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Small Business Economics

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12-11-2018

SME policies as a barrier to growth of SMEs

Author: Daisuke Tsuruta

Published in: Small Business Economics | Issue 4/2020

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Abstract

We investigate whether firms have incentives to retain their status as small and medium enterprises (SMEs) to benefit from various SME policies. To examine this issue, we use the exogenous changes in the SME Basic Act in Japan. The SME Basic Act describes aims of SME policies in Japan, which involve enhancing the growth of SMEs using policy. The Act also contains the requirements and definitions of SMEs that are the target of the policies. Only firms that satisfy the definitions of SMEs under the SME Basic Act can participate in the SME policy programs in Japan. The requirements regarding capital stock in the SME Basic Act were changed in 1999. By focusing on the change in the requirements for capital stock as an exogenous event, we show that firms are less likely to increase their capital stock so that they can continue to satisfy the requirements that retain their status as SMEs. Furthermore, firms that increase their capital stock increase their size. As firms have a disincentive to increase capital stock so that they can keep their SME status, this indicates that the SME requirements are significant constraints on firm growth. Many studies show that individual SME policies (such as R&D subsidies and public credit guarantees) stimulate firm growth and activities that are consistent with the aim of these SME policies. Although the purpose of the SME Basic Act is the enhancement of the growth of SMEs, we show that the requirements under this law impede the growth of SMEs.

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Some previous studies (e.g., De Meza 2002; Dawson et al. 2014) argue that under asymmetric information, firms borrow more funds compared with the situation of symmetric information.

In Japan, the social cost of credit guarantees is also significant, as argued by Saito and Tsuruta (2018).

Acs and Szerb (2007), for instance, argue that this is the case.

According to OECD (2013), the volume of credit guarantees as a percentage of GDP is 7.3% in Japan, the highest among the listed countries.

OECD (2016) notes that “small companies in Japan tend to remain small, in part because high public support discourages small firms from growing because they would lose the benefits associated with SME status” (p. 11).

For example, the policies result in SMEs winning contracts even if their production capacity and efficiency are not as high as those of larger firms, so the policies enhance the profitability of SMEs. In other words, if firms grow from SMEs into large firms, they cannot participate in these policy programs and this reduces their opportunities to win contracts.

See http://www.chusho.meti.go.jp/soshiki/ninmu.html regarding the aim of the Small and Medium Enterprise Agency in Japan.

Hosono et al. (2017) also investigate the effects of changing the SME Basic Act of Japan using firm-level data. However, the data used in Hosono et al. (2017) include firms with 30 million yen or more of capital stock, and therefore do not contain the data of smaller-sized SMEs. Our data include various-sized SMEs, so we can investigate the effects on micro firms that need the support of SME policies. According to Economic Census for Business Frame in 2014 by the Statistics Bureau of the Ministry of Internal Affairs and Communications (MIC), the ratio of the number of firms with 30 million yen or less of capital stock to all firms is 86.7% (see the website of the MIC (http://www.stat.go.jp/data/e-census/2014/pdf/kaku_gaiyo.pdf [last date accessed: September 2018]) for more detail), so we can investigate the effects of the SME Basic Act more accurately. However, the data used in Hosono et al. (2017) are panel data, not pooled cross-section data, and can therefore investigate the effects on the postperformance of SMEs over several years.

See the website of the Ministry of Finance in Japan (https://www.mof.go.jp/tax_policy/summary/corporation/082.pdfhttps://www.mof.go.jp/tax_policy/summary/corporation/082.pdf (in Japanese, last date accessed: September 2018)) regarding the corporate tax rate trends.

See Article 1 on the website of the Small and Medium Enterprise Agency (http://www.chusho.meti.go.jp/sme_english/outline/08/01_01.html) (last date accessed: September 2018) .

See Article 3 on the website of the Small and Medium Enterprise Agency (URL is in footnote 10).

For details of the survey see: https://www.mof.go.jp/english/pri/reference/ssc/index.htm (last date accessed: September 2018).

https://www.mof.go.jp/pri/reference/ssc/outline.htm#questionnaire (in Japanese, last date accessed: September 2018).

The items in the annual survey are similar to those in the quarterly survey. All quarterly items in English are available at the following website: https://www.mof.go.jp/english/pri/reference/ssc/historical.htm (last date accessed: September 2018).

The database in this paper is pooled-cross section data, so the entry–exit data are unavailable. The observations are randomly selected in every year, so firms that are likely to exit are included in our sample. This implies that sample selection bias is not so severe. However, we cannot control remaining sample selection bias using econometric models, which is a shortcoming of our database.

This is an upward shift in the cost of growth in Figure 1 of Baumol (1962) when public support is terminated or tax rates rise.

Because of a lack of panel data, it is difficult to control endogeneity caused by an omitted variable (such as a productivity shock).

We add 1 to all variables because some firms’ tangible fixed assets and/or number of employees is zero. We remove observations whose revenue is zero, but we also add 1 to revenue to maintain consistency with the definitions of the other variables.

The consequence of additional equity capital is not only firm growth. Ou and Haynes (2006) argue that firms avoid defaulting on loans as additional equity capital mitigates liquidity shortages.

The low asset growth rate was caused by the financial crisis of the late 1990s.

Berger and Udell (1998) argue that venture capital is also a source of finance for small firms, but in Japan, venture capital is not common for SMEs.

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Title: SME policies as a barrier to growth of SMEs
Author: Daisuke Tsuruta
Publication date: 12-11-2018
Publisher: Springer US
Published in: Small Business Economics / Issue 4/2020
Print ISSN: 0921-898X
Electronic ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-018-0119-0

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