“Why don’t we have more entrepreneurial companies in Japan?” I am frequently asked.
My response is a very simple one, as is my prescription for solving this problem. 1) Create an environment in which everyone wants to become entrepreneurs, and 2) appropriately educate the entrepreneurial wannabes. Nothing could be simpler than this.
In the past, the Ministry of the Economy, Trade and Industry (METI) and the Small and Medium Enterprise Agency have implemented various support and assistance programs for encouraging entrepreneurs. But the whole approach of “assisting” entrepreneurs will not give rise to entrepreneurs. Even when something is born of these programs, frequently they are weak and lacking in dynamism and strength, and seldom do they grow into large entities. What is important is to have a concept of “nurturing” such an environment where entrepreneurs will naturally appear in large numbers without any outside assistance.
According to METI’s statistics on the number of businesses being established and closed in Japan (personal businesses plus incorporated businesses), in every single year since the 1990s, more businesses have closed down than have been established. Another disturbing statistic comes from the number of newly listed companies in Japan’s various new stock exchanges. After peaking at 188 companies in 2006, the number of new listings has dropped sharply to 49 companies in 2008 and only 18 in 2009. The same downward trend is seen in the volume of venture capital (VC) invested in recent years. VC investments peaked in 2006 at 279.0 billion yen, but dropped to 136.6 billion yen in 2008 and 87.5 billion yen in 2009. These numbers are very troubling indeed, even Lehman shock was taken into consideration.
To promote innovation and achieve economic growth, what we need in Japan is a virtuous cycle of wealth creation where entrepreneurial businesses are formed that eventually give rise to whole new industries. However, what is actually happening is the exact opposite.
So, what should be done? As I have already mentioned, I believe the following three points comprise a sound method for promoting entrepreneurs.
Fostering positive values: To create an environment where “everyone wants to become an entrepreneur,” we need to develop a set of values and a culture that pay respect on entrepreneurs who have taken risks.
Fostering a positive environment: To create an “environment conducive to entrepreneurs,” we need to implement deregulation, promote liberalization of the private sector, and foster venture capitals.
- Fostering human resources: To ensure that the “future entrepreneurs are appropriately educated,” we need to increase the number of institutions and business schools dedicated to educating and training entrepreneurs.
Thus, there are three major things that must be done. In each area, the following specific measures should be taken.
- Fostering positive values: Create a set of values and a culture that praises entrepreneurs who have taken risks.
At Harvard Business School where I studied, the best students were those who were most strongly inclined toward starting their own businesses. It is no accident that so many who studied at Harvard Business School have become entrepreneurs. The list includes Hiroshi Mikitani of Rakuten, Tomoko Namba of DeNA, and Daisuke Iwase of LIFENET. Anyone who adopts the spirit and values of entrepreneurship acquires a willingness to take risks and a strong sense of mission that he or she must contribute to society by creating new value.
It would be no exaggeration to say that there was a very clear “career pyramid” at Harvard. Imagine what would have happened if Mr Mikitani had remained at the Industrial Bank of Japan, or Ms Namba at McKinsey, or Mr Iwase at a buyout firm. I can definitely say that the impact on society and the value that each one of these three people has created as an entrepreneur far outweighs the value that they may have been able to create at their former jobs. This is why I want the best and brightest human resources to leave their comfortable jobs and to take the risk of creating new businesses.
There are very few countries in the world that subject their children to the level of competition that exists in Japan. From the youngest age, our children grow up competing. For example, take my second son who is now in the sixth grade and studying very hard to prepare for junior high school entrance exams. Many generations of Japanese have grown up in an environment of intense academic and professional competition. I find this to be very encouraging and promising. However, where do our best and brightest young people go after finishing their education in Japan’s best universities? For many, the ultimate career goal is to work for the government, a major corporation, a foreign investment bank or a consulting company. This career path does not lead to the creation of new value for society.
By contrast, the prevailing value system in the United States says that the most outstanding human resources should take risk and work to create new value. Entrepreneurs stand at the pinnacle of the career pyramid, and in the American culture, everyone is ready to praise the successful entrepreneur.
We should aim to establish the same kind of career pyramid in Japan and to create a set of values and culture that affirms that, “the most outstanding members of society should take the risk and aspire to create new businesses.” If we succeed in doing this, everyone will naturally start to think about entrepreneurship and launching new businesses. In turn, this will lead to the creation of new value in society and the emergence of a vibrant and dynamic society. Ultimately, this will encourage the shift of human resources, capital, knowledge, and other valuable resources to new industries.
The words and actions of the nation’s leaders are the most important factors in nurturing these new values and bringing about such a change in our collective consciousness. Consider that photos of President Obama having dinner with Apple’s Steve Jobs and Facebook’s Mark Zuckerberg at the home of a Silicon Valley venture capitalist were widely distributed in the media. There is no question that these photos convey a very clear message to society.
Speaking at the 2011 Davos Conference, Prime Minister David Cameron of the United Kingdom voiced this rallying cry. “Unleash entrepreneurship... For every euro invested in venture capital in Europe, more than seven times that is invested in the U.S.”
How about our Japanese prime minister and the minister of economy, trade and industry? Seldom, if ever, do we hear the words entrepreneurship from their lips. Keeping this up means that we will never foster new values in Japan. To increase entrepreneurial businesses, it is absolutely essential to transform social awareness and values by praising risk takers who are taking on new challenges. As a first step, I hope that the positive message in praise of risk taking will come from leaders of a wide range of fields.
This fostering of positive values toward entrepreneurs is the most important factor before us. Nurturing a culture that shows praise on risk taking and new challenges is far more important than any subsidies and program of the government. Once this culture is in place, the habit of competition that the Japanese have will propel people toward entrepreneurship and will naturally create a highly energized economy.
- Fostering a positive environment: Create an economic system that facilitates the establishment of new businesses!
(1) Further Promotion of Deregulation
“There are number of big industries sleeping in correspondent to the number of government ministries.” If our government ministries embark on active programs for deregulation, this in itself will give rise to many big industries. For example, the Ministry of Finance is surrounded by many big financial businesses that are waiting to be discovered. By the same token, the Ministry of Internal Affairs and Communications is surrounded by numerous communication and transportation businesses that remain deep in sleep. Surrounding the Ministry of Education, Culture, Sports, Science and Technology (MEXT) lie many opportunities in the field of education, while agribusinesses remain dormant around the Ministry of Agriculture, Forestry and Fisheries.
The government must faithfully implement the principle of “public to private.” And the government is called upon to use every means available, including special economic zones, market testing for privatization, and private finance initiative (PFI) and deregulation.
Regulatory barriers are the strongest in medical and health services, welfare services, employment, labor market, education, agriculture and fishery. To tackle the problem of deregulation in these highly regulated areas, the Government Revitalization Unit should take on the role of command post for realizing regulatory reform throughout all areas of government administration.
Its mission should be to fundamentally review and revamp government regulations and to take effective measures to ensure greater simplicity and transparency in administrative procedures. Furthermore, Japan needs to switch from its traditional administrative mode of prior restraint to principles of autonomy, self-reliance, and self-responsibility.
The bigger the protection and assistance from the government, the weaker the industries become Therefore, there is an urgent need to promote deregulation, to ensure free entrance of new competitors, to unleash animal spirits, and to thereby create fully vitalized societies.
(2) Open up Government Procurement (Bidding System) and create the Japanese Version of SBIR
The government is the biggest single purchaser of goods and services in Japan. It is desirable for approximately 10-20% of the money spent by government on purchases (government procurement) to be allocated to entrepreneurial businesses. This alone will greatly facilitate and speed up the growth of new industries. But there are many obstacles in the path that must be removed. Eligibility requirements for bidding in government procurement must be reviewed with greater flexibility.
In this context, key areas of concern are the principle of “prior performance” and corporate size requirements. Under a more flexible system, in order to give entrepreneurs a greater opportunity to sell their goods and services to the government, emphasis would be placed on technological capabilities and product performance. Needless to say, reforms in the government procurement system that are fair, equitable and beneficial to taxpayers should be pushed forward with due speed, including open bidding for the assignment of broadcasting and communication frequency ranges.
Considerable amounts of taxpayers' money are currently being invested & granted to R&D based entrepreneurs from New Energy and Industrial Technology Development Organization (NEDO), and through the Small Business Innovation Research System (Japanese version of SBIR). Unfortunately, however, from the perspective of entrepreneurs these programs are difficult to approach. Measures should be taken to make the programs easier to understand and to create a one-stop administrative format.
(3) Qualitative and Quantitative Improvement of Venture Capital
The function of venture capital (VC) is to foster entrepreneurial businesses. This is done by providing entrepreneurs with such resources as capital, management know-how, and access to networks and human resources. In this way, VC plays the role of a catalyst and a behind-the-scenes supporter that allows entrepreneurs to battle successfully in an extremely competitive environment.
In Japan, almost all VCs are affiliates of financial institutions. Moreover, with a very few exceptions, Japanese VCs lack the know-how for nurturing entrepreneurs. Japan and the United States are currently looking into setting up a “Tomodachi Fund” with U.S. Ambassador John Roos, who was formerly a Silicon Valley lawyer, taking the lead. One of the ideas being considered is to send people to the Silicon Valley to study VC. A similar type of program is being considered by METI. Twelve years ago, METI was running a program for nurturing venture capitalists. Actually, the key members of Globis’ VC Division used this system to participate in short-term overseas study programs. Today, Japan’s venture capital industry is supported by graduates of this program. In this field, there is much to be learned from the United States and much to be done in developing human resources for VC in Japan.
Another important issue is the provision of capital to VC. In the United States, there are three major sources of venture capital funding: pension funds, university endowments, and foundations. How does the situation compare in Japan? First of all, pension funds invest almost exclusively in equities and government bonds. As for university endowments, as directed by the MEXT, Japanese universities generally restrict themselves to principal-guaranteed products (in other words, government bonds). Finally, Japan simply does not have foundations that would, for example, compare with the Bill & Melinda Gates Foundation in terms of the massive volume of capital under management.
As a result, sources of VC funding in Japan become limited to banks, corporations, and wealthy individuals. However, banks find it difficult to invest in VC due to BIS regulations. Corporations are under pressure from shareholders and cannot readily invest in areas outside their core businesses. So, where does this leave us? Wealthy individuals are the only remaining source (consisting mostly of successful entrepreneurs who have listed their own companies).
METI provides matching funds to VC investments made by the Organization for Small & Medium Enterprises and Regional Innovation. This is a very rational approach in that METI matches by investing the same amount as invested by the private sector. I earnestly hope that this program will continue to foster an environment that would lead to the establishment of numerous independent VCs in Japan.
- Fostering Human Resources: Increase the number of institutions and organizations dedicated to educating and training entrepreneurs!
Look around and you see that there are wine sommelier schools to train sommeliers, there are designer schools to train designers, there are military academies to train military officers, and there are law schools to train lawyers. The same holds true for educating entrepreneurs and corporate managers. We need graduate schools in business (MBA programs) to foster these human resources.
It would be folly to say that entrepreneurs and corporate managers are the only professionals that don’t require specialized education. Say something like this and someone is bound to jump up with the rebuttal, “How about Steve Jobs, and how about Mark Zuckerberg?” The point to remember is that Steve Jobs and Mark Zuckerberg are surrounded by teams of professional managers who work hard to translate their ideas into reality. What is needed is to educate these types of management teams.
Many of Japan’s recently successful entrepreneurs, led by Masayoshi Son and Hiroshi Mikitani, are people who have received systematic education and training in business management. We live in an age where, in addition to ideas and will power, a successful entrepreneur needs intellectual powers as well. In other words, what is needed is a combination of strong entrepreneurial spirit and high intelligence to create a business in a very speedy manner, to grow and to finally emerge victorious from the highly competitive environment.
We need to nurture a set of new values and a culture where entrepreneurs who have succeeded behave in a manner that will lead society to view them as role models. As a result, their risk taking will be showered with praise.
Let us return to the original question: “Why don’t we have more entrepreneurial companies in Japan?” My response is a very simple one, as is my prescription for solving this problem. 1) Create an environment in which everyone wants to become entrepreneurs, and 2) appropriately educate the entrepreneurial wannabes. Nothing could be simpler than this.
If we succeed in achieving this, Japan will regain its vitality, new businesses will continue to be born, and the economy will grow. This is the challenge of putting the Yamato-damashii or Japanese spirit to the test of creating value. If we are able to do this, Japan will have no trouble achieving sustained growth.© Japan Today