ABSTRACT. This paper examines various aspects of total
factor productivity across different firm sizes in Japan. It
shows that larger firms have higher total factor productivity
levels and growth than smaller firms. There are, however,
some exceptions to this pattern especially in the electric
machinery sector where small firms tend to have the edge. The
paper also finds that two distinctive characteristics of small
and medium firms, the practice of subcontracting and the use
of external patents, are positively related to total factor
productivity growth while the availability of subsidized public
loans is not.
Technological progress contributed significantly
to the remarkable economic growth of the
Japanese economy in the post-WW II period.
According to an estimate by Nishimizu and Hulten
(1978), as much as 30 percent of Japan’s economic
growth in the 1955–1971 period was attributable
to technological progress (as measured by growth
in total factor productivity, TFP). While the rate
of economic growth declined substantially in the
early 1970s, technological progress continued to
contribute significantly to economic growth.
Indeed, the contribution of technological progress
increased after the mid-1970s, accounting for
more than 50 percent of economic growth from
1975 to 1985 (Kawai, 1999). However, in the
1990s, during which economic growth stagnated,
the rate of technological progress has been
negative. Because of demographic and economic
maturity, there is a small likelihood of rapid
expansion of capital and labor inputs in the
Japanese economy in the future. Accordingly, the
importance of technological progress for achieving
economic growth will be greater.
One special characteristic of the Japanese
economy is a large and important position held
by small and medium enterprises (SMEs). In 1957,
99.7 percent of establishments in the nonprimary
sector were SMEs, and 82.8 percent of workers
were employed by SMEs. Although the shares of
SMEs on these indicators declined over time to
register 98.8 and 77.6 percent in 1996, respec-
tively, SMEs still hold a dominant and important
position in the Japanese economy. These numbers
alone point to the importance of SMEs in the
Japanese economy, but their importance would be
increased if one considers their close relationships
with large enterprises through various channels
such as subcontracting relationships.
In light of these observations, this paper
examines technological progress achieved by
SMEs in the manufacturing sector. Specifically,
we first estimate the rate of technological progress,
here measured by growth of TFP, of establish-
ments of different sizes for the 1966–1996 period.
The analysis covers the final part of the rapid
economic growth period (1966–1972), the lower
but steady growth period (1972–1991) including
a sub-period affected by two oil crises (1972–
1981) and a sub-period characterized as a bubble
economy (1985–1991), and the period of prolonged
recession (1991–1996). We then examine differ-
ences in the levels of TFP among establishments
of different sizes. We also analyze the determi-
nants of technological progress and technological
levels. In addition to statistical analysis, we
examine technological progress by SMEs by uti-
lizing information obtained from various surveys.
Technological Progress by Small
and Medium Enterprises in Japan
Small Business Economics 18: 53–67, 2002.
2002 Kluwer Academic Publishers. Printed in the Netherlands.
School of Social Sciences