6.Transition Period, the Second Stage (2000-)

The Japanese government developed its SME policies under the former SME Basic Law that was enacted in 1963. The general perception of SMEs at the time was that; i) they were small in size and large in number, ii) they were old-fashioned and undifferentiated, and iii) small businesses were particularly weak, and thus required special social policies. With such an understanding, conventional SME policies had been basically aimed at rectifying the gaps between SMEs and large enterprises. The core points of the policies were “to remedy disadvantages in business activities” as steps to modernize SMEs by each type of industry. In the past, the focus had been placed on pursuing the scale merit of SMEs while developing uniform modernization policies for each industry. However, the environment surrounding SMEs has undergone various changes since then, and the conventional idea of SMEs and past policy tools no longer fits the actual situation of SMEs. Such changes include the growth and maturation of the economy, the diversification of consumer needs, the IT Revolution, and the progress of globalization. These, along with other factors, have reduced the importance of trying to eliminate the scale gap itself, increased the number of enterprises engaged in diverse businesses within the same industry, encouraged a shift from mass production of standardized products to small-lot production of a variety of products, and increased business opportunities while intensifying competition. We should recognize that, in the present quick-changing economic environment, SMEs are beginning to make the most of their advantages of “mobility and flexibility.” Also, the recent decline of the start-up rate, which has even gone below the closure rate, is provoking concern that it may impede the metabolism and labor-absorbing capacity of the economy.

In these circumstances, the Japanese government has recognized the importance of giving attentive assistance to activities of all kinds of SMEs, from venture businesses to small enterprises, while encouraging their self-help efforts, based on a new concept of SMEs in which the merits of SMEs are positively acknowledged. To this end, the government fundamentally revised and restructured conventional SME policies including the SME Basic Law in the so-called “SMEs Diet” in December, 1999.

<New Key Factors in SME Policies>

The new SME Basic Law, which is based on a new philosophy of promoting diverse and vigorous growth and the development of independent SMEs, rather than rectifying the gaps, presents three key factors for SME policies. They are:

i)	first,	“promoting business innovation and new business start-ups” (or, promoting self-sustaining enterprises);
ii)	second,	“strengthening the management base of SMEs” (or, enriching business resources); and
iii)	third,	“facilitating adaptation to economic and social changes” (or, offering a safety net).

(1) Promoting Business Innovation and New Business Start-ups

The image of SMEs anticipated for the 21st century is “self-sustaining SMEs.”

To realize this, SMEs need to work on new business activities or make business innovations, for instance, the development and sale of new products and services, and the use of new production methods or product sales methods, as well as the development and introduction of new business management methods.

Since venture businesses are led by managers with much entrepreneurship who can daringly develop knowledge-intensive businesses by taking risks, their activities are expected to revitalize the economy and change the economic structure. However, these enterprises are faced with severe business risks due to their function of creating new business fields, and they are required to overcome a great number of obstacles before their business goes on track, by procuring funds, commercializing technology, securing human resources, innovating business and starting up new businesses. We consider such promotion of the self-help efforts of SMEs one of the most important tasks in future SME policies.

i)	In terms of assistance in fund-raising, new capital markets have started operating in the Japanese financial market, namely, “MOTHERS” from November 1999 and “Nasdaq Japan” from June of 2000. This measure has expanded options for SMEs to raise funds from such capital markets.
ii)	In addition, a credit guarantee system was introduced for the issue of corporate bonds or privately placed bonds by SMEs, in order to promote development of the bond market available to SMEs.
iii)	As a measure to support technological development, the entire government will try to provide subsidies for new business development and spend money on research entrusted to SMEs. The government established a SBIR system, or Small Business Innovation Research system, which offers consistent support up to the commercialization phase.

(2) Strengthening the Management Base of SMEs

When SMEs implement business activities, they often lack managerial resources due to their small size, and also face difficulty in procuring such resources from outside. Therefore, the government aims to strengthen the management base of SMEs through i) supplementing SMEs’ vulnerable managerial resources and ii) improving their business environment. Conventionally, the basic condition for SMEs to develop business activities was to have material managerial resources, or modernized equipment and facilities. However, the government realizes that it is becoming more important to establish an environment in which SMEs can secure non-material managerial resources such as business expertise, technologies, information and human resources, by utilizing functions of the private sector. Thus, the government is planning to implement relevant measures to this end.

New measures in this area are as follows;

First of all, the Japanese government has established support centers that provide so-called “One-Stop” assistance services in terms of both funds and non-material areas such as human resources, information, and technologies in an attentive manner, to meet the diverse needs of SMEs on each of the national, prefectural and local levels.

The support centers integrate and set up networks of local public entities and various existing private SME support organizations to offer information and advice on policy measures, as well as assisting with business and technological problems of SMEs in one place, by making the most of the skills and abilities of professionals in the private sector.

In the area of human resource development, the government revised the SME Management Consultant system, which used to merely give complementary assistance in public business diagnoses. The system is now positioned as a certifying system for private business consultants with both a wide-ranging knowledge of SME businesses in general and advanced consultation skills.

(3) Offering a Safety Net

Although SMEs make self-help efforts in their economic activities, they may face an unexpected event for which they cannot be held responsible, such as a sudden change in the trade structure or exchange rate, restrictions in the supply of raw materials, the occurrence of a great disaster, or a chain-reaction bankruptcy triggered by the collapse of a large enterprise. In such cases, a considerable number of SMEs could experience damage to their business. This policy is intended to facilitate SMEs to adapt to such sudden changes in the environment by implementing emergency relief measures or measures to ease such drastic changes, as a safety net to stabilize business.

Measures in this area include long-implemented financial measures against disasters, and measures to prevent chain-reaction bankruptcies. In addition, the government has sped up corporate rehabilitation procedures by reviewing the Bankruptcy Law, which was criticized as being difficult to apply to SMEs, and by introducing a new corporate rehabilitation scheme, the Civil Rehabilitation Law.

Furthermore, considering the recent frequency of both bankruptcies of large enterprises and major natural disasters in Japan, the government plans to further increase and strengthen the safety net measures, especially in the areas of finance and credit guarantee, so that SMEs can deal with such situations more effectively and promptly.