The Government Is Backing India Entry. So Why Are Most Japanese SMEs Still Waiting?

Japan is putting more weight behind business expansion into India. For Japanese SMEs, turning that opportunity into an operating business still requires the right people, structure and local capability.

Key takeaways

• Japan is strengthening government support for Japanese SMEs and startups looking to enter India.
• Demographic pressure and labor shortages at home are adding urgency to international expansion.
• Despite those pressures, only a small share of Japanese SMEs currently operates internationally.
• Internal capacity remains a major barrier, including shortages in both international personnel and capabilities.
• Government support can reduce barriers between Japan and India, but it cannot execute the expansion for the business.
• Companies still need to navigate entity, tax, payroll, employment, hiring and banking requirements.
• A successful India entry depends on matching the operating structure to the company’s plans and having the right local support to establish and manage it.

India is getting harder to leave on the sidelines

For a Japanese SME, the case for looking beyond Japan may already be building.

Customers are starting to ask more about India. Leadership may see the country’s scale and talent. Competitors may already be looking abroad. At home, labor shortages are making the existing growth model harder to indefinitely rely on.

Now another signal is arriving: the Japanese government is putting more support behind India entry.

In August 2026, Japan’s Ministry of Foreign Affairs launched full operations of a new Japan-India Economic Affairs Division. The dedicated team is designed to support Japanese SMEs and startups entering India.

Its role goes beyond promoting India as an investment destination. The division can raise regulatory barriers directly with the Indian government and bring business concerns into bilateral discussions.

For an SME that has been watching India from the sidelines, that can make the timing feel increasingly compelling.

Japan and India are also targeting JPY 10 trillion in private-sector investment in India by 2035. Priority areas include AI, startups and critical minerals. Opportunities extend across manufacturing, technology, logistics and professional services.

Taken together, the signals are difficult to ignore. India is becoming more prominent; Japan is investing more heavily in the relationship and domestic pressures are changing the expansion calculation.

Yet for many Japanese SMEs, the move into India is still at the consideration stage.

Why is India becoming harder for Japanese SMEs to ignore?

Japan’s demographic challenge is no longer a distant forecast.

The country’s working-age population peaked decades ago, while low fertility continues to constrain the future workforce. Labor shortages are already affecting businesses today.

A 2025 Reuters survey found that labor shortages were seriously affecting business at two-thirds of Japanese companies. Labor-shortage bankruptcies also reached a record 342 cases in 2024, up 32% from the previous year.

For SMEs, those pressures are changing the international expansion calculation.

Entering another market requires investment, management attention and a willingness to take on new complexity. Relying entirely on a shrinking domestic workforce and customer base carries risks too.

India presents a very different demographic and economic picture.

Its large workforce and expanding economy offer Japanese businesses access to significant scale. The country is also actively working to attract more foreign investment.

India will not be the right market for every Japanese SME. But the pressures inside Japan are becoming more pronounced. Dismissing overseas expansion simply because it is complicated is becoming harder to justify.

So why are most Japanese SMEs still waiting?

The numbers reveal a clear gap between the pressure to internationalize and the number of SMEs actually making the move.

According to SME Support Japan, only 8.9% of SMEs were engaged in overseas expansion. That was down from 11.3% in 2018. Around 77% had no plans to expand internationally at all.

India is attracting growing interest, but it is not yet a leading expansion destination for Japanese SMEs.

According to a survey conducted by the Japanese External Trade Organization (JETRO), 15.1% of Japanese SMEs planning overseas expansion selected India as a potential destination. The US, Taiwan and Thailand all ranked higher

India offers scale, while the Japanese government is putting more support behind the corridor. Yet market opportunity alone does not make international expansion easy to execute.

India brings a different regulatory, tax and employment environment. Establishing operations also requires time, local knowledge and management attention.

For many SMEs, however, the constraint starts even earlier.

They may not have enough people inside the organization to manage the expansion.

The biggest constraint may be sitting at headquarters

International expansion creates a capacity problem for smaller companies.

Entering India requires management attention across legal structure, employment, payroll, tax and ongoing compliance. That work arrives while the same leadership team is already running the domestic business.

For Japanese companies, the internal gap appears significant.

According to another JETRO survey, 85.2% of Japanese firms with overseas business reported insufficient international-expansion personnel at headquarters. An even larger 88.9% said those employees’ capabilities were insufficient or did not meet expectations.

Those are companies already doing business overseas.

An SME making its first major move into India may have an even larger capability gap.

Someone still needs to own the project and coordinate decisions across multiple workstreams. These can include entity structure, employment, payroll, tax registrations, advisers and ongoing compliance.

All of that must happen while leadership continues running the existing business in Japan.

Large multinationals may have international tax, legal, HR and finance teams to divide the work. Most SMEs do not.

The issue is not necessarily a lack of ambition or a weak business case.

Many SMEs have built their teams around operating successfully in Japan. International expansion requires additional capabilities, networks and local knowledge that may not yet exist internally.

If internal capacity is the bottleneck, another year of market research may not solve it.

The business needs a practical way to bridge the gap between seeing the opportunity and becoming operational in India.

Government support can open doors. It cannot execute the expansion.

The new Japan-India Economic Affairs Division can address some external barriers companies encounter.

It can advocate for Japanese businesses, raise regulatory concerns and engage directly with the Indian government. That support can make the broader investment environment easier to navigate.

What government support cannot do is build the company’s operation for it.

The business still needs to choose an appropriate legal structure and establish its local operations. It needs to hire employees, run payroll and manage ongoing requirements.

Goods and Services Tax (GST), employment and other compliance obligations also remain with the company.

Government support can help address obstacles around the investment corridor. It cannot replace the operational capacity required inside the market.

A company can have a strong opportunity and a more supportive policy environment. Neither automatically gives it the infrastructure to launch.

Government can make India easier to enter. It cannot make a company ready to enter it.

Where does India entry get complicated?

Once a company decides to enter India, the challenge shifts from strategy to execution.

The main friction points are not unusual for international expansion. Companies need the right entity, employees, payroll, tax registrations, banking and ongoing compliance.

What changes in India is how those requirements interact.

A decision about legal structure can affect tax and operating flexibility. Hiring decisions create payroll and statutory obligations. Banking delays can hold up an otherwise well-planned launch.

For Japanese SMEs with limited international resources, coordinating those workstreams can become a significant project.

Five areas to plan before launch

Companies can spend months researching the market, then rush operational setup once they are ready to launch. That can create avoidable delays.

Planning the operating model earlier gives each workstream time to develop alongside the commercial strategy.

Choose the structure around what you plan to do in India

Choosing a legal structure is one of the earliest decisions in an India expansion.

A private limited company, branch office and liaison office support different types of activity. They also carry different tax, liability and operational implications.

The right choice therefore depends on what the business intends to do in India.

A company building a substantial local operation may need a different structure from one exploring the market. The same applies to a business hiring employees before making a larger investment.

Companies sometimes treat incorporation as the first step because an entity feels like evidence of progress. But forming the wrong structure can create problems that are difficult to unwind later.

The operating plan should come first.

Consider the expected headcount, commercial activity, revenue model and level of investment. Then choose the structure that can support those plans.

For some SMEs, that may mean establishing an entity from the outset.

Others may need a more flexible way to begin hiring while they evaluate the market.

Do you need an entity before you start hiring?

An Employer of Record (EOR) can allow a company to employ people in India without immediately establishing its own entity. The EOR becomes the legal employer while the worker supports the client company’s business.

That can be useful when a Japanese SME wants to build an initial team and test the waters before making a larger commitment.

It can also create breathing room while an entity is being established.

EOR and entity establishment are not competing answers. They can support different stages of the same expansion.

An SME might use EOR for its first employees, then establish an entity as the operation grows. Another business may know from the start that a direct local presence makes more sense.

A structure that helps the business enter India quickly should not make the next stage harder to execute.

Hiring in India requires more than finding the right people

Access to talent is one of India’s biggest attractions. Employing that talent introduces a different set of considerations.

Compensation structures, statutory benefits and payroll requirements may look unfamiliar to a Japanese management team. This can include differences between cost-to-company and take-home pay structures.

Companies also need compliant employment contracts and processes that reflect applicable Indian requirements.

Payroll adds another recurring layer.

Depending on the workforce and applicable rules, this can include provident fund, gratuity, Employees’ State Insurance (ESI), professional tax, labor welfare fund and income tax deducted at source (withholding tax).

None of this should overshadow the talent opportunity that brought the company to India. But hiring cannot be separated from the infrastructure needed to employ people properly.

That is especially important for SMEs without an international HR or payroll team.

A strong recruitment plan can get employees through the door. The operating model determines what happens after they arrive.

Tax and banking can affect the launch timeline

An entity may be incorporated before the business is fully ready to operate.

Tax registrations, banking and related compliance can influence how quickly the company reaches that point.

India’s GST framework includes registration, recurring filings and management of input tax credits. Japanese SMEs may need time to adapt their internal processes to those requirements.

Banking can create another timing consideration. Opening an Indian corporate bank account as a foreign entity involves Reserve Bank of India requirements. The process can also take longer than companies initially expect.

These workstreams should therefore be part of launch planning rather than treated as post-incorporation administration.

A company can have its legal entity on paper and still be waiting for the infrastructure needed to operate it.

Leadership needs to account for that gap when setting launch dates or making commitments to customers and employees.

What does a practical India entry path look like?

There is no single sequence that works for every Japanese SME.

The entry path should reflect what the company is trying to accomplish in India and how quickly it needs to move.

A business testing customer demand may need limited local infrastructure at first. A company hiring an initial team may need employment capability before it needs a full entity.

A business preparing for significant commercial activity may need to establish more infrastructure earlier.

The practical starting point is to define the first stage clearly.

Start with the next 12 to 24 months

Instead of designing the operation around an uncertain future, companies can start with the next phase of the business.

Consider:

• How many employees will be needed?
• What will those employees do?
• Will the company generate revenue locally?
• Does it need to contract with customers in India?
• What investment is planned?
• How quickly does the team need to become operational?
• Is India being tested or developed as an established market?
• Does the company need a distribution network in India? Is the import of goods involved?
• Does the company need to operate and invoice from multiple locations

Those answers help determine which capabilities need to exist first. They also help prevent the company from building too much infrastructure too early.

Plan for the structure to change

The operating model used for entry may not be the one the company needs two years later.

An initial EOR team can grow. Customer activity can increase. The business may decide India has become a strategic market.

At that point, a local entity may offer a better fit for the company’s operating needs.

That transition is easier when it has been considered from the beginning.

Companies should understand how employees, payroll, contracts and ongoing compliance would move into a new structure. The goal is not to predict every stage of growth.

It is to avoid an entry model that becomes an obstacle when the business changes.

Why does the Japan side of the relationship matter?

India entry is not only an India-side execution problem.

Japanese SMEs often have their own internal approval processes, communication preferences and documentation expectations. Those factors can shape how quickly an expansion moves.

Communication style, decision-making cadence and trusted relationships can all affect the process.

Those differences become especially important when several workstreams are moving at once.

Leadership may need updates in Japanese. Finance teams may need detailed documentation before approving spend. Senior decision-makers may want confidence in the process before committing to the next stage.

A provider that understands those expectations can reduce friction between headquarters and the local operation.

The benefit goes beyond language support. A Japan-based contact can understand how the organization makes decisions and translate those expectations into practical execution in India.

That can keep the expansion moving without forcing headquarters to manage every local detail.

Frequently asked questions about India entry for Japanese SMEs

Why are more Japanese SMEs considering India?

India offers access to the world’s largest workforce, a growing economy and increasing bilateral support from Japan.

Japan’s own demographic pressures and labor shortages are also making overseas expansion more relevant for many businesses.

Does government support make India entry easier?

It can help.

Japan’s new India-focused government support can raise regulatory concerns and strengthen the broader bilateral environment.

Companies still need to manage the operational work required to launch and run the business.

Does a Japanese SME need an Indian entity before hiring?

Not always.

An EOR can allow a company to hire employees before establishing its own entity.

A local entity may become more appropriate as headcount, commercial activity or investment increases.

What are the main operational challenges when entering India?

Common areas include entity structure, employment, payroll, GST and tax, hiring and banking.

These workstreams often need to be planned together because delays in one area can affect the wider launch.

Why does a Japan-based point of contact matter?

Japanese companies may have different communication expectations and internal approval processes.

A Japan-based contact can help coordinate those needs with the local India operation and make the overall expansion easier to manage.

The opportunity is real. Execution decides who captures it.

Japan is putting more support behind India entry.

The demographic pressure at home is growing. India offers scale, talent and a market that many Japanese SMEs have barely started to explore.

None of that removes the work required to enter the market well.

Companies still need the right structure, people and local infrastructure. They also need enough internal capacity to manage the expansion without distracting from the core business.

For many SMEs, India may already make sense on paper. The harder part is building the people, structure and local infrastructure needed to make it work in practice.

Japan is helping open the door to India. For Japanese SMEs, the bigger decision may now be how much longer to wait before walking through it.

Evaluating India entry for your business? Let’s talk about building an operating model that supports your team from initial hiring through local expansion.