(Year)

Transcription

1 Section 3 Approaches to addressing companies with high export potential 1.Using trading companies and wholesalers to enhance export capacity In order to achieve regional revitalization, it is important to consider the use of regional resources and knowhow in capturing foreign demand through promotion of exports. To that end, the use of trading companies and wholesalers will be the key for many companies, including SMEs, which have relatively low productivity and which face a scarcity of funds and information concerning markets outside their region. Generally speaking, trading companies and wholesalers bear various costs related to exports and have the ability to obtain up-to-date information concerning markets in other regions and countries through their domestic and foreign sales networks. Therefore, using trading companies and wholesalers expands the chance for SMEs with a scarcity of funds and low sales capability to significantly increase customers for their products and services. In particular, export to foreign markets expected to grow will provide a huge business opportunity for regional SMEs amid the dim prospects for domestic market growth. However, currently, the number of SMEs engaging in export (direct export) to foreign markets is not growing because export requires a heavy burden of expenses compared with domestic sales and also because it is difficult to obtain information on customers abroad (Figure II-3-3-1). 116 Figure II Number of SMEs engaging in export (manufacturing industry) The number of SMEs engaging in export is not growing. (Companies) 7,000 6,196 6,303 6,336 6,302 6,397 5,937 5,920 6,000 5,348 5,000 4,603 4,702 4,838 4,342 4,000 3,568 3,000 2,000 1, (Year) Note: SMEs engaging in direct export. Source: 2016 White Paper on Small and Medium Enterprises in Japan (Small and Medium Enterprise 116 Here, only figures for companies engaging in direct export were tabulated due to data constraints. 555

2 Agency) Among factors behind the lack of growth in exporting companies is the fact that it is difficult for SMEs to find trading companies and wholesalers interested in sales of their products and services, for example. Even if trading companies and wholesalers interested in sales of their products and services are found, it may be difficult to agree on terms such as sales price and volume and commission fees. Therefore, below, we will first theoretically analyze the merits and demerits of using trading companies and wholesalers and then examine the following points based on a questionnaire survey conducted with SMEs: whether there are cases in which the use of trading companies and wholesalers by SMEs has actually enabled export to foreign markets; how much the use of trading companies and wholesalers can reduce expenses; and what challenges SMEs face in relation to the use of trading companies and wholesalers. Trading companies and wholesalers play an important role in trade transactions. Generally speaking, when companies engaging in manufacturing (manufacturers) export products and services directly to foreign markets, they must bear expenses necessary for establishing a sales network for their products and services. On the other hand, trading companies and wholesalers have a very different function compared with manufacturers in general, which is to provide economies of scope. Economies of scope, which is used as an indicator of economic efficiency concerning corporate activities, refers to the ability to conduct business activities with higher economic efficiency by simultaneously engaging in multiple businesses or simultaneously handling a variety of products and services. 117 In such cases, if the merits generated by the sharing of business resources between different products and services outweigh the additional cost arising from handling of different products and services, economies of scope work. In the case of trading companies and wholesalers acting as export intermediaries, their existing export networks are equivalent to business resources that can be shared. As trading companies and wholesalers can use the existing product and service export networks to distribute new products and services, they can increase sales at little additional cost. In the case of manufacturers (Figure II-3-3-2), only those which have a sufficiently high level of productivity to secure profits despite bearing the fixed cost (represented by FX in the figure) necessary for establishing an export network can engage in export on their own (direct export). In the figure, only companies whose productivity level is located on the right side of Point ΦY, where Πx, a curve representing the operating profit (operating profit curve), intersects with the horizontal axis, can engage in export. Other companies (whose productivity level is located on the left side of Point ΦY) cannot earn profits through export as the fixed cost related to direct exports more than offsets profits, causing them to suffer an operating loss There are also economies of scale and economies of density. 118 According to Melitz (2003), who proposed the new, new trade theory which incorporated corporate heterogeneity into conventional trade theory, in industries exposed to competition from abroad through trade, companies with the highest level of productivity engage in export and companies with a lower level of productivity concentrate on production for the domestic market (Melitz model). This theory maintains 556

3 Operating profit Figure II Direct export and indirect export Πx : Operating profit curve of companies engaging in direct export Πw: Operating profit curve of companies engaging in indirect export Companies that can earn profits through export using trading companies and wholesalers as intermediaries Πx Πw Fixed F X Φ Y Indirect export Φx Direct export Direct export Productivity Source: Akerman (2010) On the other hand, in the case of export using trading companies and wholesalers as intermediaries (indirect export), manufacturers with a relatively low level of productivity, which would otherwise be unable to engage in export, can do so because they do not have to bear the fixed cost necessary for establishing an export network, which is represented by FX. In the figure, as the operating profit curve shifts from Πx to ΠW, companies whose productivity level is located on the left side of Point Φx, where Πx and ΠW intersect with each other, can earn more profits through indirect profits. In particular, companies whose productivity level is located on the left side of ΦY are those that can earn no profit through direct export and which can earn profits only through export using trading companies and wholesalers as intermediaries. The incline of the operating profit curve ΠW of companies engaging in indirect export is more moderate than that of the operating profit curve Πx of companies engaging in direct export because commission fee payment to trading companies and wholesalers arises in the case of indirect export, reducing the operating profit accordingly. Does this theoretical model work in the real world of corporate activity? Below, we will verify the theoretical model based on statistical data and a questionnaire survey. Figure II shows the distribution of labor productivity at manufacturing business establishments across Japan based on the Census of Manufacture. The distribution of business establishments engaging in export is located on the right side of the distribution of business that companies with the lowest level of productivity are forced to exit the market. The model presented here is one created by expanding the so-called Melitz model by explicitly incorporating trading and wholesale companies into it. 557

4 establishments not engaging in export. On average, the productivity of business establishments engaging in direct export is higher than that of business establishments not engaging in direct export. Figure II Export and labor productivity (1) Source: Census of Manufacturers (METI) At this time, a questionnaire survey was conducted with around 30,000 SMEs across Japan, and we quantitatively examined the relationship between exports, including indirect ones, and labor productivity. Table II shows the results of the examination. Table II Export and labor productivity (2) All industries (Note 1) Explained variable Mode of export Labor productivity (Note 2) *** (0.0398) Year of foundation Capital amount (converted to a log) Tradable (Note 3) Dummy for industry *** (0.0015) (0.0418) *** (0.0871) Number of observations (companies) 3,502 Log likelihood -1, (Note 1) Non-exporting companies: 0; Indirect-exporting companies: 1; Direct-exporting companies: 2 yes 558

5 (Note 2) Average from 2010 to 2014 (Note 3) Dummy values are as follows. Non-tradable: 0; Tradable: 1. The non-tradable companies are those whose most important market is the municipality or prefecture in which the company is located. The tradable companies are those whose most important market is the whole of Japan or overseas markets. (Note 4) Estimated with an ordered logit analysis ***: Significant at the 1% level. Figures in brackets are the cluster standard errors of the 17 industries. Source: Questionnaire Survey on the Growth and Investment Activities of Small and Medium-sized Companies and COSMOS1 (Corporate Financial Database) (2015) (Teikoku Databank) Of the approximately 4,600 respondent companies, only around 470 were engaging in direct exports, but if those engaging in indirect export are included, the number of exporting companies was nearly 900. In the estimation, the respondent companies were divided into three groups non-exporting companies, indirect-exporting companies and direct-exporting companies based on the results of the questionnaire survey, and an ordered logit analysis was conducted with respect to these groups using labor productivity, the year of foundation and the capital amount as regression variables. The results indicate that the co-efficient value of labor productivity is positive and statistically significant and that the mode of export tends to change in accordance with the level of labor productivity: productivity is progressively higher from non-exporting companies to indirect-exporting companies to direct-exporting companies. This suggests that by using trading companies and wholesalers as export intermediaries, companies with a middle level of productivity can engage in export, and it may be said that the model described in Figure II-3-3-2, which shows the relationship between exports and productivity, was verified by actual corporate activities. What specific merits can exporting companies gain by using trading companies and wholesalers? In the questionnaire survey, detailed questions were asked with respect to the expenses saved and merits gained through the use of trading companies and wholesalers. In addition, companies that replied that they were not using trading companies and wholesalers were asked about the reasons for this in order to identify challenges to be overcome when promoting the use of trading companies and wholesalers. As for the specifics of the expenses saved through the use of trading companies and wholesalers as export intermediaries, many SMEs cited the saving not only of fixed expenses, such as the cost of establishing local sales and service facilities but also of various other expenses, including marketing expenses for sales promotion and other activities (Figure II-3-3-5). In particular, more than 70% of the respondent companies replied that most or a significant portion of the cost of establishing local sales and service facilities was saved. 559

6 Figure II Expenses saved and composition of companies replies Many SMEs replied that various costs, including the cost of establishing local sales facilities, were saved. (Companies) Cost of establishing local sales and service facilities Marketing costs, including those for local sales promotion activities Cost of collecting information on local laws and regulations and business practices Costs related to export of goods Not much was saved. A significant portion of the cost was saved. Most portion of the cost was saved. Costs related to after-sales services Others Note: Multiple answers allowed. Source: Questionnaire Survey on the Growth and Investment Activities of Small and Medium-sized Companies (2015) (Teikoku Databank) As for the merits gained, around 50% in the manufacturing industry replied that they obtained new export customers through the use of trading companies and wholesalers as export intermediaries (Figure II-3-3-6). Of SMEs in the wholesale industry that are not acting as export intermediaries, around 40% replied that they obtained new export customers through the use of trading companies and wholesalers acting as intermediaries. 560

7 Figure II Acquisition of new export customers through the use of trading companies and wholesalers Many SMEs replied that they obtained new export customers through the use of trading companies and wholesalers. 100% 90% 80% Don't know 70% 60% 50% No 40% 30% 20% Yes 10% 0% Manufacturing industry Wholesale industry Source: Questionnaire Survey on the Growth and Investment Activities of Small and Medium-sized Companies (2015) (Teikoku Databank) As described above, many SMEs replied that using trading companies and wholesalers as intermediaries generated merits in terms of saving expenses and obtaining customers. While some companies have achieved some results by using trading companies and wholesalers, it is true that there are many companies which are unable to use them. In this questionnaire survey, of the 4,600 respondent companies, around 3,700 were engaging in neither direct nor indirect export. On the other hand, as shown in Figure II-3-3-3, there are some non-exporting companies whose productivity is higher than the average productivity of companies engaging in direct export. 119 Figure II shows the results of the question asked of such non-exporting companies about their reason for not using trading companies or wholesalers. 120 The most frequently cited reply, chosen by nearly 40% of all respondents, was unable to find suitable trading companies or wholesalers. This was followed by such replies as the commission is too high and unable agree on terms such as production volume and price. The results suggest that many non-exporting companies that tried to export their 119 Todo (2011) refers to such companies as reclining dragon (i.e. latent potential) companies. 120 Of the obtained replies, those given by companies that cited the presence of sufficient profits from direct export or domestic sales as the reason for not using trading and wholesale companies were excluded from the tabulation. 561

8 products by using trading companies and wholesalers as intermediaries have given up because they were unable to find trading companies and wholesalers suited to them. (Proportion, %) Unable to find suitable trading companies or wholesalers Figure II Wholesalers are not trustworthy Reason for not using trading companies or wholesalers (manufacturing industry) 6.5 It takes longer to sell products 10.9 Unable to agree on terms such as production volume and price 19.6 The commission is too high 10.9 Products or services not suitable for export 15.2 Others Note: Multiple answers allowed. Source: Questionnaire Survey on the Growth and Investment Activities of Small and Medium-sized Companies (2015) (Teikoku Databank) 2.Non-exporting companies with high export potential Next, we will consider how many companies there are, by sector and by region, which have sufficient export potential in terms of productivity but which are not engaging in export. As was discussed in the previous paragraph, when companies engage in export they need to bear some expenses. Therefore, it is theoretically argued that companies cannot engage in export unless their productivity is higher than a certain level. 121 However, in reality, among companies with a similar level of productivity, some may engage in export but others many not. In some cases, even companies whose productivity is higher than that of exporting companies may decide not to engage in export based on management s judgment. In this paragraph, we use the raw data 122 of the Census of Manufacturers, as in the previous paragraph, in order to identify, by sector and region, non-exporting business establishments 123 whose 121 This refers to the Melitz Model under the so-called new, new trade theory. 122 In this paragraph, data for 2014 was used. 123 Data concerning direct exports was used due to data constraints. 562

9 productivity is higher than the average productivity 124 for exporting business establishments and analyze the distribution of non-exporting business establishments with high export potential by sector and region (Figure II-3-3-8). Figure II Non-exporting business establishments with high export potential (yellow part) (1) Distribution by sector First, all business establishments were divided into exporting business establishments and nonexporting business establishments by sector 125 based on the presence or absence of direct export. Then, non-exporting business establishments were divided into non-exporting business establishments with high export potential and other business establishments based on comparison with the average productivity for exporting business establishments by sector (Table II-3-3-9), and the proportion of non-exporting business establishments with high export potential was calculated by sector (Figure II ). 124 Value added per employee was used. 125 Here, the top 10 sectors in terms of the total shipment value, etc. were selected for the analysis. 563

10 Table II Classification of business establishments based on the presence or absence of direct export and productivity (by sector) Non-exporting business establishment petroleum and coal products metal products iron and steel chemicals production-use machinery plastic products (excluding those otherwise listed) electrical machinery electronic parts, devices and electronic circuits food transport equipment Exporting business establishment Non-exporting business Other business establishment with establishments high export potential Unit: Number of business establishments 564

11 Figure II % Proportion of non-exporting business establishments with high export potential (by sector) Non-exporting business establishments with high export potential Business establishments engaging in direct export 10% 20% 10% 18% 19% 10% 6% 14% 8% 11% 8% 4% 0% 7% 9% 12% 2% 8% 4% 4% 7% 5% 1% Note: Non-exporting business establishments with high export potential refers to the companies that are not engaging in direct export although their productivity exceeds the average productivity (value added per employee) of business establishments engaging in direct export in each sector. The above figure covers the top 10 industries in terms of total value of shipments. Source: Census of Manufacturers (METI) As a result, it was found that the proportion of non-exporting business establishments with high export potential is large in the manufacturing of petroleum and coal products and the manufacturing of metal products. In the case of the manufacturing of food products, it was found that although only 1% of all business establishments is engaging in direct export, the proportion of non-exporting business establishments with high export potential is five times as large. (2) Distribution by region Next, similar classification and analysis were conducted by domestic region (Table II and Figure II ). As a result, it was found that there are many non-exporting business establishments with high export potential in Hokkaido in particular. It was also found that in all regions across Japan, there are more non-exporting business establishments with high export potential than exporting business establishments. 565

12 Table II Classification of business establishments based on the presence or absence of direct export and productivity (by region) Non-exporting business establishment Exporting business Non-exporting business establishment Other business establishment with high establishments export potential Hokkaido Koshinetsu Kanto Kinki Chugoku Kyushu-Okinawa Tokai Shikoku Tohoku Unit: Number of business establishments Figure II Proportion of non-exporting business establishments with high export potential (by region) Non-exporting business establishments with high export potential 15% Exporting business establishments 10% 5% 13% 1% 8% 8% 7% 7% 6% 6% 6% 6% 0% 5% 5% 5% 5% 5% 4% 3% 3% Note: Non-exporting business establishments with high export potential refers to the companies that are not engaging in direct export although their productivity exceeds the average productivity of business 566

13 establishments engaging in direct export in each region. Source: Census of Manufacturers (METI) (3) Summary It was found that in all regions and sectors, there are a substantial number of business establishments that are not engaging in export despite possessing a high level of productivity and high export potential. This means that there is still ample room for expanding the export base, particularly in Hokkaido by region and with respect to oil-related products and metal products by sector. On the other hand, the results of this analysis do not provide clues to what kind of impetus is necessary for encouraging non-exporting business establishments with high export potential to engage in export. For example, in some cases, the decision may depend on managers approach to business, and in other cases, there may be a division of roles between business establishments for domestic supply and business establishments for export. Presumably, there are challenges particular to individual sectors and regions. This analysis will be useful for considering a sector-by-sector or region-by-region approach to measures to expand the export base. 567