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Top>Research>Small enterprises and the establishment of municipal ordinances to promote SMEs


Kazuhide Yahata

Kazuhide Yahata [profile]

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Small enterprises and the establishment of municipal ordinances to promote SMEs

Kazuhide Yahata
Professor, Faculty of Economics, Chuo University
Areas of Specialization: Small and Mid-Sized enterprises Theory, Regional Economic Theory, and Local Industry Theory


The Basic Act for the Activation of Small-Sized enterprise was enacted in June 2014. Leading to the establishment of this law was the difficulty of management at small enterprises which failed to receive the benefits of Abenomics. Although revision of the Small and Medium-Sized Enterprise Act in 1999 was intended to realize generous policy for supporting the founding of enterprises, it was not effective and SMEs have continued to decline. I firmly believe that small enterprise promotion policy via municipal ordinances to promote SMEs is the key to regional economic promotion. In this article, I will discuss the very basics of establishing such ordinances.

1. Establishment of SME promotion ordinances based on the agglomeration of regional industry

In order to carve out a path for regional economies embroiled in tough economic conditions, the first point of establishing SME promotion ordinances is planning and formulation based on industrial agglomeration of existing industry and commerce in each region. There is an infinite variety of industrial agglomeration in different regions throughout Japan. This is due to structural difference in industries such as agriculture, forestry and fishing, construction, manufacturing, wholesale/retailing and service, as well as to agglomeration of SMEs with differences within the same industry. Due to such differences, it is only natural that sufficient results are not obtained when applying uniform government policy to cultivate outstanding SMEs. Regional development with pride from residents is only possible by advancing current industrial agglomeration: in other words, by promoting the unique aspects of each region.

2. Policies led by municipalities and local chief executives

The second point is necessity of policies led by municipalities and local chief executives that are closest to the region. Such parties can assess actual regional conditions with greater ease than the national government. In 1999, Article 6 of the Small and Medium-Sized Enterprise Basic Act was revised to state the following: “Local public entities are responsible for formulating and implementing measures for SMEs which are suited to the natural, economic or social conditions in a local public entity's locality, and which are in accordance with the basic principles and based on an appropriate division of roles with the region.”

In other words, in addition to defining a municipality’s role in cooperating with policy defined in the Basic Act, Article 6 also makes it possible to enact unique SME policy based on regional characteristics. Article 4 of the former Small and Medium-Sized Enterprise Basic Act stated that municipalities must “work to adopt a policy in compliance with national policy.” Through such policy, many municipalities were limited to serving as subcontracting organizations for the national government rather than accepting the needs of regional small enterprises. It is most unfortunate that such thinking continues to pervade municipal officials and that some municipalities oppose working to ensure corporate profit.

When looking at global conditions, it is clear that municipalities must formulate and implement promotion/support policy for numerous small enterprises existing within that administrative region. I am researching Italy’s Basic Law for Artisan Enterprises (1985). Article 1 of this law states that municipalities are responsible for policy formulation. Japan should also study how this law empowers municipalities, which are closest to the region, as the basis for policy to promote the regional economy. Incidentally, an “artisan enterprise” is a small enterprise in which management works onsite together with laborers.

3. Opportunities for direct dialogue with regional small enterprises

An advance case for such ordinances is the Sumida Ward Basic Ordinance for SME Promotion which was established in 1979 by Sumida Ward in Tokyo. This ordinance is unique in how it incorporates the actual conditions and needs of SMEs in the ward. It is well-known how Sumida Ward officials of assistant manager rank or higher visited all SMEs in the ward during the 2 years prior to enactment of the Ordinance. Through these visits, ward officials conducted an exhaustive survey based on first-hand experience and direct discussion with SME management, thus ascertaining the true state of SMEs in the ward. Furthermore, after enactment of the Ordinance, municipal workers participated in gatherings for SMEs in each neighborhood. One such example is the Sumida Ward Industrial Promotion Conference. These meetings enable ward officials to understand the needs of small enterprises and to formulate policy which matches actual conditions. Accordingly, the third point of establishing SME promotion ordinances is for municipal officials to conduct first-hand surveys of actual economic conditions in the region and to establish effective policies enacted based on assessment of true needs.

Even on the prefectural level, SME groups are campaigning to have each municipality provide instruction and allocate working budgets for the formulation of ordinances for regional promotion and SME promotion. This is in addition to the formulation of SME ordinances. Particular active groups include the National Conference of the Association of Small Business Entrepreneurs and the People’s Association of Commerce and Industry. As a result of movements to establish SME promotion ordinances throughout Japan, SME promotion ordinances have been created in 116 municipalities of 31 prefectures as of April 2014.

4. Importance of links with regional welfare, environmental activities and other community building activities

The fourth point is the importance of linking SME promotion ordinances with community building activities, in the broad sense of protecting the regional environment and welfare. It has long been said that environment and welfare are the keywords of the 21st century. The series of food fraud issues in recent years has led to more detailed information on agricultural products and processed foods produced both in Japan and overseas. As a result, there is rapidly increasing demand for locally-produced agricultural products and processed foods which are safe and provide peace of mind. Moreover, we are starting to see an increase in “local production for local consumption movements” which is revitalizing regional agriculture. This is gradually fulfilling the necessary conditions for reconstruction of regional economic cycles based on local industry such as agriculture, forestry and fishing, manufacturing, wholesale and retail.

By implementing policy which prioritizes the environment and welfare, it is possible to create communities where residents can continue to live with peace of mind. To achieve this goal, municipalities must promote SMEs which are welcomed by residents and friendly to the local environment, rather than large shopping centers and convenience stores that sell products procured from throughout the world. SME promotion ordinances must also support local SMEs through policy which is linked to public contract ordinances in the construction industry, community planning ordinances advanced by local residents, home-reform subsidy systems designed to create employment opportunities, and a variety of other ordinances and systems.

5. Resident self-governance is the very basis of democracy

The fifth point is the need to construct a new network between municipalities and residents in order to achieve the goals discussed above. I am not referring to public hearings which have often been held to ensure an “alibi,” nor am I referring to informal discussions or committee meetings open only to a select few residents. Instead, municipalities must establish policy which reflects the broad opinions of regional residents. There are expectations for the activities of NPOs which have been founded. However, history clearly shows that bankruptcy comes quickly when relying on volunteer labor due to cost reductions associated with financial difficulty in a municipality.

It is important to incorporate residents’ opinions when formulating SME promotion policy to cultivate leaders in the promotion of a regional economy which is organically linked with community planning, urban planning, social welfare and other policy.

European countries have a long history of municipalities playing a leading role in regional government. According to my surveys, commerce officials on the municipal level assess the status of production regions, regional industry and shopping districts, thus formulating regional economic promotion policy while considering the opinions of SMEs and residents.

An example of systems which reflect residents’ opinions in municipal policy is how Italian cities have several “district resident councils” for each region. In this system, direct elections are held in each region to select residents who come from different professions and have diverse ideologies. The system ensures that these representatives possess the right to debate municipal policy and that they clearly communicate the decision-making process to other residents.

It is certainly true this can be attributed to differences in government systems. Still, this system shows the very basis of democracy as the reflection of regional residents’ opinions to issues in which those residents are affected by policy. This includes community planning, regional economic promotion and social security.


In Japan, movements by SMEs for the enactment of SME promotion policy have contributed greatly to the establishment of such ordinances by municipalities. However, we must not overlook that such movements are also community planning movements which involve regional residents. This illustrates the extent to which residents are beginning to recognize regional economic promotion as their own problem. An even more accurate description would be that residents are faced with tough economic conditions which force them to take an interest in economic promotion.

Kazuhide Yahata
Professor, Faculty of Economics, Chuo University
Areas of Specialization: Small and Mid-Sized enterprises Theory, Regional Economic Theory, and Local Industry Theory
Kazuhide Yahata was born in Tokyo in 1953. In 1984, he completed the Doctoral Program at the Nihon University Graduate School of Business Administration and left the University after the course without any degree. (Master of Commerce)
He served as Full-Time Instructor and Associate Professor at the Sakushin Gakuin University Department of Business Management. Since April 2001, he has assumed his current position of Professor at the Chuo University Faculty of Economics.
His recent research focuses on surveying the promotion of local industry in Tokyo, including surveys of the shoe industry in the Asakusa neighborhood of the Taito Ward.
His recent theses include Statistical Analysis of SMEs and Diverse Employment Patterns: Case Example Featuring Small and medium retailers (Keizaigaku Ronsan (The Journal of Economics), Chuo University Faculty of Economics, 2013) and Significance of Neighborhood Shopping Districts & Cooperative Community Development: Case Example Featuring the Kyoto Nishi-Shin-Michi Nishiki-Kai Shopping Street Promotion Association (Keizaigaku Ronsan (The Journal of Economics), Chuo University Faculty of Economics, 2010).