Vibrant Small and Medium-sized Enterprises: Follow the lead of the "global niche-top enterprises"!

Consulting Fellow, RIETI

The Research Institute of Economy, Trade and Industry last summer conducted a nationwide survey on the small and medium-sized enterprises (SMEs) that have demonstrated a high level of independence and offer highly competitive and unique products and processing services, in other words, niche-top type enterprises (NTEs). The survey revealed a number of interesting facts, of which the most noteworthy is the existence of a group of so-called "Triple Advantage Takers (TATs)" (enterprises that utilize the three national policies intended for SMEs), who accounted for approximately one-third of the NTE respondents. These vibrant SMEs not only utilize the three national policies as the name suggests, but also uncompromisingly exploit every external resource available to them, including universities and business partners. What has made them so noteworthy, in addition to their aggressiveness, is the possibility that the government has played major roles in bringing such enterprises to rise via the Industrial Cluster Policy and other approaches.

"Niche-top type enterprises": Excellent SMEs that all share common traits

A survey was conducted on 2,000 NTEs, and 663 responses were received. For details, please refer to the discussion paper "Study on Global Niche-top Enterprises as Representatives of Excellent Small and Medium Manufacturing Companies in Japan" (13-J-007).

The average NTE has 97 employees and net annual sales of 2.35 billion yen, or 20.7 million yen per employee. Analysis of massive quantitative and qualitative data has revealed that we can identify statistically significant differences for many questions between NTEs and randomly selected manufacturing SMEs. This group of "excellent SMEs" is larger in scale and demonstrates better performance in terms of productivity, margins, and other factors compared to average SMEs. Their average year of founding is 1962, therefore, this group also includes a number of long-lasting companies.

Since the 1990s, NTEs have been actively promoted as excellent local SMEs by the local governments and chambers of commerce around the country, in addition to being recognized under such programs as the "300 of Japan's Vibrant Monozukuri (Manufacturing) SMEs" conducted by the Small and Medium Enterprise Agency every year from 2006 to 2009. For this reason, their uniqueness and distinguishing features tend to be emphasized. However, these motivated and capable SMEs, which span across different industries, business models, histories, and size, also share a number of common characteristics.

"Global niche-top enterprises": The cream of the crop of excellent SMEs

Enterprises with typical NTE characteristics that demonstrate relative superiority in performance are called global niche-top enterprises (GNTEs) (Note 1). Their most distinctive characteristics are: (1) establishing a reputation whereby users come to them in anticipation of having their problems solved; and (2) developing unique networks with other companies and universities over the years to aid them in formulating solutions. Such inter-enterprise collaborations are often performed with well-established big user companies as well as big and small suppliers. Typical GNTEs share a number of other attributes as evident in their products penetrating smoothly into foreign markets due to the high non-price competitiveness, demonstrating smart overseas operations in an unhurried step-by-step manner, and often confronting threats of cheap knockoff products yet being able to manage to secure their markets through their high-quality products and various intellectual property protection methods such as patent and trade secrets.

The average GNTE has 111 employees and net annual sales of 2.76 billion yen, or 23.9 million yen per employee, which exceed those of the average NTE. Their average year of founding is 1959, which means they have been in business for more than 50 years and have lasted even longer than the average NTE.

"Triple Advantage Takers": Vibrant, forward-looking SMEs

The survey asked the NTEs whether they utilized the three national policies intended for SMEs, i.e., acquiring public competitive funds for technological development, legal certification for approving good business plans including those under the Business Innovation Plan pursuant to the Act on Supporting Business Innovation of Small and Medium-sized Enterprises, and selection as part of the "300 of Japan's Vibrant Monozukuri (Manufacturing) SMEs." TATs are those that utilize all three of the above policies.

The average year of founding of TATs is 1961, making it a year older than the average NTE, but they only have 88 employees and net annual sales of 2.21 billion yen, or 20.1 million yen per employee on average, which both fall short of those of the latter. Furthermore, compared to GNTEs, TATs are younger and far smaller in size. In terms of their margins, they are also outclassed by GNTEs and fall slightly short of those of NTEs as well, after adjustments for anomalies. TATs are also domestically oriented relatively, as 74.9% of them have overseas sales which account for less than 10% of total sales, whereas that for GNTEs is 45.1%.

However, in terms of utilizing public competitive funds for technological development, TATs have distinguished themselves, as 40.5% selected the response for the most frequent usage, i.e. four times or more, which was comparable to 40.8% for GNTEs. Additionally, as the most important source to turn to in the event of insufficient technology, an overwhelming 31.0% cited research institutions such as universities, which far exceeds the 17.3% of the average NTE. This may be said to be an indication of their enthusiasm toward industry-academia collaboration. In comparison, the percentage of GNTEs with similar replies was low at 9.8%, which was an indication of their preference toward inter-enterprise collaboration over industry-academia collaboration. However, detailed analysis also revealed that TATs are not only enthusiastic toward industry-academia collaboration but also toward inter-enterprise collaboration as well, at a level approaching that of the GNTEs. Furthermore, although they tend to have low percentages of overseas sales on average, the enterprises that had expanded abroad were more aggressive toward establishing overseas sales bases than even the GNTEs.

Triple Advantage Takers that were inspired by the Industrial Cluster Program

Then what is the source of the TATs' enthusiasm? What motivates them toward utilizing external resources including their namesake government policies?

According to the interviews conducted prior to the survey, it was only from the late 1990s to the early 2000s that the use of various policies including government subsidies gained momentum even among the GNTEs. Under the Industrial Cluster Program, which began in 2001, the staffs belonging to the regional bureaus of the Ministry of Economy, Trade and Industry visited excellent SMEs with the staffs of related local agencies and provided various support, offered information on public programs, and furnished detailed assistance, including instructions on how to fill out application forms for public competitive funds as necessary. As of this moment, this type of assistance initiated by the national government has become established and is being perpetuated by the local governments and related institutions around the nation. The SMEs, which initially demonstrated uneasiness toward such assistance, eventually accepted it and became proficient in utilizing the policies of the national and local governments as one among a number of external resources. The formation of TATs is thought to be a phenomenon of the past decade, and there is no doubt that encouragement by the national government has played a role in this process. Thus, in so far as it instigated the growth of these enterprises, it can be said that government policies have been effective.

Vibrancy alone is not enough to make a "GNTEs"

The aforementioned discussion paper positions GNTEs as successful enterprises and gives a detailed discussion on the policies and assistance necessary for TATs, as potential GNTE candidates. However, it is inevitable that TATs will face a long and arduous path toward becoming GNTEs. It seems that, despite their willingness to utilize government policies, much of the efforts of the TATs have proven to be futile, as shown in various responses suggesting the low degree of policies generating successful outcomes, including product development, compared to those of the GNTEs.

Henceforth, when screening SMEs for public competitive funds, the government will need to confirm firmly of the existence of customer needs as well as a reliable partner for formulating solutions, which are both characteristic attributes of GNTEs. Moreover, in light of the fact that inter-enterprise collaborations have played a major role in the nurturing of GNTEs, a system in which TATs can become involved in inter-enterprise collaborations that include major enterprises will also become necessary.

Furthermore, as TATs tend to shy away from overseas expansion, they will need to sharpen their competitive edge by marketing their products in foreign markets. To this end, taking part in overseas trade fairs, the equivalent of fighting in an away game, would be the most effective method.

The effort put into this undertaking by each enterprise will be the most crucial point. It is hoped that each TAT gains a higher level of awareness and makes a conscious effort toward becoming a GNTE.

April 2, 2013
  1. ^ In the survey, GNTEs were defined as "NTEs with few domestic competitors and more than one unique niche-top product as well as shares in the world market."

April 2, 2013