CULTURAL APPROACH to DEALING with JAPANESE BUSINESS in JAPAN: DIFFERENCES BETWEEN Smes and LARGE COMPANIES

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CULTURAL APPROACH TO DEALING WITH JAPANESE BUSINESS IN JAPAN: DIFFERENCES BETWEEN SMEs AND LARGE COMPANIES

March – 2016

Gloría Garcia, Ph.D.

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Table of Contents Executive Summary ...... 3 1. Framework ...... 4 2. Understanding Japanese cultural values to interpret Japanese actions in business ...... 6 2.1. The importance of Japanese cultural values in business in Japan ...... 7 2.2. Identified situations in business in Japan where misunderstandings arise...... 8 2.3. Obstacles arising from misinterpreting meanings and intentions in Japanese business ...... 9 3. Business with Japanese companies in Japan and abroad...... 11 3.1. Five essential aspects for doing business with Japanese companies ...... 11 3.2. International Business in Japan and Business with Japanese companies ...... 13 4. The real and growing significance of the Japanese SMEs ...... 14 4.1. Traditional importance and present situation of the Japanese SMEs ...... 14 4.2. Japanese SMEs are internationalizing ...... 15 4.3. Instances of internationalized Japanese SMEs ...... 18 5. Differences between dealing with Japanese large companies and Japanese SMEs ...... 20 6. Conclusions ...... 22 7. Recommendations ...... 23 Bibliographical references ...... 24 Web links ...... 25

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Executive Summary

Business relationships between the European Union (EU) and Japan have improved in recent years. However, Japan continues to be a country where doing business is often a formidable undertaking. The cultural values and traits of the Japanese people still guide the way in which most of adult people act and speak in public. Dealing effectively with Japanese business people requires a thorough understanding of the meaning of certain acts that reflect their underlying cultural values and social customs.

In the case of the EU Small and Medium Enterprises (SMEs), they usually do not do business with third countries, and expansion to Asian markets can be regarded as both an opportunity and an inconvenience. Japan is an important country in Asia and Japanese SMEs are transforming from being subcontracted suppliers to producing and marketing to customers, even in foreign countries and with foreign enterprises.

This work is based on broader research conducted by the author in Japan as a Visiting Researcher at the Institute of Social Sciences, University of Tokyo. It has two main aims. The first is to present the cultural values in Japanese business that result in certain ways of speaking and acting, and to emphasize why these aspects should be understood in depth for developing business relationships in Japan. The second is to show the real importance of the Japanese SMEs, and to show the differences between doing business with Japanese large enterprises (LE) and with SMEs.

Thus, after presenting the identified cultural values in Japanese business, the author describes some situations where misunderstandings arise and the obstacles that result from misinterpreting meanings and intentions. Then, she highlights the five essential aspects for doing business with Japanese companies, and shows the differences between doing business in Japan and with Japanese enterprises. She expounds the real and growing significance of the Japanese SMEs giving some illustrative instances of Japanese SMEs internationalization and how they worked with foreign companies. After showing the importance of doing business with Japanese SMEs, the variations between dealing with Japanese LEs and SMEs are revealed. Finally, she draws some conclusions and gives some practical recommendations such as that it is essential to take enough time to cultivate the necessary interpersonal relationship, that knowing the history of the particular Japanese company and showing respect and consideration help to create trust, that formal meetings are not the place for discussing and take decisions because they are public situations, or that European SMEs should better begin business with Japanese SMEs.

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1. Framework

Japan continues to be a country where doing business is often a formidable undertaking because the traditional values and traits of the Japanese people still guide the way in which most of adult people act and speak in public. Strategy preparation, market knowledge and cultural understanding are necessary elements for success in international business. Culture is, perhaps, the most difficult because it is not just a matter of reading, analysing or memorizing but of understanding and feeling. This is why this report stresses the real significance of culture in business.

Some people think that cultural differences do not prevent from doing international business, and the expert agrees that cultural differences themselves do not hinder intercultural business. However, their ignorance produces misunderstandings that can cause it. Business with other cultures can fail because of lack of information, insufficient understanding, bad communication, and needless conflicts. In the case of business in Japan, unique products and high quality service are essential, and mere Japanese business protocol knowledge does not replace them. However, ignoring cultural differences can lead to business relations being broken off.

Specific cultural values allow people of each society to know what is appropriate in every situation. Thus, they represent the implicitly or explicitly shared ideas and beliefs about what is good, right, and desirable in the community. These accepted ways of doing things determine the norms about how people should conduct themselves and act towards others. Different cultural backgrounds can cause business people to make wrong judgments about the intention, sincerity, words and actions of others.

In this work, culture is understood as the values, norms, beliefs, attitudes, and behaviours learned and shared by a group of people that allow them to see the world in the same way. Values are the deepest level of culture and the most external level are directly observable things such as the way of doing things. Acting and speaking can be noticed but not the underlying cultural values, and thus they may remain unchanged although are expressed in different ways of acting and speaking.

Business relations between the European Union (EU) and Japan have improved in recent years. However, dealing effectively with Japanese business people requires a thoroughly understanding of the meaning of certain acts reflecting their underlying cultural values and social customs. In the case of the EU Small and Medium-sized Enterprises (SMEs), they usually do not do business with third countries, and expansion to Asian markets can be regarded as both an opportunity and an inconvenience. Japan is an important country in Asia and Japanese SMEs are transforming from being subcontracted suppliers to produce and market to customers, even in foreign countries and with foreign enterprises.

SMEs are the backbone of any economy and, according to the EU definition, 99 per cent of EU enterprises are SMEs. There are over 20 million SMEs in the 28 EU countries1 and 70 per cent are located in the six largest EU economies, i.e. France, Germany, Italy, Poland, Spain and the United Kingdom (UK) 2 . Many EU SMEs try hard to going international but only a small part of them are involved in international business inside or outside the EU Market3. In the last years, 30 per cent of SMEs have exported to another EU country and 2 per cent have invested in a

1 http://ec.europa.eu/growth/smes/access-to-markets/internationalisation/index_en.htm 2 European Commission. Internationalisation of European SMEs, 2015 3 Flash Eurobarometer 421, Internationalisation of Small and Medium-Sized Enterprises, Report, October 2015.

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www.EUbusinessinJapan.eu company in another EU country. Outside the EU, 20 per cent of SMEs have exported to non-EU countries, 4 per cent have worked with a non-EU partner on R&D, and 2 per cent have invested in a company based abroad. As reference, it can be said that most of the SMEs (69%) did not carry on any business outside the EU in recent years. The 74 per cent of EU SMEs that have not exported recently believe they will probably never export. A 2 per cent used to export but have stopped and another 2 per cent tried to export but have given up. Finally, 64 per cent of SMEs declare that they have no experience in exporting.

Table 1. Percentage of SME sales coming from domestic, EU, and foreign countries (% average) From own From countries From countries country inside the EU outside the EU European Union 28 66% 21% 13% Type of market Goods to consumer 76% 16% 8% Goods to companies 67% 21% 13% Services to consumer 74% 18% 7% Services to companies 69% 20% 11% Source: own elaboration based on data from Flash Eurobarometer 421, October 2015.

About 45 per cent of EU SMEs affirm that one of the main difficulties in internationalisation is identifying business partners abroad, and 24 per cent declare that a major problem lies in their products or services since they are specific to their domestic market. Thus, the most common export destination is the EU (81%) and few SMEs export beyond. Outside the EU, SMEs exports mainly to Middle East and North Africa (15%), Eastern Europe, Caucasus and the Balkans (14%), the USA (13%), and Latin America (10%).

With respect to Asia, EU SMEs export mainly to India and South East Asia (11%), China (10%) and Russia (10%). In March 2011, before the Tsunami in Japan, only 8 per cent of internationalised SMEs had business activities in Japan. However, Japan is the world’s third largest economy in the world, greater than the UK and Germany economies combined and remains the most high-technology country of Asia. Besides, EU SMEs consider Japan as an access and testing ground for the Asian market because of its regional reputation of high quality. Therefore, there is potential for EU SMEs to further expand their activities in Japan.

Nevertheless, EU SMEs think that compared to other countries, one of the barriers to enter the Japanese market is the quality of Japan’s own products and services. As it will be explained later, this should not be considered a barrier but a cultural value that underlies the way in which Japanese market works. Besides, Japanese SMEs are willing to cooperate with UE SMEs since many have not developed international business networks yet.

This work is based on a broader research conducted by the author in Japan as a Visiting Researcher at the Institute of Social Sciences, University of Tokyo, and it has two main aims. The first is to present the cultural values in Japanese business that result in certain ways of speaking and acting, and to emphasize why certain aspects for developing business relationships in Japan should be understood in depth. The second is to show the real importance of the Japanese SMEs and the differences between doing business with Japanese large enterprises (LE) and with SMEs.

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www.EUbusinessinJapan.eu variations between dealing with Japanese LEs and SMEs. Finally, she draws some conclusions and gives some practical recommendations.

2. Understanding Japanese cultural values to interpret Japanese actions in business

Before explaining the specific Japanese cultural values that guide the Japanese business mind, it seems necessary to give a brief rundown of their origin. Japanese cultural values draw from various sources such as the geographical conditions of Japan, the foreign influences during its history, and its spiritual and philosophical traditions. Japan’s geographical conditions: Japan’s geographical isolation, its comparatively small size and its relatively large population have resulted in its people living in close physical proximity to each other. This has led to a feeling for working in common or in groups, for concerning about the feelings of others, and for being important to be aware of the relative status of individuals. Besides, unlike Europe, in Japan there are frequent natural calamities such as typhoons, earthquakes, floods and landslides that have fostered a great respect for nature and a desire to live in harmony with it, instead of trying to control it.

Foreign Influences during the History of Japan: To author’s knowledge, Japan and Thailand are the only Asian countries that have never been colonies. However, throughout its history, Japan has received several foreign cultural influences the first of them came from China in the 4th century. In the 16th century, Western European countries, mainly Portugal, Spain and the Netherlands later, had a direct contact with Japanese people until the Edict of 1635. This decree ordered the closing of Japan, and forbade Japanese people from going overseas and from returning after living abroad. For over 200 years Japan was officially although not fully closed, and it was not officially opened until the Meiji Restoration in 1868. In the middle of 19th century the influence of the West arrived to Japan mainly from the United States. This contact with the industrialized West brought democracy and constitutional parliament, access to modern technology and knowledge about the Western lifestyle to Japan. Thus, Japanese have developed the practice of adopting useful elements of foreign cultures, merging them with local customs and adapting them to Japanese use (iitoko-dori).

Japanese Philosophical and Religious Traditions: As a part of culture, philosophical and religious traditions are the beliefs and rules that guide people in their decisions and judgments through life. In the case of Japan, these traditions have been developed in the course of its history as a result of the combination of various systems of Thought. Syncretism is the most important phenomenon throughout the religious history of Japan and this is the main reason why many Japanese people do not make a clear distinction between Shintō, Buddhism and Confucianism beyond their mere rites. Japanese Thought is interested in the reality of this world giving importance to the values that are convenient for the everyday life. Shintō, Zen Buddhism and Confucianism are three traditions that are concerned with the present life and besides, they are likely the traditions that have had a greater influence on the formation of Japanese business mind-set. Certain cultural values in business, which have derived from these three main philosophical and religious traditions, are the base on which the Japanese people asses their own behaviour and the one of others4.

4 García, G., June 2015. EU-Japan Centre for Industrial Cooperation 6

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2.1. The importance of Japanese cultural values in business in Japan Japanese society is not so homogeneous as it might be thought since there are variations according to region, community size, urban or rural location, education, work, or minority groups. However, they share cultural values and accepted rules of conduct that allow a high degree of homogeneity exists in their social customs. Although not all Japanese business people are the same, they conduct themselves in the same way in every specific public situation according to what is socially considered appropriate instead of following what they think individually. Dealing effectively with Japanese business people still requires in-depth knowledge of the underlying cultural values and social customs that drive their actions, thoughts and actions.

On the base of both the author’s experience and research in Japan, there are twelve Japanese cultural values in business that she has identified as essential in understanding how to create and maintain business relationships with Japanese people. These specific cultural values have moulded the Japanese business mind-set and shaped the traits of the Japanese business way. They allow understand the misunderstandings and misinterpretations that result in obstacles in business, and they are explained in a few words.

Personal relationships: In the Japanese traditional culture individuals are considered in relation to their social relationships. Relationships are paramount in the Japanese social structure and consist in a complex of subtle social norms that govern every type of interpersonal relationship. The interpersonal relationship in business is one of them.

Save face in public: Saving not only one's own face but also other's face in public situations is perhaps one of the most important Japanese cultural values. Japanese people try to find an appropriate way of adapting one’s own wishes to the requirements of others and avoid offending or harming the public image of others by developing one’s character.

Self-control of feelings: It seems amazing how Japanese people behave in a crisis situation, i.e., to keep self-control and self-discipline no matter what happens. Self-control means to be able to conceal the feelings, emotions and reactions in every situation. Self-discipline is the capacity to pursue what one thinks is right despite temptations to abandon it. Self-control and self-discipline consist in keeping the personal feelings and interests separated from what one know it should be said or done in public because it is the appropriate one.

Honne vs. Tatemae: Japanese people usually do not express in public their own opinions and real feelings (honne) with the purpose of not offending or hurting others. They usually care what they say and how they say to avoid direct confrontations by speaking and acting appropriately, i.e., according to what is socially expected (tatemae). Thus, honne is used in private and tatemae is used to interact in public situations such as business.

The importance of circumstances: Shintō considers that the term “good” means the individual actions that are best for the community and “bad” the ones that hurt it. No action is good or bad by itself, but its meaning and value depend entirely on the circumstances, the purpose, the moment, and the place. Circumstances are important because the proper way of acting and speaking is defined as the behaviour that is expected in every circumstance. Besides, impermanent circumstances require flexibility to adapt to new situations. In Zen practice it is said that the most wonderful mind is like water because water is ever changing its shape to suit all kinds of environment. Adaptation is obtained by avoiding the attachments, i.e., letting go of things and thoughts that keep us stuck in our present circumstances.

Striving for perfection: The Japanese striving for perfection in the smallest elements is a cultural value that can be perceived in the usual high level of quality and service in Japan. Everyone attempts to attain perfection and have the self-discipline to not give up, although one knows that it may be not possible. Mastering the technique by EU-Japan Centre for Industrial Cooperation 7

www.EUbusinessinJapan.eu constant repetition is not enough, but things must be done in a no-mind (mushin) state in which thought and action occur at the same time. Personal striving for perfection remains a worthy goal to acquire spiritual satisfaction.

Membership to the group: Japanese society gives a great importance to the group or community (ie) and to its social function as the nucleus around which work and life are organized. In this way, the individual is considered as a member of a group, and the individual behaviour should be polite and appropriate to promote the cooperation in the group. Thus, tolerance, flexibility of mind, attitude of acceptance and harmony are important aspects of the group's interaction. Individual merits are assessed on the base of attaining the collective goals.

Harmony between the members of the group: Harmony should be understood as avoiding direct confrontations in daily life. Conflict arises from the relation between one person and others and hence, harmony between the members of the group is the result of finding an appropriate way of adapting one’s own wishes to the requirements of others. There is the official or public face, i.e., the opinions and actions that are appropriate to the position and situation (tatemae), and the private face, i.e., the one's true feelings or intentions (honne).

Avoiding uncertainty: Japanese people avoid uncertainty and this is the main reason of the emphasis on form and process (kata). Kata is the right way to do something, and it is also the practice to reduce uncertainty about unknown situations. This works by relying on accepted social norms and requires that all members of society understand and act in the same way according to kata.

Complying with social norms: The Confucianism concept of “li” extends from codified costumes and rituals, understood as the acts of everyday life, to ethical thinking, feeling and acting. It gives every person a specific position in family, community and society. In turns, this position allows each one to decide what one should or should not do in a particular circumstance and hence, to use the appropriate words and actions.

Japanese silence: As a Japanese proverb stays: “Silence is golden” (iwanu ga hana), therefore silence is important in Japan. Zen Buddhism has had a great influence on the Japanese view of silence when it says that truth cannot be described verbally but it exists only in silence. Although words are necessary to express concepts, language prevents from a deep understanding of the reality that exists beyond words.

Social hierarchy and respect to seniority: The vertical structure of the Japanese society is based on the concept of social hierarchy from Confucianism. Hierarchy allowed the proper relations among people and specified clearly the responsibilities and obligations governing the relations between individuals. Deference to seniority is the basis for the Japanese social hierarchy, and the relationship between two individuals of upper and lower status is the base of the structure of Japanese society.

2.2. Identified situations in business in Japan where misunderstandings arise There are six situations where misunderstandings usually arise in business in Japan and that are result of the twelve specific cultural values previously explained.

First contact: In Japan, the initial contacts are not usually done directly but with the help of a third party (shokai- sha). Cold calls, emails or letters do not produce the intended result and they are considered a rude way of starting a business relationship. Japanese people will answer politely, sometimes there will be no answer at all, but the meeting will not be held. Business contacts should be established through the appropriate connections and the introduction (shokai) done by a common friend who is trusted by both parties. Thus, it is a good start to be

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www.EUbusinessinJapan.eu introduced by a person that is well known in Japan, has a good relation with the Japanese company and knows the foreign company. An acceptable way of reducing the Japanese uncertainty of a first contact is to use the backing of an official and trustworthy institution that gives credibility to the foreign enterprise.

Decision-making: In general terms, Japanese companies do not take decisions in formal meetings with the foreign enterprise but inside the company. The process begins with informal face-to-face meetings between the members of the work group (nemawashi). After, the decision-making is done in this indirect way, every member involved in the decision must read a written proposal and express slight suggestions and individual agree (ringi). The Japanese process of decision-making requires a great deal of time but, as there is consensus in the group, the implementation is quickly and frictionless.

Meetings: In Japan, formal meetings with the foreign company are not about discussing or clarifying different interests, but about listening and gathering the information they need to take decisions internally. The Japanese expect that each side will send people of the same seniority and position, and they are surprised when the members of the foreign enterprise disagree between them in public and express their personal opinions. In Japan, the person who speaks out without consideration of the group's thinking makes him or herself look untrustworthy and loses credibility. Formal meetings are public situations and are generally not the place for personal opinions or true thinking, but the situation for the appropriate speaking. Holding regular meetings helps to make Japanese business people feel they can trust and be confident.

Conflicts resolution: As business relationships are still personal in Japan, possible conflicts are resolved in a friendly and non-public way by mutual consultation (hanashiai) instead of litigations. The appropriate way to discuss and resolve conflicts and differences is the indirect and private way that does not involve public discussion, confrontations, or loss face.

Contract implementation: Japanese business people think a contract must be adapted to the changes that occur during its implementation. This is so because the purpose of the contract is achieving outcomes mutually satisfactory and maintaining a long-term relationship (nagai tsukiai). It is important remember that informal meetings are carried out not only before and during formal negotiations, but also during the subsequent implementation of the joint business strategy. Japanese people are used to keeping in constant personal touch with their business partners and for this purpose, they prefer to make personal visits as frequently as possible in order to get to know the individuals in charge and the business progress in an informal way.

Demanding customers: From a Japanese perspective, customers are gods (okyaku sama wa kami sama desu). This expresses a sense of respect and politeness for consumers, but it does not connote that the seller is a slave to customer. It means that the seller feels his responsibility is the customer satisfaction and strives to achieve it. They understand the importance of establishing a close rapport with customers because the service side of the business demands people skills that must be adapted to each country, culture and language.

2.3. Obstacles arising from misinterpreting meanings and intentions in Japanese business Cultural values establish what is good and bad, true and false, and are the basis of people's judgments about the intention and sincerity of others. Different cultural values can cause inaccurate judgments, misinterpretations, and misunderstandings in international business. Appropriate ways of acting in one culture can be consider unacceptable in other. Four obstacles in business, that usually arising from misinterpreting Japanese actions when their underlying meaning is not understood, are presented.

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Source of trust: Express one’s feelings and acting in public like thinking is traditionally the base to trust people in the Western business practice. Western people usually have confidence in those who tell the truth, i.e., people who do what they say. Japanese business people trust people who speak and act appropriately in public situations (tatemae) because everybody knows that these are not the true feelings or opinions (honne). Japanese people can identify when is honne and when is tatemae because they have grown up used to switching between them. However, this frequently causes misunderstandings when foreign business people are not able to distinguish which is which in Japanese business. Foreigners often interpret tatemae as dishonesty since they perceive that Japanese business people have two faces. For their part, Japanese people are habitually suspicious of people with little self-control that express one’s thinking in public situations, such as business and negotiations.

Speaking and acting depend on circumstances: Japanese people’s speaking and acting can be different on the basis of circumstances because these determine what is appropriate. In similar happenings, factors such as the place, the time, the relative status or the existing relationship will change the way of speaking and acting. Understanding this fact can help foreigner business people avoid needless misunderstandings and conflicts. Japanese people are really aware of the impermanence and transience of life (mujo), and thus they understand that there is nothing permanent or fixed and that reality is changing continuously. In Zen, words turn entirely senseless as soon as they are taken out of their original context. Thus, to have flexibility means that all the thoughts that are generated within one’s own mind need to be adjusted to the varying reality. Flexibility is obtained by avoiding the attachments, i.e., letting go of things and thoughts.

Concept of quality in product and service: When foreign companies try to access to the Japanese market, they habitually consider the high quality as a technical or market requisite. However, this understanding prevent them from being aware of the real meaning of high quality in product and, above all, the extremely high level of service that Japanese employees offer to customers and users. This outstanding quality is a cultural value and not a deliberate market barrier; it is just the way in which business works in Japan. The hard competition in Japan does not come from foreign competitors but from Japanese companies, and foreign enterprises have to improve their quality and service to be competitive in Japan. This kind of obstacle about the highest level of required service is difficult to grasp for foreign enterprises with no experience in Japan no matter their international record in other countries. The Japanese philosophy of service (omotenashi) also has the benefit of keeping the customer happy and maintaining healthy mutual relations.

Business between equals: Most of the western business people have the principle that customers and sellers are on an equal footing. This is based on the idea that business is about exchanging money for a product or service that benefit to both. However, this attitude can make it difficult for Japanese to do business as equals.

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3. Business with Japanese companies in Japan and abroad It has just been seen that the specific cultural values that guide the Japanese business mind produce misunderstandings in six business situations and cause obstacles in business between Japanese and no-Japanese people because of the misinterpretation of meanings and intentions. Besides, these specific cultural values in business are also the basis of the most necessary aspects of Japanese business.

3.1. Five essential aspects for doing business with Japanese companies The author has identified five aspects that should be grasped since they are essential for doing business with Japanese companies no matter their size. These aspects are presented now5.

The interpersonal relationship in Japan

Japanese companies usually do business in a very personal way and establishing interpersonal relationships (ningen kankei), in which people understand each other, is an important requisite to do business in Japan. The Japanese relationship in business is an overall and friendly relationship that entails mutual reciprocity between the people involved with the purpose of furthering mutual benefits. Creating this interpersonal relationship is fundamental because Japanese business people trust more on those with whom they know than on those that just want to do business. They need to get to know foreign partners as much as possible for being able to understand their way of acting and interpret their reactions, and so feeling confident in dealing with them. This requires spending a lot of time and money in establishing an interpersonal relationship before they do business, since they feel more comfortable doing business with people who are friends, and not just acquaintance.

After hour meetings are an important part of the Japanese business because they allow business people to express their personal opinion about the business (honne) instead of the appropriate statements in public (tatemae). These informal gatherings outside the work environment consist in social activities, such as dinners, drinks or karaoke, and they are the way of developing a personal approach because Japanese behave differently at workplace than they do outside of work.

Avoiding direct confrontation and disputes

Avoiding direct confrontations in public is priority in the Japanese business since it is an important cultural value of Japanese society. They prefer to resolve conflicts through an indirect channel, such as the informal meetings or mediation (chūkai), and not to express their thoughts in a straightforward manner to avoid hurting the other’s feelings and spoiling the relationship. Therefore, they take care of what they say and how they say it (tatemae), for instance, avoiding saying “no” and using less direct expressions such as “it is difficult”. They appreciate harmony more than to say the true feelings and opinions (honne) in public situations.

Vagueness can be one of the most puzzling aspects of the Japanese communication. However, it should be realized that Japanese verbal communication is complemented by gestural communication, since the shared cultural values are the context in which verbal messages can be understood. Therefore, foreign business people should remember that is important to interpret well not only the meaning of words or how they are said, but also non-verbal communication. In Japan, silence (chinmoku) is understood not as a void between words but as a manner of

5 Text based on García, G., June2015. EU-Japan Centre for Industrial Cooperation 11

www.EUbusinessinJapan.eu communicating what it is important. Japanese silence may express a broad variety of meanings depending on each particular situation, such as to avoid direct confrontation, to prevent from offending others, to show that one is offended or to express disagreement.

Saving face is a deeply rooted cultural value in Japanese society and people rarely lose their temper in public, unless one of the parties holds a significantly higher status. The Japanese are more concerned with self-control than with control others or the situation, since they are taught to not reveal what they really want to say (honne) and to contain emotions for the purpose of maintaining interpersonal harmony. The appropriate conduct in each public situation changes according to circumstances and it is culturally established. A Japanese business meeting is a public situation in which it is necessary to say what it should be said according to the accepted social norms (tatemae), and personal opinions (honne) should not be expressed.

Understanding the meaning of the written contract

Japanese use brief and general written contracts with the purpose of emphasizing the business relationship that has been created. A contract is perceived as the mere formalization of a binding personal compromise to work together, rather than a detailed document with fixed clauses that have to be complied exactly. This is because it is usually considered that if there is no interpersonal trust, the mere possession of a signed paper will not improve the business situation.

Japanese people are very aware of changing circumstances (jijō henkō) and thus, the extremely precise clauses under the signed contract are not considered definite, even just after being signed. The specific terms lose their validity if circumstances change and the conditions become unfavourable to any party. This is based on the conviction that both parties to a contract should help each other when problems arise because this help will be able to be returned in the course of the long-term relationship. They do not feel they have to comply with the detailed terms although they keep the binding personal compromise. Therefore, the problem does not lie in the contract but in the different understandings.

Cooperation and competition

Cooperating in the group to attain the group goals and competing with other groups and, above all, competing with oneself. Depending on the group, the cooperation will be between work groups inside the same company, between companies inside Japan or between countries outside Japan. Despite the primacy of the group in traditional Japanese society, Individual performance is highly valued and is a major source of advancement. However, the aim that is considered to be more important in Japan is individual performance that benefits the group. Therefore, there are cooperation and competition simultaneously; in fact, Japanese people are competitive because of their ability to cooperate.

Situational speaking and acting

According to Zen, words turn entirely senseless as soon as they are taken out of their original context. Thus, Japanese speaking and acting depend on the circumstances since people are really aware of the impermanence and transience of things. They understand that there is nothing permanent or fixed and that reality is changing continuously. The events are mere transitory circumstances and the appropriate conduct in each public situation, which is culturally established, changes according to circumstances. A Japanese business meeting is a public situation in which it is necessary to say what it should be said according to the accepted social norms (tatemae). On the other side, personal opinions (honne) are something private that it should not be expressed in public. For instance, most of Western business people interpret smiling and laughing as something good that indicates

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www.EUbusinessinJapan.eu agreement. However, in Japan a smile can means also unease, shame, confusion or problems, but it should not be misunderstood as insincere because it is only a tatemae smile.

3.2. International Business in Japan and Business with Japanese companies Doing business with Japanese companies overseas can be perceived as not so complicated as doing business with Japanese companies in Japan. This is a fact that usually amazes foreigners but it has an explanation. This critical aspect has to do with the two Japanese cultural values of Importance of Circumstances, and Hierarchy.

In business, circumstances mean that both the relative hierarchical position and the way of acting vary according the place, the kind of business and the role of the companies. The same business between two companies can cause different Japanese ways of acting, depending on whether the Japanese company approaches to a foreign company overseas, the foreign company approaches to a Japanese company in Japan, or if the foreign company is a buyer or a seller.

EU firms that import from Japan can see that the whole process is usually smooth flowing from start to finish and as hassle free for them as possible. They can find out that business with Japanese is easier than it seemed. Besides, Japanese management inside companies located overseas coexists with the adaption to host country in their relations with local enterprises.

But when EU enterprise try to do business in Japan, they are really mindful of both the difficulties involved and the effort required. The way of acting and speaking changes because the situation has changed. Japanese business overseas deal with a process of learning and adaptation, and when Western business people go to Japan they think that Japanese business running on the same way. However, Japanese companies in Japan follow Japanese customs because they have to maintain face.

In hierarchical relationships, each party has certain expectations of the other. In business, hierarchy means that when a foreigner goes to Japan as a tourist or a customer, Japanese people are extremely cordial, hospitable, kindly and easy going. Customers are on top is a Japanese hierarchical value that is strictly performed always and besides, it is the approach that is expected of a foreign company in Japan.

The following can seem obvious, but it is not. In Japanese business everyone is not treated equally since Japanese thinking is that the way of acting depends on circumstances of the business. However, in western businesses no matter who is the buyer and who is the seller and behaviour does not depend on the place because depend on the thinking. It should be said, however, that difficulties often vanish when Japanese company are quite interested in the specific business activity of the foreign enterprise.

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4. The real and growing significance of the Japanese SMEs Japanese companies are not only Large Enterprises (LEs) but also SMEs; in fact, the 99 per cent are SMEs according to the Japanese definition (Table 3). Therefore, it is relevant to know the real significance of the Japanese SMEs, their growing international activities, and some illustrative instances of how Japanese SMEs doing business with foreign companies.

4.1. Traditional importance and present situation of the Japanese SMEs European people generally have knowledge of Japanese LEs such as Sony, Toyota, Honda, Cannon and so on. However, under these LEs there are unknown SMEs that are the cornerstone of the Japanese economy supporting local economies, societies, and employment. They employ almost 70% of the workforce and account for over half of the gross domestic product (GDP)6. More than 99 per cent of all registered businesses in Japan are SMEs and about 90 per cent of them are micro business7, which give job to approximately 30 million people. There are almost four million SMEs in Japan (Table 2) with 10,8 per cent operating in the manufacturing sector, 20,9 per cent in the retail sector, 33,7 per cent in the service sector, 5,5 per cent in the whole sector, 15,4 per cent in the hotels and restaurants sector, 11,6 per cent in the construction sector and 1,8% in the transport sector8.

Table 2. Breakdown of Japanese enterprises by size Number of enterprises Number of employees Large enterprises (LEs) 0.011 million 13.97 million Small and Medium Enterprises (SMEs) 3.853 million 32.17 million Medium enterprises 0.510 million 20.25 million SMEs Small enterprises 3.343 million 11.92 million Source: own elaboration with data from the SME Agency. It should be notice that the concept of Japanese SMEs is different from the EU definition of SMEs because it depend on the sector in which the enterprise is principally engaged and do not take in account the annual turnover. In Japan, the SME Basic Act establishes the definitions of SMEs (Table 3).

Table 3. Definitions of Japanese Small and Medium-sized Enterprise SMEs Small enterprises (Micro businesses) Type of Industry Stated capital or number of employees Employees Manufacturing industry 300 million yen or less 20 employees or fewer and others 300 employees or fewer Wholesale trade 100 million yen or less 5 employees or fewer industry 100 employees or fewer Service industry 50 million yen or less 5 employees or fewer 100 employees or fewer Retail trade industry 50 million yen or less 5 employees or fewer 50 employees or fewer Source: own elaboration based on data from the SME Basic Act.

6 Ministry of Economy, Trade and Industry (METI). 7 White Paper of the SME in Japan (2014). The term “SME” is defined in Article 2, of the Small and Medium-sized Enterprise Basic Act as a concept that includes small enterprises. However, the government uses the term “SMEs and micro businesses” in order to expressly indicate that sole proprietorships are included in the scope of measures and support. 8 Data from the SME Agency. EU-Japan Centre for Industrial Cooperation 14

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Subcontracting suppliers: Japanese SMEs are regarded as suppliers of parts and components to LEs through subcontracting system, which is built on a long-term business relationship between the firms involved in it. However, LEs obtain parts and components from several sources, such as the production on their own factories using their staff and resources; short-term purchases in the market based on price; and, the continued stream of production based on long-term commitments with subcontractors that possess specialized technology and that usually are efficient and reliable Japanese SMEs. LEs foster competition among their subcontractors, expecting they meet demands on cost, quality, and delivery. So, Japanese SMEs are used to competing and specializing in a particular process in which they are competitive.

From subcontracting suppliers to independent SMEs: The long-term recession caused a reduction in demand that made LEs began to produce parts and components in-house to use the excess of workers. Therefore, many LEs started to reduce the number of their suppliers, along with the components they use in manufacturing. For this reason, since 2001 9 , the Japanese government has encouraged SMEs to move from interdependency subcontracting relationships with the major LEs to becoming self-sustaining enterprises. SMEs usually manufactured for the demand that LEs have obtained from the market, but lately SMEs have had to face the market directly and to gain customers by themselves. Besides, Japanese SMEs are facing stiff competition from overseas manufacturers of cheap goods. SMEs that have outstanding technology and special skills are able to create new business and to grow in niche areas by taking advantage of specialized production processes. However, SMEs need to change the idea of producing “goods with the best quality” to an idea of producing “goods that sell well.”10. Sabae City, in Fukui Prefecture, is a representative example of production region cluster that it is formed by enterprises belonging to a specific industry and concentrating in a particular region. In this place, SMEs that manufacture eyeglass frame have clustered and established a system of division within the cluster to make competitive, high quality, and mass-produced goods. Nevertheless, as cheap goods produced in other Asia countries have shrunk their domestic and export markets, some SMEs in Sabae City have gone from being OEM11 to becoming original brand manufacturers (OBM), and selling with their own brand directly to customers.

4.2. Japanese SMEs are internationalizing In the last years, Japanese SMEs have experienced increasingly quite hard business conditions both at home and abroad, mainly as a result of declining domestic demand, LES’s overseas production, and increasing competition from other Asian countries. Considering that on the one hand, growth in Asian developing countries is remarkable and the living standards of people is rising; and that, on the other hand, population in Japan has been declining since 2011 and is expected to continue into the future, domestic demand is falling, and industry structure is changing, many SMEs have begun to access overseas markets.

Japanese SMEs are expanding abroad through both direct and indirect exports12, foreign direct investments (FDI), and business cooperation with overseas companies. It is interesting that, despite the SME’s limitations, such as fund-raising, information gathering, or management skills, most of Japanese SMEs are not expanding overseas through the progression from exports to FDI, but they take the route of FDI from the start. Besides, although 30 %

9 Annual document known as White Paper on Small and Medium Enterprises in Japan, 2001. 10 White Paper Small and Medium Enterprise in Japan, 2015. 11 OEM: Original equipment manufacturer is a company that makes a part or a final product that is used or sold by another enterprise. 12 Direct exports are those exports where customs procedures are carried out by the exporting company itself or in the company’s name. Indirect exports are exports where the export partner is known and the exporting is carried out through an export agent, wholesaler or trading company in the exporting company’s own country. EU-Japan Centre for Industrial Cooperation 15

www.EUbusinessinJapan.eu of total export value was accounted for by SMEs, almost 40 per cent of the internationalised SMEs began exporting in 2000 or later. Most of the exports of Japanese manufacturing SMEs belong to machine tools and processing machinery industries, chemical industry, and electrical machinery and metal products industries.

Most of the Japanese SMEs export mainly to China and to North America (Figure 1). However, China, Taiwan and South Korea decline sharply as future export destinations. ASEAN countries, such as Thailand, Viet Nam and Indonesia, increase as future export destinations. The percentage of SMEs that consider Myanmar and India as promising destinations also increased significantly.

Figure 1. Countries and regions as main export destinations currently, and as future export destinations. Source: the SME Agency, 2013.

More than 70 per cent of FDI made by SMEs begun in 2000 and, in the non-manufacturing sector, more than 50 per cent begun in 2005. Thus, the majority of the SMEs that made FDI are from the manufacturing sector, (70,%) and many are in the wholesale trade (18,3%). However, there has been a marked increase among SMEs in the service industry (3,7%) and information and communications industry (5,9%) in recent years. Specifically, enterprises such as noodle restaurants, beauty salons and information systems development companies have expanded into overseas markets.

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The main reason motivating Japanese SMEs to conduct FDI has changed from cost reduction to demand acquisition, either present or future demand, and develop new business partners and markets. Although SMEs have chosen mainly China for doing FDI, more recently they are shifting their focus to the ASEAN nations as sites for productions (Figure 2) and sales facilities (Figure 3).

Figure 2. Countries and regions that are most important at present, and that will be emphasized in the future for productive FDI. Source: the SME Agency, 2013.

It is important to point out the large increases of Myanmar as a FDI target for production activities and India as a FDI target for sales activities (Figure 3).

However, the fact is that many Japanese SMEs feel a psychological barrier to working with overseas companies. This attitude of SMEs to sales, technology or capital tie-ups with foreign enterprises probably is related to the fact that this kind of collaboration involves working with partners with a different language and culture, and also entails additional uncertainties

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Figure 3. Countries and regions that are most important at present, and that will be emphasized in the future for commercial FDI. Source: the SME Agency, 2013.

4.3. Instances of internationalized Japanese SMEs With the purpose of showing the situation of real SMEs and how they doing business with foreign enterprises, a small but representative and illustrative sample of the bright internationalization strategies that Japanese SMEs is performing in overseas markets is presented (Table 4).

Table 4. Summary of instances of internationalized Japanese SMEs SME’s name Employees - Business activity Internationalization Strategy capital 1. Nishimura 6 employees Glasses frame. Innovating new design and developing own Precision ¥ 10 million brand (Paper Glass). 2.Takefu 45 employees Special metal for blades and Creating a consortium to commercialize a Special Steel ¥ 50 million kitchen knives. traditional industry of its region with its own brand. 3. Mebiol ------Agriculture technology (Imec®) 13 Developing advanced technology for ¥ 94 million to grow vegetables. innovative vegetable factories. 4. IMT ------Indoors land-based aquaculture Developing advanced technology for Engineering ¥ 73 million systems for shrimp production. innovative aquaculture facilities. 5. Kanasago 40 employees Natto. Innovating new natto named Mamenoka. ¥ 3 million 6. Advanet 150 employees Hardware and software for Designing and developing high value-added ¥ 72 million electronic control devices. products, and an alliance with an overseas company. 7. Marukoshi 22 employees Wholesaler of industrial Translating its website into foreign languages ¥ 30 million machinery and equipment. and cooperating with overseas buyers. Source: own elaboration.

13 Imec® is an invention of Dr. Yuichi Mori who has over 30 years of experience in developing leading-edge membranes and hydrogels technology for use in medical products. His purpose is to apply these medical technologies to agriculture. EU-Japan Centre for Industrial Cooperation 18

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Nishimura Precision Co, located in Sabae city, is a SME that manufactured tiny screws for several industrial uses, including frame production. For more than 100 years, thousands of SMEs manufactured glasses frames in Sabae-shi, which is one the world’s three biggest production centres. Every SME was specialized in one of the 200-250 processes necessary for producing a glasses frame, and they were the OEM supplier of glasses frames for LEs. When the orders were reduced because of these LEs began to buy to Chinese suppliers, Nishimura Precision decided creating its own brand Paper Glass and beginning to sell directly to final consumers by Internet. In order to differentiate from Chinese competitors, it designed an innovative glasses frame by devising the stems to curve upwards from the hinges. This innovation in design enables flat-folding eyeglasses (2 mm) and to clear the lenses while folded. Nishimura Precision also sells overseas through the glasses section of a department store in Shanghai.

Takefu Special Steel is a SME based in Echizen City, Fukui Prefecture, that manufactures a special metal formed of different kinds of metals, which is used in the manufacture of products including blades of kitchen knives. This SME joined with 15 other SMEs, including knife manufacturers and designers in Echizen, to create a consortium, called Echizen Brand Products Consortium, that commercialize this traditional industry of its region with their own brand LIZA. Takefu Special Steel provides the clad metal that is worked on by the craftspeople, who are employed by the other SMEs members of the Consortium, to manufacture blades of knives and kitchen knives using the same original forging and hand-finishing techniques that were used for making Japanese swords. This consortium is exporting to countries where Japanese cuisine is very popular. In 2006, the cutting performance and design of the high-quality kitchen knives won acclaim in the U.S. and Germany, and overseas sales increased significantly.

Mebiol is a SME that manufactures an innovative agriculture technology (Imec®)14 for growing safe and high quality vegetables even on the places where the current farming is impossible, such as deserts land, concrete and seriously contaminated land. In Imec® factories, plants are cultivated and grown on a thin film made of hydrogel which absorbs water and nutrients and blocks germs and viruses even without the use of chemicals. Imec® was first commercialized successfully with tomatoes in Japan during 2009, and it is expected to be a way to solve massive food shortage. Tomatoes produced in Imec® farms compete based on their pleasant aroma, sweet taste and high levels of nutritional substances such as amino acids. Mebiol is focused on R&D and, besides exporting their factories, its main earnings are royalties from the Imec® patents that have already been registered in more than 70 countries. The company operates two vegetable factories in Japan and it has received inquiries about the system from companies in Singapore, Indonesia and Malaysia so far. Factories capable of delivering vegetables directly to retailers are popular in countries where high temperatures cause fresh produce to spoil quickly.

IMT Engineering is a SME located in Myoko, Niigata Prefecture that develops land-based aquaculture systems. Since its foundation in 1997, it is pioneer in farming shrimp with Recirculating Aquaculture System (RAS) technology. And most recently, it has developed the Indoor Shrimp Production System (ISPS) that was patented in 2007. This ISPS enables the cultivation of shrimp on land, even in landlocked nations, away from their natural aquatic habitats such as rivers and oceans because it is housed inside a plant and uses microorganisms to cleanse and circulate the water, promoting growth in a renewable system. The process has eliminated the need for drugs and antibiotics, producing shrimp that are both safe and high in quality. IMT’s first domestic production incorporating this technology and marketing sample was the “Myoko Yuki” shrimp. In a plant built in a high plain town far from the ocean, these shrimps were thoroughly monitored via information and communications technology from birth to

14 Imec® is an invention of Dr. Yuichi Mori who has over 30 years of experience in developing leading-edge membranes and hydrogels for use in medical products. His purpose was to apply these medical technologies for agriculture. EU-Japan Centre for Industrial Cooperation 19

www.EUbusinessinJapan.eu distribution and sales. This SME sells the shrimp production through their customized e-commerce site and it also exports its system.

Kanasago Co. is a SME based in Ibaraki Prefecture and created in 2009 by a group of former employees of a bankrupt LE who had six natto factories in Japan. Natto is known in Japan as the king of fermentation, and Ibaraki is well known as the birthplace of Japanese natto and for producing various types of high quality. Although Natto is an important element of Japanese food and culture, it has not been generally consumed widely outside Japan due to the food’s strong fermentation odour. To solve this difficulty, the Ibaraki Prefectural Industrial Technology Centre discovered a new natto bacillus and used it to develop a less-stringy form of natto that replace natto’s powerful fermentation odour with a more delicate scent evocative of Japanese food culture. This innovative natto has been named Mamenoka, which means fragrant beans and it should help erase the product’s negative image overseas while retaining its health benefits and distinctive taste.

Advanet Inc., based in Okayama City, Okayama Prefecture, is a SME that designs and develops hardware and software for electronic control and measurement devices for industrial use. As it was success in the development of high value-added products and the domestic market was becoming saturated, Advanet sought ways to expand its sales overseas. Thus, in a trade fair in Germany, the Italian company Eurotech approached the SME and they began to examine the possibility of a capital alliance. In 2007, Advanet accepted an investment from Eurotech and this alliance is enabling Advanet to sell its products via Eurotech’s overseas group companies, and Eurotech to sell its products in Japan via Advanet. For Advanet does not lose the confidence of its customers in Japan due to the alliance, they agreed not to change its management methods for three years. Besides, for dealing with the linguistic and cultural differences at the practical level, the two companies have made arrangements for communication, for example by using symbols that communicate meaning at a glance, to ensure that everything proceeds smoothly.

Marukoshi Co. Ltd., based in Chigasaki City, Kanagawa Prefecture, is a wholesale SME of machinery and equipment used in factories. Marukoshi commenced exporting at an early stage of its history to one of the main company’s clients that established a base in Singapore. However, the major increase in its exports dates from 2007 with the creation of a website translated into English, Spanish and Italian. Previously, Marukoshi had not even had a Japanese website, but the website in different foreign languages has enabled the SME contact with buyers from new countries and regions and increase the number of overseas customers about ten-fold. Today, Marukoshi is expanding its sales by cooperating with partners, i.e. reliable local buyers in overseas markets.

5. Differences between dealing with Japanese large companies and Japanese SMEs Known information about doing business in Japan is largely based on Japanese LEs. However, when it comes to doing business with Japanese SMEs, it should be known to what extent such information is valid. Thus, after having examined the five essential aspects for doing business with Japanese companies no matter their size, it is fitting to show the differences that have been found between dealing with Japanese LEs and SMEs. Most of the Japanese perceptions and actions come from the shared cultural values. However, the way in which they are reflected in business with foreign companies can be different in some aspects between Japanese SMEs and LEs. This fact can lead foreign enterprises to think Japanese SMEs are more open or similar to Western companies than LEs, when actually it is the opposite

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Based on the research conducted by the author with Internationalised Japanese SMEs located in Tokyo, the findings show that Japanese SMEs also apply cultural values to business but, to a certain extent, it depends on each SME and the circumstances. Japanese SMEs also attach great importance to establishing an interpersonal relationship with the foreign company and to have frequent personal contact. With reference to communication, they think that understanding each other is a matter of concern since they prefer to use indirect verbal communication with the foreign company. SMEs assume that foreign party will act like they expect; in other words, that it will know Japanese cultural business, it will avoid dispute and direct confrontation in public situations, it will save mutual face, it will say what is appropriate to the situation, and it will use the indirect and informal channel for conflicts solving. Japanese SMEs also think that a contract means a long-term commitment, and thus the terms are conditional since depend on circumstances. Circumstances are always changing and they must do what is necessary in each occasion to keep the long-term business relationship. Therefore, they do not fulfil the detailed conditions because they should have flexibility to cope with unexpected changes.

In this section there are examined the main differences that have been found between Japanese LEs and SMEs, when it comes to doing business with foreign enterprises.

Meetings: When Japanese LEs keep meetings with foreign companies, there are generally more Japanese people present than foreign people, and they usually change from one meeting to another with the same foreign company. In the case of SMEs, it is mainly the owner who maintains meetings with the foreign company.

Decision-making: Japanese SMEs do not usually make decision by consensus. The exception can occurs when several members of a family manage the SME, but not if they are only father and son. Unlike Japanese LEs, in SMEs the person who speaks in meeting is the same one who takes decisions.

Initiative: Initiative is a factor that influences the way in which Japanese SMEs act towards foreign companies. If the initiative comes from the Japanese SME, it will strive to know how adapting to the foreign company and decisions making will take it less time than usual. If initiative comes from the foreign company, the Japanese SME will show the traditional way of acting.

Attitude toward contracts: Nowadays Japanese LEs are more accustomed to Western style contracts, however SMEs still consider a contract as the expression of the long-term commitment.

Characteristics of the foreign team: In the case of Japanese SMEs, although the characteristics of the foreign team, such as position or seniority, are not so important, they can make it difficult to establish the interpersonal relationship.

Cooperation vs. competition: In Japanese LEs, individual performance and cooperation between the members of the group has the aim of achieving the group goals. At the same time, groups compete each other. Therefore, it is important understand who the group is, if it is the work group, the enterprise or the country. Although SMEs and LEs share this cultural value of simultaneous cooperation and competition, in SMEs the competition is not between the people inside the company but with other SMEs. The cooperation is between individuals of the same SMEs or between SMEs if they agree to collaborate.

Feeling bonded with the company: The prestige of the LE and its economic success, along with the tacit pact between Japanese LEs of not hiring each other's employees, promote the feeling of bonding with the company. But this does not happen in the case of Japanese SMEs since they are many more, they are not so prestigious and they usually hire employees from other SMEs. The feeling of bonding with the company could occur in highly regarded or in the most innovative SMEs.

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6. Conclusions The main conclusions that can be drawn from this work are the following:

In intercultural business, conflicts may be a result of not sharing the same cultural values about what is appropriate or right, and this is critical for assessing sincerity and trustworthiness. Besides, misunderstandings can arise when non-Japanese people do not know the cultural values that allow interpreting the meaning of acting and speaking in every business situation. Japanese SMEs and LEs share the same cultural values but to a certain extent they are expressed in different ways.

Japanese business meetings with foreign enterprises are public situations in which it is necessary to say what it should be said according to the accepted social norms (tatemae). On the other side, in Japan, personal opinions (honne) are something private that it should not be expressed in public.

Japanese business people are oriented to the group they belong to, and this attitude of being concerned about the group's interests still remains at workplaces in Japan. Therefore, in public, Japanese business people maintain an attitude of support toward the group even when personal thoughts disagree with group and thus, members of the same group act in a similar way.

Trust is essential for doing business in Japan but a trustworthy relationship with partners and customers is beyond the professional relations in the Western. Western people can develop a relationship as a result of doing business, but in Japan it is unlikely to do business if there is no a previous personal relationship of trust.

Trust does not rest on the written contract but on the established interpersonal relationship and thus, a long-term strategy, including the compromise of a long-term business relationship, is essential to do business in Japan.

Japanese people are well informed and well prepared; they do market research and understand foreign culture. Foreigners doing business in Japan, in turn, need to have the willingness to understand in depth the Japanese culture values because this good understanding will help them to deal with the Japanese way of doing business.

Foreign business people need to challenge some of the basic assumptions about the lack of competitiveness of Japanese SMEs because innovation and differentiation are present in them. Competition is not new for Japanese SMEs as suppliers of Japanese LEs and they innovate to differentiate from competitors. Most of the internationalised Japanese SMEs have outstanding or unique technology and special skills, have established their brands among their clients, and have developed original products that other SMEs and LE were not producing. Business cooperation is not only between LEs or between LEs and SMEs in a supplier-customer base, but also between SMEs looking for new market niches.

The Japanese striving for perfection is manifested in the high level of quality and service to what they are accustomed. The emphasis on simultaneous cooperation and competition shows the two complementary faces of Japanese business.

As a consequence of the different meanings of contracts coming from dissimilar cultural values, non-Japanese business people usually face more problems with their Japanese partners during the implementation than before the contract has been signed. They don't feel they have to comply with the detailed terms although they keep the binding personal compromise. Therefore, the problem does not lie in the contract but in the different understandings

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Like Japanese LEs, SMEs also do FDI. Although Japanese SMEs establish factories in Asia they also need to sell in new markets. However, for Japanese SMEs exporting and producing in Asia is easier than in Europe.

7. Recommendations This work concludes with some practical recommendations to improve the confidence and understanding in doing business in Japan with Japanese enterprises no matter their size.

The interpersonal relationship in Japan (ningen kankei) is key, and not taking enough time to cultivate this relationship may be interpreted as little interest and not being thoughtful.

Physical presence is essential to build interpersonal relationships in Japan as well as to implement business since it is customary the daily contact and the constant change of decisions.

Knowing the history of the Japanese company, and not only their products, services or customers, shows interest and helps to create trust with the Japanese partner.

Showing respect and consideration will be appreciated because in Japan is not only a matter of form but of intention as well. For instance, in the case of exchanging business cards (meishi) beyond imitating the mere act of using both hand and offer a slight bow there is an underlying meaning that foreign enterprises should comprehend. Taking care in handling the cards is a way of showing respect and transmit that Japanese values are understood. Western business people often write on the business cards or put them in their pockets instead of store them in a card at the end of the business meeting. This fact communicates that the Japanese business cards are unimportant and you do not value them.

Harmony, by saying the appropriate thing (tatemae), is more appreciated than saying true feelings and personal opinions (honne) in public situations. Therefore, avoiding personal confrontations and discussions, and saving one's own and other's face in public are priority in the Japanese business.

Formal meetings are not the place for discussing and taking decisions but for obtaining information. Trying to do it in a different way can spoil the relationship. Western people usually hold meetings to exchange what they know and make decisions. However, Japanese people hold meetings to obtain information about foreigners and what foreigners know.

Japanese business people still feel upset when status differences or distinction in position are ignored in business interactions. As an example, it could be mentioned the importance of exchanging proper business cards (meishi) since they indicates the seniority and post of the person in the hierarchy of the company and Japanese need to know these facts to decide how to speak to the other person and what level of politeness to use.

It should be remembered that in Japan, the customer is considered more important than the supplier, unlike in Western business where customers and suppliers usually are on an equal basis.

Giving bad news with a smile does not mean happiness or malice but embarrassment because Japanese people conceal their true thoughts and feelings in public situations. In the same way, while the word "no" is avoided, they have many ways to express it, such as stay in silence or change the subject.

European SMEs should better begin business with Japanese SMEs because they are competitive and are willing to do business with foreign enterprises.

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Web links

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Markets, European Commission- Entrepreneurship and SMEs-Access to. (2016). From http://ec.europa.eu/growth/smes/access-to-markets/internationalisation/index_en.htm

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Steel, Takefu Special. From http://www.e-tokko.com/eng_index.htm

Mebiol. From http://www.mebiol.co.jp/en/

Engineering, IMT. From http://www.imteng.co.jp/english/index.html

Kanasago. From http://www.mamenoka.jp/

Advanet. From http://www.advanet.co.jp/en/

Marukoshi. From http://kk-marukoshi.com/foreign/index.html

DADA. From http://www.dada-salon.com/ch/index.html

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