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September 22, 1999
Small and Medium Enterprise Agency
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| New Policy Objectives for the Twenty-first
Century |
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Developing and growing a wide range of independent small and medium
enterprises (SMEs) for greater economic vitality
[Giving freer rein to SMEs' diversity and creativity]
SMEs that can be wellsprings of economic dynamism as they
exercise
their agility, flexibility, and creativity.
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[Expectations of the SMEs] |
(1) Hotbeds of competitiveness: It is hoped SMEs will revitalize
market
competition and foster economic renewal.
(2) Innovators: It is hoped SMEs will draw upon their innovative
technologies to create new business models.
(3) Attractive job creators: It is hoped SMEs will exercise
their
entrepreneurial spirit and provide arenas for self-fulfillment.
(4) Leaders in economic development: It is hoped SMEs will
form the loci of
regional industrial and commercial clusters.
1. Supporting bootstrap efforts for business innovation and start-ups
Efforts are to be made to support bootstrap efforts by ambitious
entrepreneurs wanting to establish or grow their businesses or wanting
to re-engineer their companies.
2. Creating a more competition-conducive climate
Efforts are to be made to offset market inefficiencies by ensuring
that SMEs have better access to capital, human resources, technology,
information, and other resources and are able to compete on a equal
footing.
3. Providing the necessary safety net
Along with seeking to soften the impact of abrupt environmental changes
and to facilitate apt responses by entrepreneurs, efforts are to be
made to ensure that people have a second chance to use their skills.
[Consideration for Micro-enterprises]
Micro-enterprises are well suited to enabling their founders to exercise
their creativity and special skills, and they offer excellent opportunities
for personal start-ups. In implementing SME policy in line with the
above objectives, it is imperative that all due consideration be paid
to micro-enterprises' operational foundations and management forms
so that they can vigorously exercise their diversity.
[Reference]
The present Basic Law for Small and Medium Enterprises
[ Background ]:
This law was enacted in light of Japan's dual structure
between big companies and SMEs in terms of productivity
and other factors.
As such, it is aimed at rectifying what were seen as the
inherent difficulties of having too many too-small SMEs and
was premised upon a reading that SMEs were necessarily and
uniformly disadvantaged.
[ Policy Concept ]:
[ The main policy objectives are stated as ]:
| (1) |
Greater sophistication in the SME sector to improve
manufacturing productivity (e.g., modernization of facilities,
optimization of corporate scale, and cooperation and collaboration
among enterprises)
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| (2) |
Leveling the playing field (i.e., offsetting SME disadvantages)
so that they can deal with other companies on a more equal
footing (e.g., by preventing excessive competition and
ensuring they have the appropriate business opportunities).
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| Environmental changes since then
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| (1) |
Inversion of the relationship between start-up rate and failure
rate (i.e., less concern about there being too many companies
and a new emphasis on the need for start-ups) |
| (2) |
Qualitative changes in differentiation as Japanese income levels
have risen (i.e., the shift from emphasizing equality of results
to emphasizing equality of opportunity for starting and growing
companies. |
| (3) |
Greater SME diversity |
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| Environmental Changes and SME Policies
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- Strengths because of small scale
* Flexible and able to change ( compared to large corporations,
adaptable
and able to make decisions rapidly )
* Inducive to individuality and creativity ( high employee satisfaction
)
----> Developing conditions in which SME strengths are utilized
to the full,
amid environmental change.
- Weaknesses because of small scale
* Difficult to secure all management resources such as capital,
personnel,
technology and information, internally ( e.g. have technical ability
but no sales experience )
* In many cases, also difficult to secure management resources that
are
lacking, from outside
----> Diversification of insufficient management resources and
management issues for each SME, amid environmental change
The policy approach of the present Basic Law, which is based
on a negative image of all SMEs as being weak, and is carried
out uniformly as a rescuing- type policy, needs to be revised.
Based on the fact that SMEs are a very diverse group, SME
policies need to be reconstructured to respond to each SME's
level of growth and business activities, and to enable them
to conquer their weaknesses and fully utilize their strengths.
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1. Supporting bootstrap efforts for business innovation
and start-ups (1) Promoting business innovation
Traditional policies centered on facility modernization through
the various industry cooperatives are proving less effective today.
Instead, multifaceted support, including that to inter-industry
networks, is needed to facilitate business innovation for the
independent specialization that so many SMEs are working for.
From support for new equipment to support for coping with a
diversity of management issues (e.g., research and development
and human resources development)
- Organizational intermediaries:
From industry cooperative to the diverse range of voluntary
groups and other network organizations that have sprung up to
meet new needs, as well as individual SMEs,.
- Financing support system for structural upgrading:
From the pursuit of economies of scale as in collective operations
to support for individual SMEs in their business innovation
(2) Support for ventures
An effort needs to be made to facilitate an environment conducive
to the emergence of ventures commercializing original technological
insights or developing new business forms and models, and to support
these start-ups' bootstrap efforts.
* Capital markets have to be improved, including reforming
and revitalizing OTC markets and creating a better market for
privately held shares.
* Efforts have to be made to broaden the pool of available
capital, including making more use of limited liability investment
partnerships and creating tax preferences for private investors
( business angel ).
- Enhancing the ventures support infrastructure
* Efforts have to be made to foster venture capitalists and
other discerning support specialists and to create networks
of such support personnel.
- Promoting technological development and commercialization
* Efforts must be made to enhance the Small Business Innovation
Research (SBIR) program and to facilitate technology transfer.
(3) Promoting start-ups
The present Basic Law says nothing about start-ups. Yet it is
essential that policy resources be allocated toward the creation
of a climate conducive to new business start-ups. This is an important
SME policy focus.
- Facilitating the supply of start-up capital
* Capital procurement should be facilitated in light of the
SMEs' typical lack of physical collateral and unproved credit
record.
- Improving the start-up infrastructure
* Networking among the concerned institutions should be strengthened
to ensure that these start-up support policies are better understood,
and the range of seminars, workshops, and other educational
opportunities for entrepreneurs should be enhanced.
- Fostering the entrepreneurial spirit and improving the entrepreneurial
climate
* Efforts should be made to expand the range of offerings and
to strengthen the curricula for entrepreneurship education in
universities and other educational institutions, as well as
to strengthen retraining programs for mid-career people.
(4) Business innovation in the commercial and service sectors
It is important to support business innovation in the commercial
and service sectors consistent with the special features that
characterize these sectors. Looking especially at the small retail
sector, and given the fact that small retail operations are typically
part of larger integrated organizations, policies should be considered
that encourage restructuring within these organizations and the
emergence of new organizational structures.
- Shifting the emphasis to support for competitive commercial
districts.
* Study needs to be given to policies for restructuring commercial
districts' organizational strength as part of the effort to
promote evolutionary change in commercial districts and investment
in commercial districts.
* The emphasis has to be on supporting independent initiatives
by local communities, such as those to revive their city centers.
- Support for individual retailers
* Support should be provided for start-ups, type conversion,
information networking, and other managerial innovation.
- Support should be provided for innovation in the wholesale
sector, including retail support for closer integration among
manufacturing, distribution, and retailing.
2. Creating a more competition-conducive climate (1)
Facilitating capital procurement and enhancing equity capital
Public financing systems should be strengthened, even as they remain
inherently complementary to private-sector financing, to respond to
the diverse capital requirements of start-ups and business innovation
and to enhance their safety-net functions. At the same time, the climate
needs to be improved to facilitate access to direct financing, including
facilitating bond issues and other tools in line with the diversification
of capital procurement means.
Special measures should be taken with regard to SME taxation consistent
with such operating environment improvements and policy initiatives
so as to promote the stabilization of the SMEs' managerial foundations
and their entry into new areas.
[ Capital supply ]
* There is a need to move away from collateral-secured lending
and to put more emphasis on technology, commercial feasibility,
and other non-financial factors in considering loan applications,
as well as to devising more flexible systems in terms of interest
rates, interest-payment grace periods, and the like.
* There is also a need to move away from qualitative complementation
and to enrich the credit-worthiness complementation systems and
deal with systemic risk, as well as putting greater emphasis on
safety-net aspects.
* There is a need to move from indirect financing to promoting
the issuance of corporate bonds, including making greater use of
credit guarantees, and to improving the data accumulation as it
relates to risk assessment.
- Improving the SME operating environment
* Consideration of preferential taxation for start-up "angel"
financiers
* Study of the taxation of reserves held by family-owned companies
and other facets
* Study of business inheritance taxes and the like premised on
this need to improve the business climate
- Special attention to special measures with regard to gross taxation
* The emphasis should be on the things that are really needed,
such as business innovation and new technology utilization
(2) Enhancing intangible management resources
The government should scale back its "guidance" role and
shift to support for market mechanisms and private-sector initiatives
so as to promote the enhancement and strengthening of intangible management
resources such as managerial expertise, technology, and the information
needed for restructuring and start-ups.
- Restructuring support policy implementation
* National: There is a need to place more emphasis on formulating
basic policies, indicating a menu of options, and conducting model
programs and wide area programs.
* Prefectural: The prefectures should select from among the options
on the national government menu and then implement these policies
on their own. At the same time, they should strengthen their core
support organizations for one-stop service.
* From organization oriented budgeting to organization's function
oriented budgeting by policy theme
* From guidance by the government and industry organizations to
greater use of private-sector experts who satisfy certain minimum
qualification criteria
* Consistent with this, the qualifications for Registered Smaller
Enterprise Consultant should be reviewed with a view to moving away
from the present system in which this is a person who supervises
assessments for local governments to a new system making broader
use of private-sector experts.
- Facilitating technological development
* There is a need to strengthen the cooperative arrangements
among public testing laboratories, universities, core support
organizations, and the like in support of technological development
and to beef up the Prefectural Research Institute.
* Support mechanisms have to be devised that provide integrated support,
from technological development through product commercialization.
- Promoting greater informationalized
* Greater attention has to be paid to informationalize training
programs and to developing the support personnel needed for introducing
information equipments or using information.
(3) Promoting linkages for cross-complementation of managerial
resources
Sharing of SME management resources should be encouraged through such
diverse organizational patterns as joint subsidiaries, trade association,
networks, and other loose linkages among corporations on a voluntary
basis. Seeking to offer the possibility for flexible restructuring,
the cooperative structure should be promoted and made more flexible
with the addition of a growth perspective.
- There should be a wide variety of possible network organizations,
with the choice made in each situation depending upon how developed
the business is.
- Cooperative structure: This should move from systemic rigidity
to greater systemic flexibility, as by incorporation.
- Support focus: The focus should be on supporting loose-linked
networks among corporations and on greater support for the diversity
of linkages needed to respond to new requirements (including review
of the system of financing structural up-grades).
- The commercial and industrial cooperative format should be reviewed
and an effort made to ensure that it does not result in cartels
and is able to deal with environmental, energy, and other issues
of common concern.
* Efforts should be made to revitalize industrial complexes, and
promoting networking among the companies within the complex should
lead to a strengthened potential for self-powered development by
the regions SMEs.
(4) Enhancing Human Resources
As well as enhancing the labor markets, easing labor mobility, and
effecting other improvements in the labor environment, enhancing human
resources also requires a greater effort on personnel training and
development.
- Improving the labor market climate
* An effort should be made to bring labor supply and demand into
better balance as by relaxing the regulations pertaining to staff-provision
companies and private-sector headhunting operations.
- Systemic portability should be enhanced and other changes made
to ensure that pensions, retirement benefits, and other provisions
are labor-mobility neutral.
- Employment management has to be improved to ensure the necessary
labor can be secured.
- Strengthening human resources development
* The Institute for Small Business and Technology, and other organizations
need to put a greater emphasis on training programs that the local
communities have trouble providing for SMEs and on training programs
for support personnel.
* Technical institutes, and other specialist training institutions
need to form and use network linkages with universities, Prefectural
Research Institute, and private-sector educational institutions.
(5) Leveling the playing field and ensuring that SMEs have a
fair chance at contracts
Commercial and industrial cooperative cartels and other administrative
intervention in the markets should be dramatically scaled back and
eliminated. At the same time, consideration needs to be given to strengthened
measures to ensure that trading is fair and orderly and that SMEs
have a fair chance even after market deregulation.
* Commercial and industrial cooperative cartels should be abolished.
* The Law on the Prevention of Delay in the Payment of Subcontracting
Charges and Related Matters as it impacts manufacturing should be
strengthened and consideration should be given to extending its
provisions to some services and other industries.
* Consideration should be given to strengthening measures to ensure
trade fairness, above and beyond those covered by the Law on the
Prevention of Delay in the Payment of Subcontracting Charges and
Related Matters.
- Ensuring a fair chance at national government and other contracts
* Official governmental purchasing needs to relax the priority
on efficiency and to give more consideration to venture start-ups
and other SMEs.
* The practice of introducing subcontractors should be expanded
and made regional to promote greater initiative and independence
by subcontractors.
3. Providing the necessary safety net
While corporate risk management is fundamental, it is important to
promote responses to sudden changes with emergency shelter policies
in the event of abrupt changes in the business climate or other externalities
and to implement systems giving people a second chance if their entrepreneurial
dreams do not work out the first time.
(1) Short-term emergency shelter in the face of abrupt changes in
the business climate
* Financial support policies in case of a credit crunch
* Measures such as those to strengthen management foundations
* Moving away from business area coordination and considering restructuring
with the priority on predictability and transparency
(2) Risk insurance systems (including Mutual Relief System
for Small- scale Enterprises safety nets, Mutual Relief System for
the Bankrupcy Prevention of SMEs, and overseas investment insurance
for global operations)
(3) Improving the legal provisions relating to bankruptcy law
(simplifying and streamlining corporate reorganization procedures
to make them easier to use and to make it easier for people to get
a second chance)
(1) Raising the capitalization ceiling:
| a. |
Consumer Price levels are currently more than double what they
were in 1973, the last time the SME definition was significantly
revised, and average corporate capitalization and like indices
are 3-5 times what they were then. |
| b. |
Even companies that are capitalized well in excess of the SME
ceiling often still need to have management personally co-sign
loans or otherwise often have trouble raising fund. |
(2) Number of employees:
This should stay the same (except for services, which should be separated
off from retailing and the number increased).
| a. |
The overall tendency, especially at the big companies, is to
trim personnel rolls. |
| b. |
As service firms have started dealing more business-to-business,
they have become less and less like retail operations. Yet their
average number of employees has increased and companies with more
employees than the current definition are a large and growing
share of the market. |
(3) Corporate independence: have to be considered, but the
rigidly prescriptive definition should be changed to be more accommodating
of the SME's range of diversity.
(4) Start-ups:
There should be a new stipulation relating to start-ups.
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Revising the SME Definition |
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Number of employees
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Capitalization (million yen)
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Currently is
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Proposed
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Currently is
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Proposed
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| Mining and manufacturing |
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| Wholesale |
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| Retail |
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| Services |
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| Note: |
As part of last June's policies to counter the credit crunch,
the four bank-related laws were amended on an emergency basis,
raising the SME capitalization ceiling for wholesalers to
\70 million and that for retail and service firms to \50 million.
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(1) Enhanced policy assessment and improved advantages
(2) Strengthening SME associations
(3) Drawing on private-sector capabilities
(4) Balanced decentralization (the role of local
government organizations)
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