Impact of Public Policy on Innovative SMEs in Japan

Abstract

Public policy on innovative small and medium-sized enterprises (SMEs) is regarded as an important issue throughout the world. Japan is not an exception. In 1995, a new policy to revitalize the Japanese economy was implemented. There has been, however, little empirical research conducted on SMEs in Japan. This paper challenges this research gap and evaluates the Japanese public policy program. Research was conducted with a questionnaire sent to all program awardees. In addition, matching firms that did not receive any program awards and closely resembled awardees were identified. It is found that program awardees grew faster than matching firms; however, firms that received multiple awards did not show better performance than firms receiving single awards. High-growth SMEs contribute to social wealth through the creation of new businesses and jobs (Phillips and Kirchhoff 1989; Storey 1994; Gavron et al. 1998; Acs 1999). In recent years, many governments have increased their attention regarding public policy toward SMEs (OECD 1994, 1997, 1998). Economic literature suggests that there are two rationales for a government to support innovative SMEs. First is the generation of positive externalities. Government subsidies such as research and development (RD Greenwald, Stiglitz, and Weiss 1984). This public certification to the quality of firms helps SMEs receive external management and financial resources and helps them grow faster (Pfeffer and Salancik 1978). As a response to market failure, government subsidies can be justified (De Long, Bradford, and Summers 1991). Public policy toward innovative SMEs has been monitored and assessed in Organization for Economic Cooperation and Development (OECD) countries (Storey 1994; OECD 1995; Gavron et al. 1998; Lerner 1999). However, very few studies of public policy toward innovative SMEs have been conducted in Japan. This paper confronts this research gap. Research Background When the bubble economy collapsed in Japan, the growth rate of the gross domestic product (GDP) declined from 2.9 percent in 1990 to 0.4 percent in 1991 and continued at the same level for another two years. In addition, the economic climate for new business creation in Japan was not good even before the collapse of the economy. The business startup rate for all types of business in Japan had been declining, and the rate of business closings gradually had been increasing (Hawkins 1993). Furthermore, a high level of unemployment persisted. Under such serious economic circumstances, the first policy initiative was taken in 1995 to support innovative SMEs in Japan. Formally known as the Temporary Law Concerning Measures for the Promotion of the Creative Business Activities of Small and Medium Enterprises, it was the first legal foundation in Japan to support innovative SMEs and venture firms. Based on the United States' experience, the Japanese government introduced this new public policy program towards inno vative SMEs and expected innovative SMEs to revitalize the Japanese economy. This law was a symbolic sign of a shift in Japanese government policy on SMEs, which was followed by the amendment of the Small and Medium Enterprise Basic Law. This 1963 law, which determines the objectives and targets of public policy regarding SMEs in Japan, was amended in 1999. The amended law clearly states that the mission of government assistance is to develop and support a wide range of independent SMEs for greater economic vitality, whereas the previous law stated that the mission was to rectify the gap between large enterprises and SMEs in terms of productivity. …