At the recent Red Herring Japan Technology Summit in Kyoto, innovation, change and Japan’s future role in the world economy were the topics on the table. But the real question hidden beneath the presentations was: Can Japan sufficiently change itself to succeed in a world where entrepreneurship and innovation are more important than ever?
While many participants expressed optimism that Japan could make the changes necessary to succeed over the coming years, many obstacles still remain. But presentations by a number of Japanese entrepreneurs – both inside and outside Japan – showed that entrepreneurship was not only possible, it is actually being practiced by a brave few.
While many participants expressed optimism that Japan could make the changes necessary to succeed over the coming years, many obstacles still remain. But presentations by a number of Japanese entrepreneurs – both inside and outside Japan – showed that entrepreneurship was not only possible, it is actually being practiced by a brave few.
Can Japan ever be more entrepreneurial?
The usual reasons as to why Japan isn’t entrepreneurial enough were trotted out. One was that for many businesses, the domestic Japanese market is often sufficient for profitability – yet that is also true of other advanced economies with higher levels of entrepreneurship, and so remains an unlikely answer.
Other factors mentioned were the supposed “brainwashing” elements of the Japanese school system, the emphasis on “suffering” and the supposed inherent “shyness” of the Japanese. But these reasons have been offered throughout history to explain Japan, usually when Westerners look for excuses as to why Japan doesn’t meet their expectations – yet Japan has defied these expectations time and again. Japan has alternately opened and closed its doors to the world at several points in its history, and has seen plenty of its formerly entrepreneurial businesses go on to become world market leaders (Toyota, anyone?).
Another intriguing factor mentioned was that the generation of Japanese postwar baby boomers, now approaching retirement, may be less willing to take risks than their younger counterparts. The share of employed persons in Japan over age 45 has slowly climbed to close to 50%, with most of those elder statesmen now in decision-making roles. Their unwillingness to take risks may frustrate those who wish to move faster or more decisively, and could be a reason why Japan has lagged behind.
The relative lack of acceptance of failure in Japanese society was also mentioned. Failure is said to be more unacceptable in Japan, as opposed to the West, where failure in business is routine and even celebrated as a valuable learning experience. In Silicon Valley, for example, the success rate of a portfolio may be only one or two out of five, and the other three or four failures are just written off. But in Japan, that kind of risk-taking attitude is relatively rarer.
But the most convincing social factor against the formation of a healthy entrepreneurship culture in Japan was the fact that Japan’s version of capitalism is just different from others. As mentioned in his legendary book Kaisha, Dr. James Abegglen explains that Japan has a different concept of “shareholder value” than the West. In Japan, more emphasis is placed on investing for the future and respecting existing societal values, rather than the somewhat libertarian attitude of treating all assets and resources as fungible, as practiced in the West. One conference panelist even went so far as to say that in Japan, “traditional” capitalists are treated as curiosities and oddities, not role models.
Financial factors were also discussed, such as the lack of a financial system that encourages the formation of venture capital. One panelist said that currently, no one is trying to sell small Japanese companies to investors outside Japan. For various reasons, hedge funds in places like New York choose to buy global or country indexes rather than specific foreign companies, and thus don’t take the time to truly understand the potential of companies inside Japan. And even though Japanese investors have long invested in other countries, investing domestically seems to have gone out of style. Nevertheless, it was also said that while plenty of Japanese companies and investors want to expand their reach to include smaller companies inside Japan, no one wants to go first.
The Challenges Ahead
A speech by Fredrik Haren, author of The Idea Book cast additional light on the challenges ahead. According to Haren, the number of graduates from Chinese universities alone last year was 600,000. Markets are globalizing as communications costs fall. Developing nations around the world will be competing on the same level as developed nations within a few years, if not already. And while the number of potential ideas that will emerge in the future is almost limitless, finding viable ideas, not to mention profitable ones, will be the greatest challenge of all.
Nobuyuki Idei, the former CEO of Sony, also stressed that Japan has to change to meet the challenges of this new world. Mr. Idei called for nothing less than a transformation of Japan’s capital markets. Mr. Idei went on to say that Japan suffers from an “ABCD” syndrome, which he said stands for Aging, Bureaucracy, Closed and Domestic.
Mr. Idei went on to say that Japan must not make culture-based or language-based excuses to resist integration on the world stage. Japan must instead be a catalyst for future change, and abandon its negative self-critical nature. Japan must be less afraid to take risks and develop a vision. Without the vision, said Mr. Idei, there is no chance to get attention from investors, either inside or outside Japan.
The conference’s final panel came with advice straight from the venture capitalists themselves. Their recommendations were as follows:
Globalize Japanese venture capital. Venture capitalists inside Japan need to travel more and learn from other countries as to how to make venture capital more successful. Finding out everything from the formal to the informal in the venture capital world can help Japanese VCs absorb the most helpful tips from what the world has to offer.
Reform the Japanese financial system. Japan is literally sitting on a mountain of savings – somewhere in the trillions of yen. Yet much of that money has been going overseas in search of higher yields elsewhere. There is ample room in the market for new financial players to capture the potential of Japanese innovators by funding ideas that may not receive sufficient attention elsewhere. But regulatory issues may still prevent the full development of such a system, and may need to be addressed.
Transform the image of the entrepreneur.According to panelists, the word “entrepreneur” still has a vague connotation in Japanese society. For some, the enduring image is that of a stingy shopkeeper who has saved money gradually over the years. Others think of the high flyers of Roppongi Hills, driving sports cars and seeking publicity. But neither type is very likely to result in a positive role model for Japan to emulate. The image of the Japanese entrepreneur needs to be remade into someone who cares about society, and uses his or her power to advance the country through their creativity and vision.
Change the mindset inside companies.The most important point was that companies – and individuals – need to change their internal mindset before they can be successful. One CEO inside Japan said he won’t hire anyone who doesn’t speak English. Another said he prefers to hire foreigners when starting a new company because they’re less risk averse. Yet another said he prefers to recruit Japanese people who have studied overseas, grabbing them before they are absorbed into the Japanese corporate system, only to be lost forever.
