Industrial Structure and Enterprise Networking: Learning from Japanese Experience

Abstract

The organizational structure and characteristics of any business or group of businesses contributes to their performance. Therefore to explain the good performance in any firm one must out of necessity give attention to the organizational aspects of such a firm.

6.1 Introduction

The organizational structure and characteristics of any business or group of businesses contributes to their performance. Therefore to explain the good performance in any firm one must out of necessity give attention to the organizational aspects of such a firm. Such attention should be focused both on the organizational characteristics of the firms themselves and that of the other organizations with whom these firms interact. The form organizational structure take basically is a function of several factors such as technology, goals and environmental circumstances.¹

There are several ways of looking at organizations, but for the sake of clarity and the achievement of the purpose of this section, the goal objective, which explains the existence of organizations will be emphasized. Goal objective means that organizational structures are set the way they are to help in achieving certain specific goals. Largely a systems approach to the understanding and analysis of organizations would be used in combination with other approaches. Therefore it would be compelling to look at both the organizational characteristics of the SMEs and that of other organizations external to them and assess the kind of interaction between them.

In looking at the organizational characteristics of the Japanese SMEs, it is useful to include the internal organizational structure of these firms and the overall environment which brings into focus the inter-firm connections , the external organizations that the small and medium businesses have to reach to articulate and achieve their interests. It is necessary to point out that some of these organizations are not the creation of the small and medium enterprises themselves, but the efforts of the government in an attempt to boost the performance of this business sector. Such efforts came out of the recognition of the important role that this business sector plays.

6.2 Overview of the Organizational Characteristics of SMEs

Drawing upon the work of Kiyonari (1980:2), manufacturing SMEs may be classified into four categories by combining factors of markets, location and social division of labor : (i) Regional industry , (ii) community-based Industry , (iii) Industry producing for large corporations and (iv) other types.²

A general description of the organization of the SMEs would be necessary before any meaningful analysis can be done. First, some of the SMEs have a long history of existence (Edo period before 1868, and Meiji Era 1868–1912), and they draw most of their resources including the human expertise from the local environment. Usually they have regional specific advantages in terms of what they produce, which means that they sometimes serve other parts of Japan as well as exporting their products abroad. The other key characteristic is that these types of enterprises usually belong to the same industrial category and are concentrated in a regional cluster of so called ‘production region’. In the past as the economy modernized, several of these industries were forced to change their products in order to survive and keep up with the change in demand. Such is the case of Sanjo-Tsubame region in Niigata prefecture which in the earliest times specialized in the manufacture of nails but was forced to change to the manufacture of kitchenware. This process of change was an extremely successful one marked by a high level of specialization signified by the high quality of goods produced. Probably, the explanation for such success lies in the fact that the technologies used in the manufacture of the new products was in a way related to the previous one.³

The other group of industries comprise of those producing for large corporations. The products do vary in their nature, but in most cases they produce parts to be used by larger firms in the assembling of the final products. The nature of relationship these firms have with the big corporations is what is referred to as sub-contracting, which will be discussed later. In the actual sense many of the industries are of this sort. Going by the 1981 MITI survey , 65.5 % of SMEs in manufacturing are sub-contractors and the proportion was said to be increasing.⁴ On the other hand there are firms that produce finished goods independently. Because overwhelming number of firms that are involved in sub-contracting, much attention would be focused on them rather than the few firms based on independent production.

The other interesting characteristic of the SMEs organization is the sophisticated social division of labor , which is expressed in the production and sales activities. “Social Division of Labor” means the division of the production process into component processes and sub-processes each of which is performed by specialists. The production of a single item is therefore the work of many specialists, and co-ordination and organization of the total production process becomes necessary. In the social division of labor, the party performing marketing and other “soft-ware” functions retains economic and managerial control, therefore is the core of the system. They provide finished products to specialty stores and department stores in major consumption centers. Only in a few cases do you find integrated makers who perform all steps in the production process in their own plants. It would be wrong to state that subcontracting business practice is exclusively done by large firms to small firms. On the contrary, it takes place among firms of varied sizes. It is only that the sub-contracting work given to the comparatively smaller firms is more conspicuous probably because of the scale of production involved.⁵

In the human resource management area, most of the SMEs have been facing a severe problem of shortage of qualified manpower as compared to the larger well-established firms. Out of the necessity to meet this challenge, most of the firms have been compelled to practice a human resource management type which is purely goal oriented in the sense that unlike the larger firms which recruit only young graduates once in their lifetime, these industries have been very flexible in their recruitment procedures thus the composition of their workforce is quite varied and highly characterized by labor mobility. The contributions of this human resource management method would be evaluated in the later part of this chapter.

The other organizational characteristic of the small and medium manufacturing firms is their membership and occasional involvement in organizations that are common to a host of other similar businesses. In the actual sense, in Japan there are a large number of organizations concerned with the issues related to the operations of the small and medium businesses. Immediately notable is the Small Business Corporation , Prefectural Information Centers , and Co-operatives formed by industrial groupings either by regions or product type.

In terms of management, the use of modern management methods is notable among several of the SMEs. However there is no uniformity among businesses of differing sizes in the use of modern management methods. The overall trend is that the lager the size of the firm, the higher the chances of the use of the modern management methods marked by the separation of management and ownership. In essence, the small family-run firms tend not to use the new management methods, and the personality of the owner tends to dominate the way things are done in such firms. The management environment of several of the manufacturing SMEs has so far been changed by the technological progress achieved in electronics field. This is helping these industries to rationalize or to enhance their sophisticated management control necessary for coping with the changing management environment.

The willingness to mechanize in the office-related processes has also been steadily on the rise thus corresponding to the environmental demands such as the growth in the volume of office work while the number of personnel remains limited. The dire need to standardize and rationalize most of the office procedures as the complexity of office work increases necessitates mechanization. The management environment has changed so much so that without an effective information preparation and supply system, which is plan-oriented, the future and operations of any business firm remains oblique. On the other hand technological developments has so far helped the process of mechanization in the sense of the constant supply of new models of office machines with the consequence of lower affordable prices, greater ease of operation and more compactness in these machines. Just to illustrate the increased use in office machines, one notes that progress has been made from the use of the abacus to the adding machine, to the electronic calculator, copying machine and cash register and in recent years the use of computers is becoming popular among several of the SMEs.⁶ All the progress in the attempts at office mechanization has been made possible due to a favourable external environment in which easy to use and affordable computers and office machines are available. The presence of computing centers and other channels of information flow has also supported the efforts in office mechanization.

Having given a general description of the organizational characteristics of the manufacturing SMEs, it would be worthwhile to evaluate the strengths of these characteristics largely by the use of qualitative arguments and a few times whenever possible employ the use of quantitative method by way of statistical data. The evaluation of theses organizational characteristics helps to establish their possible contribution to the vitality of the manufacturing SMEs. This is based on the widely accepted concept that organizational characteristics can either facilitate or constrain the operations of a firm. It is notable that only the salient organizational aspects have been chosen for evaluation.

6.3 Industrial Networking

Industrial networking can be defined as the interrelation of firmsin production with clear interdependence amongst these industries, and this occurs in such a way that the interdependence still allows for competition in the market. Industrial networking as a concept was first applied in the study of the kieretsu (a group of Japanese companies tied together through reciprocal share-holdings, credit relations, trading relations, and interlocking directorships).⁷ Industrial networking takes two forms. First, is the vertical enterprise network , which mainly involves large firms and the subcontracting SMEs. In this case, the subcontracting SMEs and their parent firms get to discuss the problems related to the production process and even sales. The second type of networking is of the horizontal type. The horizontal industrial network mainly comprises of several small and medium business enterprises sharing their knowledge about production and management technology. In all these exchanges, trust, reciprocity and close interpersonal relations are golden pivot on which networking revolves.⁸ The Japanese culture seems to provide quite a supportive environment for networking since it emphasizes on long-term stable relationships based on obligation hence reciprocity and trust are not difficult to obtain.

6.4 Regional Grouping of Certain Industries—Community Based Industries

The long period of existence of these industries in itself is a strength in the sense that a lot of technological experience and skills is acquired in the area of manufacture thus enhancing the social capability of this areas to handle any new technology in case of change in the products due to new market demand. The elaborate linkage between the various firms to form regional production areas in itself is a kind of industrial networking. On the other hand, smooth change to the production of new types of products suggests flexibility, which is a positive attribute of these industries. Like when the Sanjo-Tsubame nail factories were forced out of business due to arrival of superior western type nails on the market, only the nail production lines closed, but the human skills remained intact and was used vastly in the setting up of the metal tableware industry.⁹

Technological accumulation can therefore be seen as one of the outstanding contribution of the regional-based industries. These industries are actually treasure-houses of technology and skill in their respective areas. In this case, it is, however useful not to make sweeping generalizations about the contribution of the regional-based industries which vary from very high-level techniques and skills to very low-level ones. On the other hand, it must be acknowledged that technology which by tradition has been accumulated in a region, which has become a production region is an asset that money cannot buy. The acquisition and the mastery of the new technologies cannot be possible without such a background.¹⁰ Usually the accumulation of a certain level of technology is necessary in the attempts to make advances in the new and still non-mastered ones. Thus the contribution of some of the regional-based industries to the technological progress of a large number of SMEs is undeniable. The presence of these industries in the general industrial structure of the small and medium manufacturing firms thus contributes to vitality. An explanation of the technological advancement of the SMEs would be incomplete without the mention of the technological foundation provided by the regional-based industries.

It is notable that the community or regional-based industries do give a firm economic base to their regions. Such a firm economic base helps in meeting the employment and income requirements of the residents of these areas. The relevance a firm economic base for further development of other small and medium industries is to be understood in the sense of a readily available market in a situation in which the firms rely basically on the regional market. In marketing, it is always important to have a reliable regional or domestic market before moving ahead to seek markets elsewhere. By and large, the presence of these firms provides a favorable environment in which investment in other industries become possible. It is also a widely accepted theory that there is no better incentive to starting a small business than to be raised where such type of business exists in large number. The argument here is that the regional arrangement and long period of existence of these industries help in forming a firm economic base in the regions in which they are located and take on the role of preventing the collapse of the region’s economy and society.

Suppose that these industries did not exist, several young people on completion of school would leave the countryside and provincial cities to seek employment in the bigger metropolitan cities. In essence the favorable environment in which small industries can grow has been created and enhanced by the historical presence of the regional based industries. Even though still young well educated people have the tendency to seek work in bigger firms in the cities offering better working conditions and salaries, the situation would have been much worse if there was no industrial base formed by the regional industries.¹¹

There is however, the existence of a dependent attitude in which several of the regional-based industries look forward to too much help from the government. Over dependent attitude is in itself a constraint on the development of self-initiative approach to finding solutions to the existing problems of firms. This problem is further reinforced by the age-old belief that small industries are weak and therefore this image makes several of the firm owners to take things with much resignation. The danger here is that such an attitude results in little action on the part of the entrepreneurs involved. This has been a problem notable over the years about regional-based industries. It doesn’t need much thinking to point out dangers of such an attitude and its influence on the other part of SME structure.¹²

6.5 Subcontracting System

Subcontracting relation is defined in the 1970 SME Subcontracting Business Promotion Law as “the production of intermediary processed goods such as parts and components.” Ryoushin Minami also defines subcontracting system as a system in which large manufacturing firms known as oyagaisha —literally meaning parent companies give the production of certain intermediate products or parts to the relatively smaller firms known as kogaisha —literally meaning child companies.¹³

Subcontracting has a long history in Japan. Even before the WWII, the industrialized parts of Japan like Nagoya and Yokohama already had a clear pattern of division of labor in metal works and machining processes. Thus after the war, the large industries like car manufacturers found an already existing potential subcontracting SMEs possessing skills and the willingness to work. The only setback for these SMEs was their weak financial position. Financial scarcity among these industries can be traced back to the Meiji period as discussed in chapter one of this study.

The original subcontracting system after the war was similar to the ‘outputting system’ used by merchants during the Meiji era . Under this system, a trader managed the flow of processing jobs given out to several highly competitive small enterprises. This historical experience brings into focus the issue of exploitation of the subcontractors by the core firms. Much positive change has occurred regarding the issue of exploitation of the smaller firms by large ones. There has been much change in the form in which the subcontractor-core firm relationship takes. The relationship has evolved from the prewar one characterized by exploitation to one in which vertical integration which encourages efficiency is achieved.¹⁴ Increasingly, the relationship has evolved into a symbiotic one, even though it is notable that the subcontractors do commit their resources and ability to surpass the requirements of the core firms. This may be partly due to the intense competition amongst SMEs hence the fear of losing subcontracting business to other competitors. The desire to win favor from the parent firms can be directly linked to the dedication to achieving efficiency among many of the subcontractors.

It is notable that the number of subcontractors employed by the parent firms is reducing in most industries due to the strict selection of capable and efficient subcontractors.¹⁵ This in itself is an indicator that subcontracting system is done in such a way that it contributes to efficiency in the Japanese industrial system. Usually, a subcontractor with a reputation for skills and high technology receives several orders. Equally important for getting orders is the strict observation of deadlines and the ability to reduce production costs. In order to meet these challenging requirements, the subcontracting SMEs have been forced to improve their administrative technology. Such improvement is a plus for the subcontracting firms because it leads to stable transaction relations.

Subcontracting system is an indicator of a sophisticated division of labor, which means that all the subcontracting firms do specialize in producing only particular items. This allows for the concentration on research on improved production technology and the pursuit and maximization of their comparative advantage.¹⁶ Usually, the subcontracting firms work together with the parent firms to improve their technology. Close communication between the firms takes place while working together in design, quality and developing useful ties for technological improvements without large information costs. The important point here is that the provision of technical guidance is quite effective for the spread of the use of more efficient modern technology among several SMEs.

It is notable that technical assistance takes place under the condition of long- term continuity of business between the subcontracting and parent firm. The long- term relationship is an indicator of a high degree of commitment which is evidenced by the fact that in a 1981 survey, the proportion of subcontractors that had changed their parent firm was only 16 %.¹⁷ Usually, the larger the parent firm, the least the chance of change of parent firm. If anything, long term relationship is a prerequisite for the advancement of loans of equipment, planning of production and investment in co-ordination with the parent firms.

Invariably, the subcontracting relationship provides the opportunity to SMEs to get access to certain modern production technologies. This so far has been one of the contributing factors to the process of the continuing reduction in the technological gap between SMEs and the large firms. Subcontracting therefore can be seen as a useful channel for the diffusion of management and production technology from the large firms to the subcontracting firms. For instance, the spread of the use of kan-ban system and quality-control circles is a perfect example of the diffusion of management technology from large firms to the SMEs.

It should however be noticed that not all manufacturing SMEs are subcontractors. There are some independent SMEs that posses advanced technologies, but these are rather few compared to the subcontractors. Actually by estimation, 65 % of the manufacturing SMEs are subcontractors.¹⁸ Even though, the subcontracting firms do get the above mentioned benefits from the parent firms, still the power relationship is not one among equals. The relative sizes between the parent and the subcontracting firm signals to the corresponding economic power differences. Parent firms due to their relatively vast resources have a stronger hand in the bargaining process. The level of dependence of the subcontractor firm on the parent firm is a good gauge of the power relationship. In a case where a subcontractor has only one purchaser of its products, over dependence on this purchaser occurs with the consequent disadvantage that in the event of reduced order-size, the subcontracting firm is always hard hit.

Sometimes during hard times, certain parent firms make very harsh demands on the subcontractors, such as to further cut down prices. This is a matter of taking advantage of the fierce competition among the subcontractors. In the textile industry for example, the situation got worse to the point where after receiving several complaints, the Fair Trade Commission of Japan had to order textile contractors to stop forthwith the unfair cutbacks and arbitrary refusals of products ordered.¹⁹ Usually, the lowest person in the subcontracting hierarchy bears the brunt more than anybody else. This is because when a parent firm cuts orders and demands price reduction on items produced, then similar demand is made by tiers of subcontractors in a chain reaction style. Eventually, it is the last firm or person at the bottom of the hierarchy that suffers most.

To solve the problem of mistreatment of the subcontractors by the contracting firms, the government passed a legislation that handles all matters related to the issue. In 1956, the Subcontracting Law was enacted. This law covers a wide range of issues related to the subcontracting business such as delays in payment of the subcontractors and unfair demand. Subcontractors are urged to file complaints, even though still several of them remain silent seemingly out of fear of retaliation. Overall, a large percentage of the subcontractors are completely satisfied with their relationship with their parent firms and seeks no changes.²⁰ In these cases of satisfaction, any hard demands from the parent firm are mitigated by a steady flow of orders, access to machinery and materials from the parent firm. Also the long-term relationship that most of the subcontracting firms develop with their parent companies goes hand in hand with a deep sense of obligation such that in times of disaster like, outbreak of a fire and consequent destruction of production facilities, the parent firm is bound to step into give help. Long-term relationship in business originates and draws strength from the Japanese culture , which emphasizes stable long-term relationships, which operates under a strong sense of obligation.

In as much as certain weaknesses exist in the subcontracting relationship, real strength in the system, which promotes vitality among the SMEs, can be noticed. Besides encouraging efficiency through specialization, the parent firms do perform certain useful services, which the small and medium firms cannot afford on their own. Note that the requirements in a subcontracting relationship are promptness, precision, and the ability to cut costs all of which are integral part of efficiency. The system also is an important avenue through which both production and management technology flows down from the relatively larger industries to the SMEs. The objective of modernization of facilities of the small and medium businesses is therefore partly fulfilled by the subcontracting system. Generally, it would be fair to conclude that the subcontracting system in certain respects contributes to vitality amongst the Japanese SMEs. On the other hand the Japanese culture seems to provide quite a favourable environment for industrial networking. Therefore there is need to discuss the role that culture plays in industrial networking process.

6.6 Japanese Culture and the Industrial Networks Process

Industrial networking requires certain specific conditions for it to be accomplished. Regarding human interaction, the crucial requirements of trust, reciprocity and need for interdependence will be discussed here. The whole process of networking is one of intense exchange relationship; therefore all the firms involved must be ready to offer something to the others. The interaction between the firms is conducted through the intercourse of the top management personnel who deal with each other within a cultural framework. The link between culture and the way business is conducted is unquestionable more so in Japan. Certain Japanese cultural values strongly influence the manner in which businessmen relate to each other. It is my intention therefore to discuss the importance of these values for the process of industrial networking.

First, it would be important to look at the concept of reciprocity and obligation in the Japanese culture. To understand reciprocity among the Japanese, one must of necessity try to grasp the meaning of the concept of on which is a relational concept combining a benefit or benevolence given with a debt or obligation probably incurred earlier on. On is a social credit for the giver, and to the receiver, it is a social debt. To restore a balance reciprocity is required ( on gaeshi ). Reciprocity therefore literally means paying back of on. Because of the high value for reciprocity among the Japanese, a deep sense of gratitude interlocked with on has been inculcated as the foundation of the Japanese moral character. Also receiving on can also be considered a burden ( giri ) that one prefers to unload as soon as possible, meaning that gratitude involves guilt feeling toward the giver.²¹

Usually, gratitude is expressed verbally and by action. To refuse to repay, one risks being accused of being on shirazu (unaware of on and therefore ungrateful). To be known as ungrateful spoils ones reputation, which means losing face among other people, more so the immediate group that one belongs to.²² Loosing face among ones’ group is something that the Japanese dread and this is illustrated in the usual Japanese expression in the case of a regretful situation—Ana ga attara hairitai kimochi desu. This statement literally means to feel like crawling into a hole because one feels ashamed of one’s mistake. This expression is used to convey remorse for a mistake committed.²³

Reciprocity and obligation are thus tied together in the interaction between individuals. This means that interdependence among individuals or groups is guided by the principle of need to show gratitude. Within this cultural framework trust is the golden pivot round which relationships revolve. Because everybody is bound by the same cultural values, when they give away anything they do not fear the possibility of ungrateful behavior on the part of the receiver. The exemplification of trust is the way Japanese firms conduct business and sign contracts with minimal if not complete exclusion of the use of lawyers. Usually such contracts are not very detailed, due to the expectation that naturally a more complex long-term relationship will happen. The relationship that ensues after a contract is signed is regarded to be a complex one that cannot be completely covered in contracts. In the actual sense, the presence of lawyers in the business negotiations tends to convey the message that trust is lacking or maybe that one is not sure of oneself as a negotiator. Usually, lawyers become involved only in serious civil or criminal disputes that are beyond normal resolution by the parties involved.

Firms operate in communities in which the personal relations between businessmen is quite strong therefore the very fear of social sanctions make the decision makers for firms to avoid anything that might cause them bad reputation and a possible isolation by the other firms. However, other than the force of cultural values, it is important to state that economic conditions also contributed to the development and provision of an environment in which trust could be firmly rooted. In actual sense trust took root during the period of high economic growth because opportunities for future profit were more important and outweighed the possible temporary profit from betrayal.²⁴

In as much as culture has been a contributing factor to the whole process of industrial networking, it is accurate to view culture not as a static element. Culture always is bound to change and the Japanese one is no exception. The direction of change for the Japanese culture would probably be from dependence modeled after the relations in the traditional family to independence. Cultural change does not take place all over sudden, but rather is a gradual process. The change in the direction of independence might mean that relationships will have to be redefined and it is not possible to accurately point out the consequences of this change on the industrial networking process.

6.7 Networking and the Use of Information Technology

The use of information technology has existed for a long time among the SMEs, even though several problems still stand in the way to optimal use of the modern technologies via which information flows. The importance of information technology to enterprise networking is that firms can be linked through the modern communication channels thus allowing the flow of large volumes of information. This supplements the human interconnections and probably could lead to new ones being created.²⁵

Compared to the large industries, SMEs seriously lag behind in the use and investment in information technology. Several of the small and medium firms do not have adequate knowledge about information technology and its applications. This is directly related to the human resource problem amongst the SMEs. Lack of capable engineers and highly educated staff restricts the usage of information technology. Financial problem also restricts the extent to which these firms could invest in information technology. Besides the benefit-to-cost ratio in the short term hinders investment in information technology at a time when there are other pressing financial needs such as investment in more up-to-date production technology .²⁶

The government policy, which aims at increasing the use of information technology among SMEsis a promising one. Through the Japan Small Business Corporation , the National Small Business Information Center was created in 1982 as a central organization, which disseminates information to the Local Information Centers in the prefectures. These centers have a database known as Small and Medium Enterprise Information Research System (SMIRS) , which has all kinds of information relating to the operations of SMEs. Apart from SMIRS, there are other organizations, which are concerned with the spread and use of information among the small and medium industries. For example, the Planning Section of the Tokyo Metropolitan Labor Economic Office, Commerce and Industry Planning Department has a SME information system database, the so-called “Mynet-Tokyo”. This database has about 22,027 records on corporations, people, organizations, research reports, information about policy and consultation offices, and all sorts of statistical data relating to SMEs.²⁷

Also the SME Consultation Center has an E-mail system called the Small Enterprise Information System, so called “TORIDAS” meaning “retrieve” in Japanese. It provides E-mail system, a bulletin board system, facsimile transfer, electronic meeting system and a database on SME related information. These descriptions of the information network system are an impressive one. However, the usage of these services is still rather low given the number of SMEs that use these systems of information supply. Going by the survey done by the National Information Center (1991), 28 % of SME manufacturers of production goods and 22 % of manufacturers of consumer goods had used the SMIRS.All the same it is slightly encouraging that the trend has been one of small improvements year after year. For instance, the numbers of consultations were 363,810 in 1985, 364,563 in 1987, and 368,058 in 1988.²⁸

The upper side of the whole idea of information network through the use of information technology among the SMEs is that it gives a strong backing to the efforts towards industrial networking. Information technology makes industrial networking much easier and faster. It is however important to point out the fact that all the contacts made through the information networks are more useful when they are followed by the development of close interpersonal relations between individuals representing their firms. As the use of information technology increases among the SMEs, it is expected that this would give more vitality to the operations of these industries.

6.8 Advantages of Industrial Networking

The main strength of the industrial network system lies in the general reduction in the transaction costs. Because the various firms pool their resources together, it becomes possible for them to benefit from the economy of scale otherwise not possible in individual firm activities. Through this method information is acquired at a relatively reduced cost both in terms of time and money. Industrial networking is also a very efficient way of achieving technological diffusion amongst various industries. This is important in the sense that most of the SMEs lack the resources to conduct in-house R&D. It is therefore easy to arrive at the conclusion that industrial networking has a substantial benefit for the SMEs.

6.9 Institutional Support for SME Activities

Because of the economic importance of the SMEs generally in the Japanese economy, the government places policy priority on their support and development.²⁹ The government uses various organizations as a policy tool to support the development of SMEs. This approach to the problems of the small and medium businesses has so far led to the formation of several organizations, which support and link the activities of these industries. All these organizations are goal oriented which can be readily deduced from their very names. The goals range from modernization of production facilities through gaining access to new technologies, manpower development, assistance to firms to change their line of business, tapping of external resources and the sharing of risks, gaining economies of scale for example in joint R&D to acquiring of information. In trying to achieve these goals, these organizations also provide links for the SMEs thereby aiding the process of industrial networking.

It would be worthwhile to list and describe the major governmental organizations that give assistance to the small and medium businesses before trying to evaluate their contribution to the vitality of these industries. A large number of public support organizations do exist such that only the largest ones can be mentioned in this study. Their large number attests to the government’s commitment to promote the activities of these industries.

First, there is the Small Business Corporation ( Chusho Kigyo Jigyodan ). This was established under the Small Business Corporation Law. This organization provides a variety of services ranging from low interest financing for collective manufacturing, development of human resources especially the training of small business owners, industrial structural improvement, promotion of collective work, guidance to small businesses in sophisticated operations, relief and bankruptcy prevention measures. Under this organization, there are public examination centers, which give research services, testing, training, and guidance for the SMEs. These centers known by the Japanese word Kohsetsushi are found in all the prefectures. The prefecture offices are also linked nationally.³⁰

Second, there is the Small Business Finance Corporation ( Chusho Kigyo Kinyu Koko ). This organization was established in 1953 as a fully government owned bank. Its major task if the provision of financial assistance to small and medium businesses in special areas like the financing of fixed asset investment and giving capital for long-term investments. Third, is the People’s Finance Corporation (Kokumin Kinyu Koko), established in 1949 also as a wholly owned government financial institution. The main aim of this organization is to advance loans to people who would find it hard to secure loans from private banks. Such loans are intended for the small and medium business only. Fourth, is the Central Cooperative Bank for Commerce and Industry (Shoko Kumiai Chuo Kinko). This was established in 1936 and its task is mainly the funding of business cooperatives. Its fund sources are mainly from the member cooperatives and the government. Other sources are from deposits, bonds and treasury funds. Fifth, there is the Small Business Credit Insurance Corporation (Chusho Kigyo Shinyo Hoken Koko), which deals with insuring liabilities for guarantees of credit guarantee associations and loan funds needed for the guarantees of these associations. This helps in easing the difficulties incurred in the generation of funds for small businesses. Usually it would be hard for several of the SMEs to gain easy access to credit facilities due to low collateral ratings, and to ease this problem, the government formed the Credit Guarantee Associations (Shinyo Hosho Kyokai). These associations are found in all regions to serve the local industries. Their function is to make it easier for the small and medium industries to obtain credit from banks and other financial institutions.

There is the seventh organization, which is in charge of coordinating the affairs of the small businesses’ cooperatives. This is the Federations of Small Business Associations (Chusho Kigyo Dantai Chuokai) whose main tasks are the organization and administration of small business cooperatives, liaison services and provision of information and holding seminars. The liaison services are quite important because there are several cooperatives whose functions need coordination. There are prefecture federations which all unite to form a national federation.

The most important issue to consider when talking about these organizations is the fact that SMEs suffer several disadvantages arising from small scale of their operations, smaller base of development, and weak credit ratings. However, through these organizations they can increase their productivity, increase the value added to their products through technological improvements, and strengthen their bargaining position. Figure 6.1 is an example of the extensive nature of assistance that these organizations give for instance on the improvement of the technical level of small and medium businesses.

Fig. 6.1

Improvement of Technical Level of SMEs . Source Now In Japan: Promotion of Small and Medium Enterprises in Japan. Japan External Trade Organization (1983, p. 10)

The fact that these organizations have prefecture offices linked to the overall national office is quite important. The presence of local prefecture offices signifies that the local problems and issues can be addressed while the link with the national office serves to bring in new information that otherwise could not be available to the prefecture offices. It is also important that the national office tries as much as possible to standardize their operations and services in all the prefectures.³¹ This is significant in helping to avoid possible delays in services through decentralization while at the same time it is possible to link up all the prefectures through the national organization. These organizations also link up several firms to provide services which could not be afforded by the individual firms, and besides there are other benefits that each individual firm can reap out of an extensive and intensive relationship with other firms. The benefits of such extensive and intensive inter-firm relationships can be understood within the framework of industrial networking.

Having described and analyzed the organizational characteristics of the manufacturing SMEs, it is evident that these characteristics contribute to vitality amongst these industries. Regional community based industries’ importance is seen in terms of the accumulation of skills and technology, which in essence provides a strong technological foundation for the new industries. On the other hand, the organization of labor is one that is highly adaptive to the unfavorable situation of shortage of workers. The subcontracting system too has a positive contribution by way of helping in the diffusion of both management and production technology and creation of readily available markets for the products of most of the SMEs.

The existence of several organizations, which support the activities of SMEs serves to improve the performance of these industries. Through these organizations, SMEs can reap the advantages of joint effort, and acquire information about markets and new technologies. The Industrial networking system itself is an important means of cutting the transaction costs; hence it contributes to general efficiency in the operations of these industries. In future if the majority of the SMEs adopt the use of information technology, then this would be a new source of strength for these industries more so at a time when these industries are becoming more knowledge and information intensive. There are many ways that we could as well do this

6.10 Japanese SMEs in a Changing International Environment

Small and medium manufacturing enterprises have coped with changes of all sorts in their entrepreneurial environment. Consider a business environment that is constantly changing thereby posing several challenges to the existing firms. It doesn’t need much thinking to see the crucial need for firms in such an environment to be highly adaptive in their response to the incessant changes in order to survive. Adaptability demands high flexibility on the part of the firms. Compared to the large firms, SMEs’ structure inherently makes it easier and quicker for them to have changes in their structure as a means of coping with the turbulence of the business environment. This is specifically related to the change in business line. For example in a survey of industries (covering a period of six years 1982–1987) the percentage of SMEs that converted their line of business was approximately twice as much as that for large enterprises.³²

Therefore, the objective of this chapter is to identify the major challenges of the international environment that the manufacturing SMEs have been facing and the measures that these firms have been taking to solve these problems. Obviously, in the earlier part of this work certain problems have been identified and the various solutions discussed, but the problems raised in this chapter have not so far been touched. Yet, these problems have for a long time constituted serious challenges to the good performance of the manufacturing SMEs. On the other hand analyzing the measures to solve these problems could be a pointer to vitality. First, it is necessary to identify the problems namely, appreciation of the yen, changing market structure, and the new age of internationalization.

6.11 Problems Related to Changes in the International Business Environment

The appreciation of the yen has been a crucial problem to the manufacturing SMEs from around the period of the mid 1970s to the present times (1995). In the actual sense this problem has worsened with value of the yen going up against the sinking dollar to hit the new unprecedented mark of 79 yen to the dollar (going by Tokyo foreign market exchange rate of April 19, 1995). A strong yen mainly affects the competitiveness of the exported products of the small and medium manufacturing firms. This is in terms of price since a high exchange value for the yen against other currencies results in high prices for the exported products. This becomes a serious problem in cases in which competition is largely based on price other than quality. This is true for certain products for which attaining good quality standards is easier meaning that competing edge lies in lower prices of products in the market.

A strong yen means high prices for the Japanese exports, which put the SMEs at a disadvantage in competition against the products of the NICs, ASEAN and China . The NICs so far have achieved an export-led growth because of a delay in their currencies adjusting to the U.S dollar, thereby increasing their production capabilities. The price competitiveness of their products has also been due to low wages, even though recently South Korea and Taiwan have had their currencies adjusted to the dollar and the wages have also been rising signifying that they now have to seek a new competitive edge in terms of quality and diversification of their products. On the other hand from 1986 onwards the ASEAN countries have been striving for an export-led economic growth through the policy of attracting investments from abroad and making full use of the low cost of labor. The trend in China is similar to that of the ASEAN nations. All this signifies a change in international competitiveness, which has had a serious effect on the Japanese export structure. The most adversely affected has been the consumer goods while capital goods have on the other hand experienced fairly steady sales.³³ This trend is well illustrated in Fig. 6.2 for the period between 1983 and 1988.

Fig. 6.2

Trends in exports by goods in terms of yen. Source Ministry of Finance: trade statistics—adopted from Japan White Paper on Small and Medium Enterprises (1989, p. 34)

Going by the general business scale, exports of products manufactured by the SMEs declined by a wide margin. This is a good indicator of the change in the structure of trade, which represents a challenge to the good past export performance of the SMEs. Figure 6.3 clearly depicts the trend of declining exports between the period of 1985 and 1988.

Fig. 6.3

Trends in exports by business scale (industrial products in yen terms). Source Ministry of Finance: trade statistics—adopted from White Paper on Small and Medium Enterprises in Japan (1989, p. 35). Notes (1) 1985 = 100; (2) “Products from small and medium enterprises (large enterprises)” are defined by products from Japanese industries (the Standard Industrial classification for Japan) as products which 70 % or more of the total shipments are manufactured by small and medium enterprises (for large enterprises as through subcontracting practice)

However, despite the grim picture depicted by the significant decline in the exports of the manufacturing SMEs above, marked improvement of 4.0 % was noted in 1991 over the previous year of 1990. This was quite a significant improvement given that the figure of 4 % even outpaced the 1.9 % increase in the overall exports (all industries put together). Added to this was the fact that the percentage of SMEs reporting increased exports outnumbered those reporting decreased exports in 1991.³⁴ The main explanation for this positive development is that of increased demand overseas, but other reasons certainly lies in the manner of conducting business by the various manufacturing SMEs which will be looked into in the next part of this chapter.

Other than the problems related to the constantly appreciating yen value stated above, the process of internationalization of economies poses a challenge to the manufacturing SMEs in terms of opening of the domestic market. This means that other than competition on the international front, these industries also have to face stiff competition from imported products in the domestic market. The competition on the domestic front is felt more for products for which price; quality and design are fairly identical to those produced by the Japanese SMEs. Going by the Small and Medium Enterprise Agency survey on consumer patterns in February 1986, over half of all consumers (57 %), when thinking of purchases, will not differentiate between imported goods and domestic goods if the price, quality and design are of identical levels.³⁵ This implies that so long as a commodity satisfies the needs of the consumers then there is always high demand for it.

6.12 Lessons from SMEs ’ Response to the Problems

Having discussed the various problems posing challenges to the business environment of the manufacturing SMEs, it is therefore necessary to analyze the different ways through which these enterprises try to provide solutions to these problems in order to survive and continue to record good performance which so far has made it possible for them to play a key role in shaping and restructuring the Japanese economy. It is worth noting that it is not the turbulent business environment that is of significance, but rather it is the various ways through which the SMEs try to provide solutions that are of most importance. The ability to provide solutions to cope with the challenges of the business environment in itself typifies dynamism.

6.12.1 Business Conversion

Entry into new fields of business has been a common strategy for most SMEs as a means of coping with changes in the international and domestic economy. In 1989, the percentage of manufacturing SMEs that had converted their lines of business (this statistically included diversification as part of business changeover) was about twice that of the large firms. This indicates positive response of the manufacturing SMEs to structural change. When an enterprise enters the manufacture of a new product and the volume of sales of the new product exceed 50 % of the total sales, then such an enterprise is said to have converted its line of business. On the other hand, when a new product is developed and the volume of sales is less than 50 % of the total sales, then the firm is said to have diversified its production process .³⁶

The government supports the efforts of SMEs interested in changing their line of business. Under the Law on Temporary Measures for Business Conversion of SMEs, assistance is given to small businesses in industries faced with structural recession. Before assistance can be given, the government usually through the prefectural governor’s office must approve the restructuring plans. The type of assistance offered range from financing at preferred interest rates, credit guarantee schemes, and tax deferrals. Figure 6.4 illustrates how the assistance for business conversion is carried out.

Fig. 6.4

System of Business Conversion Source Now In Japan, Promotion of SME in Japan (JETRO Publication 1983, p. 14)

In 1986 a survey done by SME Agency showed 52 % of SMEs said to have had past experience with entry into new field. The mode of entry varied from business diversification, raising quality and adding value, developing new items and a change in business line. The common thing in all these cases is that all the firms had placed an emphasis on the use of existing technology, sales channels and the available management resources. The essence of this is that business conversion requires adequate preparation well beforehand; hence the use of the existing resources is key to the success of this business strategy.³⁷ From Fig. 6.4 it can be clearly understood that several processes are a prerequisite to a successful business conversion.

First, a survey is carried out followed by information supply, which leads to a possible diagnosis of the problem. After problem identification, it is then possible to provide guidance to the firms intending to pursue business conversion. A successful business changeover depends on several factors. Cited as the most important reasons in a 1977 Survey on Changeover in the Field of Manufacture were: survey and information collection on business fields intended, full preparations, raising of funds, superiority of quality of new product and uniqueness of function, securing of employees (technicians), and cultivation of sales outlets which requires doing a survey and information collection on prospects of order receipts and sales. Also given as important is joint activity with other enterprises to increase the resource base. Business changeover can be a very effective response to the changing business environment. It is notable that in 1979, 80 % of small manufacturers that practiced business changeover reported smooth sales and an increase in profits.³⁸

Attempts at business conversion however are not purely made of success stories. Several difficulties have been experienced such as lack of funds, personnel and management resources, difficulty in finding sales channels and difficulty if new technology unrelated to the existing one is used. In the light of these problems several cases of business conversion have been in fields closely related to the existing business as typified by change from textile to garment and vice versa in the early 1970s. Such change to closely related areas of business has been part and parcel of Japanese industrial history. The case of nail industry in Tsubame-Sanjo area which successfully changed to kitchen and tableware manufacture further qualifies this argument. Usually, the Japanese SMEs like the big firms do follow the kaizen concept in making changes in business line. Kaizen is a Japanese term literally meaning improvement. Under this concept, small continuous incremental improvements are made to products and technology.³⁹ Such small changes are important in avoiding the risks and uncertainties of taking a leap into a new technological area or the manufacture of new products totally unrelated to the previous ones. Going into completely new areas involve recruiting new personnel, buying new machinery, obtaining a vast body of new information and cultivation of markets. All these are too costly and the risk of failure is quite big. Besides the kaizen approach in business changeover ensures the maximum utilization of the available resources, and more often than not efforts at business changeover is a collective activity. The collective activity is made viable through the inter-firm network system already discussed in the previous chapter.

Business changeover largely follows the logic of product life cycle. Products when introduced into the market go through the stages of: introduction, growth, maturity and finally decline in demand. Therefore a firm that intends to keep a head of the competitors must add value, diversify its products or altogether launch new products related to the old ones. In essence business changeover serves well in keeping a head of competitors in the market. Note that in response to their competitors from the NICs and ASEAN countries , the export based SMEs emphasize adding value, redesigning of products and development of new products which are in a way related to the previous ones. Making constant improvements on both products and technology through business changeover thus serves to bring vitality to the manufacturing SMEs while making maximum use of the existing resources.

6.12.2 Market Diversification

The other response to the intense competition in the international market has been market conversion and diversification. This involves identifying and even creating new markets. In 1970s, the manufacturing SMEs tried to diversify their market by moving a way from the extremely competitive US market to Europe, Southeast Asia , the Near and Middle East and other regions. Going hand in hand with the market diversification strategy has been the attempts at developing new products, and increasing the added value content of products. Knowing that the competitive edge of the NICs rests in low prices, most of the export based SMEs shifted to a new competitive edge found in the introduction of new product and maintaining high quality standards. This in itself means keeping a head of their competitors by constantly shifting the competitive edge. If today the competitive edge was in the form of added value content, the next few years it would probably rest in the introduction of a new product. In essence this is an aggressive response to the international division of labor which in itself gives vitality to the manufacturing export-based SMEs.

Examples of industries that tried diversifying their markets can be noted in the case of the Metal tableware manufacturers that shifted from the US market to Near-and-Middle East, Europe and Africa. Precision measuring instruments manufacturers also diversified to South East Asia, Near-and-Middle East. This trend was also noted in the bicycle and parts industry, which shifted from the US market to Southeast Asia and Europe in the mid 1970s. This has been so due to the intense competition in the American market .⁴⁰

Part of diversification of the market has been a shift to the domestic Japanese market. It is worth noting that competition in the markets is not only limited to the international scene, but is also felt in the domestic market. There has been a steady increase of imports over the years, which has therefore intensified competition. This came in the wake of international calls for Japan to open up markets to goods from other countries. Other than competition in the domestic market, the major challenge lies in the nature of the market itself. The Japanese market is a highly diversified and sophisticated one, which therefore requires the production of goods of high quality in small lots. This requires the collection of much information about the markets. However, various groups can be easily identified for the market. This identification is usually based on demographics, therefore meaning that various age groups are seen as a market segment because each has distinct tastes, preferences and needs.⁴¹

Most SMEs have tried in the past and still continue in their endeavors to respond positively to the domestic market. The diversified nature of the market requires production of goods in small lots; therefore most of the manufacturers have adopted the use of innovative technology like FMS (flexible manufacturing system). Such technology allows for the production of goods of different specifications and designs on the same production line. Bankruptcy of the mass production technology in the 1970s also forced many of the manufacturers to adopt the flexible manufacturing technology.⁴² The other management strategy used in marketing by certain SMEs is through “development imports”. Development imports mean the use of the Japanese domestic market information to produce goods overseas for imports to Japan. This means that the taste and design are according to the Japanese market. Such production arrangement is usually done with an affiliate overseas or through agreement with a foreign firm. In case of an agreement with a foreign firm, the Japanese firm’s top executives first make trips to tour the country in which they want to carry out production. Then agreements about such issues like quality, design are then settled and the technology to carry out the manufacture of these goods is normally given by the Japanese SME. The finished products are then exported to Japan. The rationale here is that it is cheaper to produce these goods abroad due to comparatively cheaper labor costs, cheaper costs of electricity and plant site. This method of production is quite effective in the reduction of the production costs. The other superior attribute of this system of production is in the fact that it fuses the production process with the marketing activity, which minimizes the incident of poor performance in the market. This system is used in the production of parts or finished products. A good case in point is that of Pearl Metals Co. of Tsubame-Sanjo (Niigata prefecture ) which manufactures kitchen utensils. To cope with the problem of the strong yen, this firm imports half-made frying pans from firms that it has agreements with in China and then processes these to finished products in their own factories adding much value using sophisticated technology.⁴³ This way the appreciation of the yen has been turned into an advantage by firms that use this kind of business practice.

In a field survey on the “management strategies” done in December 1988 by the SME Agency, 15.4 % of SMEs said they were procuring parts from overseas, while 30.6 % said they were interested even though they had not made any plans to make procurements. In certain cases the goods produced overseas are 60–50 % lower than the cost of production in Japan. This is specifically the case with production done in China. However, the firms that are involved in this kind of production reported certain disadvantages with this system. For goods produced in Southeast Asia and China or even sometimes in the NICs, the problem is mainly to do with quality, while from Europe or USA; there is always a problem with keeping the delivery schedule.⁴⁴

6.12.3 Moving Operations Overseas

Shifting operations abroad is another method that some of the SMEs adopted in response to the yen appreciation and international division of labor . Most of the investments are in Asia while a few are in Europe and the US. In Asia, the earlier investments were mainly concentrated in the NICs, but in the past few years there has been a shift to the ASEAN countries and China . Movement overseas began as a process of moving comparatively disadvantaged industries from Japan to other areas where they would regain the lost comparative advantage at home. 37 % of the SMEs interviewed in 1990 cited low cost of labor as the main reason that made them move into production abroad. Most of these investments are of the joint venture type. Largely this is because of the existence of strict regulations on equity shares in many Asian countries.⁴⁵

As mentioned above, moving abroad has mainly been in pursuit of comparative advantage in the form of low labor cost, and low cost of raw materials. Because of this, even firms with less than 100 employees have set up branches in different countries thus forming an international network aimed at maximizing the advantages of location in different countries. This demonstrates a strong tendency to cope with the changing international business conditions. Following the logic of comparative advantage is a useful means of maintaining a competitive edge over the other competitors, like in this case cheap labor and cheap raw materials signify that price competing edge can be attained. At the same time the Japanese SMEs compared to their counterparts in the NICs and ASEAN countries from which they now face competition in the markets, are technologically more advanced therefore capable of achieving competitive edge in terms of price and quality. Table 6.1 vividly illustrates this tendency to aggressively follow the logic of comparative advantage.

Table 6.1 Examples of multi-national business development

By selecting different locations for the procurement of raw materials and carrying out manufacturing and sales based on the advantages inherent in various countries, these SMEs find it possible to link all the firm operations. This makes it possible for such firms to plan production that is market oriented. In this kind of production system, information about the different stages of the firm’s operations can be easily acquired through the coordination between the parent and the subsidiary firms. This is an effective means of rationalizing the operations such that it becomes possible to reduce costs while at the same time achieving the quality goals.

However as can be noticed from the table, in moving the production operations overseas, certain problems are experienced by these SMEs more specifically at the initial stages of investment. The ability to tackle these problems depends on the managerial ability and the resources at the disposal of the firm in question. Usually, it is more difficult for most of the firms to find extra personnel to send abroad to work in technical areas that the subsidiary is still lacking. Difficulty in solving this problem is mainly because; at the parent firm the services of such persons are equally needed. As such the number of Japanese personnel leaving their firms to work at the subsidiaries is quite limited, and if they leave then it is usually for the purpose of training the local subsidiary’s personnel.

Moving overseas so far can be regarded as a very beneficial business strategy to some of the SMEs as they try to link up all the stages of their operations. In a survey done by the SME Agency in 1988, of the enterprises that advanced into overseas operations, 53 % answered that they were successful or somewhat successful, while 9 % said they were unsuccessful or somewhat unsuccessful.⁴⁶ The figure of 53 % indicating success can be regarded as a fairly good level of performance with the high chance that the learning curve on how to conduct business improves with time. However, in as much it can be said that moving overseas by several SMEs in pursuit of the logic of comparative advantage helps transform the industrial structure of Japan, it also carries with it the negative consequences such as loss of business for some of the subcontracting firms.⁴⁷

So far most of the manufacturing SMEs have exhibited a high level of flexibility in their response to the challenges of the international business environment . It is interesting to note that they have tried doing this while maximizing the use of the meager existing resources at their disposal as in the case of business conversion. Also in establishing production and sales networks that transcend the national boundaries some of these firms have been able to achieve a two-edged competitive advantage that lies in price and quality. Nevertheless it would be wrong to state that these firms have provided solutions to all the problems that they face. Certain problems like the constant appreciation of the yen seem to be beyond the ability of the SMEs to provide a solution, while it adversely affects their business performance. With such problems, only the government’s support and intervention can rescue these industries as typified in the recent government emergency plan specifying strengthening support to SMEs suffering from yen’s appreciation.⁴⁸

From this chapter it can be deduced that the Japanese small and medium manufacturing enterprises have faced severe economic environment in their operations. Despite these problems, these industries still have managed to fulfill an important role in the Japanese economy by responding appropriately to the trials and requirements of the times. From the comprehensive historical background of these industries given in chapter one, it can be noted that right from the time of industrial revolution in Japan to the modern times, several odds have stood in the way of the development of SMEs. Yet despite all these problems, these industries have been able to modernize and upgrade their technology, improve their productivity, and even make inroads abroad. Therefore these industries have generally demonstrated a dynamic performance, which this study explains.

To provide adequate explanation to the sustained vitality of these industries, a holistic approach of the systems model type, which takes a critical look at these industries, and their environment in entirely was taken by this study. Entrepreneurial factor, the organizational structure and its characteristics, and flexibility to respond to the constantly changing and challenging business environment are all seen as the major explanations to the issue of dynamism amongst the small and medium manufacturing industries.

Entrepreneurship should be understood as the engine that keeps business moving. Therefore while investigating vitality among the manufacturing SMEs, entrepreneurship is an important variable to lookat. The finding was that real entrepreneurship exists in Japan contrary to the view of certain critics that hold contrary opinion. The fact that at no point in time did the rate of business closure surpass the business opening rate clearly demonstrates this contention. It is true that during certain years the business start up rate went down, but this was attributable to factors such as slump in economic growth rate and or high rent on both land and business premise. The ability to open up new businesses is one way that entrepreneurship positively contributes to vitality amongst these industries. It is not just the opening up of businesses per se that is of significance, but the task that these entrepreneurs take upon themselves. This task is identified as creativity and the ability to make constant improvements on both the technology in use and the products. The creativity and constant incremental improvements known as kaizen in Japanese contributes to vitality amongst these industries by way of the cumulative impact of these small changes made over long periods of time. Such small incremental improvements are advantageous to these industries because it allows for the maximum utilization of the available scarce resources while at the same time improving productivity. These entrepreneurs combine kaizen with the idea of recycling of old technologies using ‘fusion technology method’ to come up with a hybrid technology. Through this mechanism relatively less money is spent on technological improvements as compared to cases in which firms seek leaps in technological development.

The entrepreneurial characteristics however, differ from the Western standard depiction of an entrepreneur. It is not the lone individual making distinguished achievements in business, but rather it is the concerted effort of many individuals trying to make it in business. Other than the personal network of contacts that the individual entrepreneurs develops, usually there is the support given by people related to him like relatives, friends, and in certain cases even the former employer. Through these connections it becomes easier to acquire business information, financial support and other benefits derived from human connections. Social networks are therefore an integral and important aspect of entrepreneurial undertaking. The social relations therefore operate as a very valuable resource to the entrepreneurs. On the other hand the high savings rate and the generally good educational background of the Japanese people make entrepreneurial endeavors liable to much success as opposed to a situation in which these elements are lacking. In essence an explanation of the vitality of the manufacturing SMEs that does not include the role of the entrepreneurs would be an incomplete one.

Essentially, the organizational characteristics and structure of the SMEs contributes to vitality even though a few fundamental weaknesses are notable. The distinguishing structure and characteristics of these industries can be summed up as the presence community based industries, subcontracting system, flexible employment practices accompanied by continuous process of office automation, membership to several organizations concerned with SME matters, and industrial networking supported by relatively increasing usage of information technology. All these can be seen as responses to the challenges of the business environment.

Having been in existence for a long time, the community-based industries have so far served as treasure houses of technology and skills thereby raising the social capability to absorb new technologies. This technological base is a necessity for the efforts at modernization of the production and management technologies to be a success. The community-based industries also play the important role of providing a firm economic base, which is a prerequisite for further industrialization. However, one weakness for several years amongst these industries has been that an over dependent attitude. This means looking forward to too much help from the government. This attitude is reinforced by the age-old belief that small industries are weak. The result is that of a tendency on the part of many entrepreneurs to take things with much resignation, which kills self-initiative spirit.

The flexible employment policies of most manufacturing SMEs prove to be quite advantageous in the face of shortage of labor. The flexibility lies in the employment of various types of people ranging from old persons, middle age married women, middle age persons quitting their jobs elsewhere to hiring of foreign workers. Flexibility is also notable in the increasing use of flexible convenient working time for these categories of persons. This flexible working hour is mostly limited to certain sections of the factories in which this practice does not disrupt the production process . The efforts at improving the image and working conditions of these industries are also a very positive step in the management of the scarce human resource. It is notable that most industries try as much as possible to move away from the condition typified by the ‘3K’ in Japanese- kitsui, kitanai, and kiken (difficult, dirty and dangerous). The efforts at office and production line automation are some of the major measures to combat this problem. Such responses among several of the manufacturing SMEs have so far helped to preserve vitality that could have been lost. Though the training of workers is not yet well developed, as is the case for the large firms, most firms place an emphasis on the training of their workers, which generally helps in the upgrading of the workers skills. However, one fundamental weakness is notable in the fact that as these industries become more technology intensive, there is increased demand for highly skilled workers, which is one area in which serious shortage exists. In this regard survival into the future seems to lie basically in the ability of these industries to attract the young prospective workers having high educational qualifications.

On the other hand the subcontracting system contributes to efficiency in the production system since it requires promptness, precision, and the ability to cut costs. This system of production also acts as a channel through which modern technology trickles from the large firms to the SMEs and in many cases this takes place in a long-term relationship. In essence the parent firms help the subcontracting firms to perform certain costly tasks that they cannot economically achieve on their own. In addition, the sophisticated division of labor generated by this system makes it possible to concentrate on the research related to the production of a particular group of items while reducing the costs of acquiring information through joint efforts with the parent firm. Nevertheless, one fundamental weakness with this system is in such a case when the parent firm shifts its operations from one location to another, thereby triggering the instant loss of market for the products of the subcontractors. The shift of Nissan automobile plant from Zama to Kyushu illustrates this fundamental weakness. The problem of bullying of subcontractors by parent firms and big retailers is also a problem that has to be constantly addressed by the antitrust watchdog the Fair Trade Commission. Despite the few flaws in the subcontracting system, it serves to impart vitality to the performance of the SMEs.

The horizontal industrial networking system too is quite beneficial to the operations of the SMEs. Due to the sophisticated social division of labor there has been growing interdependence between several firms over the past years, which illustrates the extent to which these firms perceive the importance of this concept. The strength of this system lies in the reduction of transaction costs through joint activity by several firms. At the same time information can be acquired at a relatively reduced cost, for instance the information about new technologies. Industrial networking is an efficient way of achieving technological diffusion in the face of the meager resources of several of the SMEs to conduct R&D on their own. A part from the various public support organizations, which bring many firms into contact with each other, the Japanese cultural values of reciprocation and obligation tend to enhance industrial networking process. In future if these firms can overcome the problems that so far hinder them from the expanded use of information technology, then this would give new vigor to the industrial networking process.

The existence of several goal oriented support organizations for the SME activities reflects the government’s commitment to promote the activities of this category of industries. Through these organizations various services are offered such as assistance in efforts at modernization of production facilities, training of employees, assistance to firms wishing to change their line of business, acquisition of information, help to gain access to external resources and assistance to benefit from economies of scale through joint activities with other firms involved in related areas of production. The distinctive structure of these organizations deserves attention, because they are such that technological research and development institutions are well dispersed in the country while at the same time they are linked together in a way that allows for information to flow easily from one center to another. In essence technological know-how is not concentrated in a few elite institutions.

In dealing with the problems related to the turbulent international environment, the SMEs have exhibited great level of flexibility, creativity and ingenuity. Through a three pronged approach of business conversion, diversification of the markets and increasing investments overseas, these industries have so far tried to cope with the problems of a strong yen, increasing competition from the ASEAN countries , China and the NICs, changing market structure, and the new age of internationalization. Most impressive is the system of business conversion in which maximum utilization of the available resources is practiced through constant improvements on the old technologies. It is worth noting that the cumulative impact of such changes is quite great. Diversification of the markets too has proved to be a good business strategy which has led to the development of such advantageous business practices like imports development which is based on the use of the home market information for production of goods cheaply abroad. On the other hand outsourcing and the complete relocation of production facilities abroad illustrates the ability of some of these firms to pursue the logic of comparative advantage. All these business strategies notwithstanding, most of these firms still find themselves only capable of partly dealing with the problem of rising value of the yen. So long as such a situation prevails, these firms will always look forward to the government to provide support through certain policy measures.

Consequently it is possible to arrive at the conclusion that vitality amongst the manufacturing small and medium industries can be largely explained by the entrepreneurial factor, the organizational structure and its characteristics and the flexibility to respond to the constantly mounting problems in the international business environment. The government’s efforts to provide support to these industries is also very significant yet it should be understood not as an attempt to create special advantages for them, but one which aims at removing the disadvantages that these industries already face. Certain weaknesses of course do exist in these variables, but still the positive aspects of these variables far outweigh the possible negative considerations. From this point of view, it would be possible to draw lessons from this study for SMEs in Sub-Sahara African countries.

Generally Africa can be regarded, as one region ridden with poverty and lack of industrialization, while at the same time the strong desire to industrialize exists. Currently, Sub-Sahara African countries have hundreds of thousands of micro-enterprises lacking technology, a sordid condition that requires transformation through infusion of technologies and skill acquisition. The industrial base of the Sub-Sahara African countries is still quite weak even within the formal manufacturing sector. For instance in the case of Kenya, the industrial sector contributed averagely 11 % of the GDP while for Uganda it is 4 and 7.8 % for Tanzania .⁴⁹ This situation has not changed as can be gleaned by the recent data on manufacturing as a percentage of GDP of Kenya. This has remained unchanged at—13 % (2011), 12 % (2012), 12 % (2013), and 11 % for 2014 (World Bank 2014).

Therefore the contribution of the industrial sector to the GDP of these countries is very minimal. Instead the agricultural sector contributes to the largest portion of the GDP of these countries, even though agriculture also still lacks capital input, and thus can be said to be underproductive. Yet, this region can still benefit from the lessons drawn from this study in their efforts to industrialize.

To begin with, several reasons exist as to why the development of SMEs would be extremely useful. The development of SMEs would help in the generation of employment opportunities and the utilization and mobilization of resources that would otherwise remain idle. For instance SMEs make possible the mobilization of family savings, which may otherwise remain, unutilized or channeled to unproductive activities and luxury spending. These industries are also quite useful in the training of entrepreneurs, since in entrepreneurial business exposure counts much. Finally, these industries are necessary for the strengthening of the overall industrial sector by utilizing certain advantages that the large firms lack thereby complimenting their activities.

First and foremost, because little industrialization process has taken place in these three countries there is need to build the social capacity of these countries to absorb new technologies. In this respect, much can be learned from the role that the community or regional based industries have played in Japan. It is possible to establish production regions based on the resources available in each area. This would help to provide an economic base for these regions, which is necessary for the creation of a domestic market. Invariably the creation of a domestic market is a prerequisite for further industrialization process to take place.

To fulfill the task of social capacity building, the governments should be instrumental in the establishment of public research institutions that allow the free flow of information to take place. This requires the structuring of these institutions in such a way that they are well spread in various parts of the country thus avoiding the creation of elite institutions with little reach to the local areas. At the same the time standardization of the operations of these institutions is key for the successful application of information to practical use in factories and offices. It is notable that in the past whatever little research has been carried on in the laboratories has not been well linked to the production process . In this case research process loses its meaning, since it ends up as an exercise in futility.

The historical development of the sophisticated social division of labor in the community-based industries could as well serve as a model for these countries for developing informal business in the rural areas into formal industry. For this to be fulfilled there is need for an organizer or a leader to coordinate and supervise all the phases of production. In Kenya for instance, the production of traditional arts and crafts, wood carvings for export could benefit from this system if there can be capable organizers and planners of the production process . So far most of the people involved in the production of these handicraft goods always do it on individual basis only to end up with lower prices when selling to the merchants who export these products.

To benefit from the subcontracting system, which can be useful in the creation of backward linkages, governmental guidance is necessary. Even though linkage formation could take place in the absence of governmental guidance, it may take unnecessarily longer time if left entirely to the market forces. This is in terms of assisting local small and medium sized firms to act as suppliers to the multinational firms. In this case efficiency should be the criterion for the selection of industries to be involved in this process to avoid the mishap of having suppliers that face serious problems in becoming internationally competitive. Therefore an assessment of the respective specific competitive advantages of the multinational firms and the local industries is necessary.

Concerning technological improvements, much can be learned from the Japanese SMEs’ kaizen approach. Traditionally, these countries’ perception has been that big leaps in technological development are the mark of success. This perception is exemplified in these countries’ quest for the most modern and sophisticated technology even when the capacity to handle such technology is still evidently lacking. Contrarily, the kaizen approach would be highly beneficial in the sense that the cumulative impact of constant incremental improvements can be so great as evidenced in the technological progress made by the Japanese manufacturing SMEs. While it is cheaper to make technological improvements using this concept, it also allows for the maximum utilization of the available scarce resources and facilitates the learning process. The kaizen concept would be more viable if combined with the industrial networks system because the increased interdependence of firms can be useful in such important processes like technological fusion.

Lastly, it is important to point out that in as much as the government can provide a supportive environment to business activities; it is the entrepreneurs who can transform business. Therefore programs aimed at the development of entrepreneurship should be given priority by the governments. In this case the entrepreneurial training should be mainly focused on the manufacturing sector. In the past most of the business activities of several entrepreneurs have been concentrated in commercial activities only while urgent need exists for moving into the manufacturing sector. Encouraging entrepreneurship at the level of SMEs is important since it is the nursery of entrepreneurial talent, which is valuable in organizing and managing larger undertakings in the future.