As Japanese companies move to focus on their core competencies and to increase their productivity, a vibrant small business and entrepreneurial sector is essential to promote additional labor flexibility. This is needed to help Japanese executives change companies and professions during the course of their careers,so that they can apply their knowledge and experience in the same kinds of start-up and emerging enterprises that are exhibiting so much dynamism in the United States. Japan is drawing upon the U.S. example to promote a thriving small business sector that can become a major source of new employment and technological innovation and development. The Japanese government is working to see that the entrepreneurial class will flourish. There is already substantial evidence of success. 
 

Beginning in the years immediately following the war, companies such as Sony (founded in 1946) and Honda (founded in 1948) witnessed tremendous growth. The brightest Japanese graduates sought positions in these large companies and the government. With strong optimistic forecasts for future growth, workers came to prefer the stability and prestige offered by larger companies over the higher risk of smaller, start-up firms. This trend was fostered by an educational system that prepared younger Japanese for lifetime careers in large institutions.

In a sense this period can be equated to the United States in the 1950s and 1960s, when large conglomerates such as ITT, Gulf and Western and LTV were seen as the paragon of corporate achievement. These firms were staffed by "organization men" in "gray flannel suits" who were recruited directly from college, to work their way up the corporate ladder until retirement.

U.S. corporate behavior was forced to change in the face of strong international competition and the stagnant growth the United States endured in the 1970s and 1980s. In Japan, however, strong economic fundamentals allowed this situation to perpetuate itself until the burst of its "bubble economy" in the early 1990s. For several years now, it has become clear this old system must be changed and Japanese graduates no longer expect to be watched over by one employer throughout their working careers.

To remain competitive in the global arena, it is clear that Japan must adapt its institutions and business models. This will require new business practices that recognize the need for a more flexible approach. These are needed to help Japanese firms enter more easily into alliances and new business areas and for professionals and workers to transition themselves through their careers to meet the demands of a rapidly changing, increasingly globalized, business environment.

• IMPACT OF GLOBALIZATION AND DYNAMISM OF SMALL FIRMS: With each passing year, the economies of the world are more closely linked together. Capital moves quickly and seeks the highest return, cheapest operating cost and fewest restrictions. Similarly, only those companies that can offer higher value-added products and services to an expanding, international client base -- and deliver them quickly -- will succeed. This trend has not only decreased the importance of size, but also provides an advantage to smaller entrepreneurial companies. Their flexible structure allows them to more quickly develop and adapt new technologies and to create and enter new market niches and business models. As larger, more established firms are generally less likely to reward innovation or to experiment with risky, new ventures than smaller, entrepreneurially-oriented enterprises, they are less likely to experiment to promote the new ideas, technologies and business methods that will lead economic growth in the twenty-first century.

• NEED FOR GREATER LABOR FLEXIBILITY: As a result of post-war strategies that emphasized strong, stable industrial growth, Japanese corporations developed hierarchical structures that rewarded employees for the length of their tenure within a corporate or institutional entity. This system rewarded loyalty and provided a dedicated workforce. However, as the Japanese economy shifted its orientation from the development of domestically-based manufacturing strength to the delivery of higher value-added goods and services, it did not provide the labor flexibility necessary to rapidly shift the human resources that are essential to sustain competitiveness in a more mature, globally-oriented economy.
  
  

• Since April, 1998, listed companies have been able to use stock options to attract superior employees, and 247 companies now offer them.
• In August, 1998, a Technology Licensing Organization (TLO) was established to encourage the patenting of university research and to facilitate the distribution of this intellectual property to the industrial sector. Government research and development funds are also now being channeled to small businesses on a preferential basis.
• In October, 1998, the Citizen’s Finance Corporation began providing financing to unemployed corporate managers who want to start businesses of their own in amounts up to 5.5 million yen, or about $45,000.
• Since December, 1998, the Japan Small Business Corporation has been providing financing to entrepreneurs who create new businesses or for prototype development that can serve as the basis for venture firms.
• Since December, 1998, people who wish to start a business have been able to access a special insurance system offered by credit associations, which provides credit assistance in amounts up to 10 million yen, or about US$83,000.
• In January, 1998, the Citizen’s Finance Corporation established a financing system to provide unsecured loans without collateral to help individuals start businesses in fields in which they have prior experience.
• In April, 1999, the Small Business Finance Corporation and the Citizen’s Finance Corporation initiated a system providing low-interest financing to women and elderly people who want to start businesses.
• In July, 1999, the Japanese Government approved a comprehensive Program for Industrial Revitalization which contained measures to promote new business development. This initiative allows individuals and companies access to a broad range of incentives without government approval. It contains measures including a program to provide no-interest loans for up to seven years to facilitate capital investment in amounts up to 50% of the total amount required.
  
  

An example of this trend is the recent August 5, 1999 American Depository Receipt offering by Internet Initiative Japan (NASDAQ:IIJI), a high tech firm formed in 1992. It offers a range of Internet access services and Internet-related services to customers in Japan through a network backbone between Japan and the United States. This successful flotation of over 7 million shares was lead-managed by Goldman Sachs & Co. and has been well received by U.S. investors.

Entrepreneurial firms are also emerging to take advantage of deregulation, changing demographics and the increased importance of e-commerce and technology in Japan. One company, Monex, one of Japan’s first on-line brokerage firms, was founded earlier this year by a 35-year-old entrepreneur. With just under 100,000 on-line brokerage accounts now in existence in Japan, this sector is forecast to grow over 400% by the end of next year. Monex has already attracted investments from major firms including Sony, J.P. Morgan, Japanese publisher Recruit and a division of a major Taiwanese conglomerate.