Small and Medium-Size Enterprise Support Policies in Japan

Abstract

Technical and marketing support for small and medium-size enterprises (SMEs) in Japan comes mostly through private networks. Public support is more important in the area of finance. Three sources of directed credit - loans from specialized parastatals, loans channeled through local governments, and loan guarantees - account for about 20 percent of all SME borrowing and 35 to 60 percent of investment borrowing.

Itoh and Urata examine how Japan's public and private sectors support small and medium-size enterprises (SMEs). They focus on technical, financial, and marketing assistance.

Their findings are based on a survey of 107 firms: 40 that produce silverware, 33 engaged in synthetic textile weaving, and 34 that manufacture auto parts. Each sector represents a distinctive form of industrial organization, but they also share several characteristics:

Each industry is concentrated in a particular region, each involves close subcontracting relationships, and each has overcome difficulties and achieved a certain measure of industrial success.

Technical support for these SMEs came largely through private channels, including parent firms, equipment suppliers, and other firms in the same line of business. Public institutions played only a subordinate role. Marketing support also came largely from parent firms, trading companies, and other private sources. Producers of intermediate goods in particular -- such as auto parts and synthetic textiles - relied heavily on subcontractors.

Most loans for Japan's SMEs were provided under competitive market conditions but three sources of directed credit - loans from specialized parastatals, loans channeled through local governments, and loan guarantees - accounted for about 20 percent of all SME borrowing and 35 to 60 percent of investment borrowing. Default rates averaged less than one-half of one percent of outstanding loans, and real interest rates were positive. The majority of firms surveyed used and valued directed credits. The smallest firms in particular valued them.

Public institutions complemented the private marketplace in all three areas. Public technical and marketing support helped create and maintain private networks. In finance, Japan successfully embedded directed credit in a well-functioning, predominantly private, competitive, and prudential financial system. Through partnerships, public support continues to play both a direct and an indirect role in supporting the development of SMEs in Japan.

This paper - a product of the Finance and Private Sector Development Division, Policy Research Department - is part of a larger effort in the department to examine the impact of proactive intervention on SME performance.