With just a little help from my bank: Japanese SMEs’ export decision
Tomohiko Inui, Keiko Ito, Daisuke Miyakawa
While large Japanese firms have already been present internationally for a long time, small firms have found it difficult to overcome the info obstacles connected with entering overseas markets. This column argues that lender banks might help as they not merely provide financial support but also business consulting services utilizing their extensive knowledge obtained through lending transactions. It implies that small and medium firms whose lender banks accumulate more overseas market information will start exporting.
The successful globalisation of Japanese firms, especially small and medium-sized enterprises (SMEs), can be an important issue in Japan (since it is elsewhere). Facing sluggish domestic sales against the backdrop of an aging and shrinking population, Japanese firms have already been shifting their profits to export markets.
While well-established, large firms have already been diversifying their destinations of sales and locations abroad, it really is generally problematic for SMEs to overcome the many obstacles connected with entering overseas markets. Actually, the share of exporters among SMEs is quite small while the most large firms are engaged in exporting. Inside our database that includes all the Japanese manufacturing firms with 50 or even more employees, only 25% of SMEs (50-300 employees) are exporters while 60% of large firms (300+ employees) are exporters. Considering that a substantial 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 necessary from an insurance plan perspective to induce SMEs to expand their business activities toward overseas markets.
According to a survey conducted by the tiny and Medium Enterprise Agency of Japan, it really is clear that lots of enterprises that would prefer to export face problems such as for example finding an “outstanding partner enterprises” and “ascertaining the needs of local enterprises and residents overseas.” Especially in comparison to large enterprises, a higher percentage of SMEs have not had the opportunity to attempt export operations due to the issue of finding partners. This survey result means that it is a significant task for SMEs to acquire information on foreign firms and overseas market conditions, which might result in a possible decrease in costs and uncertainty connected with exporting activities.
These details hurdle is a significant challenge for SMEs simply because they have only limited managerial resources to conduct research on export markets in comparison to large enterprises (Japan SMALL COMPANY Research Institute 2008). While collecting overseas market information through information exchanges with their current transaction partners is an efficient approach, SMEs will often have much fewer transaction partners than large firms because of their small size of activities, in fact it is expected that SMEs will face serious difficulties in exporting. These arguments motivated us to review the role of overseas market information designed for SMEs within their export decision and the info channels that are particularly very important to them.
Some previous studies curently have examined the role of overseas market information on the firm export decision. For instance, information exchange with other exporting firms reduces the average person fixed costs connected with collecting and analysing market conditions, and for that reason escalates the probability that the firm will export (e.g., see Krautheim (2012) for a theoretical investigation). In line with the hypothesis, access information on foreign markets substantially reduces uncertainty and encourages firms to activate in export activities. Empirical work by Koenig et al. (2010) confirms this hypothesis, showing that the current presence of other exporters nearby includes a positive influence on the export decisions of the firms.
Regarding Japan, lender banks generally provide not merely financial support but also business consulting services utilizing their extensive knowledge collected through lending transaction relationships and from various information sources. Because the monitoring of borrower firms is very important to banks, generally, they are expected to build up information on borrower firms and related parties. Thus, if we assume a particular bank is quite knowledgeable about overseas work at home opportunities either through its banking activities (e.g., foreign branches) or transactions with client firms with experience in exporting, potential exporter firms would think it is helpful to check with such a bank. Concrete types of support services that banks provide with their borrowers to greatly help them in regards to to international activities are given by a Japanese Bankers Association report (Japanese Bankers Association 2011). Based on the report, apart from traditional banking services like the usual loan business, deposit services, payment services, lease and leaseback deals, or the problem of stand-by letters of credit, lender banks often provide client firms with information on potential business partners in foreign countries along with advice on recruiting employees, advertising, tax systems, and administrative issues such as for example accounting systems, laws, and regulations.
The information supplied by lender banks could possibly be more very important to SMEs than that for large firms for the next two reasons. First, although SMEs generally have less resources about overseas markets than larger firms (e.g., smaller number of trading partners, lower contact with overseas information through imports, or even more constraints on internal resources assigned to the assortment of overseas market information), they often keep close ties to lender banks and therefore are in an excellent position to acquire feedback from banks on the business strategies. Hence, lender banks could play a significant role as a conduit of export market information for SMEs. Second, lender banks themselves have a solid motivation to supply such information to client SMEs because the expansion of client firms’ business activities naturally leads to larger work at home opportunities for lender banks. Quite simply, so far as lender banks have accumulated overseas market information, it really is natural to allow them to share such information with their clients.
In new research we confirm the need for 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 will start exporting. Moreover, the info provisions by lender banks also decrease the probability of firms stopping exports, suggesting that such information substantially reduces the fixed entry costs of exporting along with the costs connected 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 claim that lender banks play an essential role as information sources for the export decision of SMEs who will probably lack internal resources.
Our results may imply the federal government should proactively involve banks in its export promotion policies. The option of information from lender banks is specially important for SMEs to start out exporting. However, Japanese banks can also be thinking about providing more support services for firms trying to expand their business abroad. Actually, small regional banks particularly see their client firms face declining domestic demand and for that reason worry that their own business may shrink. Helping such banks to build international service networks and building on the banks’ support services may permit the government to implement its export promotion policies better. Moreover, since banks have accumulated significant information on the client firms’ business, they could have useful knowledge on the sort of firms which should receive support from the federal government and the sort of support that is most reliable. The federal government should recognise that SMEs strongly need useful information on export markets as a way to lower the fixed costs of exporting and consider how exactly to provide useful information effectively to SMEs.
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 Form of an appealing Financial and Capital Market for the Asian Economy: Case Studies on Banks’ Services to aid Client Firms’ International Activities], March 2011, Japanese Bankers Association.
Japan SMALL COMPANY Research Institute (2008), “White Paper on Small and Medium Enterprises in Japan 2008: Improvement of Productivity and the task of Community Revitalization,” THE TINY 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 result of Distance on International Trade”, Journal of International Economics 87 (1): 27-35.