SMEs and subcontracting in Japanese manufacturing: does globalisation make a difference?

Japan has a unique reputation for its industrial success achieved, among others, through subcontracting the relationship between large firms and Small and Medium Enterprises (SMEs). However, subcontracting has been on the decline since the late 1980s, particularly in the globalisation era. If subcontracting has acted as a major source of technological strength and other inputs to SMEs, its decline would adversely affect their performance. This paper probes the relative importance of SMEs and its changing structure in the course of the changing subcontracting intensities of Japanese manufacturing between 1980 and 1998. Further, it analyses SME economic performance to ascertain whether and how declining subcontracting under globalisation has affected SMEs. Contrary to the expectations, the performance of SMEs in More Subcontracting-Intensive (MSI) industries have not been affected when subcontracting declined. This could be due to the exit of inefficient ones, and the decades-old subcontracting relationship would have enabled majority SMEs to acquire self-sufficiency to stand on 'their own legs' for protecting their interests in the globalisation era when subcontracting in Japanese manufacturing declined.