Human Resource Problems Facing Regional Companies, and How to Overcome Them

Faculty Fellow, RIETI

Regional Companies' Increasingly Acute Labor Shortage

Even without quoting the Edo period senryu verse that humorously comments on the tendency for the well-educated grandchildren of once prosperous families to have to put up "House For Sale" signs in beautifully executed calligraphy (Karayo de uri-ya to kaku sandai-me), it should be clear that business succession over the long term is a difficult undertaking. In this senryu, "grandchildren (sandai-me)" refers to the idea that the company is built on the vitality and the hard work of the founders, is safeguarded by the children who grew up witnessing their struggles, but is in jeopardy once the torch passes to the third generation. However, this is not the only issue. If we calculate one generation as being 30 years or so, then the third generation marks 100 years, over which time the business environment is likely to have changed dramatically, and responding to these changes is also an important consideration.

Furthermore, in the Japan of today, the declining birthrate has led to the beginnings of a contraction in the labor force, and small and medium-sized enterprises (SMEs) in the regions are now confronted by an increasingly acute labor shortage as a result. The 2018 White Paper on Small and Medium Enterprises in Japan devotes one of its chapters to this issue. According to the Japan Finance Corporation's "Quarterly Survey on SME Trends" to which the White Paper refers, the proportion of SMEs citing "labor shortages" as a management problem has been rising steadily over the past few years, to the point where it is close to the peak recorded during the late 1980s to early 1990s of ‘bubble economy’ years.

Insufficiency of Information Regarding Regional Companies are also Acute

The White Paper analyzes how SMEs are responding to these labor shortages. However, if we were to add another issue, it would have to be the failure of SMEs to market themselves effectively. As pointed out by Yuji Hosoya in his Companies Capable of Bringing out the Potential of the Local Economies: The future seen in the global niche-top enterprises (Chikuma Shobo, 2017), there are many high-quality companies among Japan's SMEs that could fairly be described by the label "global niche-top". There are also long-established companies with a history of more than 300 years, dating back to the middle of the Edo period. However, surprisingly few individuals, even among local people, are aware of the existence of these smaller but high-quality companies.

In this regard, there is an extraordinarily large asymmetry of information between the management of such companies, people working in related industries, and some of researchers studying SMEs on the one hand, and the vast majority of people on the other hand. Of course the man in the street never makes such uncivil remarks to the presidents of companies like these, and this perception gap has not been taken particularly seriously thus far. However, given Japan's demographic trends, labor shortages are likely to continue long into the future, and it has become necessary for such SMEs to explicitly lay out their vision for the future as part of the process of recruiting human resources.

Matching Human Resources in the Age of "The 100-Year Life"

Matching personnel with experience in large companies based in urban areas to those regional SMEs is a "two birds with one stone" approach that enhances the management capabilities of SMEs while at the same time compensating for the shortage of core human resources. Recently a number of companies specialized in this matching activities have appeared. Certainly, in today's society of longevity, dubbed by some as the age of "The 100-Year Life," it has become necessary for workers to brush up their skills at an opportune point, part-way through their working lives, and to put their accumulated experience to good use in second or even third careers.

Lynda Gratton and Andrew Scott's 100-Year Life (Bloomsbury Information Ltd., 2016), which was also a bestseller in Japan, advocates practicing a "multi-stage life" in which workers experience a variety of careers throughout their lifetimes, characterized by long-term breaks from work and multiple changes of employment, in order to avoid calamity over the course of a longer life. Regional companies struggling with labor shortages should respond to workers faced with the need for new life plans by searching for core human resources who enhance management capabilities, and proactively working to raise the appeal of their own companies by laying out visions for the future, thus opening the way to broad-based hiring of human resources.

Coordination Problems Related to Personnel Matching

Nevertheless, despite the appearance of personnel matching agencies and other companies, the fact is that there is insufficient matching of experienced personnel who are considering their life plans in the era of "The 100-Year Life," to the personnel needs of SMEs in the regions. Even the White Paper referred to earlier states that no more than 8.1% of companies are dealing with labor shortages of core human resource by means of "utilizing external personnel, such as those from large companies, by means of transfers, concurrent appointments, or side job offers."

In order for personnel matching functions to be used more effectively, the following two obstacles must be avoided. One is that, from the standpoint of the SMEs that are hiring, because the management issues faced by large companies and SMEs are different, however much experience an individual has accumulated in a large company, it is difficult to commit to employing them without determining whether they can contribute to their own management. On the other hand, from the perspective of the person responding to the vacancy, there is a severe lack of information when it comes to selecting, from among the many SMEs out there, a company with ambitions for the business, and to whom the individual can entrust the second or third phase of their working life. There is also a serious problem of asymmetrical information for both parties.

In the field of economics, the deficiency in the matching function caused by this lack of information is referred to as a coordination problem. When potential buyers and sellers do not have detailed knowledge of the quality and conditions involved in a transaction, or are even unaware of the existence of the potential counterparty, the result is that the search for counterparties and the gathering of detailed information by both sides becomes so costly that the transaction itself is abandoned. When such coordination problems exist, the matching function must be facilitated by organized intervention.

Facilitation Measures for Personnel Matching are Required

As a concrete example of facilitation measures for the matching function, I'd like to exercise my author's privilege to mention my university's recurrent education program called the "Shinshu University Program for Creating 100-Year Companies." On the one hand, companies in Nagano Prefecture that are looking for solutions to their actual management problems and for the core human resources to implement them are invited to this program. On the other hand, the program invites applications from ambitious individuals who are keen to take up the challenge of resolving these problems, and match them to the companies. As part of the scheme, the participating individuals are assigned to visiting researcher positions within the university for a period of six months to work on problem-solving initiatives. Fortunately this program has been adopted as a this fiscal year's Human Resources Support Business for Regional Small and Medium Enterprises (Scheme for Securing Core Human Resource) by the Small and Medium Enterprise Agency. In addition, with the support of Japan Human Resources Co. Ltd., a government-affiliated company providing human resource services, the first year has gotten off to a successful start.

The focus for this scheme is removing the information gap between personnel on one side and the companies on the other, and the quickest route to achieving this is to address specific problems encountered by regional companies and to have the companies themselves evaluate the results. In this case the catalyst was the university stepping up to bat, but in future it is likely that a variety of other organizations getting involved and driving activity. The most important issue in regional revitalization is to create many regional companies that are able to confront changes in the business environment and maintain healthy operations over the long term, and acquiring the human resource to support such initiatives is now a crucial issue.

October 12, 2018

November 9, 2018