With a little help from my bank: Japanese SMEs' export decision
Faculty Fellow, RIETI
Professor in the School of Economics, Senshu University; Project Member, RIETI
For ITO Keiko's full bio,
Associate Professor of Economics, Nihon University
For MIYAKAWA Daisuke's full bio,
While large Japanese firms have been present internationally for years, small firms have found it difficult to overcome the information obstacles associated with entering overseas markets. This column argues that lender banks can help as they not only provide financial support but also business consulting services using their extensive knowledge obtained through lending transactions. It shows that small and medium firms whose lender banks accumulate more overseas market information are more likely to start exporting.
The successful globalisation of Japanese firms, especially small and medium-sized enterprises (SMEs), is an important issue in Japan (as it is elsewhere). Facing sluggish domestic sales against the background of an aging and shrinking population, Japanese firms have been shifting their sales and profits to export markets.
While well-established, large firms have been diversifying their destinations of sales and locations abroad, it is generally difficult for SMEs to overcome the various obstacles associated with entering overseas markets. In fact, the share of exporters among SMEs is very small while the majority of large firms are engaged in exporting. In our database that includes all of the Japanese manufacturing firms with 50 or more employees, only 25% of SMEs (50-300 employees) are exporters while 60% of large firms (300+ employees) are exporters. Given that a significant share of firm activities (e.g., number of firms, number of employees, and value added) are accounted for by SMEs in the manufacturing sector, it is important from a policy perspective to induce SMEs to expand their business activities toward overseas markets.
According to a survey conducted by the Small and Medium Enterprise Agency of Japan, it is clear that many enterprises that would like to export face problems such as finding an "outstanding partner enterprises" and "ascertaining the needs of local enterprises and residents overseas." Especially compared to large enterprises, a high percentage of SMEs have not been able to undertake export operations as a result of the difficulty of finding partners. This survey result implies that it is an important task for SMEs to obtain information on foreign firms and overseas market conditions, which may lead to a possible reduction in costs and uncertainty associated with exporting activities.
This information hurdle is a serious challenge for SMEs given that they have only limited managerial resources to conduct research on export markets compared to large enterprises (Japan Small Business Research Institute 2008). While collecting overseas market information through information exchanges with their current transaction partners is an effective approach, SMEs usually have much fewer transaction partners than large firms due to their small size of activities, and it is expected that SMEs are more likely to face serious difficulties in exporting. These arguments motivated us to study the role of overseas market information available for SMEs in their export decision and the information channels that are particularly important for them.
Some previous studies already have examined the role of overseas market information on the firm export decision. For example, information exchange with other exporting firms reduces the individual fixed costs associated with collecting and analysing market conditions, and therefore increases the probability that the firm will export (e.g., see Krautheim (2012) for a theoretical investigation). According to the hypothesis, having access to information on foreign markets substantially reduces uncertainty and encourages firms to engage in export activities. Empirical work by Koenig et al. (2010) confirms this hypothesis, showing that the presence of other exporters nearby has a positive effect on the export decisions of the firms.
Banks as information conduits
In the case of Japan, lender banks generally provide not only financial support but also business consulting services using their extensive knowledge collected through lending transaction relationships and from various information sources. Since the monitoring of borrower firms is important for banks, in general, they are expected to accumulate information on borrower firms and related parties. Thus, if we assume that a particular bank is very knowledgeable about overseas business opportunities either through its own banking activities (e.g., foreign branches) or transactions with client firms with experience in exporting, potential exporter firms would find it helpful to consult with such a bank. Concrete examples of support services that banks provide to their borrowers to help them with regard to international activities are provided by a Japanese Bankers Association report (Japanese Bankers Association 2011). According to the report, other than traditional banking services such as the usual loan business, deposit services, payment services, lease and leaseback deals, or the issue of stand-by letters of credit, lender banks often provide client firms with information on potential business partners in foreign countries as well as advice on recruiting employees, advertising, tax systems, and administrative issues such as accounting systems, laws, and regulations.
The information provided by lender banks could be more important for SMEs than that for large firms for the following two reasons. First, although SMEs tend to have less resources about overseas markets than larger firms (e.g., smaller number of trading partners, lower exposure to overseas information through imports, or more constraints on internal resources allocated to the collection of overseas market information), they usually keep close ties to lender banks and thus are in a good position to obtain feedback from banks on their business strategies. Hence, lender banks could play an important role as a conduit of export market information for SMEs. Second, lender banks themselves have a strong motivation to provide such information to client SMEs since the expansion of client firms' business activities naturally leads to larger business opportunities for lender banks. In other words, as far as lender banks have accumulated overseas market information, it is natural for them to share such information with their clients.
In new research we confirm the importance of lender banks' role as an information provider for potential exporters (Inui, Ito and Miyakawa 2014). We find that firms whose lender banks accumulate more overseas market information are more likely to start exporting. Moreover, the information provisions by lender banks also reduce the likelihood of firms stopping exports, suggesting that such information substantially reduces the fixed entry costs of exporting as well as the costs associated with maintaining firms' export status. We also find that the role of such information provisions by lender banks is more conspicuous for SMEs than for large firms. These results suggest that lender banks play a crucial role as information sources for the export decision of SMEs who are likely to lack internal resources.
Our results may imply that the government should proactively involve banks in its export promotion policies. The availability of information from lender banks is particularly important for SMEs to start exporting. On the other hand, Japanese banks may also be interested in providing more support services for firms trying to expand their business abroad. In fact, small regional banks particularly see their client firms face declining domestic demand and therefore worry that their own business may shrink. Helping such banks to build international service networks and building on the banks' support services may allow the government to implement its export promotion policies more effectively. Moreover, since banks have accumulated significant information on their client firms' business, they may have useful knowledge on the type of firms that should receive support from the government and the type of support that is most effective. The government should recognise that SMEs strongly need useful information on export markets in order to lower the fixed costs of exporting and consider how to provide useful information effectively to SMEs.
This article first appeared on www.VoxEU.org on January 6, 2015. Reproduced with permission.
- Inui T, K Ito and D Miyakawa (2014), "Lender Banks' Provision of Overseas Market Information: Evidence from Japanese small and medium-sized enterprises' export dynamics", RIETI Discussion Paper Series, 14-E-064.
- Japanese Bankers Association (2011), Ajia Keizai-ken ni totte Nozomashii Kinyu-Hoken Shijo no Arikata: Ginko no Torihikisaki Kigyo no Kaigai Shinshutsu ni okeru Shien Jisseki [The Shape of a Desirable Financial and Capital Market for the Asian Economy: Case Studies on Banks' Services to Support Client Firms' International Activities], March 2011, Japanese Bankers Association.
- Japan Small Business Research Institute (2008), "White Paper on Small and Medium Enterprises in Japan 2008: Improvement of Productivity and the Challenge of Community Revitalization," The Small and Medium Enterprise Agency.
- Koenig P, F Mayneris and S Poncet (2010), "Local Export Spillovers in France", European Economic Review 54: 622-641.
- Krautheim, S (2012), "Heterogeneous Firms, Exporter Networks and the Effect of Distance on International Trade", Journal of International Economics 87 (1): 27-35.
January 7, 2014
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