Japan's Hidden Champions Hold the Key to Revitalization of Regional Economies

Hermann Simon, a German scholar and specialist in business administration, conducted a systematic survey in the 1990s and showed that there exist a number of companies identifiable as "hidden champions" in Germany. A hidden champion, as defined by Simon, is a family owned/unlisted small and medium enterprise (SME), which is headquartered in a regional city, has a relatively long history, holds an extremely large share in a niche area of the world market, and earns the majority of its sales revenue from exports. It is believed that there are some 500 to 1,000 such hidden champions across Germany, together accounting for a substantial portion of German exports. Furthermore, his book (1998) points out that similar companies are observed extensively around the world, particularly in developed countries.

In Japan, many of the SMEs that are referred to as "global niche top" manufacturing companies fall under the definition of hidden champions. For instance, several Kyoto-based measuring instrument manufacturers used to be typical examples though they are no longer "hidden" today. The reason why they do not relocate their headquarters to Tokyo is that they see no need to do so as they have been dealing with the global market from a very early stage. Including potential hidden companies, i.e. those holding a large share of the domestic market in their respective niche areas, Japan has numerous hidden companies, distributed across the country and operating as regional leaders in their respective regions. The Small and Medium Enterprise Agency (SMEA) has been publishing a list of "300 dynamic monodzukuri (manufacturing) SMEs" every year since 2006, having introduced a total of 1,200 companies to date. Many of these SMEs can be perceived as candidates for becoming hidden champions in the future.

Hidden champions bring a number of benefits to a regional economy and society including the provision of quality job opportunities. Being bearers of innovations through the development of new products, they also contribute to the growth of the regional and national economy. Many of the German and Japanese hidden champions are engaged in the business-to-business (B-to-B) supply of differentiated materials, parts and components, and equipment to companies across the world. For these companies, the idea of questioning their reliance on exports, something that has been cited as a problem since the Lehman shock, is nonsense. Meanwhile, amid concern over the hollowing out of industries resulting from the expansion of overseas production, hidden champions continue to maintain a degree of domestic production bases. They are thus counted on to succeed and further develop the manufacturing technologies accumulated to date in Japan while at the same time continuing to maintain an absorptive capacity to properly respond to the emergence of new technologies in the future.

In empirical research based on German data, Audretsch et al. (2008) indicated the existence of a mechanism for economic transitions, in which intra-industry startups, focusing on market niches through the differentiation of products, are given a chance to play an active role when an industry reaches maturity in its lifecycle. Also in this mechanism, such SMEs are located in urban peripheries where they can benefit from knowledge spillovers leading to innovations or in post-peak industrial agglomeration areas and their vicinities. Audretsch et al. (2008) pointed out that this theoretical expectation is consistent with the fact that many German SMEs defined as hidden champions are located in such regions (Hosoya, 2009).

Up until recently, Japan was the world's largest industrial agglomeration area. Today, however, although Japan has past its peak, there are still SMEs belonging to matured manufacturing sectors in existence and operating in various areas across the country. Quite a few of them are dynamic SMEs that boast excellent technological capabilities and seek to explore market niches by utilizing their existing capabilities and reinventing themselves in order to venture into a new business. Such SMEs can be seen as potential hidden champions. The government has been supporting these companies through its policies for the promotion of, or otherwise related to, the formation of industrial clusters and other relevant measures. These policies can be defined as designed to increase the probability of success for attempts to explore niche markets and help generate new hidden champions through the use of various networks such as those for industry-academia collaboration and cross-industrial collaborations (joint product-development activities among the member SMEs), thereby contributing to the revitalization of regional economies (Hosoya, 2009).

The existence of potential hidden champions, which may become the target of these government policies, is widely recognized. However, the actual status of these companies is not necessarily clear as no systematic or analytical survey has been conducted to date. Led by the SMEA's initiative to highlight 300 dynamic manufacturing SMEs nationwide, local governments, chambers of commerce and industry, and other organizations have compiled and published the directories of companies forming local manufacturing clusters. Nonetheless, the information provided by these directories is limited to the profiles of companies and their products in most cases. And even though there are some preceding studies based on questionnaire surveys of companies constituting geographical industrial clusters, such as those in the greater Tama region across the borders of Tokyo, Kanagawa, and Saitama prefectures, no attempt has been made to capture the state of affairs at a national level based on integrated objective criteria.

By conducting such a comprehensive survey and thus extracting traits unique to hidden champions as well as their secrets of success and know-how, we can enhance soft-side measures provided by organizations designated to support potential hidden champions. Meanwhile, by clarifying the roles played by hidden champions in the economy and society of regions in which they operate, we can build the confidence and attitude of entrepreneurs. Furthermore, by conveying the actual status of Japanese companies to those in other countries, we can expect an increase in opportunities for international transactions, which in turn may pave the way for Japanese hidden champions to evolve into global niche top companies. I am keen to work on this issue of hidden champions which I believe is a research theme leading to actual policy proposals.