Role And Future of Small and Medium Enterprises - Case Study Example

Introduction Japan has typically been and still continues to be a nation that is dominated by Small and medium enterprises. For instance; in the year 1995, 83% of all the existing companies in the nation were SMEs. Furthermore, the sector hired 76% of the employees (Meyer, 1998 p.2). In the context of the manufacturing industry, three quarters of the existing firms in the 1990s were SMEs. Nowadays, SMEs continue to dominate the Japanese economy which accounts for 99.7% of all the existing companies and 70% of the entire workforce (SMEA, 2013). The dominance of Small medium enterprises in Japan indicates that they have been undertaking various roles in the Japanese business system. This paper seeks to examine whether the role of small and medium enterprises in Japan’s business system has changed since the 1990, essentially in the manufacturing industry. The scope of the analysis will also be a grounded on evaluating the future of SMEs in Japan’s business system. Change in Japanese SMEs In one way, it can be argued that the role of SMEs in Japan since the 1990 has not experienced changes. Watanabe (1999, p225) in a study to examine the changing image of Japanese Small entrepreneurs discloses the fact that SMEs have played a significant role in the development of Japanese economy. The Japanese economy experienced various economic shocks during the mid-1980s, which influenced a slight decline in business activities. However, the birth rate of businesses bounced back during the 1990’s. The nation experienced an increase in SME activities which further influenced economic growth. This was majorly influenced by government support which spearheaded increased SME activities. For instance, in order to encourage entrepreneurship in the manufacturing sector, the Japanese government devised a temporary legislation in 1995 to encourage creative business activities by SMEs (Watanabe (1999, p.216 ). The legislation involved offering tax concessions, special credit insurance and financial incentives for SMEs in the manufacturing industry. Due to government support, many SMEs were established with many businesses willing to invest in higher technologies that would advance their manufacturing activities. Watanabe (1999, p.221) interviewed a plastic parts manufacturer in Tokyo who had just constructed a new plan in Tokyo. The manufacturer stated that he would invest in computerized manufacturing technologies that would double his production and productivity. Therefore, as Watanabe (1999, p.221) highlights that government support of SMEs during the 1990s greatly transformed the nature of SMEs which further influenced increased business operations making SMEs a significant contributor towards the economic development of Japan. The role of SMEs in the economic development of the Japanese economy has not changed even after the 1990s. Although the Japanese economy has been weakened in the recent years by the 2008 global financial crisis and the earthquake 2011, it can be argued that SMEs have still played a significant role in enhancing the development of the Japanese economy (SMEA, 2013, p24). According to the 2013 White Paper on small and Medium Enterprises, SMEs were also greatly affected by global crisis and the 2011 earthquake , nevertheless SMEs have continued to support Japans economy and leading to a recovery from the recent economic shocks (SMEA, 2013, p215). For instance, the production trend of Japanese manufacturing SMEs greatly declined in 2011, however, by the year 2012 the industry regained its ground leading to an improvement of the economy. Li et al (2011, p 5415) conducted a study on “Sustaining growth in electronic manufacturing sector; Lessons from Japanese mid –size EMS providers”, the findings of the study disclosed that although many SMEs in Japan were seriously affected by the recent financial crisis, nevertheless a good number of SMEs that exist in the electronic manufacturing industry seem to be doing well to a level of attaining significant growth. The growth was mainly attained by acquiring powers of negotiation to attain economies of scale, adoption of IT and reorganizing their supply chain for manufacturing (Li et al , 2011, p.5415). Such growth in the SME sector is also destined to enhance economic growth of the nation. It can therefore be stated that the strength and recovery of the Japanese economy have closely been associated with the dynamics of the activities of SMEs. The role of SMEs in innovation has also not been transformed. The role of SMEs in the innovation process essentially in the manufacturing industry cannot be ignored. Since the 1990s Japan traces its innovation system to the role played by SMEs (Stroz , 2012,p2 ). Innovation was mainly influenced by increased international pressure on Japan to generate original ideas and knowledge. An additional factor was the innovation policy adopted by the Japanese government. The policy involved support of R& D in learning institutions and SMEs. Most of the manufacturing SME companies in the 1990s had an orientation of developing new products out of their own innovative ideas (Storz, 2006, p181). Stroz (2012, p.182) reveals that the role of SMEs in Japan’s innovation system has not changed in fact. SMEs in various industries have actively been involved in innovation with the objective of developing new products that can enhance customer satisfaction. Small and Medium enterprises in Japan have also played an active role in the promotion of employment. Since the 1990s, SMEs have greatly contributed to offering job opportunities for many Japanese people. When looking at the manufacturing industry, in the year 1996, a total of 665, 540 Small and Medium enterprises were operating in Japan. The existing businesses accounted for 99.7% of the manufacturing enterprises. In the similar year, SMEs in manufacturing employed a total of 7, 311, 993 employees, which was 62.1 % of the total employees (Ikea, 2001, p1). During the 1990 SMEs mainly employed part time employees, for instance; in the year 1997, the percentage of part time workers in Japanese large manufacturing firms was 14.2%. On the other hand, SMEs took the largest share in employment of part time workers. Medium firms employed 24.8%, while small firms employed 24.5% of the part time workers in Japan (Ikea, 2001, p1). Even after the 1990s, SMEs have closely been connected to supporting employment as well as providing different types of modes of work. For instance; in the recent years, university graduates have taken advantage of the job openings offered by SMEs (SMEA, 2012, p18). Although the trend of employment in the manufacturing industry has declined due to more employees preferring to work in the service sector, nevertheless it can be stated that SMEs in Japan have played the significant role in provision of employment opportunities. Another significant role of SMEs in Japan is to support large manufacturing companies. SMEs have played a significant role as suppliers to large companies. This role has existed for a long period and has been natured for many years (Broyer, et al 2012, p5). After the 1990s SMEs still undertake the role of support large firms. For instance; large car production companies such as Suzuki, Yahama, Fuji Heavy Industries, Nissan Mortars, Toyota and Nissan, still greatly depend on SMEs in order to support their manufacturing activities (SMEA, 2012). On the other hand, it can be stated that the role of SMEs in Japan since the 1990s has been transformed. One area of change has been in subcontracting. Traditionally, essentially under the Marxist economics, subcontracting in Japan involved an asymmetry trend between small and large firms (Kimura, 2002 p.1). Large firms held the monopolistic type of power whereby they made decisions concerning on prices and the product quality and delivery. Large firms used small firms as their subcontractors in order to take advantage of their technical strength, low wages and supply of raw materials (p164). As the years progressed, the subcontracting relationship changed. In the 1990’s subcontracting changed to become a long term relationship between downstream and upstream firms on the basis of reputation and coordination as opposed to having large firms that had monopolistic decision making (Kimura, 2002 p.1). Schaede, (2008, p151) discloses that between 1998 and 2004, there have been changes in the subcontractor relations within the manufacturing industry. This has been attributed to factors such as globalization. Due to globalization, for instance the introduction of e- commerce, small firms have been able to sell their services and products to more buyers and larger suppliers with strong technical capabilities. In addition, small firms are also getting closer to their buyers through the use of e-commerce. Furthermore, small firms are also able to contribute to the product designs of their buyers for instance in the 2007 relationship between Matsushita Electronics and Toyota. (Schaede, 2008, p151). Although SMEs in the Japanese manufacturing sector greatly supported employment during the 1990, however, after the 1990s, SMEs have witnessed an increased use of outsourcing as opposed to employing new workforce. A case in point is in the recent recession where many SMEs firms preferred to outsource in order to reduce production costs. For instance, in order to sustain growth in the manufacturing industry, many firms opted to outsource employees (Uchikawa, 2008). The adoption of outsourcing has resulted to a reduction of permanent employment rates. The future of SMEs in Japan’s business system SMEs in Japan are still destined to be the future growth drivers of the Japanese economy. The state of SMEs in Japan provides an indication that they have the potential be the driving force of the economy in the future. This is because, despite the challenges facing the sector such as a reduction in domestic demand, what is evident is that SMEs in Japan are usefully internalizing and tapping into the engine of growth within economies in Asia (Economist Intelligence Unit, 2010, p.6). In addition, many small and medium enterprises are actively involved in innovation. What is evident is that based on the fact that SMEs form a lion share of businesses in the Japan, then prospects of the future indicate that they are guaranteed to be the drivers of economic growth (Economist Intelligence Unit, 2010, p.6). Another future aspect concerning SMEs in Japan is that they are likely to face challenges in terms of acquiring finances. Economist Intelligence Unit (2010) discloses that banks are becoming increasingly reluctant to offer small companies funds. Due to the recession, banks have become reluctant to provide funding to SMEs. This implies that SMEs are likely to experience a decline in their business activities in future due to the lack of adequate funding yet growth in SMEs requires effective funding (Economist Intelligence Unit, 2010, p.9). SMEs in Japan are also likely to be key drivers of for innovation in Japan. Fukugawa (2006, p.181) pointed out that SMEs in Japan have actively been involved in activities that promote innovation. Such initiatives include R& D and knowledge sharing. Fukugawa (2006, p.182) further highlights that; there has been intense commitment by SMEs to come up with joint product development. Furthermore, SMEs have been in contact with external knowledge sources like Research institutes in order to attain technical achievement in innovation. Due to adoption of such initiatives, SMEs are likely to advance innovation in Japan in the future. SMEs also have a potential to be the driving force towards the development of large industries or firms. SMEs in Japan are in a continued process of expanding their production activities both to local and international markets. By expanding their activities, SMEs are destined to rise to the level of being large firms. For example, large firms including Honda, Toyota and Sony, initially began as small family businesses. However, with time, the firms were able to advance their operations to becoming large firms that meet the demands of both local and international markets (Gamage, 2014, p38). Thus, it can be stated that with continued expansion, SMEs can be transformed to large firms. The future of subcontracting in Japanese SMEs is that they have the potential to enhance efficiency in production within the manufacturing sector. Uchikawa (2008, p162) highlights that growth in the productivity of the manufacturing sector has been attributed to involvement in subcontracting. Although the sub-contracting system has been changing over the years, the existing division of labor that exists between large enterprises and Small and Medium enterprises are still effective. This basically implies that production in the manufacturing industries will improve while firms in the manufacturing industry continue to improve. Conclusion The discussion has presented various views concerning whether the role of Japanese SMEs has changed since the 1990s. Some of the factors highlighted to argue that changes have not taken place include the fact that SMEs have been a driving force towards the development of the Japanese economy. In addition, SMEs still play the role of promoting employment and supporting large manufacturing companies. On the other hand, changes have occurred in Japanese SMEs which include; changes in sub-contracting and the use of outsourcing in employment. The paper has also examined the future of SMEs in Japan. Most of the points stated give an indication that SMEs are still destined to provide positive contributions to Japan. References Broyer, S, Iwahara, K, Wirschke, C, 2012, The misfortune of Japanese SMEs: A prophecy for Europe, Economic Research, p5. Economist Intelligence Unit, 2010, SMEs in Japan, A new Growth Driver , The Economist,p6-9. Fukugawa , N, 2006, Determining factors in innovation in small firms : A case of cross industry groups in Japan, Small business Economics, 27, pp 181-193. Gamage, A, 2014, Recruitment and Selection Practices in Manufacturing SMEs in Japan: An analysis of the link with business performance, Ruhuna Journal of Management and Finance, 1 (1),p 37-38. Ikea ,2001, Employment relationships in micro and small firms , Country Profile Japan, Basque Institute of Research and studies . Kimura , F , 2002, Subcontracting and the performance of small and medium firms in Japan, Small business Economics , 18, pp p 1-3 , 163-75. Li , H, Tan , K, Atsunori, H, 2011, Sustaining growth in electronic manufacturing sector; Lessons from Japanese mid –size EMS providers, international , Journal of production, International Journal of Production Research , 49(18); 5415-5430. Meyer , D, Muzyka, D, Probert, J, 1998, Small and Medium Enterprises in the Japanese Economy, Euro- Asia Centre For Research,p2. Schaede, U, 2008, Subcontracting Globalization and supplier relations, in Choose and Focus; Japanese Business Strategies for the 21st Century, Ithaca : Cornell, 134-152. SMEA, 2013, White paper on Small and Medium Enterprises in Japan, Tokyo; Small and Medium Enterprises Agency, METI. SMEA, 2012, White paper on Small and Medium Enterprises in Japan, Tokyo; Small and Medium Enterprises Agency, METI Storz, C, 2006, Small Firms and Innovation Policy in Japan, London : Routledge , p181-193. Storz, C, 2012, Small Firms and Innovation Policy in Japan, Routledge Contemporary Japan Series. Uchikawa , S, 2008, SME under Recession in Japan, JETRO. Watanabe, 1999, A changing image of Japanese small entrepreneurs , In D. Dirks er al. (eds.) Japanese Management in the Low Growth Era : Between External Shocks and Internal Evolution. Berlin: Springer) pp 207-227. Read More