work out then you can go and fnd a job. Here, if you start up and fail,
there’s a much smaller mid-career market. The risks of failure are just so much higher.”
To be sure, technological advances have helped to bring down barriers: for even the smallest
enterprises, connecting with business partners, clients or customers from a wide geographical area is
now so common as to be unremarkable. Mr Callon points out that the growth of the Internet has also
greatly reduced costs for advertising and communications for SMEs. “The ability now to put up a webpage
at almost no cost means start-ups have far greater ability to acquire customers and grow their businesses
compared to ten years ago” he says.
As well as help reach broader domestic audiences, IT can help SMEs that have expanded internationally
manage their subsidiaries. Masato Yamaji, president of the Sanwa Dengyo Group, a plant engineering
business with 260 employees headquartered in Kagawa prefecture, explains how the group uses an
innovative Internet-based system to ensure close co-operation between staff in Japan and in the
company’s subsidiaries in China (see the case study on p21).
There may be other ways for Japan’s SMEs to move forward, without relying only on technology. Mr
Yui doubts that focusing on areas already dominated by multinational tech companies will be fruitful—“I
think trying to do that is like playing Othello when you’re already boxed-in,” he says. Instead, he suggests
Japan should look to its cultural strengths, such as attention to detail and high standards of hospitality
as the basis for new ventures. “The level of service in Japan is so high that even what is regarded as
normal here translates as very high-end by global standards.”
Although this may sound predictable from someone attempting to create a new category of hotel,
Horiba’s president suggests something similar in his own high-tech feld. Mr Horiba says the company’s
ability to service its clients is becoming ever more important as product differentiation narrows: “The
Japanese way of doing business that values trust and reliability, for instance, has a lot of potential.”
7
IFC, Doing Business 2011,http://www.doingbusiness.
org/data/exploreeconomies/
japan
SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 21
Case study: Sanwa Dengyo—The China connection
Masato Yamaji is the second-generation boss of the Sanwa Dengyo
Group, a plant engineering business headquartered in Kagawa
Prefecture, with 260 employees across the group’s seven companies.
Like many frms in Japan, Sanwa is facing the challenge of a mature
and shrinking domestic market. The market has declined “by more
than half” compared with the boom times before the bursting of the
economic bubble. Survival now depends on fnding new markets,
whether through innovation or going overseas, while fnding ways to
slash costs.
Typically the plant-engineering business in Japan relies on
domestic demand, Mr Yamaji says, with most SMEs reluctant to
investigate opportunities abroad. Choosing to adopt a proactive
approach, however, he decided to shift some of the group’s
operations to China more than nine years ago, despite concerns
about the risks of technology and know-how being leaked to local
competitors. By capitalising on the company’s strength in IT,
Sanwa Dengyo has established a system whereby the engineers in
Japan can use online tools to closely liaise with and manage the
staff in China who programme the factories’ automated systems
and design plant facilities. Moreover, the system also allows young
Japanese engineers to train and manage staff—a way of giving them
management experience before they might normally obtain it.
The company’s early presence in China has also led to its securing
contracts for the maintenance and modifcation of Japanese
companies’ local plant facilities. This is an area of business it is
seeking to grow further, leveraging “the sixty years of track record”
it has in Japan. While Mr Yamaji describes this side of the business
as “high-risk and low-return”—meaning the group’s domestic
competitors are unwilling to do it—he suggests the company is
not in a position to be choosy about the kind of work it takes on.
“We will fnd a way into the future, even if it means taking on work
nobody else wants to do.”
SMEs in Japan
A new growth driver?
22 © Economist Intelligence Unit 2010
5. Conclusion
T
here’s no doubt that Japan’s SMEs were hit hard by the global recession, or that they were having a
tough time even before then. Many have not yet recovered. But for those that survived the fnancial
crisis, there should be some consolation in the fact that conditions are unlikely to get that bad again
soon.
However, there is little room for complacency, and business sentiment amongst SMEs remains negative.
The sector, so vital to the Japanese economy, needs support and nurturing if it is to be a future driver of
growth. Aside from its vital role as a supplier to Japan’s big brand names, next-generation innovation and
future corporate giants are expected to emerge from its ranks.
“I don’t look at it as we have a problem,” says Ichigo’s Mr Callon. “I look at it like we have a vibrant SME
class: let’s keep it that way, let’s grow it.”
Policy initiatives and reforms have lowered barriers to entry, and there is more increased support
and advice available. But the consensus from interviewees for this report is that more can be done. In
particular, better promotion of existing programmes, as well as more convenient access to them, is
needed—as even those administering the initiatives acknowledge.
As for growth prospects, the doubling of SMEs’ exports in the six years before the recession hit shows
that they have been globalising—though not to the extent of their counterparts elsewhere. While they
may not yet have to follow the lead of clothing giant Uniqlo or internet marketplace Rakuten in making
English their internal language, a more international outlook is clearly needed.
Creativity is something that every SME needs and no government programme can provide. As some of
the case studies in this report have shown, even hardships can provide opportunities. SMEs need to be
creative in everything from their product development to fnancing to human resources. Japan also needs
to fnd new ideas from abroad to commercialise here, rather than have some of its best technologies
leveraged by other countries.
SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 23
Innovation may come in the felds of service, design or retailing, rather than just technology, but in
whatever arena it is vital if the SME sector, and therefore Japan, is to prosper.
Whilst every effort has been taken to verify the accuracy
of this information, neither The Economist Intelligence
Unit Ltd. nor the sponsor of this report can accept any
responsibility or liability for reliance by any person on this
report or any of the information, opinions or conclusions
set out herein.
Cover image - Nomadic Luxury/Stone/Getty Images
LONDON
26 Red Lion Square
London
WC1R 4HQ
United Kingdom
Tel: (44.20) 7576 8000
Fax: (44.20) 7576 8500
E-mail: [email protected]
NEW YORK
750 Third Avenue
5th Floor
New York, NY 10017, US
Tel: (1.212) 554 0600
Fax: (1.212) 586 0248
E-mail: [email protected]
GENEVA
Boulevard des Tranchées 16
1206 Geneva
Switzerland
Tel: (41) 22 566 2470
Fax: (41) 22 346 9347
E-mail: [email protected]
HONG KONG
6001, Central Plaza
18 Harbour Road
Wanchai
Hong Kong
Tel: (852) 2585 3888
Fax: (852) 2802 7638
E-mail: [email protected]
Paper size: 210mm x 270mm
SMEs in Japan:
A new growth driver
A report from the Economist Intelligence Unit
Sponsored by
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LONDON
26 Red Lion Square
London
WC1R 4HQ
United Kingdom
Tel: (44.20) 7576 8000
Fax: (44.20) 7576 8500
E-mail: [email protected]
NEW YORK
750 Third Avenue
5th Floor
New York, NY 10017, US
Tel: (1.212) 554 0600
Fax: (1.212) 586 0248
E-mail: [email protected]
GENEVA
Boulevard des Tranchées 16
1206 Geneva
Switzerland
Tel: (41) 22 566 2470
Fax: (41) 22 346 9347
E-mail: [email protected]
HONG KONG
6001, Central Plaza
18 Harbour Road
Wanchai
Hong Kong
Tel: (852) 2585 3888
Fax: (852) 2802 7638
E-mail: [email protected]
Paper size: 210mm x 270mm
SMEs in Japan
A new growth driver?
A report from the Economist Intelligence Unit
Sponsored by
C
M
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CM
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CMY
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SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 1
Contents
Preface 2
Executive summary 3
1. Introduction 5
SMEs in Japan’s economy 7
2. Challenges: Finance and human capital 9
Finding fnance 9
The HR conundrum 10
Case study: Kamijima Heat Treatment—A tradition of skill 11
The evolution of SME policy 12
3. Opportunities 1: Internal balance, external growth 13
The importance of internationalising 14
Case study: Cubic—Small hotels, big ambitions 17
Case study: Horiba—From SME to titan 17
4. Opportunities 2: Innovation and technology 18
Driving SME innovation 19
Case study: Sanwa Dengyo—The China connection 21
5. Conclusion 22
SMEs in Japan
A new growth driver?
2 © Economist Intelligence Unit 2010
Preface
SMEs in Japan: A new growth driver? is an Economist Intelligence Unit report, sponsored by Microsoft.
The Economist Intelligence Unit’s editorial team conducted research for this paper and wrote the report
independently. The fndings and views expressed in this report do not necessarily refect the views of the
sponsor. Gavin Blair was the author of the report and David Line was the editor. Amie Nagano and Takato
Mori were the lead researchers and editors of the Japanese translation. Gaddi Tam was responsible for
design.
We would like to thank all interviewees for their time and insights.
December 2010
© 2010 The Economist Intelligence Unit. All rights reserved. All information in this report is verifed to
the best of the author’s and the publisher’s ability. However, the Economist Intelligence Unit does not
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SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 3
Executive summary
M
ore than 99% of all businesses in Japan are small or medium-sized enterprises (SMEs); they also
employ a majority of the working population and account for a large proportion of economic output.
While most of these companies are not as well known as Japan’s giants, they form the backbone of the
service sector and are a crucial part of the manufacturing and export supply chain.
The health of this enormous sector is therefore crucial to the health of the economy overall. But SMEs
are among the most pessimistic of Japanese businesses, having been hit hardest by the recession that
followed the fnancial crisis of 2008. And because many are reliant on the domestic economy, in which
demand will dwindle as the population ages and shrinks, their prospects are uncertain.
Against this background, how realistic is it to expect SMEs to become the new growth drivers of Japan’s
economy? What pressing challenges do SMEs face in expanding their businesses? How are they faring in
the bid to fnd growth in new markets and through new products and services? Have they been successful
in internationalising their operations and profting from innovation? And are government policies to
support the sector helping?
This briefng paper, SMEs in Japan: A new growth driver?, sponsored by Microsoft, discusses these
crucial issues. It is based on interviews with senior executives at SMEs in Japan, government offcials and
other experts, and a review of relevant literature published both in Japan and by supra-national bodies
like the IMF, OECD and World Bank. Its key fndings include:
•
Japanese SMEs face particular problems securing fnance. That banks are more reluctant to lend to
small companies than big ones is not surprising. But such is the vulnerability of the sector, as many as a
quarter of those who received emergency credit guarantees during the recent recession would have gone
out of business without them. Japanese banks’ continued risk-aversion and a reliance on fxed assets for
collateral put many SMEs at a disadvantage when looking for funds. Banks need more effective ways of
measuring SMEs’ business value, while SME owners need better accounting to explain it.
SMEs in Japan
A new growth driver?
4 © Economist Intelligence Unit 2010
•
Finding the right employees is problematic, but tough economic times present an opportunity.
Japan’s workforce has tended to favour the security of employment at large corporations, and attracting
experienced and skilled workers can be diffcult for SMEs. However, the cloud of the recent recession has
brought two silver linings for SMEs: new entrants to the workforce are showing more interest in working
for small companies, and larger businesses that are reluctant to fre workers can transfer the knowledge of
experienced staff through employee loan programmes.
•
Growth requires the right mix of human capital—and a willingness to collaborate. While many
Japanese SMEs take pride in the skills of their master craftspeople in niche industries, to grow successfully
and scale their businesses requires the right balance of various types of human capital, including
entrepreneurs and administrative staff. And while many lack the resources to expand alone, cooperation,
even between apparent rivals in the same feld, can be a key to growth.
•
Japanese SMEs lag their developed-market peers in tapping international markets. With a shrinking
domestic market, many Japanese SMEs must internationalise to expand. While some are seeking to
leverage external markets, as a sharp rise in exports in the years running up to the “Lehman Shock”
showed, in general they have been comparably slow in making this shift. SMEs that are reluctant to
globalise cite lack of access to information about overseas markets, lack of capable management resources
in Japan, and diffculty securing fnancing as the main reasons.
•
Japanese SMEs spend comparatively little on innovation. While Japan as a whole spends a lot on R&D
in comparison with other developed economies, its SMEs do not. Lack of access to fnance and risk-aversion
are the principle reasons. Interviewees suggest successful innovation requires the right mix of policy
support and helpful bureaucratic structures to encourage entrepreneurialism, which is often hampered
by bureaucratic hurdles. Putting in place the means to easily commercialise intellectual property is also
crucial.
•
While policy towards SMEs has evolved, access to assistance is often diffcult. Policy has evolved
to target SMEs as potential growth leaders, and central and local government programmes to support
SMEs fnancially, organisationally, and in their bids to internationalise and innovate are plentiful. But
poor publicity and complicated application procedures hinder their adoption and reduce their impact. In
addition, some interviewees suggest policy measures need to focus less on fnancing SMEs and more on
encouraging their growth and development.
SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 5
1. Introduction
J
apan’s small and medium-sized enterprises (SMEs), like their counterparts around most of the globe,
were hit even harder than larger companies by the worldwide economic crisis. Not only were SMEs
affected worse, but they had been struggling to cope with weak domestic demand even before the events
referred to in Japan as the “Lehman Shock”.
Surveys of sentiment among small business owners show how tough conditions have been, for how
long. The Bank of Japan’s quarterly Tankan survey of business sentiment—the most closely watched
such indicator nationwide—has rarely shown positive readings from small business respondents in
recent years, and was still mired in negative territory in the third quarter of 2010, by which time larger
enterprises had returned to a positive outlook (Figure 1). A similar survey on conditions that includes
Key points
n SMEs account for an overwhelming majority of total enterprises in Japan, and a large part of employment and
value added, making their health crucial to that of the economy as a whole.
n Tough conditions for SMEs predate the recession of 2008-09, refecting longstanding problems with the
domestic economy.
n Japan’s SMEs were hit hard by the fnancial crisis—particularly those in the export supply chain.
Figure 1
Tankan, business conditions diffusion index, all industries
%, quarterly
-50
-40
-30
-20
-10
0
10
20
30
Q3 Q2 Q1
2010
Q4 Q3 Q2 Q1
2009
Q4 Q3 Q2 Q1
2008
Q4 Q3 Q2 Q1
2007
Q4 Q3 Q2 Q1
2006
Q4 Q3 Q2 Q1
2005
Q4 Q3 Q2 Q1
2004
Q4
2003
NB: Calculated by subtracting the percentage of enterprises that answered “bad” from the percentage that answered “good” when questioned about business
conditions in the present quarter. The Tankan defines “small” enterprises as those with capital of between ¥20m and ¥100m; “medium” as those with capital of
¥100m-¥1bn, and “large” as those with capital exceeding ¥1bn.
Source: Bank of Japan
Small Medium Large
SMEs in Japan
A new growth driver?
6 © Economist Intelligence Unit 2010
businesses with capital of less than ¥20m (excluded in the Tankan) also shows sentiment at these
businesses has been poor for a long time (Figure 2).
The contrast with SMEs in many other Asian economies, which have rebounded to dynamic growth
and banished the memory of the fnancial crisis, is stark. While all small businesses face problems with
fnance, HR and management, Japan’s SMEs also face a raft of domestic challenges that are testing their
resiliency and ingenuity to the limits.
And while Japan’s SMEs may not be as well known as its corporate titans, their health is vital to the
economic wellbeing of the country, not least because they account for an overwhelming majority of total
enterprises and employment, and a considerable part of the value added in the economy. (In this Japan
is hardly unusual; in most developed economies
SMEs are similarly important, as Figure 3 shows).
The health of this sector, comprising more than 4m
enterprises, is therefore of major importance for
the health of the overall economy.
For this briefng paper, SMEs in Japan: A new
growth driver?, Microsoft commissioned the
Economist Intelligence Unit to examine the state
of the SME sector in Japan, how it is responding to
the challenges it faces, how effective government
policy has been in supporting small and medium-
sized businesses, and what more could be done to
aid them.
The paper also assesses whether, in the face of shrinking domestic demand, Japan’s SMEs are
internationalising successfully and tapping into the growth engine of fast-growing Asian economies. In
light of the crucial role SMEs play in both developing and monetising new ideas, the paper also looks at
innovation in the country’s small businesses and assesses whether today’s SMEs can become tomorrow’s
Figure 2
Business conditions diffusion index for SMEs, all industries
-60
-50
-40
-30
-20
-10
Q3 Q2 Q1
2010
Q4 Q3 Q2 Q1
2009
Q4 Q3 Q2 Q1
2008
Q4 Q3 Q2 Q1
2007
Q4 Q3 Q2 Q1
2006
Q4 Q3 Q2 Q1
2005
Q4 Q3 Q2 Q1
2004
Q4 Q3 Q2 Q1
2003
Q4 Q3 Q2 Q1
2002
Q4 Q3 Q2 Q1
2001
Q4 Q3 Q2 Q1
2000
Q4 Q3 Q2 Q1
1999
NB: Index caclutated by subtracting percentage of enterprises that answered “worsened” from percentage answering “improved” when asked about business
conditions in comparison with previous quarter.
Source: Organisation for Small & Medium Enterprises and Regional Innovation, Japan (SMRJ).
All SMEs Medium-sized enterprises Small enterprises
Figure 3
SMEs contribution to total, 2007
(%)
Number of enterprises Total employment Value added
France 99.8 60.5 56.0
Germany
a
99.5 60.4 53.6
Japan
b
99.7 69.0 53.0
c
South Korea
b, c
98.9 71.0 45.5
UK
a
99.6 54.1 51.0
US
d
98.9 57.9 na
a
Value added at factor cost
b
2006
c
Excluding services
d
2004-05
Source: OECD, Structural and Demographic Business Statistics; Japan METI/Ministry of Internal Affairs
SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 7
multinationals—the next Nintendos, Panasonics or Uniqlos.
Rather than attempting a comprehensive survey of this enormous and varied sector, this paper sets
out to identify some of the key issues facing these companies, how they may be addressed, and what
the outlook is for Japanese SMEs—primarily as a means of generating discussion on these issues among
all stakeholders. The fndings are based on interviews with various small-business owners, experts and
offcials, conducted in October and November 2010, augmented with a review of the existing relevant
literature.
What is an SME?
The defnition of what constitutes an SME varies
between countries: this paper uses the defnition
according to the Small and Medium-sized Enterprise
Basic Act and used by Japan’s Ministry of Economy,
Trade and Industry (METI). This classifes as SMEs
businesses in the retail or services sector with less
than ¥50m (US$600,000) in capital, those in the
wholesale sector with less than ¥100m (US$1.2m) in
capital, and those in manufacturing with less than
¥300m (US$3.6m) in capital. In addition it restricts
the defnition to those in retail with fewer than 50
employees, those in services or wholesale with fewer
than 100 employees, and those in manufacturing with
fewer than 300 employees.
Figure 4
Definition of SME
Industries
Capital size
(¥m)
Number of
employees
Manufacturing and others 300 or less 300 or fewer
Wholesale 100 or less 100 or fewer
Retail 50 or less 50 or fewer
Services 50 or less 100 or fewer
Source: METI
SMEs in Japan’s economy
SMEs are prevalent across the Japanese economy,
constituting the lion’s share of enterprises in all
sectors. SMEs are most numerous in the retail,
services and restaurant/lodging industries (Figure
5), but among the most productive are those in
the manufacturing sector. While many of those in
the services sector are wholly reliant on domestic
demand, a large proportion of SME manufacturers
are essential suppliers to Japan’s famous large
exporters.
The signifcance of SMEs in the export supply
chain explains in part why the sector was hit
so hard by the recession of 2008-09. A study
commissioned by METI’s SME Agency showed that
the approximately ¥700bn (US$8.3bn) in declines
Figure 5
Composition of SME sector in Japan (% of enterprises)
Retail 20%
Service industry 18%
Finance and insurance 1%
ICT industry 1%
Transportation 2%
Education, learning support 3%
Health, welfare 4%
Wholesale 6%
Real estate industry 7%
Manufacturing 11%
Restaurants,
lodging industry 15%
Construction 12%
Source: Derived from Ministry of Internal Affairs and Communications (Japan),
“Establishment and Enterprise Census”, 2006
SMEs in Japan
A new growth driver?
8 © Economist Intelligence Unit 2010
in new vehicle exports suffered by the domestic automobile industry between the third quarter of 2008
and the frst quarter of 2009 caused a decline in production at SMEs of some ¥400bn (US$4.8bn).
1
Similarly, SME suppliers to the major electronics exporters were severely affected due to drop-offs in
exports in that sector. Numerous other SMEs that do business with the major exporters and their suppliers
were hit both directly and indirectly by the knock-on effects of the slowdown.
Many of Japan’s SMEs were carried along by the export-led pre-Lehman boom—and suffered heavily
when it ended. With domestic demand anaemic, can they prosper from new sources of growth, what
challenges do they face in trying to do so, and are the government’s numerous policies to support them
having the desired effect?
1
SME Agency, 2010 White
Paper on Small and Medium
Enterprises in Japan
SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 9
2. Challenges: Finance and human capital
A
lthough SMEs share many of the challenges of larger companies, they are also affected in distinctly
different ways by the same issues. Finance and human capital are at the core of every business and
are the predominant factors that determine whether an SME can break out of the sector to become a
larger enterprise. The experience of SMEs with regard to these two crucial issues is to a large extent what
sets them apart from bigger businesses.
Finding fnance
Rarely having the kind of fnancial reserves that can see them through severe economic slowdowns, SMEs
are typically dependent on banks and other creditors if times get tough. When credit dries up, as it did
during the recent fnancial crisis, SMEs are hit even harder, as lending institutions tend to view them as
higher-risk debtors than large companies.
As lending by major banks plummeted during the recession, the government stepped in with an
Emergency Guarantee Program that increased lending to SMEs from regional banks and state-affliated
fnancial institutions (see Figure 6). Illustrating the vulnerability of much of the sector, a quarter of those
who received these guaranteed loans reported they would have gone out of business without them.
Even during more stable economic times, fnancing smaller enterprises is a challenge. Partly this is due
to risk-aversion at Japanese banks and a reluctance to lend without substantial fxed assets as collateral.
“SMEs tend not to own very many fxed assets,” says Naohiro Nishiguchi, director of the Innovation
Network Corporation of Japan (INCJ)—part of a government revitalisation initiative that draws on public
and private funds to foster next-generation businesses. “The lending system should move towards one that
places more emphasis on the business value of the intellectual property owned by the SME,” he suggests.
Aqua Science Corporation of Yokohama, a manufacturing frm with 22 employees that has developed a
steam syringe device for industrial cleaning used during the process of manufacturing semiconductors,
Key points
n Although many policies have helped SMEs secure fnance through the recent recession, banks’ risk-aversion
and a reliance on fxed assets for collateral put many SMEs at a disadvantage.
n There are positive signs that the workforce is more open to opportunities at smaller businesses, and that
larger businesses can help transfer knowledge through employee loan programmes.
n Policy has evolved to target SMEs as potential growth leaders, with central and local government schemes
promoting entrepreneurialism and innovation. But awareness of many policies among SME owners remains
low.
SMEs in Japan
A new growth driver?
10 © Economist Intelligence Unit 2010
has a business structure that deliberately avoids the ownership of costly fxed assets like factories. The
company’s president, Yoichi Isago, explains that these can pose a serious risk to cash fow given volatile
cycles in the market.
Aqua Science has nonetheless been successful in securing fnancing, partly owing to the strength of
its intellectual property, but it has had to be creative—turning to overseas investors despite its small size.
Mr Isago explains that he has tapped venture capitalists and partners from Taiwan, Korea and the US, as
well as Japan, to secure fnance, based on the strength of the company’s core product. “People saw the
potential market value of the technology in hand,” he says.
One reason for investor confdence may have been because Aqua Science, which was spun off from a US
parent company in 2003, had proven technology and an established business model. But Mr Isago also
compares the risk-averse Japanese mindset with the business culture elsewhere. In Japan, he says, “the
culture is more focused on not making mistakes instead of one that promotes achievements.” Whereas
businesspeople in China, Korea and Taiwan “are committed to their missions,” he says. “They accept risks
for future gains.”
For its part, the government is trying to make credit guarantee requirements for SMEs more fexible,
says Ichiro Takahara, director-general of the SME Agency at METI. He explains that fnancing problems
are multifaceted: SME owners often lack the ability to explain their businesses to potential lenders,
while many private banks are unable to judge the growth potential of the business of SME applicants.
To this end, METI has launched a committee to evaluate accounting standards at SME businesses and is
promoting “relationship banking”, with closer partnerships between SMEs and fnancial institutions.
It has also introduced a training programme for fnancial institutions to study national and prefectural
governments’ SMEs programmes.
The HR conundrum
“The key for growth, whether for Japan [in general] or SMEs, is getting the right human-capital
portfolio,” says Mr Nishiguchi. This may be easier said than done: human resources are always a challenge
for SMEs, particularly in Japan where there has traditionally been a strong bias amongst the workforce
Source: SME Agency, 2010 White Paper on Small and Medium Enterprises in Japan. Reprinted with permission.
17
18
19
20
21
22
23
24
Q4 Q3 Q2 Q1
2009
Q4 Q3 Q2 Q1
2008
Q4 Q3 Q2 Q1
2007
-8
-6
-4
-2
0
2
4
6
Year-on-year change %, right axis Outstanding lending ¥trn, left axis
Figure 6
Outstanding lending to SMEs by government-affiliated financial institutions, etc
SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 11
towards larger, stable employers. But there are signs that this has been changing in recent years.
Scott Callon, president of Ichigo Asset Management, a Tokyo-based investment management company,
believes there has been a shift in attitudes towards start-ups amongst Japan’s workers. He says he found
few problems attracting quality personnel even in the early days of his company.
Keisuke Yui, president of Cubic—a business with eight employees that provides consulting services
to fnancially troubled capsule hotels, as well as running its own new style of “transit hub” hotel in
Kyoto—agrees that there has been a change in the bias towards working for major corporations. But he
concedes that the fnancial crisis has made some more cautious again about taking the risk of entering a
new venture.
In every crisis there lies opportunity, however. Hidemi Kamijima, president of Kamijima Heat
Treatment, a metal-processing company in Tokyo’s Ota Ward with 45 employees, has noted an expansion
of the pool of available labour as a result of the recession. He reports that the adverse employment
conditions are resulting in an increasing number of new graduates—a group currently facing particularly
high rates of unemployment—showing interest in his business.
Another silver lining of the current tough times noted by Kamijima is the Japanese practice of “leasing”
workers (shukko) from bigger companies who are loath to make long-term employees redundant. “This
channel offers a good opportunity for us to get the kind of human capital that is otherwise diffcult for a
small company like ours [to attract]—with an added bonus of only having to pay a part of their pay, if they
are leased,” says Mr Kamijima. (See also the case study below.)
Mr Kamijima has used his personal networks, rather than formal channels, to help his company beneft
from this kind of human-capital transfer. But such benefts may not be open to all SMEs without policy
guidance. Indeed, some interviewees suggest policies that encourage the transfer of human capital may
Case study: Kamijima Heat Treatment—A tradition of
skill
The Kamijima Heat Treatment plant is located in the back streets of
Tokyo’s Ota Ward, known as the city of craftsmanship, or monozukuri
no machi. Like many SMEs in Japan’s manufacturing supply chain,
Kamijima is a niche business built on artisanship, a tradition it carries
on today. As well as the modern vacuum furnaces for metal heat
treatment, Kamijima’s skilled workforce also use the older salt bath
method, a practice that is gradually dying out.
The labour-intensive salt bath method means that productivity
is low, but there is still a need for it when treating larger precision
components, keeping the factory’s 45 employees busy. “We get
orders from all around Japan despite being known for taking time and
being expensive,” jokes the company’s president, Hidemi Kamijima.
The shrinking market and the diffculty of maintaining the high
levels of craftsmanship–it takes decades of on-the-job training
to master the skills–are the major challenges for the specialist
factories in the sector. “Even the heat treatment work that does not
require high-grade skills is coming to us these days as the level of
craftsmanship in other factories is suffering,” says Mr Kamijima.
The company has been able to maintain its skilled workforce
through a fexible approach: taking young interns, investing heavily
in training for existing workers and getting non-manual senior
workers through “leasing” arrangements from larger companies.
Even then, the future is uncertain for Kamijima. Business is only
80% of what it was before the economic downturn, says Mr Kamijima,
and he foresees his niche business increasingly chipped away by
improving machine technology. “The work that can be done by our
craftsmanship only will defnitely shrink,” he says. Nevertheless,
he is hopeful about the company’s new business areas—conducting
experiments on heat treatment for the R&D departments of large
companies, and providing manufacturing solutions to the aerospace
industry through a consortium established by the Tokyo Metropolitan
Government (see p12 and p14).
SMEs in Japan
A new growth driver?
12 © Economist Intelligence Unit 2010
be preferable to ones that merely dole out money. One idea is for salary subsidies (for a limited period)
that could encourage the movement of senior employees from large companies to SMEs, with the added
incentive that to maintain salary levels beyond the subsidy time limit, transferees would have to help
grow the business.
Currently, however, many SMEs must rely on their own small pool of human capital. Mr Nishiguchi
points out that many of Japan’s SMEs are family owned businesses. And while this can be a merit in terms
of the ability to make quick decisions, it can be a drawback if the management draws only on family
resources.
Almost certainly linked to the familial nature of many SMEs, they are making more use of female
and older workers than large enterprises. According to data from the Ministry of Internal Affairs and
Communications Employment Status Survey, SMEs use slightly more female workers, and nearly six times
more workers aged over 65, than big businesses do—a practice that will almost certainly be adopted more
widely given Japan’s demographic challenges.
The evolution of SME policy
Japan’s Small and Medium Enterprise Agency was established in 1948
to promote the sector, and SMEs have been increasingly recognised
by the government as an important sector for the economy.
Nevertheless, despite recent progress made on policies to promote the
sector’s development, many argue more could be done.
On the legislative front, the Small and Medium Enterprise Basic Law
was amended in 1999 to redefne SMEs as a source of economic growth
and dynamism for Japan—a radical shift from the notion of SMEs as
a disadvantaged group, as they were classifed when the original law
was passed in 1963.
Then, in 2003, the law on establishing a company was changed,
allowing a new kind of enterprise, the kakunin kaisha, to be formed for
only ¥1. Until that time, a minimum of ¥10m in start-up capital was
required to start a traditional kabushiki kaisha—the reason the listed
capital of so many companies founded before then was exactly that
amount. The Nikkei newspaper reported that by January 2005, more
than 20,000 such new enterprises had been formed.
The central government took numerous measures to assist SMEs
as they suffered through the recent recession, principally in the form
of loan guarantees and direct assistance through state-affliated
fnancial institutions. In addition, the tax rate for profts above a
certain level at some SMEs (with capital below ¥100m) has been
lowered recently from 22 to 18%—a measure that is due to expire in
March 2011, although the government is looking into extending it.
Although this emergency support was crucial in helping many SMEs
survive, some argue a more considered strategy is now necessary.
Naohiro Nishiguchi, director of the Innovation Network Corporation
of Japan (INCJ), suggests the government needs to commit itself to
foster accelerated growth of SMEs, with a view to transforming them
into new growth engines. He argues that rather than just providing
fnancial assistance for SMEs, the focus should be on breaking what
he describes as Japan’s “vertical hierarchical structure, [to] move
towards a horizontal system where companies of all sizes have similar
access to effective business resources.”
Recognising the importance of the sector, local governments have
begun to take concrete steps to stimulate growth among SMEs, in
particular through industry-specifc and geographical clustering.
For example, in 2009 the Tokyo Metropolitan Government created a
consortium called the Advanced Manufacturing Association of Tokyo
Enterprises for Resolution of Aviation Systems (AMATERAS). This
draws together 10 companies with different engineering expertise
to provide integrated manufacturing solutions for the aerospace
industry in Japan and overseas. Meanwhile, the Fukuoka Prefectural
Government is planning to establish an association to help local SMEs
link directly to their counterparts in Asia, to parts of which Fukuoka is
geographically closer than it is to Tokyo.
Whilst there are also numerous other forms of assistance and
initiatives aimed specifcally at SMEs, lack of awareness of such
programmes is a key problem. Ichiro Takahara, director-general at
the SME Agency, concedes that publicising various support measures
is one of the agency’s biggest priorities. “There are many cases when
people are simply not aware of the available measures,” he says.
SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 13
3. Opportunities 1: Internal balance, external
growth
I
t is obvious that for Japan to engineer a sustainable recovery from its recent recession, its SMEs must
be able to seize opportunities for growth. This in turn means ensuring they have the right internal
structure to scale up their businesses, the ability to tap markets outside Japan as domestic demand
stagnates, and the means to proft from innovation.
This is easier said than done, especially as many SMEs suffer from an inability to marshal their own
resources effciently for growth—particularly human capital. Mr Nishiguchi identifes three sets of
human capital that are vital for scaling businesses up. One consists of the ideas/know-how people
(who typically earn the most respect in many small businesses as masters of their craft). But the other
two—entrepreneurs and administrative support staff—are equally crucial. While maintaining this kind
of balance may seem obvious, it can get lost in the day-to-day bustle of running a small business, when
stepping back to look at the bigger picture may seem an unaffordable luxury.
The importance of maintaining a balance of each type of employee is reiterated by Atsushi Horiba,
the current president of Horiba—a supplier of high-tech analytical solutions to the automotive,
semiconductor, medical and environmental industries that has grown from a small business to a
multinational corporation with over 5,000 employees (see also the case study on p17).
“Pride in craftsmanship is not enough to scale up your business,” says Mr Horiba, who insists a
“balancing act” is the key. He explains how Horiba’s own corporate culture was formerly so focused on the
technology side of the business that it “treated technicians as stars and the others like secondary actors”.
Mr Horiba made efforts to change this, to ensure that the sales and administration personnel were also
valued in the business and had the means to become stars in their own right.
The challenges faced by SMEs reliant on highly skilled, niche craftsmanship are frankly explained by Mr
Kamijima, who acknowledges that the kind of skills necessary for the delicate salt-bath heat treatment in
Key points
n To grow successfully and scale their businesses, SMEs need to balance various types of human capital:
technical experts, entrepreneurs and administrative staff.
n Cooperation, even between apparent rivals in the same feld, can be a key to growth and can help overcome the
potential hurdle of limited resources.
n With a shrinking domestic market, Japanese SMEs must internationalise. While some are seeking to leverage
external markets, in general they have been comparably slow in making this shift.
SMEs in Japan
A new growth driver?
14 © Economist Intelligence Unit 2010
which his company specialises are increasingly being threatened by more modern methods. “Retaining
craftsmanship is important but not suffcient to sustain business,” he says, echoing Mr Horiba.
To overcome the potential hurdle of limited resources and avoid getting too narrowly focused on in-
house technical skills, Mr Horiba advises SMEs to actively look for alliances with other companies, even
competitors. Japan’s larger corporations—sometimes apparent rivals from the same felds—have a long
and deep tradition of cooperating with each other in a variety of different capacities; a practice that SMEs
could emulate to their beneft.
“Becoming a part of a win-win team is particularly important for SMEs,” says Mr Horiba. Recalling,
with some pride, when Horiba forged a technical alliance with Hitachi back in 1959, he describes the
arrangement as being between “a fea and an elephant, but on an equal footing.”
Kamijima, for its part, has benefted from joining a consortium of businesses launched in 2009 by
the Tokyo Metropolitan Government—the Advanced Manufacturing Association of Tokyo Enterprises
for Resolution of Aviation Systems, or AMATERAS. This draws together 10 companies with different
engineering expertise to provide integrated manufacturing solutions to the aerospace industry—both in
Japan and, importantly, in key overseas markets.
The importance of internationalising
In light of Japan’s persistently sluggish domestic economy and demographic profle—with an ageing and
shrinking population—its companies, including SMEs, should be making the most of growth opportunities
outside their domestic market. To be sure, many are doing so: Aqua Science’s Mr Isago explains his
company takes a “borderless approach”, taking advantage of the fast-moving and enticing growth
markets in Asia’s developing markets in particular.
Indeed, many of Japan’s SMEs have come to rely more on international markets. While exports account for
a lower percentage of sales at SMEs than at larger enterprises, the rates of export growth in the years running
up to the Lehman Shock was actually faster at smaller frms. According to Bank of Japan fgures, exports
accounted for 4.4% of SMEs’ sales in 2002, but this had risen to 7.4% by 2008. Large enterprises saw their
exports grow from 23.7% of sales to 27.8% over the same period. In sales volumes, SMEs saw exports double
to ¥5trn (US$60bn) while those for big companies grew a more modest 37% to ¥71.6trn (US$860bn).
However, in comparison with their counterparts in other developed economies, Japanese SMEs are
laggards in terms of internationalisation. A recent report on the internationalisation of SMEs by the
European Commission (EC)notes that despite an identical correlation in the EU and Japan between size of
company and the degree to which it is internationalised, the level of international activity by EU SMEs is
“considerably higher” than by their Japanese counterparts.
2
According to the EC report, some 58% of EU SMEs that employ between 101 and 250 people export,
compared with 30% of Japanese SMEs in the range of 101-300 employees (Figure 7). (More recent data
cited by the SME Agency, post-fnancial crisis, show only 18.4% of Japanese SMEs of 201-300 employees
export, with lower proportions in all smaller enterprise sizes.
3
)
One obvious explanation for this discrepancy is that European SMEs have the beneft of trading within
the rich and proximate EU internal market. But even excluding those that trade only within this market,
2
European Commission,
Internationalisation of
European SMEs, 2010. This
defnes “internationalised” as
“either exporting, importing,
investing abroad,
co-operating internationally,
or having international
subcontractor relationships”.
3
SME Agency, 2010 White
Paper on Small and Medium
Enterprises in Japan
SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 15
Source: European Commission, Internationalisation of European SMEs, 2010
0
10
20
30
40
50
60
101 up to 300 employees (up to 250 for Europe) 21 up to 100 employees Up to 20 employees
Japan EU27 extra Internal Market trade EU27 all export UK only
Figure 7
SMEs engaged in export in Japan and the EU, by size
(%)
and including the UK, which shares some characteristics with Japan of a large island economy—albeit one
that enjoys EU trade privileges—shows a similar discrepancy. Figures for FDI are comparable: in the EU27
even of enterprises up to 20 workers, some 2% invest abroad, whereas in Japan this is only 0.3% (Figure
8).
Source: European Commission, Internationalisation of European SMEs, 2010
0
5
10
15
20
25
101 up to 300 employees (up to 250 for Europe) 21 up to 100 employees Up to 20 employees
Japan EU27 UK only
Figure 8
SMEs in Japan and the EU that invest abroad, by size
(%)
Given Japan’s shrinking domestic market, the relatively lower internationalisation of its SMEs is a
cause for concern, especially considering the opportunities that Asia’s burgeoning economies present.
While some Japanese SMEs like Aqua Science have not been afraid to dive in, many are not ready to
take the plunge, regardless of the opportunity. According to the SME Agency’s research, SMEs that
are reluctant to globalise cite lack of access to information about overseas markets, lack of capable
management resources in Japan, and diffculty securing fnancing as the main reasons (excluding the
excuse that they are preoccupied with the domestic market).
4
Another issue is that of language. Despite considerable resources dedicated to foreign language
learning in Japan, the average level of English remains signifcantly lower than in many comparable
4
Ibid.
SMEs in Japan
A new growth driver?
16 © Economist Intelligence Unit 2010
countries. As Ichigo’s Mr Callon—a fuent Japanese speaker—concedes: “There can be a language issue:
there isn’t as deep a pool of English speakers in Japan as there is in Hong Kong or Singapore.” However,
he maintains it is possible to get a workforce internationally functional, “because there are a lot of
incredibly hard-working and dedicated Japanese with a solid educational background in English.”
The government is certainly aware of the need to get Japan’s SMEs to internationalise. Mr Takahara of
the SME Agency notes that competition is increasing for SME manufacturers that produce high-quality
niche products, requiring that many businesses face up to the global dimensions of the international
economy. He also concedes that while Japan’s manufacturing SMEs have tended to focus on the technical
quality of their products, they have not made the most of international markets. “It’s diffcult to earn with
equipment [alone],” he says. “We have a weakness in system exports. For this, we can learn a lot from
countries like Germany, France and Korea.”
Currently the government offers internationalisation assistance to SMEs via several channels,
including Japan Chambers of Commerce, JETRO, the Organisation for Small and Medium Enterprises
and Regional Innovation, as well as offering direct funding assistance for some overseas operations
(for instance via the Fiscal Investment and Loan Program). Yet, as mentioned above, lack of awareness
and complicated application procedures hinder the take-up of such programmes. According to research
commissioned by the SME Agency, only 39% of Japanese SMEs that are globalising have used any
globalisation assistance (including government and private-sector support).
SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 17
Case study: Cubic—Small hotels, big ambitions
Cubic, a small Tokyo-based capsule hotel business with just eight
employees, may not be the stereotypical SME in that it has used
lessons learned in turning around its own business to give advice to
other struggling hotels. But it is atypical in other ways—including its
president’s international ambition and commitment to innovation.
Having enjoyed working in venture capital, Keisuke Yui came to
the capsule hotel business reluctantly when his father passed away
unexpectedly just over a decade ago. His father’s business had,
unbeknownst to him, accumulated debts of ¥500m (US$6m). After
the bank greatly reduced the debt in a refnancing arrangement as
part of the mass disposal of non-performing loans taking place at
the time, Mr Yui was able to see a way out.
He turned the business around, “mainly by improving the
service, and targeting women and overseas guests,” and paid off
the debt. He then put the know-how he and his staff had acquired
to use by sending them to struggling capsule hotels. Now Cubic has
consulting contracts with a number of hotels, on a no-results no-
fee basis, whereby the operators don’t pay unless their earnings rise
above a certain point.
Mr Yui also developed a vision for transforming the capsule hotel
into a new category of accommodation with high-end service and
amenities, stripped down to the bare essentials. The frst of these is
the 9h (“nine hours”) hotel in Kyoto, which opened in 2009.
Despite the small size of his operations, Mr Yui is already frmly
focused on expanding his vision beyond Japan. Having attracted a
good deal of global media interest for the sleek minimalist design
of his frst “transit hub” hotel, he is currently talking to potential
partners in locations including London, Rotterdam, Moscow, New
York and Hong Kong.
However, to expand into an international operator, he expects
to have to form a new company with partners such as property
companies taking a stake in the business. “This is still essentially a
family company, with shares held by family members,” says Mr Yui.
“There’s a limit to how far that kind of company can go.”
Case study: Horiba—From SME to titan
Since its establishment in 1945 by Masao Horiba (the current
president’s father), while he was still a student, the Horiba Group
has grown steadily to become a multinational giant. With its roots
in scientifc research, the company makes high-tech instruments
and systems for manufacturing, healthcare, R&D and environmental
monitoring across 37 companies in 22 countries. The group now has
over 5,100 employees and in 2009 had sales worth US$1.24bn. As a
former SME that went global, Horiba offers some useful lessons.
Atsushi Horiba, the current president, explains that while the
company was built on craftsmanship, its entrepreneurial spirit
drove it to look for markets far beyond its base in Kyoto from its
early days. As well as establishing its own operations overseas,
Horiba expanded through a series of acquisitions of foreign
companies. Mr Horiba says the company’s aggressive stance in
moving abroad has allowed it to enjoy the frst-mover advantage
that in turn has enabled the company to excel in Japan and globally,
despite its relatively small size.
At Horiba, differences that are often seen as risks in Japan’s
corporate culture are affrmed as virtuous diversity. “Japanese
companies tend to be too homogeneous. Just like pure gold is
soft and susceptible to damage, homogenised organisations can’t
endure even a simple impact,” Mr Horiba suggests. He thus not
only manages various nationalities, but also insists on sending
his Japanese employees abroad to give them opportunities to
“experience differences and the related challenges of dealing with
unfamiliar things—something they would tend to miss out if they
were to remain in Japan.”
Currently around 3,000 of the group’s 5,100 employees are
non-Japanese, including the heads of three of its four key business
divisions. In addition, 90% of the board members, 30% of the
management and 15% of non-managerial Japanese employees have
in-depth experience abroad, with overseas stints of between three
and 20 years.
Another key to growth is the willingness to take risks. “Corporate
capacity depends on willingness to make mistakes or take risks, and
the company’s ‘regenerative strength’; its ability to turn failure into
success,” Mr Horiba says. This attitude helps keep innovation alive.
“Delivering a hit [innovation] at the frst attempt rarely happens.
Even for us, with good human capital, technical know-how and a
global network, the success rate is around 20-30%,” he concedes.
SMEs in Japan
A new growth driver?
18 © Economist Intelligence Unit 2010
4. Opportunities 2: Innovation and technology
“A
s in any country, up-and-comers like SMEs tend to be drivers of innovation and change, so they’re
extraordinarily important for the economy,” says Ichigo’s Mr Callon. Indeed, smaller companies
are generally expected to be more innovative and nimble than big lumbering corporations. However, data
show that while Japan as a whole continues to lead the way in R&D, its SMEs are investing proportionally
less in innovation than those in other countries.
According to the OECD’s Science, Technology and Industry Scoreboard 2009, Japan invested 3.4% of its
entire GDP in R&D in 2007—the highest level amongst the G7 nations and well above the OECD average
of 1.9%. In fact, Japan accounted for around 20% of all the growth in R&D spending in OECD countries
between 1997 and 2007. And while 78% of R&D in Japan is fnanced by private business—compared with
an OECD average of 54%—SMEs accounted for only 6% of this, one of the lowest shares in the OECD area.
Another study by the OECD that aggregates data on the innovation performance and policies of SMEs
in its member states similarly shows Japan lagging its peers in all aspects of innovation (Figure 9). These
fndings should be a major concern for a sector that is expected to be a future growth engine for the
Japanese economy.
The International Monetary Fund’s Japan Country Report 2010 sheds some light on the causes of this
discrepancy between the healthy R&D spending of the country as a whole, and the low share occupied by
SMEs. The study found that, “For larger frms, manufacturers and exporters, R&D spending is driven by
proft expectations and not affected by cash fow or fnancing structure.” But for SMEs, service-sector and
non-exporting frms, “fnancing constraints hinder R&D spending, and, by extension, innovation”.
5
The
diffculty faced by Japan’s SMEs in accessing fnance during times of economic uncertainty is undoubtedly
going to have repercussions for future innovation and growth.
The government cannot be faulted for a lack of policy options to stimulate innovation at SMEs: the
OECD notes the presence of 17 programmes to encourage small business innovation, including research
Key points
n While Japan as a whole spends a lot on R&D in comparison with other developed economies, its SMEs do not.
Lack of access to fnance and risk-aversion are major reasons.
n Government policies to support innovation are plentiful—but poor publicity and complicated application
procedures hinder their adoption.
n Putting in place the means to commercialise intellectual property—both within Japan and in foreign
markets—is crucial.
n Focusing on Japan’s cultural strengths—such as high service standards—could be fruitful for SMEs looking to
differentiate themselves in an increasingly competitive global marketplace.
5
IMF, Japan: Selected Issues,
IMF Country Report No.
10/212, July 2010
SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 19
and development support through subsidies or contract grants, and support for technological application
development, such as patent fee reductions, loan guarantees, capital investment loans and loans for
facilities.
However, in common with other support measures for small businesses, part of the problem is not
so much lack of policy options as low take-up of those on offer, whether as a result of low awareness or
because SME owners fnd the application procedures onerous. The OECD notes in its summary of Japan’s
SME innovation policies that its programmes “suffer from a lack of applications, and [have] been found to
be administratively diffcult to implement. In particular the methods of application are too complex.”
6
Mr Isago of Aqua Science agrees this is a problem. “Public measures may be available but access is
bad,” he says, citing diffculty in fnding information, a lack of fexibility in eligibility and burdensome
application procedures—topped by lack of clarity in decision-making. “I want to know who is saying and
ensuring that Japan is going to be the innovation-oriented nation,” he says.
Driving SME innovation
Money alone, even with plentiful government support, cannot drive invention or conjure the
entrepreneurial spirit needed for starting and growing new ventures. Japan is often characterised as
having a very risk-averse culture, though this would appear to stand in stark contrast to the actions of its
companies that became global leaders in the second half of the twentieth century.
“Innovation is really the only thing,” suggests Cubic’s Mr Yui: “You can’t just keep moving forwards
with kaizen,” referring to the Japanese notion of continual gradual improvement, which has been a
corporate mantra at giants like Toyota. “At some point things have to shift to a completely new platform.
That’s innovation.” Though Mr Yui believes any number of companies have the potential to be “game
changers”—for instance in the electric vehicle sector—he thinks that the lack of a “Silicon Valley-type
community of venture capitalists” willing to take risks on new ideas hampers innovation in Japan.
Mr Nishiguchi of the INCJ also suggests that while there are plenty of inventions and inventors in
Japan, the kind of innovation required to commercialise intellectual property (IP) is lacking. “The
situation is detrimental to growth,” he says simply.
Note: Data is percentage of respondents in national SME surveys: France 2005-06; Germany 2004-06; Japan 2002-04; South Korea 2002-04; UK 2007.
Source: Derived from OECD, SMEs, Entrepreneurship and Innovation, 2010
0
5
10
15
20
25
Product innovation Process innovation Firms with new-to-market
product innovations
Firms collaborating
on invoation activities
France Germany Japan UK South Korea
Figure 9
Innovation performance of SMEs
(%)
6
OECD, SMEs, Entrepreneur-
ship and Innovation, 2010
SMEs in Japan
A new growth driver?
20 © Economist Intelligence Unit 2010
Mr Nishiguchi believes that Japan must learn not only to develop and fnd global markets for its own
IP, but look for it abroad and bring ideas back to be commoditised at home. “Countries that just nurture
IP won’t beneft from tax income or employment,” he concludes. This is essentially what Aqua Science
Corporation’s Mr Isago accomplished. Leaving the US frm he was working for, he persuaded them to let
him take technology that the company had ceased developing. Having focused on R&D for the past eight
years, he is now taking the technology out to the global market.
Mr Callon doesn’t believe Mr Isago is one of a kind, or that the country suffers from a lack of
entrepreneurial spirit. “There’s overwhelming human talent in Japan, but sometimes it’s trapped by
bureaucratic restrictions; we need to think how to allow that talent to fourish in more entrepreneurial
ways,” he says. Mr Callon suggests that, despite improvements, barriers to entry for new companies and
higher penalties for failure are what hold many entrepreneurs back. The fact that Japan ranks 98th of
183 economies for starting a business in the International Finance Corporation’s latest “Doing Business”
rankings suggests how diffcult it is for Japan to beneft from its entrepreneurial talent. (It ranks frst for
closing a business, however.)
7
Mr Callon also points out that the labour market can still be infexible. “In other countries you can try
a start-up at 32, and if it doesn’t work out then you can go and fnd a job. Here, if you start up and fail,
there’s a much smaller mid-career market. The risks of failure are just so much higher.”
To be sure, technological advances have helped to bring down barriers: for even the smallest
enterprises, connecting with business partners, clients or customers from a wide geographical area is
now so common as to be unremarkable. Mr Callon points out that the growth of the Internet has also
greatly reduced costs for advertising and communications for SMEs. “The ability now to put up a webpage
at almost no cost means start-ups have far greater ability to acquire customers and grow their businesses
compared to ten years ago” he says.
As well as help reach broader domestic audiences, IT can help SMEs that have expanded internationally
manage their subsidiaries. Masato Yamaji, president of the Sanwa Dengyo Group, a plant engineering
business with 260 employees headquartered in Kagawa prefecture, explains how the group uses an
innovative Internet-based system to ensure close co-operation between staff in Japan and in the
company’s subsidiaries in China (see the case study on p21).
There may be other ways for Japan’s SMEs to move forward, without relying only on technology. Mr
Yui doubts that focusing on areas already dominated by multinational tech companies will be fruitful—“I
think trying to do that is like playing Othello when you’re already boxed-in,” he says. Instead, he suggests
Japan should look to its cultural strengths, such as attention to detail and high standards of hospitality
as the basis for new ventures. “The level of service in Japan is so high that even what is regarded as
normal here translates as very high-end by global standards.”
Although this may sound predictable from someone attempting to create a new category of hotel,
Horiba’s president suggests something similar in his own high-tech feld. Mr Horiba says the company’s
ability to service its clients is becoming ever more important as product differentiation narrows: “The
Japanese way of doing business that values trust and reliability, for instance, has a lot of potential.”
7
IFC, Doing Business 2011,http://www.doingbusiness.
org/data/exploreeconomies/
japan
SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 21
Case study: Sanwa Dengyo—The China connection
Masato Yamaji is the second-generation boss of the Sanwa Dengyo
Group, a plant engineering business headquartered in Kagawa
Prefecture, with 260 employees across the group’s seven companies.
Like many frms in Japan, Sanwa is facing the challenge of a mature
and shrinking domestic market. The market has declined “by more
than half” compared with the boom times before the bursting of the
economic bubble. Survival now depends on fnding new markets,
whether through innovation or going overseas, while fnding ways to
slash costs.
Typically the plant-engineering business in Japan relies on
domestic demand, Mr Yamaji says, with most SMEs reluctant to
investigate opportunities abroad. Choosing to adopt a proactive
approach, however, he decided to shift some of the group’s
operations to China more than nine years ago, despite concerns
about the risks of technology and know-how being leaked to local
competitors. By capitalising on the company’s strength in IT,
Sanwa Dengyo has established a system whereby the engineers in
Japan can use online tools to closely liaise with and manage the
staff in China who programme the factories’ automated systems
and design plant facilities. Moreover, the system also allows young
Japanese engineers to train and manage staff—a way of giving them
management experience before they might normally obtain it.
The company’s early presence in China has also led to its securing
contracts for the maintenance and modifcation of Japanese
companies’ local plant facilities. This is an area of business it is
seeking to grow further, leveraging “the sixty years of track record”
it has in Japan. While Mr Yamaji describes this side of the business
as “high-risk and low-return”—meaning the group’s domestic
competitors are unwilling to do it—he suggests the company is
not in a position to be choosy about the kind of work it takes on.
“We will fnd a way into the future, even if it means taking on work
nobody else wants to do.”
SMEs in Japan
A new growth driver?
22 © Economist Intelligence Unit 2010
5. Conclusion
T
here’s no doubt that Japan’s SMEs were hit hard by the global recession, or that they were having a
tough time even before then. Many have not yet recovered. But for those that survived the fnancial
crisis, there should be some consolation in the fact that conditions are unlikely to get that bad again
soon.
However, there is little room for complacency, and business sentiment amongst SMEs remains negative.
The sector, so vital to the Japanese economy, needs support and nurturing if it is to be a future driver of
growth. Aside from its vital role as a supplier to Japan’s big brand names, next-generation innovation and
future corporate giants are expected to emerge from its ranks.
“I don’t look at it as we have a problem,” says Ichigo’s Mr Callon. “I look at it like we have a vibrant SME
class: let’s keep it that way, let’s grow it.”
Policy initiatives and reforms have lowered barriers to entry, and there is more increased support
and advice available. But the consensus from interviewees for this report is that more can be done. In
particular, better promotion of existing programmes, as well as more convenient access to them, is
needed—as even those administering the initiatives acknowledge.
As for growth prospects, the doubling of SMEs’ exports in the six years before the recession hit shows
that they have been globalising—though not to the extent of their counterparts elsewhere. While they
may not yet have to follow the lead of clothing giant Uniqlo or internet marketplace Rakuten in making
English their internal language, a more international outlook is clearly needed.
Creativity is something that every SME needs and no government programme can provide. As some of
the case studies in this report have shown, even hardships can provide opportunities. SMEs need to be
creative in everything from their product development to fnancing to human resources. Japan also needs
to fnd new ideas from abroad to commercialise here, rather than have some of its best technologies
leveraged by other countries.
SMEs in Japan
A new growth driver?
© Economist Intelligence Unit 2010 23
Innovation may come in the felds of service, design or retailing, rather than just technology, but in
whatever arena it is vital if the SME sector, and therefore Japan, is to prosper.
Whilst every effort has been taken to verify the accuracy
of this information, neither The Economist Intelligence
Unit Ltd. nor the sponsor of this report can accept any
responsibility or liability for reliance by any person on this
report or any of the information, opinions or conclusions
set out herein.
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