RIM June 1998, No.40
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Small Business in the United States, Taiwan, and Japan, and Their Small Business Policy
Sakura Institute of Research, Inc.
In recent years, small business has been a matter of mounting concern and interest across the world. And although the reasons for this differ from one country to another, generally this is due, in the case of developed countries, to the realization that small- and medium-sized companies (hereafter "small businesses") are playing an increasingly important role in creating jobs, in enhancing the competitiveness of their industries, and in making innovations, both technological as well as managerial. In the case of developing countries including those in Asia, which are confronted with the pressing need for creating employment, for developing a linkage among their industries, and for fostering supporting industries, they are faced with the necessity fordeveloping small businesses.
In Japan, where the economy has persistantly remained in the doldrums and where the rate of business formation has been decreasing since the bursting of the speculative bubble, there is growing concern about an economic meltdown. Alarmed by the situation, the government has stepped up its effort in earnest since the mid-1990s to boost business formation and encourage existing companies to undertake new businesses.
This article will survey the United States and Taiwan, where small businesses play a leading part in pushing their economies forward, to see what kind of roles they play and what kind of policies their governments are following to support them, and will review the small business policy measures currently being pursued, and should be pursued, by the Japanese government.
I. Where Problems Lie
1. Mounting Interest for Small Business Across the World
Reflecting the mounting concern and interest in small business across the world in recent years, a number of studies have been made.(1) I would like to point out the following three points.
(1) Small Businesses as Job Creators and Development of New Industries
Since the 1980s, development of small businesses has become an economic policy priority in the United Kingdom because of their job creating potential. Concerned about a rising unemployment rate, the administration of Prime Minister Margaret Thatcher (1979-90) pressed ahead vigorously with a program to promote the development of small businesses and encourage business formation. More recently, as dramatized by the "Cambridge phenomenon" (high-tech startups mushroomed in areas surrounding Cambridge University), priorities of the economic policy of the British government have shifted to supporting venture businesses of the research and development type and to fostering "business angels." (2)
In June 1995, the White House Conference on Small Business was held for the first time in ten years, which served to demonstrate President Bill Clinton' s strong interest in the development of small businesses.(3) In addition, small businesses are attracting attention because of the leading role the high-tech ventures have played in recent years in reviving the U.S. economy and the contribution small business have made in creating jobs in the service industry.
When viewed from the standpoint of contribution made in the creation of jobs, small businesses of developing countries also are making significant contribution, and developing countries are devoting major effort to fostering and encouraging the development of small businesses.
(2) Small Businesses as a Playaer Forming Linkage among Industries
Because of the necessity of developing countries, including those in Asia, in reducing trade deficits, strengthening the industrial base, and forming a linkage among industries, the development of supporting industries (such as the parts industry and the materials-process industry) has taken on a critical importance. As I have discussed the subject elsewhere,(4) I will not go into detail. Suffice it to say that the recent currency turmoil that had hit Asian countries has brought the vulnerability of their industrial base to light.
(3) Networking of Small Businesses as a Source of Competitiveness
Lately, the world's interest in industry clusters in certain localities as those developed in Italy has been mounting.(5) In Italy, there are many localities where the production of certain categories of goods such as woolen fabrics (Prato), silk (Como), and furnitures (Blianza) is concentrated. These areas of production is sustained by cooperative relationship and network based on mutual trust among entrepreneurs, which makes it possible for its members (1) to respond flexibly to changes occurring in their business environment through flexible specialization of labor, (2) to make sustained innovations, and (3) to form new businesses through spin-offs.
Realizing that the competitiveness of a company depends on the way in which its production processes are integrated and on the cooperation among related companies, regional economies are being actively analyzed from the standpoint of industry clusters and corporate networks. Under such circumstances, comparative studies of industry clusters in developed countries,(6) and analyses of developing economies from the standpoint of industry clusters are being conducted.(7)
2. Reasons for Selecting the United States and Taiwan for This Study
As stated at the beginning, this article will take up the role played by small businesses in the United States and Taiwan, and the small business policies pursued by the governments of these two economies for the following reasons
The approach taken by the U.S. government to the issues of small business are basically different from that taken by the Japanese government. While the former characterizes small businesses as a composing element of the market economy and has directed major thrusts of its effort to their development and the maintenance of the competitive environment of the market, the latter has focused on giving priority to helping small businesses meet changes occurring in the market environment surrounding them. However, as the economy has faltered continuously and the ratio of business formation has decreased in the 1990s, the Japanese government has come under growing pressure to change its policy from one strongly tiled toward industrial policy to one geared to the market principle. Therefore, I felt that the experience the United States has had in this area offers important implications to Japanese policymakers in the formulation of a small business policy.
In the case of Taiwan, the policy pursued by its government did play a role in spurring the growth of its high-tech industry, but what had played a major role in sustaining the forward momentum of Taiwan's economy was the networks of small businesses. And I feel that Japanese policymakers could draw a lesson from the role played by these networks of small businesses.
II. Human Resource Development in the Production Workplace
1. Characteristics of Skill Formation in Jpanese Companies
Before examining the situation in local subsidiaries of Japanese companies in Southeast Asia, we first need to analyze the meaning of "skill formation" in production workplaces in Japan, and the characteristics of the methods used to develop skills.
(1) What Are Skills?
The goals for employee training in the production workplace are broadly divided into productivity improvement and the acquisition of complex skills. Productivity can be improved by (1) increasing work speed, (2) improving production processes, (3) raising yields, (4) increasing operating rates, and (5) building the ability to respond quickly to changes in plans.
Work speed is increased largely by employees learning their respective tasks. However, the other prerequisites for productivity improvement depend on a variety of contributions from workers. For example, the improvement of production processes depends on the development of new ideas in the workplace. This is not possible unless employees continually monitor operations on a day-to-day basis, identify possible improvements, and make suggestions.
The nature and effectiveness of such improvements is determined to a large extent by each worker's knowledge of products and facilities and their understanding of overall production operations. To raise yields, improved quality control in the workplace is essential. This depends not only on observance of formal quality control procedures, but also on intervention to identify the causes of product defects and record any action taken.
The improvement of operating rates is linked to facility maintenance. While actual maintenance may be carried out by specialist staff, production workers also play an important role in such areas as day-to-day preventive maintenance and the identification of abnormal situations.
In other words, the contribution sought from workers is not limited to the efficient implementation of operations in the areas for which they are responsible. Worker input is also needed in such areas as quality control, maintenance, and process improvement. The ultimate purpose of training is to expand worker's knowledge of production, and to build their ability to deal with problems.(7)
Where skilled workers, such as those responsible for machine processing, are concerned, it is necessary not only to improve productivity but also to give them the ability to learn complex skills. Specific criteria for skilled workers vary widely according to the particular type of work. For example, criteria for skilled lathe operators is different from that for skilled painters.
Koseki (1985) emphasizes the importance of "intellectual skills." He defines these as the ability to initiate and arrange tasks. "This is not a matter of manual dexterity.....They need the ability to identify the key components of a task, aspects of the task that require special care, points of vulnerability, and knowing what tools to use." The common requirements for skilled workers, regardless of the particular area of work, appear to be judgment skills and insight based on past experience.
(2) Training and Incentives
How are such skills developed? In addition to effective training systems, human resource development also depends on the use of incentives to motivate workers.
According to the Japanese Ministry of Labor (1996), over 80% of Japanese companies with 300 or more employees use organized on-the-job training (OJT) to train staff. The percentage is especially high in production operations.
OJT is a method that allows workers to learn while actually working. Basically, a superior or experienced fellow-worker first demonstrates and explains the task. The trainee then attempts the task and is assessed by the superior or experienced fellow-worker. Through these processes, and through repeated job rotations, the trainee advances from simple to complex tasks and diversifies the range of tasks learned. This approach, known as "multiple skilling," enhances the worker's understanding of a wide range of tasks.
Job rotation is extremely important. One of the direct benefits is multi-skilling of workers. This gives employers greater flexibility when dealing with absences or changes in production volume. While the acquisition of work skills through demonstration and evaluation is the elementary goal of OJT, a more fundamental goal is the improvement of problem-solving skills. Job rotation helps workers to develop an ability to see the overall structure of production operations.
A common feature of OJT in Japanese companies is wide-ranging job rotation. Asanuma (1997) divides production operations into production line categories and skilled work categories. He identifies the use of rotation between these two categories as an important feature of Japanese car plants when compared to the American counterparts. The advantages of the Japanese approach are recognized by those involved in actual production operations. They say that workers who have no experience of die maintenance cannot quickly establish the causes of problems on press lines and take appropriate action.
In the United States, the United Auto Workers has negotiated agreements strictly defining responsibilities, which include job descriptions on each job category, basic hourly wages, and rules for transfers between job categories. This approach has resulted in the formation of finely differentiated job categories and clearly defined job hierarchies. Naturally, jobs at the top end of these hierarchies command higher wages. Promotion to these levels is determined by seniority basis.
Workers wanting to work in the categories known as "skilled trades" must first acquire qualifications by completing lengthy apprenticeship-type training courses.(8) Similarly, in Germany, where qualifications are a fundamental part of the social structure, there are stringent qualification requirements for skilled work.(9) It would be difficult to reconcile the wide-ranging job rotation systems used in Japan with practices such as these.
OJT is more than just a process for learning job skills. It is also an on-the-job screening (OJS) process. In the course of their day-to-day work activities, employees are evaluated and promoted on the basis of such criteria as work skills, ability to instruct younger workers, and leadership. In this way, they can advance to the upper rank of job grade system or even higher positions.
OJT is never ending. Workers promoted to team leader or section leader status need to develop problem-solving skills in keeping with those positions. They can acquire those abilities only through their actual work activities. As workers advance to higher ranks, however, the proportion of companies which provide them with off-the-job training (Off-JT) outside of the workplace tends to increase.(10) Off-JT, which usually involves group courses, is seen as a way of systematizing knowledge gained through day-to-day operations. In this sense, it complements OJT.
OJT-based training in Japan focuses on the long-term development of employee skills and assumes long-term employment with the same company. The investment is considerable for both worker and employer, and a considerable portion of job skills are specific to particular companies. To encourage long-term employment, wage structures and promotion systems are designed to favor those with long years of service. Koike (1997) identifies two characteristics of wage systems for production workers in Japanese companies. First, the wage curve is linked to years of service. Second, there is little variation in wages between clerical and production jobs. In the West, wage curves for white-collar workers are sometimes linked to years of service.
A feature of Japanese systems is that this pattern is also applied to production workers. This is because the wages of production workers in Japan are determined not by the job, but by the grades based on the years of employment and ability, and that wages rise over the years through a series of "periodical salary increases." This does not mean, however, that all workers' wages rise at the same rate. To encourage individual effort, a competitive environment is maintained by means of an "assessment" process that is reflected in promotions and wage increases.
3. Features of the Small Business Policy of the United States
(1) A Small Business Policy Designed to Help Individuals Exercies Their Independence
In the foregoing, I surveyed the environment in the United States which is supportive of business formation. It reflects the basic idea underlying the small business policy of the United States.
Article 2 of the U.S. Small Business Act of 1953 states that "he essence of the American economic system of private enterprise is free competition. Only through full and free competition can free markets, free entry into business, and opportunities for the expression and growth of personal initiative and individual judgement be assured.
The preservation and expansion of such competition is basic not only to the economic well-being ... cannot be realized unless the actual and potential capacity of small businesses is encouraged and developed. It is the declared policy of Congress that the Government should aid, counsel, assist, and protect, insofar as is possible, the interests of small-business concerns in order to preserve free competitive enterprises, to insure that a fair proportion of the total purchases and contracts or subcontracts for property and services for the Government (including but not limited to contracts and subcontracts for maintenance, repair, and construction) be placed with small business enterprises, to insure that a fair proportion of the total sales of Government property be made to such enterprises, and to maintain and strengthen the overall economy of the Nations.h
In other words, the United States is devoting major effort to supporting and assisting business formation because it believes that small businesses are a key element in supporting free competition and that guaranteeing individuals the opportunity to run their business independently leads to the prosperity of the nation.
(2) Features of the Recent Small Business Policy Measures
The small business policy measures of the United States basically is built on three pillars, namely, financial assistance, managerial guidance, and government procurement from small businesses. Features of its recent small business policy measures may be summed up as follows.
1) Finacial Support Mainly in the Form of Credit Guarantee
During the Presidency of Ronald Reagan, the small business policy of the United States changed its focus. More specifically, the Reagan Administration sharply cut down on the number of staff in the Small Business Administration, as part of its drive to realize a small government, and in 1982, it abolished the direct loan program of the Federal Government except a certain portion of it. As a result, the weight of federal financial support of small businesses shifted to credit guarantees.
2) Reduction of Documentation Requirements
With the aim of reducing documentation requirements imposed on small businesses, a Low Doc Loan System was introduced. Under this system, any person who applies for a credit guarantee worth US$100,000 or less has only to fill out a one-page application furnishing information concerning the applicant's character and debt performance records.
3) Service Offering through One-stop Shop(9)
With a view to offering interested persons one-stop shop, the Small Business Development Centers (SBDCs) provide with comprehensive services including managerial guidance and technical support. SBDC is a project jointly undertaken by the Federal Government, state governments, municipalities, educational institutions, and the private sector, and there are 57 SBDCs (with 950 subcenters) in the United States.
In addition, there are U.S. Export Assistance Centers (USEACs) which provide assistance to exporters. This system is designed to make assistance (such as counseling, information, and financial assistance) of the Small Business Administration, the Export-Import Bank, and state and municipal governments at a one-stop shop.(10) At present, USEACs are in about 20 cities including Atlanta, Boston, New Orleans, New York and Seattle, and to make such services available in other cities and states, District Export Councils have been established with the cooperation of state and municipal governments, local export promotion organizations, and private companies.
Of greater interest in recent years is the movement aimed at developing a linkage between SBDCs and USEACs.(11) If this comes to pass, the whole system will come closer to offering one-stop shops to small businesses.
4) Active Utilization of the Market Mechanism
Administrators of this system have been actively seeking to utilize the market mechanism in its operation. A good example of such effort is the small business innovation research program. This program is designed to encourage 11 government agencies which are required to consign research and development (R&D) projects worth $100 million or more to outside organizations to earmark a certain percentage of their budget for consignment to small business, and thus encourage R&D activities of small businesses.
This program is carried out in three stages. At the first stage, ideas proposed by small businesses are evaluated and selected on the basis of their scientific and technological merit and the feasibility of their commercialization. There is fierce competition for contracts (Fig.3). At the second stage, candidates offering a high feasibility of commercialization are picked from among those which have actually produced a prototype of product or have developed a production process. It is at this stage that the government grants R&D subsidies. At the third | and commercializing | stage, companies participating in the program are required to finance their project with private capital.
Another example is the way the SBDCs are run. The Small Business Administration subsidizes 50% of the budgets of the SBDCs (the budget of each center is allocated on the basis of the population of the district each SBDC serves), and the Federal Government consigns private organizations to evaluate the results achieved by, and the management of the program of, one half of the SBDCs each year.
5) Assistance to Small Businesses Run by Minorities and Women Entrepreneurs
To provide financial assistance to minorities and woman entrepreneurs, the Federal Government has established a prior loan approval system. Under this system, a credit guarantee is provided prior to the application for a loan worth $250,000 or less to small business owners, who are selected on the basis of their characters, credit standing, debt performance records, business experience, and financial ratio, rather than the collateral they offer.
With a view to expanding business opportunities for businesses owned by women, all departments and agencies of the Federal Government are required to procure 5% of their needs from businesses owned by women. In addition, the government offers training programs for women entrepreneurs.
III. Small Businesses in Taiwan and Its Small Business Policy
1. Small Businesses Lead the Export Industry
Taiwan's economic structure is characterized as one built around small businesses, as opposed to the chaebol (conglomerates)-led economy of South Korea.(12) During the recent currency turmoil that swept through Asian countries, the new Taiwan dollar suffered much lightly than the Korean won did. This is due largely to the fact that while Korean chaebol relied heavily on domestic and foreign bank loans to finance their business expansion plans, small businesses in Taiwan raised their investment funds through a network of personal connections (family members, relatives, and friends),(13) and its high-tech companies have actively raised funds through equity financing.
In Taiwan, the term "mall business" refers to manufacturing companies with a paid-in capital of NT$ 60 million or less or employing 200 workers or less, or service companies with annual sales of NT$80 million or less or employing 50 workers or less. In 1996, small businesses accounted for about 98% of Taiwan's total number of companies and about 79% of the total work force. Moreover, they accounted for about 50% of Taiwan's total exports. While this figure is somewhat smaller than the share they had some years ago, it is still higher than the figures for other countries.
There are several reasons why small businesses have prospered especially in export industries in Taiwan. In its report titled The Miracle of East Asia, the World Bank pointed out that among the East Asian countries, the small business policy of Taiwan has been most successful.(14) In addition to its policy, however, active business formation inspired by laoban (independent-mindedness)(15) and the following reasons may be pointed out.
First, dominance of government-owned companies in the basic industry has continued for many years.(16) Basic industries including steel, petrochemicals, and finance have been fostered under the government protection during the years of industrialization through import substitution, and these industries were dominated by government-owned companies until their privatization started in recent years. And because of the dominant position the government-owned companies had held, private capital (mostly indigenous capital) had to move into export industries.
Second, foreign-affiliated companies sought to tie up with local small businesses. One of the reasons that export industries had grown in Taiwan is the fact that Japanese trading companies and American retailers took upon themselves the function of procuring raw materials for and marketing the goods produced by Taiwan's small businesses, helping the latter specialize in production as international subcontractors.
The third point is the existence of flexible specification of labor among small business. In addition to the concentration of parts industries, there are companies specializing in product designing and development or marketing. As companies passed orders which they cannot fill in time on to other companies under such arrangement, they have been able to nimbly respond to changes occurring in the economy or in orders, and have thus created a system enabling them to produce goods at a minimum cost in short delivery time. This flexible specification among small businesses has led to the growth in production of goods for overseas market and to the expansion of subcontracts received from foreign companies.
2. Features of the Small Business Policy of Taiwan
The policy objectives defined in the Statute for Development of Small and Medium Businesses of 1991 are (1) the creation of management environment conducive to the development of small businesses, (2) the improvement of efficiency and productivity of the manufacturers, and (3) the modernization of management of service and commerce companies and qualitative improvement of services. What is more, Taiwan has created eight systems for the guidance of financial services, business management, production technology, research and development, information management, industrial security, pollution control, and the market to support its small business policy measures.
As Japan had done in the past, major thrusts of the small business policy of Taiwan were directed toward modernizing its small businesses. A closer look at its policy reveals, however, that some part of its policy are modeled on Japan's small business policy and other parts on that of the United States.]
(1) Policy Measures Modeled on Those of Japan
1) The Centre-Satellite Factory System
This is a system designed, on the model of the subcontracting system of Japan,(17) to reduce costs and improve product quality by developing an organic relationship in the division of labor between a large company and small companies. In 1984, the Taiwanese government formed a team within the Industrial Development Bureau of the Ministry of Economic Affairs for the promotion of the center-satellite factory system, and in 1990, it established the Corporate Synergy Development Center. The Center's objectives are to create the center-satellite factory system among business companies and improve their competitiveness by promoting tie-ups and cooperation among participating industries.
In January 1987, the number of central factories registered with the system stood at 40 cases representing 791 makers. Ten years later, in June 1997, their number increased to 179 factories embracing 2,800 makers. Broken down in terms of industry groups, the automobile industry led the pack with 23 central factories embracing 580 affiliated makers, and it was followed by the machinery industry (with 21 factories embracing 232 affiliated makers), the metal fabricating industry (with 17 factories embracing 266 affiliated makers), and the electronic industry (with 14 factories embracing 179 affiliated makers). It was reported that profits generated through managerial and technical guidance and assistance came to an amount more than 15 times the cost of such guidance and assistance. Judging from these figures, it is fair to say that the center-satellite factory system has achieved considerable results.
Moreover, the Corporate Synergy Development Center has recently been pressing ahead with projects designed (1) to shift from the organization of the conventional pyramidal type to one of the horizontal type, (2) to promote electronic data exchange among their affiliated companies, and (3) to change the focus of its policy measures from quantitative increases to qualitative improvement.
2) Government-affiliated Financial Institutions for Small Businesses
For the purpose of providing loans to small businesses, the Taiwan Business Bank was established in 1976. Prior to that, the SME Credit Guarantee Fund was established in 1974 to give credit guarantees for small businesses which lacked sufficient collateral for loans. However, small businesses account for about 70% of all loans made by the Small Business Bank of Taiwan. This ratio, which is lower than expected, has to do with the fact that small businesses utilize, as mentioned earlier, fund raising sources other than the banks.
(2) High-Tech Industrial Parks Modeled on Those of the United States
1) Rapidly Growing Comtuter and Computer-related Equipment Industry
The computer and computer-related equipment industry of Taiwan has expanded dramatically. The growth of Taiwan's electronics industry followed the pattern of development from original equipment manufacturing (OEM) to original design manufacturing (ODM) and then to independent development of products. Today, Taiwan has a 40% share in the world's personal computer market (including those of OEM) and more than 50% share in the world's motherboard and monitor markets.
The development of personal computer assembly industry has led to the growth in peripherals industry such as monitor and mouse manufacturing, and the expanding production of monitors has sparked the growth in the production of cathode ray tubes. And the concentration of related industries developed in the process has created an environment conducive to the growth of equipment assembling jobs.
A number of factors have contributed to the rapid growth of the computer and computer-related equipment industry in Taiwan.
They are the facts (1) that the industrial structure of Taiwan with many small businesses forming flexible specification among them is well suited to the computer industry which has to contend with short product cycle; (2) that critical to the development of the computer-related equipment industry are designing capability and assembling technologies, both of which do not require advanced fabricating technology; (3) that when the Taiwanese government constructed the Hsinchu Science Based Industrial Park, a number of Taiwanese engineers who had been working at high-tech industries in the United States have returned home to work at such industrial parks; (4) that an increasing orders from American companies for consignment production of computers and computer-related equipment have been channeled to Taiwan through the intermediary of Taiwanese working in the United States; and (5) that an active exchange of people and information has been conducted between Taiwan and Silicon Valley.(18)
2) Goverment Assistance
The government played the following roles in accelerating the growth of the computer and computer-related equipment industry in Taiwan.
First, the government has established high-tech industrial parks. In 1980, it established Hsinchu Science Based Industrial Park, the first science park in Taiwan. The objective of this industrial park is to nurture high value-added industries by attracting talented scientists and engineers and advanced technologies, by introducing technology-intensive industries and engineers from abroad, and by spurring research and development activities. Companies siting their plants in the industrial park are given preferential treatment such as the exemption of corporate taxes for the first five years and tariff exemptions on imported machinery and raw materials. As Hsinchu Science Based Industrial Park was filled to capacity, the government started to construct the second industrial park in Tainan.
Second, the government has established research and development (R&D) organizations and business incubators. One of the difficulties facing small businesses in Taiwan is the inadequacy of R&D investment. To remedy such situation, the government has established R&D organizations to promote technology introduction and R&D activities. This is reflected on a high rate of financing provided by the government to cover R&D costs (Fig. 4). The Industrial Technology Research Institute (ITRI) is one of such government-affiliated organization. It has five institutes under its control.
One of them is the Electronic Research and Service Organization (ERSO) which introduces foreign technologies and encourages private companies to commercialize such technologies. ERSO performs the function of introducing technologies from abroad, training technical personnel, and spreading technologies rather than involving itself in the development of new technology or technological innovation. Semiconductor makers of Taiwan were born in the form of spin-offs from ERSO.
Third, the government has invited back a large number of Taiwanese engineers from abroad. As illustrated in the fact that about a half of the 150-plus companies which have sited their facilities in the Hsinchu Science Based Industrial Park were founded by Taiwanese engineers repatriated from the United States, one of the key factors which has made the industrial park a success was the invitation extended by the government to Taiwanese engineers residing overseas. In an effort to lure them back, the government promised them the same amount of annual income they earned in the United States and has provided housing units for the repatriates.
Fourth, the government actively promoted exports. Established in 1970 for the purpose of promoting export, the China External Trade Development Council (CETRA) has been actively involved in providing information, in holding trade fairs, in giving training on export procedures, in market research, and in the development of export markets. More recently, the government has established the International Sourcing Center (ISC) with a view to transforming Taiwan into an international procurement base for foreign companies. This center provides foreign companies which are interested in purchasing electronics-related parts and finished products made in Taiwan with a data base of Taiwanese companies, and arranges exhibition of product samples for them and shipment of goods they bought.
IV. The Small Business Policy of Japan at a Turning Point
In the foregoing, we have seen an important role small businesses have played in the national economies of the United States and Taiwan, and the various forms of assistance their governments extend to small businesses. In the following, I would like to review the small business policy of Japan, identify the problems it has to address, and discuss policy options open to the Japanese government in light of the experience the United States and Taiwan have had in this area.
1. The Small Business Policy of Japan Tilted toward Industrial Policy
A closer look at the Law Regarding the Establishment of the Small and Medium Enterprise Agency of Japan enacted in 1948 reveals the influence of the thinking underlying the small business policy of the United States. Article 1 of the law states that "The aim of this law is to establish various conditions to foster and develop small and medium-sized enterprises and to improve the management of such in order to promote the healthy independence of small and medium-sized enterprises which contribute to the health of the national economy, help prevent the concentration of economic power, and ensure that opportunities are secured for fair trading practices for those seeking to manage enterprises."
However, a large number of small businesses had gone bankrupt in a succession during the recession that hit the economy after the Korean War (1951-53), the government had to take steps to protect or bail them out. In the ensuing years, the government's attention was focused on the growing gap between large and small companies, leading policymakers to recognize in the Keizai Hakusho (Economic White Paper) for FY1957 the emergence of a "dual structure" of the Japanese economy. They came to realize that in order to strengthen the competitiveness of the Japanese economy as a whole, modernization of the laggard small businesses was essential.
The Small and Medium Enterprise Basic Law enacted in 1963 defined the objective of the small business policy as follows: "Considering the important role that small and medium-sized enterprises play in the national economy, it is therefore the purpose of state policy regarding small and medium-sized enterprises to attempt to encourage the growth and development of small and medium-sized enterprises and contribute to the economic and social status of the employees of small and medium-sized enterprises so as to allow them to fulfill their important role in the national economy and, rectifying the disadvantages of small and medium-sized enterprises caused by economic and social restraints, in order to assist the independent efforts of small and medium-sized enterprises, to improve productivity and trading conditions so that differences in productivity among enterprises may be reduced" (Article 1 of the Small and Medium Enterprise Basic Law).
In 1963, the Law Regarding Small and Medium Enterprise Modernization was enacted, and this law placed emphasis on the modernization of small businesses. Pursuant to this law, the government has set goals for each industry group in terms of the modernization of facilities of small businesses and corporate integration and has created systems for financial assistance, preferential taxation, management guidance, and information service. Since its enactment, the law has been amended several times to facilitate structural reforms by industry group. As the industrial structure of the country has undergone sweeping changes during this period, measures to help small businesses adjust to changing market environment have become a central issue of the small business policy, and the government actively sought to encourage small businesses to sophisticate, internationalize and improve their capacity of data processing.
As the small business policy of Japan has thus tilted increasingly toward the industrial policy, encouragement of business formation and improvement of their competitiveness have naturally discouraged.
2. Changing Policy Vison and Focus
Chusho-kigyo no Sai-hakken | 80 nendai Chusho-kigyo Vision (Rediscovery of Small Businesses: A Vision of Small Businesses in the 1980s) published by the Small and Medium Enterprise Agency in 1980 made public a change in the basic thinking underlying the small business policy. In that report, the government affirmatively acknowledged the diversity of small businesses, and adopted a basic policy goal which was aimed at bringing such diversity to bloom. As the years rolled into the 1980s, the government also sought to encourage the formation of venture businesses and exchanges among different industry groups as its new policy measures.
The government's stance in evaluating the roles played by small businesses was unveiled more clearly in a booklet titled 90 nendai no Chusho-Kigyo Vision (The Vision of Small Businesses in the 1990s) released by the Small and Medium Enterprise Agency in 1990. It defined the roles of small businesses as (1) a competing player in the market, (2) contribution to a higher living standard, (3) the offering of an opportunity for creative initiatives, (4) contribution to the creation of communities with unique individualities, and (5) a player of internationalization at a grass-roots level.
As the basic idea of its small business policy, the report lists (1) the encouragement of self-help effort of small businesses, (2) the creation and maintenance of fair conditions for competition, (3) the pursuit of a policy geared to meet the diverse needs of small businesses, (4) the promotion of policy measures designed to create a new organization reflecting the growing importance of networking, and (5) the building of an efficient and readily comprehensive policy system.
As priorities of the small business policy, it proposes (1) the strengthening of managerial software resources, (2) the encouragement of business formation, (3) the promotion of a policy for supporting active conversion into new lines of business, (4) the building of attractive communities with individuality, (5) the promotion of internationalization of small businesses, and (6) the direction of the policy regarding small companies.
Since the mid-1990s, the government has stepped up its effort to encourage business formation and launched a series of small business measures. In April 1995, the Law Regarding Interim Measures for the Promotion of Creative SME Business Activities was enacted, and in July 1995, a special-rule issues market in the over-the-counter market was opened to enable companies of the R&D type to list their stocks even if they ran deficits. And in March 1996, the Japan Small Business Corporation opened a "venture plaza."
3. Problems Facing the Small Business Policy of Japan
What are the problems facing the small business policy of Japan? In the following pages, I would like to review the problems inherent in Japan*s small business policy and those brought to light by a comparison of Japanese policy with those of the United States and Taiwan.
(1) Problems Inherent in the Small Business Policy of Japan
1) The Coverall Nature
An interim report of the Small and Medium Enterprise Policy Making Council released in July 1993 broadly divided measures contained in the current policy for small businesses into three categories. They are namely the measures for enhancing the management bases of small businesses, those for supporting their structural reform, and those for alleviating constraints for businesses particularly small in size (Fig. 5). The impression one gets at a glance of this report is that the existing policy is merely a jumble of measures taken in the past. As a result, it covers everything but offers few remedies.
2) Constraints Imposed by the Framework of the Small and Medium Enterprise Basic Law
As shown in Fig. 5, assistance for business formation and venture business is included as a way to support structural reform, and this suggests that the small business policy as a whole has basically been incorporated into the framework of the Small and Medium Enterprise Basic Law.
Problems inherent in this approach become apparent in its policy for promoting internationalization of small businesses. For instance, the Law Regarding Interim Measures for the Smooth Adjustment of Specified SMEs in Coping with Economic Structural Changes Encountered When Advancing into New Business Fields states, in part, that "when the owner of a small business, which does business in a specific industry group exposed to multifarious and structural changes of the economy under a bleak management situation where its production or transaction value have decreased considerably, plans to venture into a new field of business, and when he conducts his business in accordance with the plan which is to be approved by the prefectural governor, he becomes eligible for a low-interest loan from a government-affiliated financial institution and for a preferential tax treatment."(19)
However, as involvement in international business is defined within the context of industrial restructuring, the owner of a small business which is performing well and plans to make foreign investment to exploit a business opportunity in foreign market is not eligible for such loan.
3) The Opacity of the Vision of the Policy as a Whole
Since the 1980s, the vision and the focus of the small business policy has changed. Nevertheless, as the old policy measures have not been updated to reflect changed focus, the guiding principle of Japan's small business policy has become blurred. Put bluntly, the government is contradicting itself by adhering to a protective industrial policy on the one hand, and by stressing the importance of market principle and the necessity for autonomy of small businesses on the other.
(2) A Comparison of Japan's Small Business Policy with Those of the United States and Taiwan
What lessons can we draw from a comparison of the small business policy of Japan with those of the United States and Taiwan? Table 3 sums up the findings of such international comparison.
First, small business policies of these countries are defined within the framework of their economic vision and their view of small businesses.(20) The United States characterizes small businesses as a constituting part of the market economy and as an entity supporting free competition, while Japan views small businesses as an element making up the dual structure of its economy and in need of modernization.
And this difference in viewing small businesses is reflected in their policy measures. However, it is true that since the 1980s, the Japanese government, as noted earlier, has recognized multifaceted roles played by small businesses. Awareness of small businesses as an object in need of modernization can be seen in Taiwan, also, but in the case of Taiwan, small businesses of the R&D type, such as the high-tech companies in the Hsinchu Science Based Industrial Park, also have established their presence in its economy.
Second, while all of these three economies extend financial assistance to small businesses, the approach they take differs from one another. In the United States, the bulk of its financial assistance is extended in the form of credit guarantee for the loans made by private financial institutions. This approach was made in line with a drive launched by the Reagan Administration to scale back government involvement in the economy, and the U.S. government stopped lending directly to small businesses except in a few cases.
Meanwhile, government-affiliated financial institutions, such as the Small Business Finance Corporation, are playing a large role in financing small businesses in Japan, but this system is being reviewed at the Administrative Reform Committee. As in Japan, Taiwan has a government-affiliated financial institutions for small businesses (Small Business Bank of Taiwan) and its government has begun to take steps to privatize the bank this year.
Third, in the United States and Taiwan, businesses are being formed actively, due in part to the existence of a unique system for assisting business formation. In the United States, there are business incubators and business information centers, in addition to a number of institutions and groups including business schools which train business managers, venture capital providers which offer risk capital, and SCOREs which are engaged in voluntary activities. They play an important role in encouraging business formation.
In the case of Taiwan, laoban as a source of entrepreneurship, networks of small businesses, and the introduction and spread of foreign technologies by government-affiliated research institutes are supporting private initiatives taken for business formation. In the case of Japan, the rate of business closures has been outpacing that of business formation since the turn of this decade. Alarmed by the gravity of the situation, the government has at long last come to grips with the problem since the mid-1990s.
4. Desired Policy Direction
When considering what the small business policy of Japan should do in light of the lessons outlined earlier, it is necessary | as Tadao Kiyonari pointed out that "We have reached a point where we have to repeal the Basic Law and replace it with a new legislation"(21)| to overhaul the existing small business policy in line with a new vision and view of small businesses. What is critically important in so doing are the following points.
(1) A Small Business Policy Built Around the Assistance to Business Formation
Given the prospects for a continuing restructuring of large companies and an increase in the ratio of aging population, it is of utmost importance to revitalize the economy by encouraging business formation and by spurring creative new business activities. What is necessary in such cases is to encourage the formation of not just venture businesses of R&D type but also of wide-ranging types of businesses as in the case of the United States. Yoshio Sato points out that "Faced with a falling ratio of business formation, many preach the virtue of assisting start-ups, most of them venture business. To be sure, room for small businesses of the advanced type will grow under the new paradigm. But what is really needed is the successive birth of small businesses which are flush with entrepreneurship and are fitting into a broad spectrum of the society, and whose activities contribute to the development of humane and vital communities."(22)
In this sense, also, major thrusts of the small business policy should be directed toward assisting business formation.
(2) A Policy Geared to International Perspectives
As the Japanese economy expands, it is being integrated into the global economy more than ever before. And this calls for a reorientation of Japan's small business policy from international perspectives. In fact, large companies are already seeking to improve the efficiency of their operations through optimal procurement of goods and services and fund raising from the global markets. For small businesses which do business in the domestic market, also, the strategy for more actively involving themselves in the world markets is essential for their survival in coming years.
In its report entitled "The Vision of Small Businesses in the 1990s" cited earlier, the Small and Medium Enterprise Agency states that "The wave of globalization of the Japanese economy is generating severe pressure on small businesses of this country to incessantly pursue higher added value to their products, to diversify the areas of business, or switch their business to new areas. The globalization of the Japanese economy, on the other hand, increases business opportunities at home and abroad, contributes to the creation of a competition-oriented market environment, and thus exerts favorable influence on the sound development of our industry and economy.As such, globalization of the economy is an inevitable trend." What is needed in coming years is to positively recognize the advantages of internationalization of the economy, (including an increase in business opportunities, the reduction of costs, and the promotion of international division of labor) and to adjust domestic policies to global standards.
(3) Implementation of Policy Measures Tailored to Regional Needs
The last point to bear in mind is the necessity to implement the small business policy measures to meet regional needs. Some point out that the function performed by industrial clusters, which has been a source of competitiveness of the Japanese industry, has weakened because of a rush of failures and closures of small businesses. In an effort to cope with such situation, some companies are actively seeking to build an interregional network of like-minded companies, while some localities are trying to prop up their sagging economies by stepping up exchanges with foreign localities. As demonstrated in the success achieved by joint ventures formed by small businesses in Nagasaki Prefecture and German companies in environment-related business, business tie-ups with foreign companies could lead to the invigoration of domestic economies. The experience of these companies serves to show the necessity for implementing a small business policy designed to meet the needs of each region.
In this article, I have surveyed the role played by small businesses in, and the small business policies of, the United States and Taiwan, and reviewed the problems in the small business policy of Japan as well as examining its future direction. What prompted me to take up the issue were the question as to whether the small business policy of Japan can serve as any guide for the development of small businesses in Asian countries, and the necessity I felt for defining Japanese small business policy in a broader context and clarify its features and the problems it faces.
This article does not go beyond sorting out issues involved, but I shall have another opportunity to take up the small business policies of different countries from a comparative standpoint.
- For further information concerning studies of small businesses in Western countries see Itsutomo Mitsui, "Global ni Mita Chusho-kigyo no Shin-paradigm" (NewParadigm of Small Businesses Seen from Global Perspectives) in Sato (1996); Itsutomo Mitsui, "Sekai-teki na Chusho-kigyo no Shin-jigen" (New Worldwide Dimensions of Small Businesses), in Tatsumi and Sato (1996); and Han Landstrom, Hermann Frank and Jose M. Veciana (1997)
- For further information concerning small business policies of the United Kingdomsee Itsutomo Mitsui (1991); and Simon Bridge, Ken O'Neill and Stan Cromie (1998).Regarding business angels of the United Kingdom, see Richard T. Harrison and Colin M. Mason (1996).
- For further details of the conference, see Yoshio Sato, "Dai-san Shifuku Sen-nen no America Chusho-kigyo - 1995 nen White House Chusho-kigyo Kaigi ni Tsuite" (American Small Businesses in the Third Millennium: On the White House Conference on Small Business in 1995), in Shoko Research Institute, Shoko Kinyu (Commercial and Industrial Finance), August 1995 edition.
- See Hidehiko Mukoyama, "Development of Asian Small and Medium Companies and Japanese Small Business Investment in Asia" in Sakura Institute of Research, RIM, 1995 Vol.4 No.31; and Mukoyama, Saito and Oyagi, "Asia no Chusho-kigyo Seisaku no Genjo to Kadai" (Present State of Small Business Policies in Asia, and Challenges They Face) in Sakura Institute of Research, Sakura Asia Chosa Hokoku (Sakura Asia Survey Report) No.8, March 1998.
- For further information on localities of production in Italy, see studies published by Yoshiyuki Okamoto.
- Kiyonari and Hashimoto (1997).
- Meine Pieter van Dijk and Roberta Rabellotti (1997).
- In the United States, the definition of "small business" varies from one industry group to another. In the case of the manufacturing industry, it generally refers to companies employing less than 500 workers.
- According to a case study made in the United Kingdom by Simon Bridge, KenO'Neill & Stand Cromie (1998), the term "one-stop shop" means a system of providing all necessary services at one agency or place, or one at which full-time representatives of all agencies are present. An agency which provides information concerning agencies involved is called the "first-stop shop."
- Small and Medium Enterprise Agency, Beikoku Chusho Kigyo Seisaku ni Kansuru Chosa Hokoku (Survey Report on the Small Business Policy of the United States), December 1996.
- Trade Promotion Committee, National Export Strategy |Fourth Annual Report to the United States Congress, October 1996, pp.98-99.
- For further information concerning the comparison of the economic developmentmechanism between South Korea and Taiwan, see Hattori and Sato (1996).
- Because of their reliance on such methods of financing and informal financing, the ratio of bank borrowings by Taiwan's small businesses has remained low.
- The World Bank, The Miracle of East Asia, 1994, p.152.
- Characteristics of laoban are (1) independent-mindedness, (2) preference for high risk and high return, (3) profit-driven attitude, (4) orientation toward amassing a fortune, (5) preference for partnership with others, and (6) preference for developing good relationships with others. For further discussions, see Hattori and Sato (1996), Chapter 10.
- More specifically, it is the capital belonging to the Kuoming Tang (the NationalistParty) managed by expatriates who had fled from mainland China. Needless to say, the reins of government of Taiwan are held by those who had fled from the mainland.
- Actually, these Taiwanese companies have learned from the production system and the cooperating factory system practiced by Japanese companies operating in Taiwan. [Taniura (1988), p.192].
- For further information, see Asamoto (1996); and Hattori and Sato (1996).
- Planning Division of the Planning Department, the Small and Medium EnterpriseAgency (1990).
- For further information concerning the method employed for grasping the small business policy, see Teraoka (1996); and Hiroshi Teraoka, "Hikaku Chusho-kigyo Seisaku-ron no Kadai - Oshu-shokoku no Chusho-kigyo Seisaku Tenkai wo Megutte" (Issues in Comparative Study of Small Business Policy: Development of Small Business Policies in Western Countries), in Chukyo University, Chukyo Keiei Kenkyu (Chukyo Management Study), Vol.7, No.2.
- Kiyonari (1997), p.266.
- Yoshio Sato, "Nihon Chusho-kigyo no Atarashii Paradigm" (New Paradigms of Small Businesses in Japan), in Sato (1996), p.5.
- Teruo Asamoto (1996), Gendai Taiwan Keizai Bunseki (An Analysis of Modern Economy of Taiwan), Keiso Shobo, 1996.
- Hidejiro Urata, "Sogyo Shien no Shakai Infra wo Isoge" (Hurry the Social Infrastructure for Supporting Business Formation), in Toyo Keizai Weekly, February 21, 1998 edition.
- Tadao Kiyonari (1997), Chusho-kigyo Tokuhon (Readings in Small Business) 3rd ed.,Toyo Keizai, 1997.
- Tadao Kiyonari, Toshimi Tanaka and Tetsuo Minato, Chusho-kigyo-ron (Small Business), Yuhikaku, 1997.
- Tadao Kiyonari and Juro Hashimoto eds. (1997), Nihon-gata Sangyo Shuseki no Mirai-zo (A Vision of Industrial Concentration in Japan), Nihon Keizai Shimbunsha, 1997.
- Secretariat of the Administrative Reform Committee (1997), Gyosei no Yakuwari wo Toinaosu (A Re-examination of the Role of the Government), 1997.
- Kin-yu Ko (1995), Denno Taikoku Taiwan no Kiseki (A Miracle of an Electronic Giant Taiwan), Ascii Corporation, 1995.
- Hiroyuki Kokado (1996), Angel Network, Chuo Koronsha, 1996.
- Ryutaro Komiya, Masahiro Okuno and Kotaro Suzumura (1984), Nihon no Sangyo Seisaku (The Industrial Policy of Japan), University of Tokyo Press, 1984.
- Materials of Corporate Synergy Development Center.
- Yoshio Sato et al. (1996), 21seiki Chusho-kigyo wa Do-naruka (What will Happen to Small Business in the 21st Century?), Keio University Press, 1996.
- Mikio Sumiya, Shinkei Ryu and Shogen To (1992), Taiwan no Keizai (The Economy of Taiwan), University of Tokyo Press, 1992.
- Takao Taniura (1988), Taiwan no Kogyo-ka - Kokusai Kako Kichi no Keisei (TheIndustrialization of Taiwan: The Formation of an International Processing Base), Institute of Developing Economies, 1988.
- Nobuharu Tatsumi and Yoshio Sato (1996), Shin-chusho-kigyo-ron wo Manabu (ANew Theory of Small Business), Yuhikaku, 1996.
- White Paper on Small Business in the Republic of China, 1996.
- Moriaki Tsuchiya and Yoshiro Miwa (1989), Nihon no Chusho-kigyo (SmallBusiness in Japan), University of Tokyo Press, 1989.
- Small and Medium Enterprise Agency of the Ministry of International Trade andIndustry ed. (1990), 90 nendai no Chusho-kigyo Vision (A Vision of Small Businessin the 1990s), Institute of International Research Trade and Industry, 1990.
- Kanto Regional Bureau of International Trade and Industry of MITI (1996), "Sangyo Shuseki" Shin-jidai (A New Era of Industrial Concentration), 1996.
- Finance Division of the Planning Department of the Small and Medium EnterpriseAgency (1990), Chusho-kigyo Kinyu no Shin-choryu (A New Current of Small Business Finance), Doyukan, 1990.
- Hiroshi Teraoka (1990), America no Chusho-kigyo Seisaku (The Small Business Policy of the United States), Shinzansha, 1990.
- Hiroshi Teraoka (1996), "Chusho-kigyo Seisaku" (Small Business Policy), in Takao Morimoto et al., Chusho-kigyo-ron (A Theory of Small Business), Yachiyo Shuppan, 1996.
- Hiroshi Teraoka (1997), Nihon no Chusho-kigyo Seisaku (The Small Business Policy of Japan), Yuhikaku, 1997.
- Tamio Hattori and Yukihito Sato (1996), Kankoku, Taiwan no Hatten Mechanism (The Growth Mechanism of South Korea and Taiwan), Institute of Developing Economies, 1996.
- Entrepreneur Kenkyu-kai of Waseda University ed. (1994), Venture Kigyo no Keiei to Shien (Management and Assistance to Venture Business), Nihon Keizai Shimbunsha, 1994.
- Shuichi Matsuda (1997), Kigyo-ron (The Theory of Business Formation), NihonKeizai Shimbunsha, 1997.
- Meine Pieter van Dijk and Roberta Rabellotti eds. (1997), Enterprise Clusters andNetworks in Developing Countries, Frank Cass, 1997.
- Hobday Michael (1995), Innovation in East Asia, Edward Elgar, 1995.
- Lall Sanjaya (1996), Learning from the Asian Tigers, St. Martin's Press, 1996.
- Han Landstrom, Hermann Frank and Jose M. Veciana (1997), Entrepreneurship and Small Business Research in Europe, Avebury, 1997.
- Marco Orru, Nichole Woolsey Biggart and Gary G. Hamilton (1997), The Economic Organization of East Asian Capitalism, SAGE Publications, 1997.
- Simon Bridge, Ken O'Neill and Stan Cromie (1998), Understanding Enterprise, Entrepreneurship & Small Business, Macmillan Press Ltd., 1998.
- Richard T. Harrison and Collin M. Mason eds. (1996), Informal Venture Capital,Evaluating the Impact of Business Introduction Services, Woodhead-Faulkner Publishers Ltd., 1996. (Translated into Japanese under the title of Business Angel no Jidai, Toyo Keizai).
- http://www.sbaonline.sba.gov (the homepage of the Small Business Administration of the United States).
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