SMEs in Japan: A new growth driver?

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SMEs in JapanA new growth driver?

A report from the Economist Intelligence Unit

Sponsored by

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© 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

Findingfinance 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

DrivingSMEinnovation 19

Case study: Sanwa Dengyo—The China connection 21

5. Conclusion 22


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.Thefindingsandviewsexpressedinthisreportdonotnecessarilyreflecttheviewsofthesponsor. 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

©2010TheEconomistIntelligenceUnit.Allrightsreserved.Allinformationinthisreportisverifiedtothe 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.



Executive summary

Morethan99%ofallbusinessesinJapanaresmallormedium-sizedenterprises(SMEs);theyalsoemploy 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 servicesectorandareacrucialpartofthemanufacturingandexportsupplychain.

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 followedthefinancialcrisisof2008.Andbecausemanyarereliantonthedomesticeconomy,inwhichdemand will dwindle as the population ages and shrinks, their prospects are uncertain.

Againstthisbackground,howrealisticisittoexpectSMEstobecomethenewgrowthdriversofJapan’seconomy?WhatpressingchallengesdoSMEsfaceinexpandingtheirbusinesses?Howaretheyfaringinthebidtofindgrowthinnewmarketsandthroughnewproductsandservices?Havetheybeensuccessfulininternationalisingtheiroperationsandprofitingfrominnovation?Andaregovernmentpoliciestosupport the sector helping?

Thisbriefingpaper,SMEs in Japan: A new growth driver?, sponsored by Microsoft, discusses these crucialissues.ItisbasedoninterviewswithseniorexecutivesatSMEsinJapan,governmentofficialsandotherexperts,andareviewofrelevantliteraturepublishedbothinJapanandbysupra-nationalbodiesliketheIMF,OECDandWorldBank.Itskeyfindingsinclude:

• Japanese SMEs face particular problems securing finance. 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 outofbusinesswithoutthem.Japanesebanks’continuedrisk-aversionandarelianceonfixedassetsforcollateral put many SMEs at a disadvantage when looking for funds. Banks need more effective ways of measuringSMEs’businessvalue,whileSMEownersneedbetteraccountingtoexplainit.



• 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 experiencedandskilledworkerscanbedifficultforSMEs.However,thecloudoftherecentrecessionhasbroughttwosilverliningsforSMEs:newentrantstotheworkforceareshowingmoreinterestinworkingforsmallcompanies,andlargerbusinessesthatarereluctanttofireworkerscantransfertheknowledgeofexperiencedstaffthroughemployeeloanprogrammes.

• 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 entrepreneursandadministrativestaff.Andwhilemanylacktheresourcestoexpandalone,cooperation,evenbetweenapparentrivalsinthesamefield,canbeakeytogrowth.

• Japanese SMEs lag their developed-market peers in tapping international markets. With a shrinking domesticmarket,manyJapaneseSMEsmustinternationalisetoexpand.Whilesomeareseekingtoleverageexternalmarkets,asasharpriseinexportsintheyearsrunninguptothe“LehmanShock”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 inJapan,anddifficultysecuringfinancingasthemainreasons.

• Japanese SMEs spend comparatively little on innovation. While Japan as a whole spends a lot on R&D incomparisonwithotherdevelopedeconomies,itsSMEsdonot.Lackofaccesstofinanceandrisk-aversionaretheprinciplereasons.Intervieweessuggestsuccessfulinnovationrequirestherightmixofpolicysupport 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 difficult. Policy has evolved to target SMEs as potential growth leaders, and central and local government programmes to support SMEsfinancially,organisationally,andintheirbidstointernationaliseandinnovateareplentiful.Butpoor publicity and complicated application procedures hinder their adoption and reduce their impact. In addition,someintervieweessuggestpolicymeasuresneedtofocuslessonfinancingSMEsandmoreonencouraging their growth and development.



1. Introduction

Japan’ssmallandmedium-sizedenterprises(SMEs),liketheircounterpartsaroundmostoftheglobe,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 referredtoinJapanasthe“LehmanShock”.

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 enterpriseshadreturnedtoapositiveoutlook(Figure1).Asimilarsurveyonconditionsthatincludes

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 ToughconditionsforSMEspredatetherecessionof2008-09,reflectinglongstandingproblemswiththedomestic economy.

n Japan’sSMEswerehithardbythefinancialcrisis—particularlythoseintheexportsupplychain.

Figure 1Tankan, business conditions diffusion index, all industries%, quarterly

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Small Medium Large



businesseswithcapitaloflessthan¥20m(excludedintheTankan)alsoshowssentimentatthesebusinesseshasbeenpoorforalongtime(Figure2).

The contrast with SMEs in many other Asian economies, which have rebounded to dynamic growth andbanishedthememoryofthefinancialcrisis,isstark.Whileallsmallbusinessesfaceproblemswithfinance,HRandmanagement,Japan’sSMEsalsofacearaftofdomesticchallengesthataretestingtheirresiliency 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 enterprisesandemployment,andaconsiderablepartofthevalueaddedintheeconomy.(InthisJapan

ishardlyunusual;inmostdevelopedeconomiesSMEsaresimilarlyimportant,asFigure3shows).The health of this sector, comprising more than 4m enterprises, is therefore of major importance for the health of the overall economy.

Forthisbriefingpaper,SMEs in Japan: A new

growth driver?, Microsoft commissioned the EconomistIntelligenceUnittoexaminethestateof the SME sector in Japan, how it is responding to the challenges it faces, how effective government policyhasbeeninsupportingsmallandmedium-sizedbusinesses,andwhatmorecouldbedonetoaid them.

The paper also assesses whether, in the face of shrinking domestic demand, Japan’s SMEs are internationalisingsuccessfullyandtappingintothegrowthengineoffast-growingAsianeconomies.Inlight 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 2Business conditions diffusion index for SMEs, all industries

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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 3SMEs contribution to total, 2007(%)

Number of enterprises Total employment Value added

France 99.8 60.5 56.0

Germanya 99.5 60.4 53.6

Japanb 99.7 69.0 53.0c

South Koreab, c 98.9 71.0 45.5

UKa 99.6 54.1 51.0

USd 98.9 57.9 na

a Value added at factor cost b 2006 cExcludingservicesd2004-05

Source:OECD,StructuralandDemographicBusinessStatistics;JapanMETI/MinistryofInternalAffairs



multinationals—thenextNintendos,PanasonicsorUniqlos.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 allstakeholders.Thefindingsarebasedoninterviewswithvarioussmall-businessowners,expertsandofficials,conductedinOctoberandNovember2010,augmentedwithareviewoftheexistingrelevantliterature.

What is an SME?

ThedefinitionofwhatconstitutesanSMEvariesbetweencountries:thispaperusesthedefinitionaccordingtotheSmallandMedium-sizedEnterpriseBasic Act and used by Japan’s Ministry of Economy, TradeandIndustry(METI).ThisclassifiesasSMEsbusinesses in the retail or services sector with less than¥50m(US$600,000)incapital,thoseinthewholesalesectorwithlessthan¥100m(US$1.2m)incapital, and those in manufacturing with less than ¥300m(US$3.6m)incapital.Inadditionitrestrictsthedefinitiontothoseinretailwithfewerthan50

employees, those in services or wholesale with fewer than 100 employees, and those in manufacturing with fewer than 300 employees.

Figure 4Definition of SME

IndustriesCapital 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 economySMEs are prevalent across the Japanese economy, constituting the lion’s share of enterprises in all sectors. SMEs are most numerous in the retail, servicesandrestaurant/lodgingindustries(Figure5),butamongthemostproductivearethoseinthe 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.

ThesignificanceofSMEsintheexportsupplychainexplainsinpartwhythesectorwashitsohardbytherecessionof2008-09.Astudycommissioned by METI’s SME Agency showed that theapproximately¥700bn(US$8.3bn)indeclines

Figure 5Composition 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


8 ©EconomistIntelligenceUnit2010

innewvehicleexportssufferedbythedomesticautomobileindustrybetweenthethirdquarterof2008andthefirstquarterof2009causedadeclineinproductionatSMEsofsome¥400bn(US$4.8bn).1 Similarly,SMEsupplierstothemajorelectronicsexporterswereseverelyaffectedduetodrop-offsinexportsinthatsector.NumerousotherSMEsthatdobusinesswiththemajorexportersandtheirsupplierswerehitbothdirectlyandindirectlybytheknock-oneffectsoftheslowdown.

ManyofJapan’sSMEswerecarriedalongbytheexport-ledpre-Lehmanboom—andsufferedheavilywhen 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


©EconomistIntelligenceUnit2010 9

2. Challenges: Finance and human capital

Although 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 largerenterprise.TheexperienceofSMEswithregardtothesetwocrucialissuesistoalargeextentwhatsets them apart from bigger businesses.

Finding financeRarelyhavingthekindoffinancialreservesthatcanseethemthroughsevereeconomicslowdowns,SMEsare typically dependent on banks and other creditors if times get tough. When credit dries up, as it did duringtherecentfinancialcrisis,SMEsarehitevenharder,aslendinginstitutionstendtoviewthemashigher-riskdebtorsthanlargecompanies.

As lending by major banks plummeted during the recession, the government stepped in with an EmergencyGuaranteeProgramthatincreasedlendingtoSMEsfromregionalbanksandstate-affiliatedfinancialinstitutions(seeFigure6).Illustratingthevulnerabilityofmuchofthesector,aquarterofthosewho received these guaranteed loans reported they would have gone out of business without them.

Evenduringmorestableeconomictimes,financingsmallerenterprisesisachallenge.Partlythisisduetorisk-aversionatJapanesebanksandareluctancetolendwithoutsubstantialfixedassetsascollateral.“SMEstendnottoownverymanyfixedassets,”saysNaohiroNishiguchi,directoroftheInnovationNetworkCorporationofJapan(INCJ)—partofagovernmentrevitalisationinitiativethatdrawsonpublicandprivatefundstofosternext-generationbusinesses.“ThelendingsystemshouldmovetowardsonethatplacesmoreemphasisonthebusinessvalueoftheintellectualpropertyownedbytheSME,”hesuggests.

AquaScienceCorporationofYokohama,amanufacturingfirmwith22employeesthathasdevelopedasteam syringe device for industrial cleaning used during the process of manufacturing semiconductors,

Key points

n AlthoughmanypolicieshavehelpedSMEssecurefinancethroughtherecentrecession,banks’risk-aversionandarelianceonfixedassetsforcollateralputmanySMEsatadisadvantage.

n Therearepositivesignsthattheworkforceismoreopentoopportunitiesatsmallerbusinesses,andthatlargerbusinessescanhelptransferknowledgethroughemployeeloanprogrammes.

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.



hasabusinessstructurethatdeliberatelyavoidstheownershipofcostlyfixedassetslikefactories.Thecompany’spresident,YoichiIsago,explainsthatthesecanposeaseriousrisktocashflowgivenvolatilecycles in the market.

AquaSciencehasnonethelessbeensuccessfulinsecuringfinancing,partlyowingtothestrengthofitsintellectualproperty,butithashadtobecreative—turningtooverseasinvestorsdespiteitssmallsize.MrIsagoexplainsthathehastappedventurecapitalistsandpartnersfromTaiwan,KoreaandtheUS,aswellasJapan,tosecurefinance,basedonthestrengthofthecompany’scoreproduct.“Peoplesawthepotentialmarketvalueofthetechnologyinhand,”hesays.

OnereasonforinvestorconfidencemayhavebeenbecauseAquaScience,whichwasspunofffromaUSparent company in 2003, had proven technology and an established business model. But Mr Isago also comparestherisk-averseJapanesemindsetwiththebusinesscultureelsewhere.InJapan,hesays,“thecultureismorefocusedonnotmakingmistakesinsteadofonethatpromotesachievements.”WhereasbusinesspeopleinChina,KoreaandTaiwan“arecommittedtotheirmissions,”hesays.“Theyacceptrisksforfuturegains.”

Foritspart,thegovernmentistryingtomakecreditguaranteerequirementsforSMEsmoreflexible,saysIchiroTakahara,director-generaloftheSMEAgencyatMETI.Heexplainsthatfinancingproblemsaremultifaceted:SMEownersoftenlacktheabilitytoexplaintheirbusinessestopotentiallenders,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“relationshipbanking”,withcloserpartnershipsbetweenSMEsandfinancialinstitutions.Ithasalsointroducedatrainingprogrammeforfinancialinstitutionstostudynationalandprefecturalgovernments’ SMEs programmes.

The HR conundrum“Thekeyforgrowth,whetherforJapan[ingeneral]orSMEs,isgettingtherighthuman-capitalportfolio,”saysMrNishiguchi.Thismaybeeasiersaidthandone:humanresourcesarealwaysachallengefor 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.

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Figure 6Outstanding lending to SMEs by government-affiliated financial institutions, etc



towards larger, stable employers. But there are signs that this has been changing in recent years.ScottCallon,presidentofIchigoAssetManagement,aTokyo-basedinvestmentmanagementcompany,

believestherehasbeenashiftinattitudestowardsstart-upsamongstJapan’sworkers.Hesayshefoundfew 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 tofinanciallytroubledcapsulehotels,aswellasrunningitsownnewstyleof“transithub”hotelinKyoto—agrees that there has been a change in the bias towards working for major corporations. But he concedesthatthefinancialcrisishasmadesomemorecautiousagainabouttakingtheriskofenteringanew venture.

In every crisis there lies opportunity, however. Hidemi Kamijima, president of Kamijima Heat Treatment,ametal-processingcompanyinTokyo’sOtaWardwith45employees,hasnotedanexpansionof 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.

AnothersilverliningofthecurrenttoughtimesnotedbyKamijimaistheJapanesepracticeof“leasing”workers(shukko)frombiggercompanieswhoareloathtomakelong-termemployeesredundant.“Thischanneloffersagoodopportunityforustogetthekindofhumancapitalthatisotherwisedifficultforasmallcompanylikeours[toattract]—withanaddedbonusofonlyhavingtopayapartoftheirpay,iftheyareleased,”saysMrKamijima.(Seealsothecasestudybelow.)

MrKamijimahasusedhispersonalnetworks,ratherthanformalchannels,tohelphiscompanybenefitfromthiskindofhuman-capitaltransfer.ButsuchbenefitsmaynotbeopentoallSMEswithoutpolicyguidance. 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.

Thelabour-intensivesaltbathmethodmeansthatproductivityis low, but there is still a need for it when treating larger precision components,keepingthefactory’s45employeesbusy.“Wegetorders from all around Japan despite being known for taking time and beingexpensive,”jokesthecompany’spresident,HidemiKamijima.

Theshrinkingmarketandthedifficultyofmaintainingthehighlevelsofcraftsmanship–ittakesdecadesofon-the-jobtraining

to master the skills–are the major challenges for the specialist factoriesinthesector.“Eventheheattreatmentworkthatdoesnotrequirehigh-gradeskillsiscomingtousthesedaysasthelevelofcraftsmanshipinotherfactoriesissuffering,”saysMrKamijima.

The company has been able to maintain its skilled workforce throughaflexibleapproach:takingyounginterns,investingheavilyintrainingforexistingworkersandgettingnon-manualseniorworkersthrough“leasing”arrangementsfromlargercompanies.

Even then, the future is uncertain for Kamijima. Business is only 80%ofwhatitwasbeforetheeconomicdownturn,saysMrKamijima,and he foresees his niche business increasingly chipped away by improvingmachinetechnology.“Theworkthatcanbedonebyourcraftsmanshiponlywilldefinitelyshrink,”hesays.Nevertheless,he is hopeful about the company’s new business areas—conducting experimentsonheattreatmentfortheR&Ddepartmentsoflargecompanies, and providing manufacturing solutions to the aerospace industry through a consortium established by the Tokyo Metropolitan Government(seep12andp14).



bepreferabletoonesthatmerelydoleoutmoney.Oneideaisforsalarysubsidies(foralimitedperiod)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 CommunicationsEmploymentStatusSurvey,SMEsuseslightlymorefemaleworkers,andnearlysixtimesmore 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’sSmallandMediumEnterpriseAgencywasestablishedin1948to 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 wasamendedin1999toredefineSMEsasasourceofeconomicgrowthand dynamism for Japan—a radical shift from the notion of SMEs as adisadvantagedgroup,astheywereclassifiedwhentheoriginallawwaspassedin1963.

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.Untilthattime,aminimumof¥10minstart-upcapitalwasrequired to start a traditional kabushiki kaisha—the reason the listed capitalofsomanycompaniesfoundedbeforethenwasexactlythatamount. 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 ofloanguaranteesanddirectassistancethroughstate-affiliatedfinancialinstitutions.Inaddition,thetaxrateforprofitsaboveacertainlevelatsomeSMEs(withcapitalbelow¥100m)hasbeenloweredrecentlyfrom22to18%—ameasurethatisduetoexpireinMarch2011,althoughthegovernmentislookingintoextendingit.

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 ofJapan(INCJ),suggeststhegovernmentneedstocommititselftofoster accelerated growth of SMEs, with a view to transforming them into new growth engines. He argues that rather than just providing financialassistanceforSMEs,thefocusshouldbeonbreakingwhathedescribesasJapan’s“verticalhierarchicalstructure,[to]movetowardsahorizontalsystemwherecompaniesofallsizeshavesimilaraccesstoeffectivebusinessresources.”

Recognising the importance of the sector, local governments have begun to take concrete steps to stimulate growth among SMEs, in particularthroughindustry-specificandgeographicalclustering.Forexample,in2009theTokyoMetropolitanGovernmentcreatedaconsortium called the Advanced Manufacturing Association of Tokyo EnterprisesforResolutionofAviationSystems(AMATERAS).Thisdrawstogether10companieswithdifferentengineeringexpertiseto 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 initiativesaimedspecificallyatSMEs,lackofawarenessofsuchprogrammesisakeyproblem.IchiroTakahara,director-generalatthe SME Agency, concedes that publicising various support measures isoneoftheagency’sbiggestpriorities.“Therearemanycaseswhenpeoplearesimplynotawareoftheavailablemeasures,”hesays.



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 beabletoseizeopportunitiesforgrowth.Thisinturnmeansensuringtheyhavetherightinternal

structure to scale up their businesses, the ability to tap markets outside Japan as domestic demand stagnates,andthemeanstoprofitfrominnovation.

This is easier said than done, especially as many SMEs suffer from an inability to marshal their own resourcesefficientlyforgrowth—particularlyhumancapital.MrNishiguchiidentifiesthreesetsofhumancapitalthatarevitalforscalingbusinessesup.Oneconsistsoftheideas/know-howpeople(whotypicallyearnthemostrespectinmanysmallbusinessesasmastersoftheircraft).Buttheothertwo—entrepreneurs and administrative support staff—are equally crucial. While maintaining this kind ofbalancemayseemobvious,itcangetlostintheday-to-daybustleofrunningasmallbusiness,whensteppingbacktolookatthebiggerpicturemayseemanunaffordableluxury.

The importance of maintaining a balance of each type of employee is reiterated by Atsushi Horiba, thecurrentpresidentofHoriba—asupplierofhigh-techanalyticalsolutionstotheautomotive,semiconductor, medical and environmental industries that has grown from a small business to a multinationalcorporationwithover5,000employees(seealsothecasestudyonp17).

“Prideincraftsmanshipisnotenoughtoscaleupyourbusiness,”saysMrHoriba,whoinsistsa“balancingact”isthekey.HeexplainshowHoriba’sowncorporateculturewasformerlysofocusedonthetechnologysideofthebusinessthatit“treatedtechniciansasstarsandtheotherslikesecondaryactors”.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.

ThechallengesfacedbySMEsreliantonhighlyskilled,nichecraftsmanshiparefranklyexplainedbyMrKamijima,whoacknowledgesthatthekindofskillsnecessaryforthedelicatesalt-bathheattreatmentin

Key points

n Togrowsuccessfullyandscaletheirbusinesses,SMEsneedtobalancevarioustypesofhumancapital:technicalexperts,entrepreneursandadministrativestaff.

n Cooperation,evenbetweenapparentrivalsinthesamefield,canbeakeytogrowthandcanhelpovercomethepotential hurdle of limited resources.

n With a shrinking domestic market, Japanese SMEs must internationalise. While some are seeking to leverage externalmarkets,ingeneraltheyhavebeencomparablyslowinmakingthisshift.



whichhiscompanyspecialisesareincreasinglybeingthreatenedbymoremodernmethods.“Retainingcraftsmanshipisimportantbutnotsufficienttosustainbusiness,”hesays,echoingMrHoriba.

Toovercomethepotentialhurdleoflimitedresourcesandavoidgettingtoonarrowlyfocusedonin-house technical skills, Mr Horiba advises SMEs to actively look for alliances with other companies, even competitors.Japan’slargercorporations—sometimesapparentrivalsfromthesamefields—havealonganddeeptraditionofcooperatingwitheachotherinavarietyofdifferentcapacities;apracticethatSMEscouldemulatetotheirbenefit.

“Becomingapartofawin-winteamisparticularlyimportantforSMEs,”saysMrHoriba.Recalling,withsomepride,whenHoribaforgedatechnicalalliancewithHitachibackin1959,hedescribesthearrangementasbeingbetween“afleaandanelephant,butonanequalfooting.”

Kamijima,foritspart,hasbenefitedfromjoiningaconsortiumofbusinesseslaunchedin2009bythe Tokyo Metropolitan Government—the Advanced Manufacturing Association of Tokyo Enterprises for Resolution of Aviation Systems, or AMATERAS. This draws together 10 companies with different engineeringexpertisetoprovideintegratedmanufacturingsolutionstotheaerospaceindustry—bothinJapan and, importantly, in key overseas markets.

The importance of internationalisingInlightofJapan’spersistentlysluggishdomesticeconomyanddemographicprofile—withanageingandshrinking population—its companies, including SMEs, should be making the most of growth opportunities outsidetheirdomesticmarket.Tobesure,manyaredoingso:AquaScience’sMrIsagoexplainshiscompanytakesa“borderlessapproach”,takingadvantageofthefast-movingandenticinggrowthmarkets in Asia’s developing markets in particular.

Indeed,manyofJapan’sSMEshavecometorelymoreoninternationalmarkets.WhileexportsaccountforalowerpercentageofsalesatSMEsthanatlargerenterprises,theratesofexportgrowthintheyearsrunninguptotheLehmanShockwasactuallyfasteratsmallerfirms.AccordingtoBankofJapanfigures,exportsaccountedfor4.4%ofSMEs’salesin2002,butthishadrisento7.4%by2008.Largeenterprisessawtheirexportsgrowfrom23.7%ofsalesto27.8%overthesameperiod.Insalesvolumes,SMEssawexportsdoubleto¥5trn(US$60bn)whilethoseforbigcompaniesgrewamoremodest37%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 EuropeanCommission(EC)notesthatdespiteanidenticalcorrelationintheEUandJapanbetweensizeofcompany and the degree to which it is internationalised, the level of international activity by EU SMEs is “considerablyhigher”thanbytheirJapanesecounterparts.2

AccordingtotheECreport,some58%ofEUSMEsthatemploybetween101and250peopleexport,comparedwith30%ofJapaneseSMEsintherangeof101-300employees(Figure7).(MorerecentdatacitedbytheSMEAgency,post-financialcrisis,showonly18.4%ofJapaneseSMEsof201-300employeesexport,withlowerproportionsinallsmallerenterprisesizes.3)

OneobviousexplanationforthisdiscrepancyisthatEuropeanSMEshavethebenefitoftradingwithintherichandproximateEUinternalmarket.Butevenexcludingthosethattradeonlywithinthismarket,

2 European Commission, Internationalisation of European SMEs, 2010. This defines“internationalised”as“eitherexporting,importing,investing abroad, co-operatinginternationally,or having international subcontractorrelationships”.

3 SME Agency, 2010 White Paper on Small and Medium Enterprises in Japan



Source: European Commission, Internationalisation of European SMEs, 2010

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101 up to 300 employees (up to 250 for Europe)21 up to 100 employeesUp to 20 employees

Japan EU27 extra Internal Market trade EU27 all export UK only

Figure 7SMEs 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 thatenjoysEUtradeprivileges—showsasimilardiscrepancy.FiguresforFDIarecomparable:intheEU27evenofenterprisesupto20workers,some2%investabroad,whereasinJapanthisisonly0.3%(Figure8).

Source: European Commission, Internationalisation of European SMEs, 2010

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101 up to 300 employees (up to 250 for Europe)21 up to 100 employeesUp to 20 employees

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Figure 8SMEs 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 managementresourcesinJapan,anddifficultysecuringfinancingasthemainreasons(excludingtheexcusethattheyarepreoccupiedwiththedomesticmarket).4

Another issue is that of language. Despite considerable resources dedicated to foreign language learninginJapan,theaveragelevelofEnglishremainssignificantlylowerthaninmanycomparable

4 Ibid.



countries.AsIchigo’sMrCallon—afluentJapanesespeaker—concedes:“Therecanbealanguageissue:thereisn’tasdeepapoolofEnglishspeakersinJapanasthereisinHongKongorSingapore.”However,hemaintainsitispossibletogetaworkforceinternationallyfunctional,“becausetherearealotofincrediblyhard-workinganddedicatedJapanesewithasolideducationalbackgroundinEnglish.”

The government is certainly aware of the need to get Japan’s SMEs to internationalise. Mr Takahara of theSMEAgencynotesthatcompetitionisincreasingforSMEmanufacturersthatproducehigh-qualityniche 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 qualityoftheirproducts,theyhavenotmadethemostofinternationalmarkets.“It’sdifficulttoearnwithequipment[alone],”hesays.“Wehaveaweaknessinsystemexports.Forthis,wecanlearnalotfromcountrieslikeGermany,FranceandKorea.”

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 (forinstanceviatheFiscalInvestmentandLoanProgram).Yet,asmentionedabove,lackofawarenessandcomplicatedapplicationprocedureshinderthetake-upofsuchprogrammes.AccordingtoresearchcommissionedbytheSMEAgency,only39%ofJapaneseSMEsthatareglobalisinghaveusedanyglobalisationassistance(includinggovernmentandprivate-sectorsupport).



Case study: Cubic—Small hotels, big ambitions

Cubic,asmallTokyo-basedcapsulehotelbusinesswithjusteightemployees, 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 unexpectedlyjustoveradecadeago.Hisfather’sbusinesshad,unbeknownsttohim,accumulateddebtsof¥500m(US$6m).Afterthebankgreatlyreducedthedebtinarefinancingarrangementaspartofthemassdisposalofnon-performingloanstakingplaceatthe time, Mr Yui was able to see a way out.

Heturnedthebusinessaround,“mainlybyimprovingtheservice,andtargetingwomenandoverseasguests,”andpaidoffthedebt.Hethenputtheknow-howheandhisstaffhadacquiredto use by sending them to struggling capsule hotels. Now Cubic has

consultingcontractswithanumberofhotels,onano-resultsno-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 intoanewcategoryofaccommodationwithhigh-endserviceandamenities,strippeddowntothebareessentials.Thefirstoftheseisthe9h(“ninehours”)hotelinKyoto,whichopenedin2009.

Despitethesmallsizeofhisoperations,MrYuiisalreadyfirmlyfocusedonexpandinghisvisionbeyondJapan.Havingattractedagood deal of global media interest for the sleek minimalist design ofhisfirst“transithub”hotel,heiscurrentlytalkingtopotentialpartners in locations including London, Rotterdam, Moscow, New York and Hong Kong.

However,toexpandintoaninternationaloperator,heexpectsto have to form a new company with partners such as property companiestakingastakeinthebusiness.“Thisisstillessentiallyafamilycompany,withsharesheldbyfamilymembers,”saysMrYui.“There’salimittohowfarthatkindofcompanycango.”

Case study: Horiba—From SME to titan

Sinceitsestablishmentin1945byMasaoHoriba(thecurrentpresident’sfather),whilehewasstillastudent,theHoribaGrouphas grown steadily to become a multinational giant. With its roots inscientificresearch,thecompanymakeshigh-techinstrumentsand systems for manufacturing, healthcare, R&D and environmental monitoring across 37 companies in 22 countries. The group now has over5,100employeesandin2009hadsalesworthUS$1.24bn.Asaformer SME that went global, Horiba offers some useful lessons.

AtsushiHoriba,thecurrentpresident,explainsthatwhilethecompany 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, Horibaexpandedthroughaseriesofacquisitionsofforeigncompanies. Mr Horiba says the company’s aggressive stance in movingabroadhasallowedittoenjoythefirst-moveradvantagethatinturnhasenabledthecompanytoexcelinJapanandglobally,despiteitsrelativelysmallsize.

At Horiba, differences that are often seen as risks in Japan’s corporatecultureareaffirmedasvirtuousdiversity.“Japanese

companies tend to be too homogeneous. Just like pure gold is soft and susceptible to damage, homogenised organisations can’t endureevenasimpleimpact,”MrHoribasuggests.Hethusnotonly manages various nationalities, but also insists on sending his Japanese employees abroad to give them opportunities to “experiencedifferencesandtherelatedchallengesofdealingwithunfamiliar things—something they would tend to miss out if they weretoremaininJapan.”

Currently around 3,000 of the group’s 5,100 employees are non-Japanese,includingtheheadsofthreeofitsfourkeybusinessdivisions.Inaddition,90%oftheboardmembers,30%ofthemanagementand15%ofnon-managerialJapaneseemployeeshavein-depthexperienceabroad,withoverseasstintsofbetweenthreeand 20 years.

Anotherkeytogrowthisthewillingnesstotakerisks.“Corporatecapacity depends on willingness to make mistakes or take risks, and thecompany’s‘regenerativestrength’;itsabilitytoturnfailureintosuccess,”MrHoribasays.Thisattitudehelpskeepinnovationalive.“Deliveringahit[innovation]atthefirstattemptrarelyhappens.Evenforus,withgoodhumancapital,technicalknow-howandaglobalnetwork,thesuccessrateisaround20-30%,”heconcedes.



4. Opportunities 2: Innovation and technology

“A sinanycountry,up-and-comerslikeSMEstendtobedriversofinnovationandchange,sothey’reextraordinarilyimportantfortheeconomy,”saysIchigo’sMrCallon.Indeed,smallercompaniesaregenerallyexpectedtobemoreinnovativeandnimblethanbiglumberingcorporations.However,datashow 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,Japaninvested3.4%ofitsentire GDP in R&D in 2007—the highest level amongst the G7 nations and well above the OECD average of1.9%.Infact,Japanaccountedforaround20%ofallthegrowthinR&DspendinginOECDcountriesbetween1997and2007.Andwhile78%ofR&DinJapanisfinancedbyprivatebusiness—comparedwithanOECDaverageof54%—SMEsaccountedforonly6%ofthis,oneofthelowestsharesintheOECDarea.

Another study by the OECD that aggregates data on the innovation performance and policies of SMEs initsmemberstatessimilarlyshowsJapanlaggingitspeersinallaspectsofinnovation(Figure9).ThesefindingsshouldbeamajorconcernforasectorthatisexpectedtobeafuturegrowthenginefortheJapanese 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.Thestudyfoundthat,“Forlargerfirms,manufacturersandexporters,R&Dspendingisdrivenbyprofitexpectationsandnotaffectedbycashfloworfinancingstructure.”ButforSMEs,service-sectorandnon-exportingfirms,“financingconstraintshinderR&Dspending,and,byextension,innovation”.5 The difficultyfacedbyJapan’sSMEsinaccessingfinanceduringtimesofeconomicuncertaintyisundoubtedlygoing to have repercussions for future innovation and growth.

ThegovernmentcannotbefaultedforalackofpolicyoptionstostimulateinnovationatSMEs:theOECD 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. Lackofaccesstofinanceandrisk-aversionaremajorreasons.

n Governmentpoliciestosupportinnovationareplentiful—butpoorpublicityandcomplicatedapplicationprocedures hinder their adoption.

n Puttinginplacethemeanstocommercialiseintellectualproperty—bothwithinJapanandinforeignmarkets—iscrucial.

n FocusingonJapan’sculturalstrengths—suchashighservicestandards—couldbefruitfulforSMEslookingtodifferentiatethemselvesinanincreasinglycompetitiveglobalmarketplace.

5 IMF, Japan: Selected Issues, IMF Country Report No. 10/212,July2010


©EconomistIntelligenceUnit2010 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 somuchlackofpolicyoptionsaslowtake-upofthoseonoffer,whetherasaresultoflowawarenessorbecauseSMEownersfindtheapplicationproceduresonerous.TheOECDnotesinitssummaryofJapan’sSMEinnovationpoliciesthatitsprogrammes“sufferfromalackofapplications,and[have]beenfoundtobeadministrativelydifficulttoimplement.Inparticularthemethodsofapplicationaretoocomplex.”6

MrIsagoofAquaScienceagreesthisisaproblem.“Publicmeasuresmaybeavailablebutaccessisbad,”hesays,citingdifficultyinfindinginformation,alackofflexibilityineligibilityandburdensomeapplicationprocedures—toppedbylackofclarityindecision-making.“IwanttoknowwhoissayingandensuringthatJapanisgoingtobetheinnovation-orientednation,”hesays.

Driving SME innovationMoney 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 havingaveryrisk-averseculture,thoughthiswouldappeartostandinstarkcontrasttotheactionsofitscompanies that became global leaders in the second half of the twentieth century.

“Innovationisreallytheonlything,”suggestsCubic’sMrYui:“Youcan’tjustkeepmovingforwardswith kaizen,”referringtotheJapanesenotionofcontinualgradualimprovement,whichhasbeenacorporatemantraatgiantslikeToyota.“Atsomepointthingshavetoshifttoacompletelynewplatform.That’sinnovation.”ThoughMrYuibelievesanynumberofcompanieshavethepotentialtobe“gamechangers”—forinstanceintheelectricvehiclesector—hethinksthatthelackofa“SiliconValley-typecommunityofventurecapitalists”willingtotakerisksonnewideashampersinnovationinJapan.

Mr Nishiguchi of the INCJ also suggests that while there are plenty of inventions and inventors in Japan,thekindofinnovationrequiredtocommercialiseintellectualproperty(IP)islacking.“Thesituationisdetrimentaltogrowth,”hesayssimply.

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

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Figure 9Innovation performance of SMEs(%)

6 OECD, SMEs, Entrepreneur-ship and Innovation, 2010



MrNishiguchibelievesthatJapanmustlearnnotonlytodevelopandfindglobalmarketsforitsownIP,butlookforitabroadandbringideasbacktobecommoditisedathome.“CountriesthatjustnurtureIPwon’tbenefitfromtaxincomeoremployment,”heconcludes.ThisisessentiallywhatAquaScienceCorporation’sMrIsagoaccomplished.LeavingtheUSfirmhewasworkingfor,hepersuadedthemtolethim 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 entrepreneurialspirit.“There’soverwhelminghumantalentinJapan,butsometimesit’strappedbybureaucraticrestrictions;weneedtothinkhowtoallowthattalenttoflourishinmoreentrepreneurialways,”hesays.MrCallonsuggeststhat,despiteimprovements,barrierstoentryfornewcompaniesandhigherpenaltiesforfailurearewhatholdmanyentrepreneursback.ThefactthatJapanranks98thof183economiesforstartingabusinessintheInternationalFinanceCorporation’slatest“DoingBusiness”rankingssuggestshowdifficultitisforJapantobenefitfromitsentrepreneurialtalent.(Itranksfirstforclosingabusiness,however.)7

MrCallonalsopointsoutthatthelabourmarketcanstillbeinflexible.“Inothercountriesyoucantryastart-upat32,andifitdoesn’tworkoutthenyoucangoandfindajob.Here,ifyoustartupandfail,there’samuchsmallermid-careermarket.Therisksoffailurearejustsomuchhigher.”

Tobesure,technologicaladvanceshavehelpedtobringdownbarriers:foreventhesmallestenterprises, 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 greatlyreducedcostsforadvertisingandcommunicationsforSMEs.“Theabilitynowtoputupawebpageatalmostnocostmeansstart-upshavefargreaterabilitytoacquirecustomersandgrowtheirbusinessescomparedtotenyearsago”hesays.

Aswellashelpreachbroaderdomesticaudiences,ITcanhelpSMEsthathaveexpandedinternationallymanage their subsidiaries. Masato Yamaji, president of the Sanwa Dengyo Group, a plant engineering businesswith260employeesheadquarteredinKagawaprefecture,explainshowthegroupusesaninnovativeInternet-basedsystemtoensurecloseco-operationbetweenstaffinJapanandinthecompany’ssubsidiariesinChina(seethecasestudyonp21).

There may be other ways for Japan’s SMEs to move forward, without relying only on technology. Mr Yuidoubtsthatfocusingonareasalreadydominatedbymultinationaltechcompanieswillbefruitful—“IthinktryingtodothatislikeplayingOthellowhenyou’realreadyboxed-in,”hesays.Instead,hesuggestsJapan should look to its cultural strengths, such as attention to detail and high standards of hospitality asthebasisfornewventures.“ThelevelofserviceinJapanissohighthatevenwhatisregardedasnormalheretranslatesasveryhigh-endbyglobalstandards.”

Although this may sound predictable from someone attempting to create a new category of hotel, Horiba’spresidentsuggestssomethingsimilarinhisownhigh-techfield.MrHoribasaysthecompany’sabilitytoserviceitsclientsisbecomingevermoreimportantasproductdifferentiationnarrows:“TheJapanesewayofdoingbusinessthatvaluestrustandreliability,forinstance,hasalotofpotential.”

7 IFC, Doing Business 2011, http://www.doingbusiness.org/data/exploreeconomies/japan



Case study: Sanwa Dengyo—The China connection

MasatoYamajiisthesecond-generationbossoftheSanwaDengyoGroup, a plant engineering business headquartered in Kagawa Prefecture, with 260 employees across the group’s seven companies. LikemanyfirmsinJapan,Sanwaisfacingthechallengeofamatureandshrinkingdomesticmarket.Themarkethasdeclined“bymorethanhalf”comparedwiththeboomtimesbeforetheburstingoftheeconomicbubble.Survivalnowdependsonfindingnewmarkets,whetherthroughinnovationorgoingoverseas,whilefindingwaystoslash costs.

Typicallytheplant-engineeringbusinessinJapanreliesondomestic 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 abouttherisksoftechnologyandknow-howbeingleakedtolocal

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 managementexperiencebeforetheymightnormallyobtainit.

The company’s early presence in China has also led to its securing contractsforthemaintenanceandmodificationofJapanesecompanies’ local plant facilities. This is an area of business it is seekingtogrowfurther,leveraging“thesixtyyearsoftrackrecord”it has in Japan. While Mr Yamaji describes this side of the business as“high-riskandlow-return”—meaningthegroup’sdomesticcompetitors 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. “Wewillfindawayintothefuture,evenifitmeanstakingonworknobodyelsewantstodo.”



5. Conclusion

There’s no doubt that Japan’s SMEs were hit hard by the global recession, or that they were having a toughtimeevenbeforethen.Manyhavenotyetrecovered.Butforthosethatsurvivedthefinancial

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.AsidefromitsvitalroleasasuppliertoJapan’sbigbrandnames,next-generationinnovationandfuturecorporategiantsareexpectedtoemergefromitsranks.

“Idon’tlookatitaswehaveaproblem,”saysIchigo’sMrCallon.“IlookatitlikewehaveavibrantSMEclass:let’skeepitthatway,let’sgrowit.”

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,betterpromotionofexistingprogrammes,aswellasmoreconvenientaccesstothem,isneeded—as even those administering the initiatives acknowledge.

Asforgrowthprospects,thedoublingofSMEs’exportsinthesixyearsbeforetherecessionhitshowsthattheyhavebeenglobalising—thoughnottotheextentoftheircounterpartselsewhere.Whiletheymay 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 creativeineverythingfromtheirproductdevelopmenttofinancingtohumanresources.Japanalsoneedstofindnewideasfromabroadtocommercialisehere,ratherthanhavesomeofitsbesttechnologiesleveraged by other countries.



Innovationmaycomeinthefieldsofservice,designorretailing,ratherthanjusttechnology,butinwhatever 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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SMEs in Japan: A new growth driver?

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