Under the paradigm shift from an industrial economy to a service oriented economy that emerged in the 1990s, while Japan has been experiencing the "lost decade," certain manufacturing industries as electrical machinery and automobile have been maintaining their strong competitiveness. Not only larger enterprises but also certain small and medium enterprises (SMEs) have been making a significant contribution to this competitiveness. Compared with larger enterprises, SMEs incorporate comparative disadvantage in capital, human resources, information and technology. Despite this disadvantage, the dramatic advancement of information technology (IT) has been making SMEs position more advantageous in terms of organizational flexibility, efficiency and subsequent qualified services management. Consequently, quite a few SMEs have been demonstrating excellent business performance through efficient and effective technological innovation. Such excellent performance can be attributed to their business strategy aiming at maximizing the benefits of tie-ups with external institutes for assimilating external knowledge to improve their service value. This paper attempts to identify the sources of such success. First, on the basis of an empirical analysis of the electrical machinery firms in Japan, attempts to demonstrate that effective R&D is essential for SMEs to maintain excellent business performance and that the R&D activities in outstanding SMEs are more efficient than larger enterprises. Secondly it identifies, identifies the sources that enable SMEs achieve better performance than larger enterprises in a service oriented economy. Third, based on the case analyses of three Japanese SMEs that achieved excellent business performance in the late 1990s, the strategies of linking them with user enterprises, universities and government for technology monitoring and capability development are suggested.
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Under the paradigm shift from an industrial economy to a service oriented economy that emerged in the 1990s, while Japanese economy has been experiencing long lasting economic stagnation, certain manufacturing industries such as electrical machinery and automobile have been maintaining their competitiveness. Not only larger enterprises (Acs and Audretsch, 1987) but also small and medium enterprises (SMEs) have been making a significant contribution to this competitiveness.
While SMEs generally incorporate comparative disadvantage to larger enterprises in management resources such as capital, human resources, information and technology, the dramatic advancement of information technology (IT) has been shifting SMEs to more advantageous position in terms of organizational flexibility and efficiency (Xiang et al., 2001; Larsen and Lomi, 2002; Izushi, 2003. Furthermore, not a few SMEs have been demonstrating excellent business performance through efficient and effective technological innovation in a mega-competition (Acs and Audretsch, 1987). This excellent performance can be attributed to their strategies aiming at maximum utilization of external knowledge (Lester, 1998; Freel, 2003).
To date, number of studies have identified the significance of technological innovation in improving SMEs' productivity thereby overcoming their comparative disadvantage with respect to larger enterprises (Small and Medium Enterprises Agency, 2003; Freel, 2003. In addition, there are studies that have suggested the potential comparative advantage in flexibility in institutional change and exploring a niche market (Kelly and Amburgey, 1991; Marten, 2001.
However, none of these studies have identified the sources inducing effective R&D in SMEs leading to excellent business performance in a service oriented economy supported by a dramatic advancement of IT, and its contribution to improving SMEs assimilation capacity for maximizing the effective utilization of external knowledge. …