Small and medium-size companies should implement careful strategies to embrace information technology and take advantage of the rapidly changing business environment, a government report said Tuesday.

The fiscal 2000 White Paper on Small and Medium-Size Enterprises, submitted to the Cabinet by trade chief Takashi Fukaya, also called on small and midsize firms to review their financing strategies amid changing relations with financial institutions.

Exposed to unprecedented competition and plagued by bad loans, Japanese banks are being selective in extending loans, the paper says.

The latest white paper is the first report compiled under the revised Small and Medium-Size Enterprise Basic Law. Re-evaluating small firms as the driving force of economic vitality, the new law calls for promoting versatile and dynamic growth in smaller businesses.

“Information technology innovation is having such a great impact on our country’s socioeconomic system that it has been dubbed the ‘IT revolution,'” the paper notes. “Not only venture enterprises but now all companies can no longer remain aloof of IT.”

IT innovation is expected to have a greater effect on small and medium-size enterprises as a tool to support them as they adopt new management and seize new business opportunities, the report says.

At the same time, it warns of the possibility of the IT revolution’s negative impact, pointing out that small enterprises may face new kinds of challenges.

Nonstrategic investment in information system-related areas will result in failure, it says, citing the reality that more than 70 percent of the firms that have made information system-related investments complain about their systems.

“Companies must take great pains in deciding how to proceed with business reforms, as well as to clarify their purpose for introducing an information system,” the report says.

While acknowledging that indirect financing will likely remain a primary means of financing for small and medium-size firms, the white paper points to the need to review their financing strategy now that the nation’s financial system has drastically changed.

As financial institutions are managing their risks with increased caution, weaker firms must attach greater importance to cash-flow management rather than focusing on sales volume. , as was deemed most important in the postwar high-growth period.

In developing new high-risk business areas in an effort to reap high returns, small firms may consider tapping direct financing through Mothers, the report says, pointing to the importance of information disclosure in doing so.