Japan’s economy is characterized by a dual structure; overall, small and medium-sized enterprises (SMEs) account for a relatively large share of the total economic output, and there is a substantial size difference between such SMEs and large firms. However, due to data limitations, few studies have focused on productivity dynamics of SMEs. Particularly, with regard to the non-manufacturing sector, such research is extremely limited. Against this background, this study examines the productivity dynamics of SMEs, including those in the non-manufacturing sector, using an extensive firm-level panel dataset constructed from the Credit Risk Database. The findings indicate that the productivity dynamics of SMEs differ considerably from those of large firms. In contract to large firms, the reallocation effect--rather than the within effect--is the main driver of productivity dynamics among SMEs, meaning that the market mechanism seems to be working properly in the case of SMEs.
