Japan’s “midsize company” policy is set to launch in 2024. The government will clearly define midsize enterprises, establishing new systems aimed at these companies to encourage growth investment and expansion through mergers and acquisitions (M&A). Midsize companies have significantly contributed to Japan’s economy by sustaining domestic investment and job creation, especially in regional areas. The focus on supporting midsize companies is intended to enhance their growth potential and, in turn, increase Japan’s overall industrial competitiveness. (Written by Kana Shimozu)
Redefining ‘Midsize’: From ‘Grouped with Large Enterprise’ to ‘Under 2000 Employees’
“We are treated as ‘large enterprises’ like Toyota Motor Corporation, despite having fewer resources and personnel. Compared to smaller companies, which receive substantial government support, we feel disadvantaged,” said a leader of an automotive parts manufacturer, with a wry smile.
In November 2023, the Ministry of Economy, Trade and Industry decided to define midsize companies as those with fewer than 2000 employees. This definition includes some listed companies, covering approximately 9800 businesses nationwide. This decision is based on the tendency for companies to significantly increase productivity when they exceed 2000 employees. The government aims to clearly differentiate between large enterprises and midsize companies and substantially strengthen policies tailored to midsize enterprises. A revised Industrial Competitiveness Enhancement Act will be proposed at the ordinary session of the Diet in 2024.
Japan’s policy for midsize companies had been less substantial compared to international standards. While small and medium-sized enterprises (SMEs) are clearly defined under the SME Basic Act in terms of capital and number of employees, midsize companies have continued in an ambiguous state, without clear definitions of their scale or characteristics.
As a result, midsize companies, despite having fewer resources than massive corporations like Toyota, Sony Group, and NTT, had to navigate under the same ‘large enterprise’ label. Compared to SMEs, they had weaker access to government subsidies and tax incentives. Local governments and regional financial institutions have also focused more on supporting local SMEs.
Content Many midsize companies are critical players in regional economies, with headquarters and factories located in local areas. According to a survey by the Ministry of Economy, Trade and Industry, over the past decade, midsize companies have significantly outperformed large enterprises in domestic investment growth: 37.5% increase (1.5 trillion yen) compared to 7.3% increase (700 billion yen) for large enterprises.
Midsize companies often support regional employment with salary levels comparable to large enterprises, particularly those that have successfully expanded their main businesses through domestic investment.
However, there are gaps in revenue and net profit margin per company between large enterprises and midsize companies, and the proportion of midsize companies that grow into large enterprises is lower in Japan compared to Western countries.
Despite policy shortcomings, midsize companies have independently achieved growth and supported regional economies. Supporting these companies and unlocking their latent growth potential directly contributes to the government’s goal of sustainable wage increases, including in regional areas, thus boosting the overall Japanese economy.
Haruji Sudo, Director-General of the Small and Medium Enterprise Agency and head of the Regional Economy and Industry Group at the Ministry of Economy, Trade and Industry, emphasizes, “Midsize companies have the potential to become world-leading enterprises. It’s profoundly significant to formulate policies that focus on the importance of midsize companies, alongside large enterprises and SMEs.”
Policy Expansion Including Subsidies for Major Domestic Investments
Prime Minister Fumio Kishida is enthusiastic: “2024 will be the ‘first year of midsize companies’, and the government will unite to build a policy framework for midsize enterprises.” One of the flagship policies to unlock the growth potential of midsize companies is the creation of a subsidy system targeting large-scale domestic investments by midsize companies. Firms with fewer than 2000 employees that meet certain criteria, such as wage levels and growth investment status, will receive subsidies covering a third of the costs for new factory construction or equipment investment over 1 billion yen.
Additionally, a “midsize slot” will be newly established in the Regional Future Investment Promotion Tax System to support business plans that contribute to revitalizing regional economies. Midsize companies recognized for their high growth ambition can deduct up to 6% (compared to a maximum of 5% for large companies) of equipment investment from corporate tax. This measure aims to create an environment conducive to significant domestic investments by forward-thinking midsize companies.
Supporting Expansion and Tackling Management Challenges for Midsize Companies
The government is not only expanding subsidy creation and tax incentives for midsize companies but also forming a nationwide support network to address their management challenges. Starting in 2024, the Ministry of Economy, Trade and Industry plans to establish a platform (PF) in multiple regions nationwide to support the expansion of new businesses by midsize companies.
PFs will involve regional industry support institutions, including private companies and universities, taking on a central role in assistance. In addition, executives from major companies and consulting firms with advanced expertise in management and industry will be involved in support. Efforts to create opportunities for midsize companies to interact beyond regional boundaries will also be promoted.
One of the challenges midsize companies face in growing into large enterprises is establishing second and third pillars besides their main business. A survey targeting companies recognized by the Ministry of Economy, Trade and Industry as “Regional Future Driving Companies,” with sales over 10 billion yen, showed that while 44% responded that their new business is “growing,” 28% said it’s “stagnating,” and another 28% are “not undertaking” new ventures, indicating that over half are not sufficiently engaged in new business development.
The low inclination to venture into new businesses, despite having a stable main business, is a background factor. Even when engaging in new ventures, many companies do not consider collaboration with other companies or utilizing external expertise, relying solely on their own knowledge and know-how, leading to suboptimal results, according to a Ministry official.
For companies exceeding a certain scale, such as sales over 10 billion yen, it’s crucial to actively develop new businesses in addition to deepening their main business, nurturing future revenue pillars for sustainable growth.
The Ministry of Economy, Trade and Industry aims to expand the support network for midsize companies, which has been less comprehensive compared to SMEs, through PFs established in each region. The Ministry also seeks to increase awareness among students and the general public, encouraging more people to seek employment and excel in midsize companies.