Defining and analysing the middle market—companies that are larger than the oft-mentioned SME sector but fall short of being the industry giants that dominate the corporate news cycle—is not simple. Our new paper published today, sponsored by GE Capital, does this for Japan. The definition we chose, having analysed a large database of Japanese companies and looked at definitions used in comparable economies, includes any company with global annual revenues of between ¥1bn and ¥100bn (around US$10m-1bn at current exchange rates). Companies in this bracket play a vital role in Japan’s economy. Given they employ a quarter of the workforce, earn around a third of gross revenues and have demonstrated remarkable resilience amid the difficult economic conditions of recent years, they arguably receive far less attention than they deserve—from policymakers or the press.
Our report (the subtitle of which—Crucial. Competitive. Concerned—summarises the key findings with maximum brevity) finds that Japan’s middle market has been comparatively resilient in recent years in the face of testing economic conditions. For instance, average nominal revenues earned by middle-market companies between 2008 and 2011—years which saw the nadir of the financial crisis and the devastating Tohoku earthquake and tsunami—fell just 7.5%, while those at large companies (with revenues over ¥100bn) fell 10%.
However, comparing average employment levels among middle-market firms from 2008-11, the sector has been hit harder than the small and big sectors—suggesting many have faced tough decisions about cost-cutting. Average employment levels at mid-market companies fell 15% in the period, compared to a 5% drop among large companies. Small enterprises (excluding sole proprietorships) performed best, with average employment growing 9% in the same period. This could be because many mid-market employees were forced to move to smaller companies (often on a non-permanent basis) as economic conditions deteriorated. In addition, while large companies had greater resources to cushion the impact of the downturn, and many policies were enacted to ease SME financing, middle-market employees were squeezed the hardest.
Although employment levels have been falling, our research shows that finding and developing talent still remain major challenges to growth. According to a survey we conducted for the report of 1,000 senior executives in Japan’s mid-market, only about one-third of them feel their firms can attract the talent they require, reflecting perhaps the dominance of big firms in Japan’s regimented graduate recruitment process. As a consequence, just 41% believe their firms are committed to developing young talent who will stay for their entire careers.
Similarly, the most pressing challenge for mid-market companies that venture abroad is the attraction and retention of suitable staff to manage those investments. This is seen to be a challenge by over 80%. Yet despite the fact that 75% are concerned about a slowdown in domestic demand, relatively few have taken the plunge to tap overseas markets. Only 26% derive 10% or more of their total revenues from foreign markets, and only 42% actually have investments outside Japan. Younger mid-market companies are the exception: 38% of those under 10 years old earn more than 10% of their revenues from abroad.
These findings and many more (including our analysis of what separates mid-market “growth champions” in Japan from their less successful peers) are available in the full report, available for download here. You can also download an infographic of the main finings of the research, and look and some interactive charts that split the findings by industry and other categories.
