[ March 31, 2008]

Small- and Medium-Scale Enterprises in Kansai Region:
Their Economic Conditions and Business Trend

Johzen Takeuchi, Professor, Osaka Sangyo University

This paper paid attention to the new trend of small- and medium-scale enterprises (SMEs) of Kansai region in Japan at the 21st century. Kansai is located at the western part of main land, and consisted of Fukui, Hyogo, Kyoto, Nara, Osaka, Shiga, and Wakayama. The region was once the center of Japanese manufacturing sector, and the major leading sector was cotton spinning after Sino-Japanese War until the 1950s. The sector expanded successfully on the condition of rapid expansion of numerous related sectors like weaving, dying, garment with various textile wares and sundry goods like shell button, hosiery, head gears, gloves, bags and so on. These sundry goods manufacturers were usually very small, and people sometimes called these sectors "small- and medium-scale industries (SMIs)", because it was
decisively difficult to find any big businesses among them. After the end of the 19th century, this trend diffused to other industrial sectors like metal processing industry and metal consumer goods production including toys, bicycles, western-style umbrellas, automatic pencil, miniature bulbs, artificial flowers, imitation ornaments and so on. They were small but decisive items to earn foreign currencies for Japan that was one of the late starting countries in global competition.

In the process of Japanese industrialization, these small businesses had multiple functions as follows. First, they succeeded in developing so-called "supporting sectors"for the rapid development of modern leading sectors. For example, modern cotton spinning industry became a key sector in Kansai region including Osaka. Among Asian countries, Japan was not a big country to supply and demand cotton thread until the latter half of the 19th century. India was historically the biggest country to supply cotton goods until the 18th century, and China was also a supreme giant to have huge demand for her huge population. However, India could not maintain its potentials under the strong regulation and suppression of British colonialism as had been well introduced by Karl Marx, and Chinese society preferred to use imported materials for their cotton weaving and final goods production on the reason that the imported goods was cheaper in price and better in terms of quality and standardization, in addition to their traditional comprador system which had been prevailing in Chinese society. Comparing with these big countries, Japanese society was too nervous to utilize imported materials for their traditional goods, and regional weavers and demanders preferred to use and purchase domestic materials. Excluding the impact of enthusiastic nationalism in the country, it should be noted that this condition could be one of the decisive factors for Japanese cotton spinners to transfer modern production systems more easily than other Asian competitors. It is possible
to identify these situations among other industrial sectors, which are introduced in this paper.

Second, at the early stage of Japanese industrialization, it was horribly hard for Japanese manufacturers to utilize imported production facilities
and systems on the reason that they were very expensive, and especially in consumer goods production, they were obliged to adopt any substitutive ways of production to cut their initial investment and maintenance cost. Not only some leading private companies like Seiko but also technologically advanced institutions like Naval Arsenals would often try to decompose imported machines in order to supply any substitutive instruments and tools, in stead of directly utilizing the imported ones. It was difficult for Japanese manufacturers to get enough productivity with such substitutive systems which they devised for themselves, and they had to compensate the inefficiency of their facilities with their own skill formation and long working hours, and it is possible to call this industrial process as an example of "industrial adaptation". Furthermore, the adaptation was closely related to the expansion of "differentiation", which means to divide the production process of advanced machines into small and multiple processes so that they were able to expand adaptation. If a society was good at utilizing only cheap labors through the differentiation, they would organize huge production lines with abundant labors and compact production facilities. However, Japanese manufacturers took different way of production, and in numerous sectors they intensified to establish various kinds of small masters and workshops which were concentrated in horribly separated processes. It should be noted that Japanese SMEs were the socio-economic factors to intensify these adaptations and differentiations.

Third, this process of adaptation and differentiation could not always have a positive function for the development of businesses in Japan. As Professor Hiromi Arisawa once suggested, numerous Japanese SMEs stagnated under the strong leadership and regulations of traditional putting-out system, especially before the Second World war. However, in the business field where they could have enough chance of market expansion, technological advance etc., they were able to have enough chance to develop into big businesses or to expand their bargaining powers against big enterprises fully utilizing their technological accomplishments and business relations. Furthermore, this developmental process could be a key factor for the Japanese economy to have numerous industrial sub-sectors like thread twisting, die casting, wire extension etc.. These sectors are mostly mere sections of manufacturing businesses in some industrialized societies, but they grew quickly as independent industrial sectors in certain countries like Japan, and it is the latter group countries that still succeed in maintaining sufficient international competitiveness in the manufacturing sectors. Not a few economists consider that industrial structures of highly industrialized societies will soon sift from manufacturing sectors to tertiary sectors, and Japanese society should concentrate on expanding the latter so that it will be able to have favorable international division of labor. However, it is one of the basic points of this paper that Japan should try to maintain her comparative advantages in manufacturing sectors, as some of the most advanced countries try to have supreme advantages in primary sectors still now.

Fourth, whenever modern economists say something about modern market economies, they have often considered that;

1) there has been no discrimination in the course of industrialization among different national economies,
2) traditional middle class people will soon be substituted with modern specialists and managers,
3) traditional SMEs will be rapidly integrated into modern huge managerial systems which will accomplish sufficient efficiency of modern management,
4) new businesses will be formed in the new industrial sectors like services, information technology, financial technology, etc. and not in traditional sectors like manufacturing sectors and primary sectors. However, this paper stand on the analytical view point as follows;
1) each national economy has its specific conditions of development,
2) the difference of initial conditions of industrialization will have various impacts on the difference of industrial structure and managerial system of each economy,
3) these difference will be one of the determinants to define the expansion of international division of labor,
4) it is noteworthy that some traditional ideas of modern economics like "Petty=Clark's Law" should be reconsidered in view of international economic integrations in the near future,
5) for the sophistication of international economy, some countries still have certain potentials for intensifying their SMEs of manufacturing sectors,
6) and, empirical surveys on SMEs of Kansai region will be able to supply some implications for the reconsiderations and re-evaluations of Japanese economic recoveries and further the development strategies of policy makings for Asian industrial sophistication and human empowerment.

This paper will lay stress on the importance of SMEs in Japanese industrial structure, especially of Kansai region, but at the same time it should be
noted that the share of SMEs of manufacturing sectors among Kansai business world is going down quickly after the 1960s. Japanese official statistical analysis have suggested that the share went down after the crash of bubble economy in the 1990, but this trend was already conspicuous after the 1960s, and this gap was raised through the statistical method of the government. It means that any analytical approaches should have sufficient relevance with its policy implications, and Japanese society was not well canalized to the direction when the society needed the most in-depth analysis for the reorganization of its industrial strategy. In spite of these mismanagements and rapid decrease of SMEs, Kansai still have prominent potentials and managerial efforts to reshuffle its regional economy, and this paper tried to introduce some of their creative activities to get new paradigms for the establishment of new strategies in the near future.