The latest government annual report on small enterprises bears out an important fact that is often overlooked amid news-breaking moves by big businesses: Small corporations continue to play a vital role in the Japanese economy. The report, submitted this week to the Cabinet by the Ministry of International Trade and Industry, says in effect that needed industrial restructuring in this country depends largely on small-business reform.
“Small and medium enterprises” make up a little over 99 percent of all enterprises and account for 60 percent of the total work force. These businesses refer to manufacturers with a capital stock of 100 million yen or less and a regular workforce of not more than 300 and nonmanufacturers (retailers and other service firms) capitalized at 10 million yen or less that employ 50 or fewer regular workers.
In the case of the construction industry, which represents about 10 percent of both the gross domestic product and the total workforce, 84 percent of its workers belong to these small businesses. This makes it difficult, politically as well as economically, to reduce the size of this traditional industry and thereby reform an industrial structure that is heavily tilted toward public investment.
Small businesses suffered a double blow in the 1980s, when the yen’s sharp rise led to the rapid expansion of imports and to the shift of production overseas. Once again they are experiencing hard times, but under radically different circumstances. With big businesses and their parent companies undergoing extensive restructuring, they can no longer fall back on traditional “keiretsu” business ties. In order to survive, they must develop new markets through technological innovations and expand into more promising areas, such as electronic communications. In a word, entrepreneurship is what is required of them.
In this regard, the white paper cites interesting findings from a comparative study of Japanese and U.S. companies. In the 1990s, the “startup ratio” – the number of newly established companies as a percentage of the total number of companies – has continued to fall in Japan; it is now below 4 percent. In the United States, however, this ratio began rising in the 1980s and is now more than three times higher than in Japan. The “closing ratio,” the percentage of companies going out of business, has followed similar trends in the two nations; it is less than 4 percent here, just a third of what it is in the U.S.
No doubt the rapid pace at which companies in the U.S. are born and die is a sign of industrial vitality. In a way, it reflects cultural differences between Japan and the U.S. Americans have a way of taking failure in stride, and many bright young people start up their own companies instead of going to established companies. Japanese youths, on the other hand, tend to avoid risks and seek security with big firms.
It is also worth noting that in the 1980s, the U.S., faced with stiff competition from Japanese manufacturers, launched a well-focused program of industrial renewal designed to encourage investment in new business ventures. In this field, Japan has lagged far behind the U.S. This explains in part the widening competitive gap between the two economies.
Last year, MITI started, belatedly, its own program to promote venture-capital investment. The main idea is to facilitate the flow of capital to startup companies from such sources as pension funds and overseas investors. The results so far are anything but impressive, which makes it all the more important to improve backup measures for enterprising businesses.
These measures should include the training of people for research and development, teamwork with research institutions like universities, and collaboration across different lines of business. However, it is not enough to provide backup mechanisms; no less important is developing a system that allows startup firms to gain basic management knowhow. What they need is not just startup capital, but “hands-on support with a human face,” as one startup-business owner put it.
Another important thing is that administrative authorities and financial institutions should develop an ability to evaluate the worth of small businesses. Instead of judging them by the conventional one-size-fits-all yardstick of fixed assets like land, those in a position to help — banks in particular — should take into account intangible factors such as technological prowess and growth potential. Using more rational standards of evaluation should make it easier to promote structural change as well as fair competition in the small-business sector.
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