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Small businesses play an important role in creating jobs and invigorating markets. Since the mid-1990s, however, the number of small-business startups has declined, according to this year’s white paper on small and medium-size enterprises. The question is how to reverse the trend. The report calls for ending decade-long deflation and creating conditions that encourage new business ventures.

Business closures have outnumbered new entries since around 1996 when deflationary effects from the collapse of the bubble economy in 1990 became more pronounced. “Businesses have become risk-averse amid protracted economic stagnation,” the report says. “This has fostered a more conservative tendency toward business inauguration.”

In the United States, by contrast, startups continue to outnumber closures, as aspiring young entrepreneurs play a predominant role. Significantly, this rising trend in small-business openings is adding vitality to the world’s largest economy.

In Japan, though, starting up a business is not as easy. One reason for this is the need for startup capital and the collateral required by banks for startup capital loans. Collateral-free loans — a departure from the traditional lending practice — are said to be available only in special cases. Without initial capital, prospective entrepreneurs are often left out on a limb, no matter how good their plans.

That is why, in February 2003, the Ministry of Economy, Trade and Industry created a new rule making it possible to set up a company with nominal capital of just 1 yen. By the end of last December, as many as 886 businesses had started under this rule.

Indeed, the “nominal capital” system is a boon to those who have good business ideas but lack the capital to put them into practice. This seems to be the case particularly with ventures related to information technology. A computer-savvy person with no startup funds can set up a small outfit, perhaps using his or her home as the office.

As one example of success, in April 2003, a former flight attendant with a major airline company established a company in Nagoya to provide one-on-one language lessons as well as courses in social etiquette. The woman says use of the system has had a “good PR effect” on her new business.

According to the white paper, interest in small-business startups has increased since 1991 in parallel with corporate moves to review the traditional seniority-based wage system. This is especially true for middle-aged and older people, many of whom have left their companies to start up their own businesses.

Young people, including college students, are also active players. Many women are also enthusiastic about running their own businesses. Moreover, the growing number of working women in service sectors is likely to improve prospects for female entrepreneurship.

The report says that in order to survive, small businesses — particularly those in the construction industry — must expand into new business lines. The number of contractors has dropped since 1997 due largely to considerable cuts in public-works investment. With such spending likely to continue declining, finding new business opportunities in agriculture, for example, is an option worth considering.

Getting into new fields, though, is proving difficult in regions that have depended heavily on public works projects. In Hokkaido, for example, local administrations are helping smaller contractors either find construction work in other areas or diversify their operations.

The higher rate of business closures, or the lower rate of business startups, reflects in part the difficulties that self-employed business people have in finding successors. In the past, family-run businesses survived mostly through generational changes, as sons and daughters took over management from their aging or deceased fathers. That tradition has all but died since the 1990s.

One reason for this, according to the report, is the growth of nuclear families. Under the extended family system, business knowledge and experience was handed down directly from generation to generation. That is now difficult, if not impossible, because fathers and children live separately.

The report emphasizes the importance of smooth, hands-on transfers of business knowhow. Indeed, on-the-job training represents an essential method of learning the nuts and bolts of running a small business. The question that remains is how to train such qualified successors.

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