Legislative initiatives for SMEs have altered dramatically over the decades. In the 1960s, when these policies were initially passed, most SMEs were defined as disadvantaged groups. However, this perception changed tremendously in the late 1990s when the government recognized that small and medium enterprises were a crucial driver of the economy (EIU 2010).
Uchikawa (2009) adds that the changes in basic law in 1999 were designed to promote vigorous growth. Currently, the law focuses on competition and innovation, which is partly because of a 2005 law that focused on promoting innovation in start-ups.
In order to determine some of the support structures or policies that enable SME start-ups, it is essential to look at certain macroeconomic factors. UNESCAP (2011) found that Japan is ranked 27 with regard to economic freedom, which is a relatively good position.
In this index, a number of components are quite relevant to SME development in the country. They include the influence of government in business, legal enforcement of contracts, regulation of barriers to trade as well price controls. The index also contains elements about payment of bribes, existence of license restrictions as well as requirements for recruiting and dismissing employees.
The economic freedom index is indicative of the policies that support productivity in a country. Therefore, since Japan is doing relatively well, then one might assert that many SMEs find the economic environment conducive for doing business.
EIU (2010) also talks about other measures designed to assist SMEs to weather difficult environmental conditions. For instance, to deal with the economic recession, the government introduced tax reductions for SMEs that have a capital of 100 million Yen by 4%. However, this policy was short-term oriented as it expired in 2011.
In additional to provision of financial assistance, several policies are designed to assist SMEs in locating markets for their products. Uchikawa (2009) reiterates these sentiments by highlighting the role of local governments in achieving this goal. A case in point is the Tokyo Metropolitan government, which brought together a number of SMEs with engineering orientation.
These companies were then linked to aerospace companies in Japan and the international market. JSBRI (2012) also adds that several provisions exist for non-financial policies. It highlights policies such as those that govern subcontracting transactions. The government passed a Subcontractor Payment Act that was designed to protect SMEs against unfair subcontracting transactions.
The government has also partnered with SMEs to assist them in locating subcontractors who want new partners. This is a large incentive for those interested in pursuing the subcontracting business model. JSBRI (2012) also notes that the government is currently assisting many small and medium enterprises that source their markets from the public sector.
The government has established a contract policy targeting local governments and other representatives of the public sector that can do business with SMEs. Additionally, businesses can access consultation services on management in order to ensure that they can handle external environmental factors.
These services are available through advice centres found in the Japan Chamber of Commerce and Industry. Japan has an Act known as the Industrial Revitalization Special Measures Act. It helps revitalise SMEs prior to their collapse. What these policies indicate is that a lot of support structures exist for SMEs during operations, when carrying out transaction or even when in need of revitalisation.
These initiatives send the message to entrepreneurs that that they have a government that supports them, so it encourages many to pursue SME ventures.
Government policy support for SME start-ups has been dynamic and ever-present. EIU (2010) notes that even though the Japanese government’s support structures are quite impressive, most potential SME owners do not know about the existence of those programmes. A need exists for awareness-raising among the public.
Another problem identified by one of the research participants in the Economic Intelligence Unit (EIU) research is inequality in access to business resources. This stems from the vertical hierarchal structures prevalent in Japan’s business communities (EIU 2010).
Main industries in which SME start ups occur
Most literature on starting SMEs also identify the common sectors in which one is likely to initiative their ventures. EIU (2010) found that most Japanese SME start-ups occur in retail with about 20% of these companies belonging to the sector. Additionally, it was found that the second largest number of SMEs is in the service industry, including the hotel or restaurant industries.
While Japan is famed for its manufacturing endeavours, start-ups in thus sector represent 11% of all SME initiatives. Therefore, manufacturing SME start-ups are position five in the list. Construction related firms represent 12% of all new SMEs while real estate, wholesale, health, education, transportation, ICT and finance represent the least amount of SME start ups in that order. It should be noted that some SMEs may belong to sectors that represent less than 1% of the total start-ups in this category.
However, the government still has instated plenty of initiatives to support those institutions. These groups include agriculture, forestry, fisheries, the transport industry (including railways and sea transport), and environmental sanitation businesses. Such SMEs enjoy IT deployment, financial and infrastructural support from the government.
METI (2010) explains that low representation from the manufacturing sector stems from the export orientation of most Japanese producers. The global economic recession has taken a toll on their survival in the industry. Additionally many of them cannot turn to the local economy because it is not that promising.
While information about major industries is available, it is imperative to identify new areas for SME growth, especially in declining industries. Few studies have been done in this aspect, so researchers ought to fill that research gap. Additionally, more research should be done on the numerous SME government policies in Japan. It is essential to determine whether they respond to industry demand and changes that have occurred over the past few years.
SME start-ups may also be classified on the basis of the clusters to which they belong. These organisations often concentrate on certain regions or industries in order to meet their need. They may organise themselves around company towns, production regions, mixed urban or invitation clusters.
For instance, Toyota City has witnessed the development of several SMEs designed to meet the needs of the firm. Usually, these organisations will work hand in hand with Large Enterprises that are their main clients (Uchikawa 2009). However, EIU (2010) notes that this approach is not working well for new SMEs.
Consequently, a new approach ought to be sought. Mixed invitation clusters include those sectors where industries come together in order to take advantage of certain aspects of production like cheap labour. These clusters may not have much in common. Uchikawa (2009) affirms that imports from China are making cheap goods from Japan uncompetitive. Therefore, new ways of clustering must be sought.
The research on SME clusters is clear; however since emerging trends have declared older models uncompetitive, it is vital for researchers to study new patterns of industry clusters. More literature is needed in examining the way forward for SME collaborations.
Financial backing and support for SME start ups in Japan
BOJ (2004) explains that SMEs heavily rely on loans for capital needs. However, these organisations have been experiencing difficulties in fund raising owing to a number of challenges. Estimates indicate that SMEs have higher debt than large corporations, so banks tend to trust the latter than the former.
When compared to large enterprises, financial institutions’ attitude towards lending to SMEs has always been much worse for them than for bigger companies. BOJ (2004) explains that part of the problem stems from the SMEs themselves. Many of them are not transparent with financial institutions.
This creates information asymmetry in the sector. Additionally, a number of SME entrepreneurs lack collateral needed to secure bank loans. EIU (2010) add that many potential SME owners do not have the skills needed to describe their businesses to lending institutions. Additionally, their financial projections or accounting practices do not assist banks in assessing their growth abilities. As a result, most potential entrepreneurs loose out on local financial support.
BOJ (2004) also believes that the banks are not faultless. Most of these institutions heavily depend on land as the only collateral. Consequently, when the price of land goes down, then the value of the collateral diminishes and they end up with non performing loans. EIU (2010) suggests that forging relationships with banks and SMEs is the solution to this problem. BOJ (2004) reiterates that that the key strategy for solving this problem is creating middle risk lenders that would meet the needs of middle risk institutions.
These lenders would consider the probability of future cash flows, public guarantees or any other collateral that is more easily available than land. It is the intellectual property of the SME that should be considered rather than the fixed assets. EIU (2010) disagree with the above concerning the key reason behind reduced lending to new SMEs.
They believe that it is the global economic crisis that has dried up credit in most institutions. UNESCAP (2011) also agrees with the latter author by stating that as credit became rationed, more lending institutions focused on established firms. Therefore, businesses that really needed funding, like new SMEs, lost this financial support. Consequently, banks have become more risk averse. However, EIU (2010) concur with BOJ (2004) on the strict lending criteria in most banking institution, which peg on availability of fixed assets.
EIU (2010) also suggests that banks can train their staff concerning SME programmes. This would provide them with a stricter basis for assessment of SME potential and hence their credit risk. UNESCAP (2011) believe that the government can ensure regulatory structures support SME financing. They can also work on improving scoring services in order to ascertain that the costs of financing SMEs are well understood.
BOJ (2004) also echo these sentiments by stating that banking institutions need to have comprehensive and well-integrated scoring infrastructure in order to deal with the information asymmetry that exists in the current banking climate.
UNESCAP (2011) also add that governments can support SME start-ups’ access to capital through the use agencies; for instance, some can specialise in transaction registries. JSBRI (2012) states that the Japanese government has started working on such agencies; although, the effect of such initiatives is yet to be seen in the market.
Since many new SMEs cannot count on traditional financial institutions for capital, many of them are looking to international investors for new opportunities. They are securing investment on the basis of their intellectual property. EIU (2010) explains that some businesses look to Korea, Taiwan and China for investment because their cultures welcome risks.
The Japanese mindset revolves around mistake avoidance rather than growth and risks. UNESCAP (2011) believe that many SME start-ups depend on personal loans for financial support. They turn to their friends, family or colleagues to develop. Nonetheless, the above writers also state that this form of financing is not always present. When external economic constraints, like the global credit crunch, enter the picture, even informal avenues of finance can dry up.
Overly, Japan has a capital access score of 7.07out of 10, and is ranked 15th out of 122 in terms of this parameter (UNESCAP 2011). While such numbers may seem impressive, they only reflect a general picture. The country has a relatively high level of access to capital but most of it does not go to small enterprises, especially those that are just starting up.
The literature shows that, compared to large enterprises, SMEs find it relatively hard to get capital financing. Authors differ on the key reasons behind these observations. Some say that it is the risk-averse culture of the Japanese; others believe it is overreliance on fixed assets for collateral that is the main inhibitor. Some writers claim that external factors like the credit crunch are to blame.
Alternatively, others believe it is poor information asymmetry that has caused the problem. Little research exists concerning informal access to capital for SMEs. Therefore, future scholars should explore this area as it is a crucial source of finance for new SMEs in Japan.
Key patterns, trends and developments in starting SMEs
Uchikawa (2009) states that entrepreneurs’ incomes have been declining since the 1990s. Consequently, self employment is not as attractive as it used to be prior to those declines. Additionally, the young generation is also loosing interest in this business model because it has more confidence in the formal employment sector.
As a result, many SMEs are operated by old entrepreneurs who lack successors. During the 80s and 90s, new SMEs were started by people in the 30s who had minimal education and no prospects for finding work. They turned to self employment because they had no alternative. One may, therefore, assert that the number of new SMEs is reducing in Japan.
China is becoming the manufacturing capital of the world. Several multinationals have realised the cost efficiencies of operating in such a climate, including some manufacturing firms in Japan. Therefore, small manufacturing enterprises that had set up their businesses around major organisations like Toyota are finding it hard to compete with component manufacturers in China. As a result, few new SMEs are developing in these sectors (EIU 2010).
Japan has achieved a gender balance in terms of the kind of people who start new SMEs. From 2007, more women than men were responsible for the creation of new SMEs. In that year, females represented 5.2% of all small and new entrepreneurial activity while males only represented 3.5% (UNESCAP 2011).
The demographic figures have been maintained to date. Ample presentation of the genders indicate that Japan has exerted a lot of effort in educating the masses about engagement of all demographic groups in business. JSBRI (2012) also back this assumption by reiterating the government’s support for female-centred SME ventures. Several financial and non financial programs exist for female entrepreneurs in the country.
In the past, one was likely to encounter problems in acquiring new employees when starting a new SME venture in Japan. Many workers had a bias towards larger institutions. Nonetheless, EIU (2010) affirms that this pattern is changing dramatically. Most SME owners can easily access quality workers even during start ups.
Some of the participants in the interviews conducting by the researchers in the article accredit this change to the financial crisis. Large companies were heavily hit by the recession, so a number of them had to let go of good employees. This made employees aware of the fact that large enterprises were not indestructible.
On the flipside, some respondents believed that employees had no choice but to look for work in smaller organisations, even though they were just starting up. Some entrepreneurs claim that the recession led to a sharp increase in unemployed graduates who had to turn to SMEs for work (EIU, 2010) & (UNESCAP 2011).
The literature indicates that some inconsistencies exist concerning the rising availability of workers for SME start-ups. Consequently, more research should be done to establish the main drivers of this pattern. Doing so would clarify whether such a pattern is only short term or whether SME owners can count on it in the future.
In close relation to the above trend is the leasing of workers, known as Shukko. New SMEs in need of high quality human resources can lease workers from large companies that have excess numbers but do not want to lay off their employees. New SMEs benefit by getting employees that they would not have a chance to access while large corporations benefit by holding on to their valued workers. They also get some monetary income on the side (EIU 2010).
Growth opportunities
JSBRI (2012) believes that many new SMEs should develop in traditional industries that have programmes and incentives designed to support them. Industries such as fisheries and the environment should be ceased as potential industries to initiate new SME ventures. Conversely, EIU (2010) says that the future for new SMEs lies in internationalisation.
Domestic demand has stagnated for a while; therefore, new SMEs should look towards external markets. In order to achieve this, entrepreneurs should learn about overseas markets, the government should provide exporters with management resources needed to enact transactions.
Furthermore, it is imperative to learn English, French or other foreign languages in order to facilitate communication between SMEs and their source markets. JSBRI (2012) illustrate that the government, through various channels, is already establishing programs that will help SMEs globalise.
SMEs can also consider altering their managerial approach when conducting business, which may require a cultural reorientation. Several Japanese organisations give precedence to technical aspects of business but ignore other components that are crucial to success; such as, management and marketing. Companies ought to consider balancing technical work with other aspects. Scaling up would require less focus on craftsmanship and more on the business aspects (EIU 2010).
Research gaps and inconsistencies
Some inconsistencies and gaps were identified from the literature. For instance, little is known about how SMEs can be informed about the numerous government programs in place. Also researchers have not studied how new SMEs can revamp declining industries or how they can form new industry clusters.
Few authors have studied whether government-led SME incentives are working. Inconsistencies on the reasons behind low capital access and high availability of employees should be clarified. More research is also needed on why new Japanese SMEs are not internationalising.
It is likely that these inconsistencies stem from the nature of research employed as well as the time frame of the research. EIU (2010) conducted a series of interviews among a few key players in the Japanese SME sector. Some were entrepreneurs while others represented agencies that work with SMEs.
They also relied on case studies. This explains why their responses were highly inconsistent. It would be more effective to carry out a survey, or at least increase the sample size. BOJ (2004) heavily relied on data collected from lending institutions, so their research findings were quite solid.
JSBRI (2012) collected aggregate economic data, financial and demographic data on key SME traits. They used it to make projections on current patterns.
It is likely that their short-term focus limited the applicability of their findings. METI (2010) carried out a comprehensive survey on SMEs, so their research methodology has minimal flaws. Conversely, UNESCAP (2011) and Uchikawa (2009) relied on secondary materials, which have their own imperfections. It would have been insightful if they did their primary research.
References
BOJ 2004, SME financing in Japan and the BOJ’s action plan. Web.
EIU 2010, ‘SMEs in Japan: A new growth driver?’ The Economist, December, p. 1-15.
JSBRI 2012, White paper on small and medium enterprises in Japan. Web.
METI 2010, White paper on small and medium enterprises in Japan. Web.
Uchikawa, S. 2009, SMEs under recession in Japan. Web.
UNESCAP 2011, SMEs in Asia and the Pacific. Web.