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Promoting Enterprise Development or Subsidizing Tradition?

Governments and trade associations have often intervened in credit markets to guarantee loans made by financial institutions to small and medium-sized enterprises (SMEs). The most active loan guarantee program in the world is the Japanese Credit Supplementation System yet the level of entrepreneurial activity in Japan is extremely low. This paradox suggests that lack of available capital may not be the only constraint on entrepreneurial activity. This empirical article examines the Japanese loan guarantee system. It reports on its strengths and weakness, finding that the Japanese Credit Supplementation System emphasizes the salvage of firms facing distress: financial support for new businesses appears to be a lower priority. This focus reflects cultural and social realities of the Japanese context. However, it arguably discourages entrepreneurial activity by both reducing the intensity of Schumpeter’s ‘creative destruction’ and also by artificially maintaining non-viable firms that then compete with unsupported firms.