Commentary / Japan

Making Japanese small business thrive

by Joel Hyatt

Contributing Writer

Japan and the European Union have concluded a new and wide-ranging trade deal that has been four years in the making. Many Japanese companies no doubt hope that this agreement will give their business a boost, while politicians hope it will help remedy some of the country’s economic problems. The agreement will create one of the largest global trade blocs in existence: Japan is the world’s fourth-largest export economy, and is already the EU’s second-biggest trading partner in Asia. Together, Japan and the EU account for around 30 percent of world gross domestic product.

Unfortunately, Japan faces economic challenges that go beyond the scope of mere trade deals. Economic growth has stalled at around 1 percent for a number of years, and because the Japanese workforce is both aging and shrinking in size, this means that strong long-term economic growth can only realistically be enabled by increasing productivity.

But Japan’s productivity has been weak for many years, well below the OECD average and the lowest in the Group of Seven. A good trade deal is always a welcome development, but in itself it may not make a significant difference to productivity levels.

One clear and effective course of action to boost economic growth would be to help more Japanese small and medium-size enterprises (SMEs) become involved in international trade.

In the Japanese domestic economy, SMEs already play a considerable role, representing 70 percent of all employment, over 99 percent of all enterprises and 50 percent of value added in the manufacturing sector, rising to 60 percent in nonmanufacturing. The majority of the components used by large Japanese manufacturing companies also come from SMEs.

Currently, however, the benefits of international trade are limited mainly to Japan’s larger companies. Few SMEs export, having found it much more difficult to make global connections: In manufacturing, only 25 percent of SMEs are exporters, in comparison to 60 percent of larger firms. This means that a great potential source of profitable trade goes untapped. It also contributes to the large labor productivity gap between small and large firms. Therefore, in order to begin solving the productivity problem, Japanese SMEs need to become “micro-multinationals” — players in the global economy for the first time.

The difficulty is that Japanese SMEs face various barriers to winning contracts with large international organizations. In Japan, part of the reason for this may be that, as found in a study by the Japan External Trade Organization, only 39 percent of Japanese SMEs had an office abroad, compared to 79 percent of large-scale firms. Weaker access to information and distribution channels are also obstacles to trade, and research released by HSBC last year suggested that SMEs worldwide are often held back by a relative lack of knowledge about how to find international business — or lack of channels through which to pursue it.

Smaller companies also don’t have the resources to pitch for business when it is overwhelmingly likely that contracts will be won by one of the large corporations. For example, in a tender process run by a large prospective client, SMEs know that they have only a small chance of winning the contract — even if they reach the shortlist.

A worldwide Globality survey found that over a quarter of companies who use such procurement methods shortlist between six and 10 suppliers, creating a huge amount of wasted time for all but one successful bidder.

On other occasions, such competitions are used as cover for a procurement decision that has already been made, so the prospective suppliers never stand a chance.

On a cost-benefit analysis, SMEs therefore often calculate that these traditional procurement exercises are therefore not worth the time and expense.

So how do Japanese SMEs secure a greater share of global business? Technology provides part of the answer. There are many examples of online platforms that have disrupted monopolies by giving a share of the market to individuals and smaller companies, showing us how much scope there is to connect suppliers with potential buyers. Airbnb has allowed an ordinary citizen renting a room to compete with hotel chains, and sites like Yahoo Auctions and Rakuten have allowed small vendors to bypass the large retailers and sell directly to consumers.

Although the sharing economy has taken a little longer to acquire momentum in Japan, it is now becoming ever more popular. New entrants to the market like TABICA — which helps people find unique cultural and culinary experiences — are offering original ways to connect people.

Through technology, Japanese SMEs in professional services — including marketing, law and management consultancy — can now be introduced to large clients without them having to devote vast time and resources in trying to market themselves outside their domestic comfort zone. For large corporate buying, using highly qualified SMEs almost always results in higher quality, lower cost and faster speed to market.

In this era, it’s clear that small businesses should not need to rely on old ineffective networks or their elected leaders to strike the right trade deal when they can take control of finding their own opportunities. It’s time for small business to embrace new technological solutions to find global customers, expand their operations, raise their productivity and become more profitable.

At the same time, large corporations should adopt new technologies that will give them the confidence to commit a percentage of their procurement spending on high-quality SMEs — driving the benefits of globalization deeper into the economy.

Such a change in corporate culture might just be the development that will enable Japan’s economy to grow and recapture its historic success.

Joel Hyatt is chairman and CEO of Globality. He is an American entrepreneur, lecturer, philanthropist, former attorney and politician of the Democratic Party, most notably as a party leader, fundraiser, and foreign policy adviser.