Changes in the Size Distribution of Manufacturing Establishments: Analysis in view of industrial structure and firm dynamics

This paper analyzes changes in the weight of small establishments in the overall industrial structure and the factors behind them in view of the size distribution of firms using data on domestic and overseas manufacturing establishments. The international comparison of long time series shows that the proportion of small establishments has generally been in decline in Japan while those of other advanced countries shifted to an upward trend in and around the 1970s. This difference was caused by changes in the industrial composition and a decrease in the proportion of small establishments within respective industries, as confirmed by the decomposition analysis of contributing factors with an eye on changes in the industrial structure. A key factor contributing to the changes in the industrial composition is the decline of industries that tend to have a large proportion of small firms, such as the textile industry. Regarding the decrease in the proportion of small-sized firms across industries, very small firms with four to nine employees have shown a particularly sharp decline. Analyzing this phenomenon by focusing on the dynamics of firm evolution, i.e., the entry, growth, and exit of firms, we find that the number of entries has mostly decreased compared with that of exits over the past few decades. During the same period of time, firm growth—another factor contributing to changes in firm size distribution—has worked to shift the size distribution toward smaller firms, which is contradictory to the findings in preceding studies on other countries. While the changes in industrial composition that have worked to lower the proportion of small establishments in the overall industrial structure can be understood as a response to various changes in the business environment, the low number of new entries is a disturbing factor that may undermine the industrial vitality of Japan. The implementation of government policy for small and medium-sized firms needs to be underpinned firmly by the thorough understanding of factors contributing to changes in the weight of small-sized firms in the overall industrial structure.