In Search of Unicorns_ An Analysis of Japans Startup Ecosystem.pdf

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CHAPTER I: INTRODUCTION

In the late 1900s, Japan was synonymous with innovation, advanced technology, and

rapid economic growth. However, looking at Japan today, it is without question the country has

had difficulties replicating the same success since the asset price bubble in 1992 and the

subsequent lost decades. Many of the most iconic companies of today from Apple, Microsoft,

Facebook, Tesla, Amazon, and a host of others are all American creations. Most, if not all, of

these companies are relatively new, having been founded as small startups just a few years or

decades prior. Japanese startups and companies have largely failed to break into this list.

Startups are a necessary ingredient for a thriving, growing economy. Economists have

long established that overall economic productivity is driven by technological progress.

According to a report by the Center for Economic Studies at the U.S Census Bureau, “High

growth output firms are disproportionately young and make outsized contributions to output and

productivity growth.”

The same study also found that younger companies have greater median

growth than their mature counterparts, thereby having a higher rate of production of goods and

services. On a micro level, the study found economic productivity, measured by output per

employee, is disproportionally higher in startups. Productivity growth in economies is driven by

employees transferring from less productive to more productive firms with small companies

contributing disproportionately to this economic phenomenon. Given Japan’s sluggish economy

due to its shrinking population and a host of other factors, the necessity of having a thriving

Ritchie, Bryan, and Nick Swisher. “The Big Small: The Economic Benefits of Startups.” IDEA Center - University of

Notre Dame, July 15, 2018. https://ideacenter.nd.edu/news-events/news/the-big-small-the-economic-benefits-of-

startups/.

Haltiwanger, John, Ron S Jarmin, Robert Kulick, and Javier Miranda. “High Growth Young Firms: Contribution to Job,

Output and Productivity Growth.” Center for Economic Studies, U.S. Census Bureau, n.d., 75.

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economy catering to infant businesses is required. “The presence of start-ups which create new

innovation and value is necessary to break economic stagnation,” said Fukuoka Mayor Soichiro

Takashima, who has taken a leading role in promoting Japanese startups. “With that in mind, I

positioned start up support as our city’s growth strategy.”

Pundits, investors, media, and observers have questioned Japan’s position, or lack

thereof, in the startup world. One key statistic that they point to is the low number of “unicorns”

in the country. Unicorn startups are defined as private startup companies with a valuation of over

$1 billion. As of March 2022, there were only five unicorn startups in Japan. In comparison,

there were 562 in the U.S., 173 in China, 43 in the United Kingdom, and 26 in Germany, all of

which are comparable economies.

However, as will be studied in much greater detail in this

thesis, these arguments are often misleading due to structural differences of the Japanese

economy.

Japan is currently experiencing profound economic changes in its economy. Data from

recent years suggest this economic transformation with promising statistics on startup creation

and capital allocated into the sector.

In this paper, two main questions will be addressed. First, what is the current state of

Japan’s startup ecosystem? Next, what factors contribute to the current state of the startup scene?

In order to answer these questions, I will study six factors that make up the Japanese

startup ecosystem: financial markets, state capital allocation, education, culture, human capital,

Gent, Edd. “Why Fukuoka Is Japan’s Most Innovative City.” Accessed April 17, 2022.

https://www.bbc.com/future/article/20190508-why-fukuoka-is-japans-most-innovative-city.

CB Insights. “The Complete List Of Unicorn Companies.” Accessed April 17, 2022.

https://www.cbinsights.com/research-unicorn-companies.

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and globalization. In most of these factors, evidence point to Japan’s economy transforming

dynamically in the coming years, thus better supporting the startup industry.

CHAPTER II: THE ROLE OF FINANCIAL MARKETS IN JAPAN’S STARTUP

ECOSYSTEM

STOCK MARKET

Before analyzing Japan’s capital market structure, it is important to consider the overall

economic context of the country. The U.S. has a stock market-driven economy in which public

companies and their managers are driven by the value of their shares. By contrast, Japanese

managers place less importance on the performance of their stock price. Japanese individual

investors themselves are also much less active in the stock market. The asset bubble crash of

1992 erased billions of dollars of investment, and ever since, Japanese households have

participated less in stock market investing than their American counterparts. As of 2021,

Japanese households held only 10 percent of their financial assets in equities, while the same

figure was 37.9 percent for American households.

Nevertheless, the stock market remains an

important source of fundraising and capital gains in the Japanese economy. In the context of

startups, many in the U.S. are driven by the prospect of having a lucrative initial public offering

(IPO) and making the founders and early employees rich. However, Japanese business culture

tends to prioritize stability and long-term growth. Therefore, startups view the stock market, not

as a vehicle for quick riches but more as a means to raise capital to further expand in the long

term.

“Flow of Funds - Overview of Japan, the United States, and the Euro Area.” Research and Statistics Department Bank of

Japan, August 20, 2021. https://www.boj.or.jp/en/statistics/sj/sjhiq.pdf.

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Japan’s unique capital market structure has important influences and provides greater

context for the startup ecosystem. The Japanese economy, specifically the capital market, is

unique. Hence, using the same analysis for studying the American and Japanese startup

ecosystems can be misleading. The bond market is also not relevant for startups, as they are a

financial tool used mostly by larger corporate companies to raise capital. Pundits and outside

observers often note the absence of Japan in the global startup scene by pointing to the lackluster

number of unicorns, private companies valued at over $1 billion. There are 173 such companies

in China and 562 in the United States, both comparable economies to Japan in terms of scale.

Meanwhile, Japan currently only has five.

However, arguments using the presence of unicorns

are largely definitional and do not account for differences in Japanese capital markets,

specifically the low listing requirements for companies to go public.

For startups globally, the end goal is often to become a public company. The scale of IPO

size in Japan is fundamentally different from that in the U.S. The average Japanese IPO market

capitalization in 2020 was $200 million. In the U.S. the average capital raised, not valuation,

through an IPO was $300 million.

In the U.S., startups traditionally go through steps of venture

capital (VC) funding. Once companies obtain pre-seed and seed funding, they go through Series

A, Series B, and Series C funding. These stages are the conventional steps that startups go

through when raising early capital from private equity and VC investors. If a company is looking

for a large public offering, it may continue through to Series D. By going through multiple stages

“CB Insights. “The Complete List Of Unicorn Companies.” Accessed April 17, 2022.

https://www.cbinsights.com/research-unicorn-companies.

“Japan’s Start-up and Venture Capital Market Begins Lift-off | McKinsey.” Accessed November 7, 2021.

https://www.mckinsey.com/industries/technology-media-and-telecommunications/our-insights/can-japan-finally-

become-a-start-up-power.

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of private funding, successful American startups easily reach private valuations of over a billion

dollars before going public.

In Japan, companies do not go through the same multistep process as American startups

due to several factors, most notably the requirements for listing. One of the Tokyo Stock

Exchange’s sections, the Growth Market, formerly known as the Mothers Market, has low listing

standards. It requires companies to have ¥500 million ($4.5 million in 2021) or more in market

capitalization of tradeable shares.

In fact, American startup companies that would usually be in

their Series B funding in valuation, between $30 million and $60 million, would be able to go

public.

Moreover, 2019 marked a watershed year as the Tokyo Stock Exchange allowed for

loss-making companies with high future growth potential to be listed in the Mothers section. One

such example of an unprofitable company that took advantage of this new policy and went public

was CRM Sansan, a centralized business card software that raised $1.2 billion.

There are many recent examples that prove the Japanese startup scene is in fact thriving,

albeit under different conditions. Raksul, a B2B platform builder, went public in 2018 at $374

million and is now valued more than $1.4 billion. Freee, an online accounting software, IPOd in

2019 at $845 million and is now worth more than $4.5 billion. Wealthnavi, a robo-advisor

software company, went public in 2020 at $535 million and is now valued at $1.8 billion.

Lastly, Plaid, an e-commerce analytics startup, went public the same year at $535 million and

株式会社日本取引所グループ[Japan Exchange Group.] “Criteria for Listing.” Accessed November 7, 2021.

https://www.jpx.co.jp/english/equities/listing/criteria/listing/01.html.

Riney, James. “What People Miss About ‘Unicorns’ In Japan | Coral Capital,” June 18, 2021.

https://coralcap.co/2021/06/what-people-miss-about-unicorns-in-japan/?lang=en.

“Japan Business Card App Operator Sansan Prices IPO at Top of Range, Raises $360 Million.” Reuters, June 7, 2019,

sec. Technology News. https://www.reuters.com/article/sansan-ipo-idINKCN1T80ID.

Ibid.

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was acquired by PayPal for $2.7 billion in 2021.

Among them are many other non-unicorn

startups that went public in recent years with billion-dollar valuations today. These recent IPOs

of highly successful and innovative companies dispel the narrative that Japan rarely produces

noteworthy startups. The low listing requirement and the lack of private capital funding mean

that startups in Japan go public early before hitting the billion-dollar valuation to be considered a

unicorn.

If going public early is not in the best long-term interest of these startups, why do

Japanese companies pursue this approach? The main reason can be attributed to the financial

landscape with little means to get private capital funding. Japan’s total VC investment in 2019

was valued at $2.5 billion. American VC funding was much larger at $135.6 billion.

With few

options for VC funding and strict requirements by big banks, startups have limited options but to

go public. The lack of VC funding and its outlook will be discussed later in this chapter.

Cultural factors also contribute to the high number of IPOs. According to Masako Ueda,

professor of economics at Northwestern University, many Japanese people believe in dedicating

their entire careers to one workplace. Thus, startup founders do not believe in handing over the

business they started to others. Instead, they start out with the intent of going public.

This

cultural factor is most noticeable when looking at the rates of mergers and acquisitions (M&A)

in the country. In 2014, Japan recorded 116 startup IPOs and only 36 acquisitions by large

PayPal Newsroom. “PayPal To Acquire Paidy.” Accessed April 24, 2022. https://newsroom.paypal-corp.com/2021-09-

07-PayPal-To-Acquire-Paidy.

“Venture Capital Investments.” Accessed November 7, 2021.

https://stats.oecd.org/Index.aspx?DataSetCode=VC_INVEST.

Medill Reports Chicago. “Japanese Startups Face Hurdles in Exit Opportunities,” March 16, 2017.

https://news.medill.northwestern.edu/chicago/japanese-startups-face-hurdles-in-exit-opportunities/.

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companies. The U.S. on the other hand reported 122 startup IPOs and 918 corporate acquisitions

in the same year.

However, the IPOs of startups at such early stages of their growth do have downsides.

Being a public company means management must be concerned with profitability rather than

early growth given shareholder demands. Moreover, once startups go public and raise funds from

the market, fundraising becomes dependent on broader market cycles and dynamics. For

example, if a company tries raising capital when its share prices are in decline, shareholders will

oppose issuing new stocks since it will dilute ownership.

According to Ulrike Schaede of

University of California, San Diego, “Corporate acquisitions are the lifeblood of any innovation

ecosystem, as they provide fast, often lucrative exits and encourage serial entrepreneurship.

Selling a startup company to a large corporation is by far the main fuel for innovation in Silicon

Valley.”

Moreover, being a public company requires greater infrastructure and legal support to

deal with shareholder and regulatory demands, increasing the overall costs of running a public

company.

The IPO of Mercari, Japan’s first unicorn company, in 2018 marked a turning point for

Japan’s startup scene. Mercari operates a successful app for its users to trade used items online.

When the startup went public in 2018, its valuation soared to $6.5 billion, even doubling at one

経済産業省[Ministry of Economy, Trade, and Industry] (2019a).

Asakura, Yusuke. “A Brief Overview of the Current Startup Ecosystem in Japan,” n.d., 14.

Schaede, Ulrike. The Business Reinvention of Japan: How to Make Sense of the New Japan and Why It Matters. 1st

Edition. Stanford Business Books, 2020.

HBS Working Knowledge. “IPO or M&A? How Venture Capital Shapes a Startup’s Future,” April 27, 2021.

http://hbswk.hbs.edu/item/ipo-or-ma-how-venture-capital-shapes-a-startups-future.

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point.

The large gains by Mercari encouraged institutional investors to look to domestic

startups and other early-stage firms as viable, yet risky, investment options given the low

marginal returns on other investments such as domestic bonds. According to Soichi Kariyazono,

chairman of the Japan Venture Capital Association (JVCA), “When many institutional investors

have a target annual return of 4 percent or so, Mercari’s late-stage investors had their funds more

than double in just 1-2 years.”

While recent trends in Japan’s VC scene will be discussed in

later sections, this listing served as a symbol of the success that entrepreneurs and startups in

Japan are capable of achieving. James Riney, CEO of VC firm Coral Capital explains, “They

[Mercari founders] have shown potential entrepreneurs that scaling to over a billion dollars isn’t

just something that happens in Silicon Valley – it can also happen right here in Tokyo.”

Moreover, Mercari broke Japanese company norms by providing generous stock options to its

employees, a common practice in American startups. Normally, Japanese startup exits only make

the founders and investors rich. Mercari’s successful IPO will give birth to new angel investors

in Japan, who will become a source of private capital funding themselves for other burgeoning

startups. One of the most famous examples of this in Silicon Valley is PayPal, whose former

employees, known as the “PayPal Mafia” went on to create LinkedIn, YouTube, Airbnb, Yelp,

Tesla, SpaceX, and other innovative startups.

Mochizuki, Mayumi Negishi and Takashi. “Flea-Market App Mercari Jumps More Than 70% in Tokyo Debut.” Wall

Street Journal, June 19, 2018, sec. Tech. https://www.wsj.com/articles/flea-market-app-mercari-soars-in-tokyo-

debut-1529389761.

“After Mercari: Japanese Asset Managers See New Era in Venture Capital Investing.” Reuters, August 9, 2018, sec.

Financial Services & Real Estate. https://www.reuters.com/article/us-japan-venturecapital-idUSKBN1KU0EA.

Riney, James. “Mercari’s IPO, and Mercari’s Mafia.” James Riney (blog), June 19, 2018.

https://www.jamesriney.com/mercari-mafia/.

VentureBeat. “A Look at the PayPal Mafia’s Continued Impact on Silicon Valley,” January 13, 2019.

https://venturebeat.com/2019/01/13/a-look-at-the-paypal-mafias-continued-impact-on-silicon-valley/.

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In April of 2022, the Tokyo Stock Exchange (TSE) restructured its previous segments

into three markets. The exchange, which merged with the Osaka Securities Exchange (OSE) in

2013, was previously divided into five sections: First Section (large companies), Second Section

(mid-sized companies), Mothers (high growth and emerging stocks), JASDAQ Standard (smaller

emerging companies), and JASDAQ Growth (smaller growth companies). The restructuring

consolidated the market into three new segments: Prime Market, Standard Market, and Growth

Market. The restructuring will also set thresholds for market capitalization in tradable shares

with their proportion to outstanding shares set at 35 percent or more. This policy will make the

Japanese market more liquid and allow for greater participation of retail and international

investors. However, more importantly for startups, the consolidation of the three small-cap

markets into one ‘Growth Market’ will make it simpler for backers to invest in listed startups.

All things considered, it is evident that the differences in capital markets have led to

misinformed statements about Japan’s shortage in startups, specifically in identifying unicorns.

In reality, Japan does have a number of successful startups that went public early before reaching

the billion-dollar valuation to be considered a unicorn. The overall trend of Japanese startups

listing early, as a result of market constraints and cultural factors, stunts the growth potential of

companies. The early growth and expansion phases of startups come to fruition best while the

company is still held privately given it is not constrained by market fluctuations and shareholder

demands. However, the future in capital markets is promising, as proven by the success of

Mercari. In order to foster a more conducive startup ecosystem, Japan must strengthen other

venues of financial funding, specifically in the VC market.

株式会社日本取引所グループ [Japan Exchange Group.] “Overview of Market Restructuring.” Accessed November

23, 2021. https://www.jpx.co.jp/english/equities/market-restructure/market-segments/index.html.

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VENTURE CAPITAL AND ANGEL INVESTORS

As highlighted in the previous section, the VC market in Japan is lagging relative to its

economic counterparts. In 2020, total capital invested in Japanese VC companies was $4.3

billion, while the same figure was $164 billion in the U.S. The same year, Japanese VC firms

invested in a total of 1,900 new startups. Their American counterparts on the other hand invested

in 12,000 startups.

VC firms are a vital part of a healthy startup ecosystem. A 2015 study found that VC-

backed companies made up 41 percent of total market capitalization in the U.S. Between 1965

and 2015, the study also found that VC-backed companies accounted for more than 92 percent of

R&D spending and patent value. In fact, the industry is attributed to the existence of 20 percent

of the largest 300 U.S. public companies.

Historically, Japanese VC firms were subsidiaries of large financial institutions, such as

insurance companies and banks. Corporate VC firms did not contribute much to supporting

startups, as they mostly supported their parent companies’ lending and brokerage businesses. For

example, JACFO, Japan’s largest VC firm, did not become fully independent from its parent

company Nomura Holdings until 2017. Other examples of such corporate venture funds include

Alliance Ventures of Nissan, Mitsubishi, and Renault, as well as Presidio Ventures of Sumimoto

Corporation. Most of these funds are classified as “corporate venture capital funds” or CVC

funds. CVC funds are different from VC funds found elsewhere in the U.S. and Europe in that

Asia Society. “Startup Nation Japan 2021: Venture Capital, Entrepreneurship and Japan’s New Growth Dynamics

(Recap).” Accessed November 24, 2021. https://asiasociety.org/japan/startup-nation-japan-2021-venture-capital-

entrepreneurship-and-japans-new-growth-dynamics.

Gornall, Will, and Ilya A. Strebulaev. “The Economic Impact of Venture Capital: Evidence from Public Companies.”

SSRN Scholarly Paper. Rochester, NY: Social Science Research Network, June 1, 2021.

https://doi.org/10.2139/ssrn.2681841.

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they primarily invest in startups with the long-term mission of the company in mind. Thus, they

invest strategically in technologies to help them gain better insight into the industry and/or a

company they want to collaborate with or acquire.

Moreover, the relationship between venture companies and their portfolio businesses is

generally distant and hands-off. Japanese venture capitalists rarely sit on the board of their

portfolio company because of Japan’s business culture in which companies fear disclosed

information will be leaked to their competitors, known as kyoosoo ishiki.

Japanese

entrepreneurs also fear that venture capitalists seek short-term profit at the cost of long-term

financial health and may ultimately take over the company.

Lastly, investments into portfolio

companies are also small and scattered in order to minimize risk. This contrasts with the

concentrated investments made in American startups.

Despite the current VC scene, there are reasons to be optimistic about the future outlook

of the industry. In recent years, the number of domestic and foreign VC funds has dramatically

increased. Many venture funds are arms of private equity companies. In 2017, there were 175

domestic private equity funds in Japan with the number increasing to 235 the following year.

This figure represent the creation of one new private equity fund a week in 2017. Foreign private

Romero, Tim, Podcast, Tim on Japanese Startups, and Uncategorized. “The Ultimate Guide to Raising Money in Japan -

Disrupting Japan.” Disrupting Japan: Startups and Innovation in Japan (blog), January 6, 2020.

https://www.disruptingjapan.com/the-ultimate-guide-to-raising-money-in-japan/.

Borton, James. Venture Japan: How Growing Companies Worldwide Can Tap into the Japanese Venture Capital

Markets. Probus Professional Pub, n.d.

Ibid.

Rowen, Henry S, and A Maria Toyoda. “From Keiretsu to Startups: Japan’s Push for High Tech Entrepreneurship,”

October 2002, 29.

“Japan Only Private Equity/Debt.” HC Asset Management, October 4, 2019. https://investmentinjapan.com/iij/wp-

content/uploads/2019/10/E1909_JP-PE-PD_2Map.pdf.

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equity players have also flooded the Japanese market for startups. In 2019, after holding its

annual partners meeting in Tokyo for the first time, KKR, one of America’s largest private

equity firms, declared Japan to be their “highest priority market” in the world outside the U.S.

The group plans to invest in two “growth stage” startups per year with investments ranging

between $27 million and $47 million per deal, said partner Eiji Yatagawa in an interview.

Besides KKR’s strategic repositioning to Japan, rival Bain Capital invested $64 million in Hey,

an e-commerce and financial services startup in 2020, and Soros Capital Management invested in

a $120 million stake in financial technology (fintech) startup Paidy as part of a group of

investors.

Another important source of capital for startups is from angel investors, high-net-worth

individuals that provide capital for business startups in exchange for ownership equity. While

venture capitalists invest in the growth stage of startups, angel investors are focused on the early

stages of a business, taking the first step rather than in profit generation. Besides the initial

funding generated, angel investors provide important mentorship and advice for founders of

startups looking to grow their businesses.

Like the VC industry in Japan, the presence of angel investors is lacking compared to the

U.S. and China. Although angel investors do exist in Japan’s startup community, they are more

low profile compared to those in other startup hubs due to public sentiments and the social

Barber, Lionel, Leo Lewis, and Kana Inagaki. “KKR Founders Set Sights on Japan Conglomerates.” Financial Times,

April 14, 2019. https://www.ft.com/content/0806a34c-5e7c-11e9-b285-3acd5d43599e.

Nikkei Asia. “KKR to Make More Bets on Japan’s Cloud Software Startups.” Accessed November 24, 2021.

https://asia.nikkei.com/Business/Startups/KKR-to-make-more-bets-on-Japan-s-cloud-software-startups.

Ibid.

Tech in Asia. “Japan Is in Dire Need of More Angels, Investors Say,” February 21, 2016.

https://www.techinasia.com/secret-angel-investing-japan.

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tendency of maintaining a low profile and retaining privacy. Thus, the traditional way of finding

investors is often through personal introductions. Angel investors in Japan are commonly

doctors, lawyers, and wealthy executives rather than successful entrepreneurs. This means that

Japanese angel investors are very hands-off and provide little mentorship or guidance.

Despite the lagging presence of angel investors, Japan has great potential in increasing

the number of such investors. With low interest rates, wealthy Japanese are eager for new

investment opportunities. Japan has the third-largest millionaire population in the world with

3.67 million millionaires as of 2020.

As more Japanese startups successfully grow and go

public, new wealth will also be generated among the founders and employees of the companies.

They can be expected to become angel investors and mentors to future entrepreneurs, akin to the

“PayPal Mafia” case previously mentioned.

In analyzing Japan’s VC and angel investing landscape, it is clear there is much room for

improvement. The most powerful policy solutions would be to incentivize VC funds to invest in

domestic rather than overseas startups, as well as to increase the size of investment by Japanese

institutional investors.

When the Softbank Vision Fund, the world’s largest technology-focused investment fund

with over $100 billion in capital, was created in 2017, Japanese startups received zero funding.

Investments primarily went to American, Chinese, Indian, and Israeli startup companies despite

Softbank and its founder, Masayoshi Son, hailing from Japan. Only recently in October of 2021

Startups, FinTech, Japan Startup Podcasts, Japan Venture Capital, and Podcast. “This Is Why Japanese Startups Can’t

Pivot - Disrupting Japan [Podcast].” Disrupting Japan: Startups and Innovation in Japan (blog), July 31, 2017.

https://www.disruptingjapan.com/why-japanese-startups-cant-pivot/.

Credit Suisse. “Global Wealth Report.” Accessed November 24, 2021. https://www.credit-suisse.com/about-

us/en/reports-research/global-wealth-report.html.

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did the Vision Fund invest in a local company with its $59.7 million investment in Aculys

Pharma.

Further highlighting the changing role of Japanese players, Gen Tsuchikawa, CEO and

chief investment officer at Sony’s Innovation Growth Ventures, said when the company’s

corporate venture arm was launched a decade ago, he did not anticipate the fund would invest in

its home economy. However, since then the group has invested in over 20 homegrown

companies.

In order to support the Japanese startup ecosystem, local players with sizable VC

war chests must be willing to support homegrown startups.

The second way to increase VC funding in Japan would be to increase the capital flows

from institutional investors. In 2016, 53 percent of private equity investments were sourced from

corporations and banks, with only 8 percent coming from insurance companies and 11 percent

from pension funds. In the U.S. 13 percent of private equity funding was sourced from insurance

companies and 43 percent from pension funds.

Japan is home to the world’s largest pension

fund, the Government Pension Investment Fund, with $1.6 trillion under management.

Japanese pension funds invest conservatively with massive holdings in Japanese government

bonds. Currently, only 0.92 percent of assets are allocated to alternative investments.

If these

sources of domestic savings navigated their capital to higher yield assets in private equity and

Nikkei Asia. “SoftBank Vision Fund Makes 1st Japan Investment with Biotech Firm.” Accessed November 24, 2021.

https://asia.nikkei.com/Business/SoftBank2/SoftBank-Vision-Fund-makes-1st-Japan-investment-with-biotech-firm.

Szkutak, Rebecca. “Japan’s Blossoming Venture Landscape.” Content. Private Equity International (blog), April 1,

2021. https://www.privateequityinternational.com/japans-blossoming-venture-landscape/.

“Japan-Based Investors in Alternative Assets.” Preqin, n.d. https://docs.preqin.com/reports/Preqin-Japan-Based-

Investors-November-2016.pdf.

“Japan’s GPIF Posts Record Annual Return on Equity Rally | Reuters.” Accessed November 24, 2021.

https://www.reuters.com/world/asia-pacific/japans-gpif-posts-record-annual-return-equity-rally-2021-07-02/.

Reynolds, Isabel, and Yasutaka Tamura. “Japan Premier Seeks to Direct Public Pension Funds to Startups.”

Bloomberg.Com, April 12, 2022. https://www.bloomberg.com/news/articles/2022-04-13/japan-premier-seeks-to-

direct-public-pension-funds-to-startups.

Komoriya 18

VC, the Japanese startup ecosystem would benefit from the huge inflow of domestic capital. In

April 2022, Prime Minister Kishida announced that his administration would create a path for the

Government Pension Investment Fund to increase its holdings and investments into startups and

venture capital.

TRADITIONAL BANK FINANCING

The previous two sections on the stock market and VC funding focused on the equity

financing of startups. However, the other side of the capital structure through debt financing will

now be examined. One of the most traditional and common sources of capital for Japanese small

and medium sizes enterprises (SMEs) and startups is traditional bank loans. This is in stark

contrast to other global ecosystems where the majority of startups are funded through equity

financing.

However, debt financing does have several benefits, most notably that founders are

able to maintain their stake in their company rather than having investors take a large percentage

of it.

Despite the importance of bank financing, studies find that firms that rely on intangible

assets like intellectual property, as is the case with many high-tech startups, are hindered by bank

biases. Traditional, large Japanese banks prefer companies that have more employees, need loans

for fixed assets, and have an existing main bank relationship. Bank loans are also not appropriate

Ibid.

Honjo, Yuji. “Capital Structure of Start-up Firms: An International Comparison.” Center for Research on Startup

Finance, n.d., 45.

Komoriya 19

for startups as they require collateral and immediate payments of the principal and interest.

Startups must first rapidly expand before entering the profitability phase.

The Japanese corporate system is unique in that is dominated by three megabanks:

Mitsubishi UFJ Financial Group (MUFG), Sumimoto Mitsui Banking Corporation Group

(SMBC Group), and Mizuho Financial Group. Many regional banks do exist, but most have

strong ties to the megabanks through the keiretsu network and the linkages of personnel and

capital, often in the form of joint ventures.

Japanese companies usually have one main bank

with which they have a loyal relationship. This main bank acts traditionally as both a lender and

shareholder, giving the bank a vested interest in the long-term stability and performance of client

companies. This system of cross-shareholding makes up the intricate system of Japanese keiretsu

networks, created to prevent hostile takeovers.

With underregulated interest rates, the key to

growth for Japanese banks was to furnish more loans, while avoiding costly bailout events. Thus,

banks incentivized their client companies to grow and diversify. The unrelated diversification

allowed for stabilization through multiple uncorrelated income streams from a variety of

businesses. This meant that a disruption or decline of one portfolio company or business would

not risk the entire firm as a whole. As long as the client borrowers generated enough cash flow to

pay the interest due on loans provided, the banks were unconcerned with the efficiency of the

Kutsuna, Kenji, Hideo Okamura, and Marc Cowling. “Ownership Structure Pre- and Post-IPOs and the Operating

Performance of JASDAQ Companies.” Pacific-Basin Finance Journal 10, no. 2 (April 1, 2002): 163–81.

https://doi.org/10.1016/S0927-538X(01)00041-5.

Nikkei Asia. “Japan’s Mizuho Breaks Tradition in Link with Rival’s Regional Ally.” Accessed January 9, 2022.

https://asia.nikkei.com/Business/Business-deals/Japan-s-Mizuho-breaks-tradition-in-link-with-rival-s-regional-ally.

Yamane, Linus. “Keiretsu and Main Banks - Japanese Economy (ECON142 PZ).” Pitzer College, November 3, 2021.

Komoriya 20

business in terms of profitability, margins, stock prices, and other financial metrics.

The

keiretsu structure also gave a significant advantage to companies that were aligned with and a

part of the vast network. This model created an unequal system of capital allocation in the

economy by giving keiretsu-affiliated firms a significant advantage in securing loans.

According to Ryoichi Mikitani, renowned economist and father of Rakuten founder

Hiroshi Mikitani, Japanese banks are very responsive to the Bank of Japan and the Ministry of

Finance when investing in companies and are encouraged not to invest in risky businesses. This

attitude creates a safety-focused environment among banks and securities firms and serves as an

obstacle to the financial liberalization of the Japanese debt capital market. This banking model is

also in conflict with promoting high-growth infant companies in the economy.

Besides the unwillingness of banks to furnish loans to startups, the biggest obstacle for

debt financing through bank loans is the risk of default and bankruptcy. Founders of Japanese

companies must personally guarantee bank loans, putting them at risk of personal bankruptcy. In

the Japanese legal system, debt is transferable. If a startup fails or the founder even dies, the

founder’s guarantor or family would be responsible for the unpaid debt.

In the U.S., it is

difficult to seize one’s property or car if a startup defaults. However, in Japan, only the most

Schaede, Ulrike. The Business Reinvention of Japan: How to Make Sense of the New Japan and Why It Matters,

Stanford Business Books, Stanford, 2020, p. 51.

“Corporate Financing and Governance in Japan : The Road to the Future.” Accessed January 11, 2022. https://web-p-

ebscohost-com.ccl.idm.oclc.org/ehost/ebookviewer/ebook?sid=1436b94c-37fd-4775-b61b-

c6ad1ade1b78%40redis&vid=0&format=EB.

Mikitani, Hiorshi, and Ryoichi Mikitani. “The Power to Compete: An Economist and an Entrepreneur on Revitalizing

Japan in the Global Economy,” 1st Edition., 240. 54: Wiley, 2014.

Burkosky, Evan. “Angel Financing in Asia Pacific : A Guidebook for Investors and Entrepreneurs.” Accessed

November 25, 2021. https://web-p-ebscohost-

com.ccl.idm.oclc.org/ehost/ebookviewer/ebook/ZTAwMHhuYV9fMTQwNzI0OV9fQU41?sid=ba3c3613-0f84-

4b88-ad0b-4f5b960b528f@redis&vid=6&format=EB&rid=1.

Komoriya 21

basic items like clothing and household goods of small value are protected from seizure.

This

system discourages serial entrepreneurs who create business after business like in the U.S.

The reliance on bank loans and the burgeoning Japanese startup ecosystem are clearly in

conflict. Traditional debt financing stunts the creation of startups given the structure of its

financing and the high risks involved with default. Thus, Japan must pursue policies that provide

startups with alternative forms of fundraising through equity financing in the stock market and

venture capital, as was previously discussed in the first two sections.

However, there are also reasons to be optimistic about the future landscape of debt

financing in Japan. The megabanks themselves have increasingly turned to higher-risk loans to

startups for greater returns. MUFG, Japan’s largest bank, recently launched a $300 million debt

venture fund to offer debt financing to late-stage tech startups in Asia-Pacific. The fund was

launched amid a “fundraising frenzy” in Asia with the rapid rise of billion-dollar unicorn

startups.

Advances in fintech can be expected to be used by large Japanese banks to incentivize

them to finance riskier loans with higher returns. Liquidity Capital, an Israeli AI-driven credit

scoring model, will be used to forecast future earnings and cash flows of potential startups

utilizing past financial and accounting data.

Similarly in 2017, Bank of Tokyo-Mitsubishi UFJ

(BTMU) acquired a stake in Xenodata Lab, a Japanese AI-based data analysis startup. BTMU

hopes to use the AI technology to navigate future returns and risks of small and midsize

enterprises. Mizuho has also collaborated with Softbank Group in using AI technology to better

Imai, Ken’ichi, Yoshihisa Akiyama, eds.1998. Benchaazu infura (The Infrastructure of Venture Companies).

Yamazaki, Makiko, and Yuki Nitta. “Japan’s Largest Bank MUFG to Launch New $300 Mln Debt Venture Fund.”

Reuters, December 23, 2021, sec. Funds. https://www.reuters.com/markets/funds/japans-largest-bank-mufg-launch-

new-300-mln-debt-venture-fund-2021-12-23/.

Ueda, Shiko. “MUFG Taps Israeli AI to Hunt for Asian Unicorns.” Nikkei Asia. Accessed January 10, 2022.

https://asia.nikkei.com/Business/Technology/MUFG-taps-Israeli-AI-to-hunt-for-Asian-unicorns.

Komoriya 22

screen loan applications.

Fintech is expected to shake up the traditional Japanese banking

industry and create a more conducive environment for startups. The expansion into financing

higher-performing startups will also benefit the banks themselves, as they face a combination of

a shrinking customer base and low to negative interest rates.

This trend has already been taking

place as reported by a study by the Bank of Japan. The study also concluded that the increase in

lending to higher-risk borrowers does not pose a threat to the economy’s financial stability.

CROWDFUNDING

Another form of capital that has risen in prominence and influence in recent years is

crowdfunding. This type of fundraising is when a large number of individual investors pool their

capital into a startup. Platforms such as Kickstarter, Indiegogo, and SeedInvest make providing

capital to an innovative idea or startup easier and more accessible.

Although this form of capital raising is relatively new, several successful startups were

launched and grew initially through crowdfunding. One example is Oculus, a division of Meta

(formerly Facebook), which manufactures virtual reality (VR) headsets. The startup launched its

Kickstarter campaign in 2012, raising over $2.4 million (ten times the goal of $250,000) from

9,522 backers.

Since then, the company used the capital to rapidly expand and develop more

Nikkei Asia. “Japanese Megabanks Raise Bets on Fintech.” Accessed January 10, 2022.

https://asia.nikkei.com/Business/Finance/Japanese-megabanks-raise-bets-on-fintech.

Refinitiv Perspectives. “The Forces Challenging Japan’s Mega Banks,” November 13, 2019.

https://www.refinitiv.com/perspectives/market-insights/the-forces-challenging-japans-mega-banks/.

Kawamoto, Takuji, Taichi Matsuda, Koji Takahashi, and Yoichiro Tamanyu. “Bank Risk Taking and Financial

Stability: Evidence from Japan’s Loan Market,” n.d., 35.

Kickstarter. “A Brief History of Oculus, from Day Zero to Day One.” Kickstarter Magazine (blog), May 9, 2018.

https://medium.com/kickstarter/a-brief-history-of-oculus-from-day-zero-to-day-one-8878aae002f8.

Komoriya 23

innovative VR headsets. Meta acquired the startup in 2014 for $2.3 billion in cash and stock,

and the company is expected to play a critical role in the development of the metaverse. Other

examples of companies launching through crowdfunding include Allbirds, one of the fastest-

growing footwear companies, now publicly valued at $2.17 billion,

and Tile, a Bluetooth

tracking company for personal belongings, recently acquired for $205 million.

Although the crowdfunding scene is much smaller in Japan in terms of scale, it has been

growing recently. Earlier, these platforms were viewed by the Japanese people as a means to

raise money for charitable causes, specifically the 2011 Tohoku earthquake and tsunami. Large

Japanese corporations have also been using crowdfunding to get opinions from users and

consumers, especially given Japanese consumers are famously hard to please and have high

demands for quality. For example, Sony has been using Manuake and other platforms frequently

to test release certain products such as Mesh Smart DIY kit and the FES e-ink watch. Sony

viewed this strategy as so important that it even launched its own platform called First Flight to

promote new business ideas and creativity for the company.

Japanese crowdfunding platforms

such as Manuake, Green Funding, and Campfire have also developed in the past few years. All

have experienced a surge in revenue and fundraising, especially during the COVID-19

Meta. “Facebook to Acquire Oculus,” March 25, 2014. https://about.fb.com/news/2014/03/facebook-to-acquire-oculus/.

WSJ. “BIRD | Allbirds Inc. Stock Price & News.” Accessed January 13, 2022. https://www.wsj.com/market-

data/quotes/BIRD.

“Tile Company Profile: Acquisition & Investors | PitchBook.” Accessed January 13, 2022.

https://pitchbook.com/profiles/company/61319-89#funding.

McCormick, Rich. “Sony Launches Crowdfunding Platform for Its Own New Products.” The Verge, July 1, 2015.

https://www.theverge.com/2015/7/1/8874943/sony-crowdfunding-platform-first-flight-launch.

Komoriya 24

pandemic.

This new form of capital raising was made possible by the Japanese government

amending a law in 2014 to allow for companies to directly raise capital through crowdfunding.

It can be expected that in Japan, and globally, crowdfunding will have a significant

impact on the future of fundraising for startups. It provides a more democratic approach for

startups to be able to both gauge the customer landscape for their products and raise capital

directly from a variety of different sources and investors.

CHAPTER III: THE ROLE OF CAPITAL ALLOCATION AND INDUSTRIAL POLICY

IMPORTANCE OF THE STATE

Although startup ecosystems are conventionally viewed as being laissez-faire with little

government interference, this view is misleading. The government plays a very important role in

the promotion of a startup ecosystem. Michael Lind explains, “the most innovative entrepreneur

in the 20th century was the U.S. government. The federal government invented or developed

nuclear energy, computers, the internet and the jet engine (…) Few private venture capitalists can

match the remarkable record of Uncle Sam.”

Silicon Valley grew and developed during the space race of the Cold War. The U.S.

wanted to launch a spaceship to reach the moon. In order to accomplish such a feat, it needed

“Japan’s Crowdfunding Firms Report Surge in Business during Pandemic | Reuters.” Accessed January 13, 2022.

https://www.reuters.com/article/us-japan-fintech-crowdfunding-idUSKCN24N0QT.

O’Melveny. “Japan Adopts New Legislation to Facilitate Equity Crowdfuding for Start-up Companies,” March 1, 2014.

https://www.omm.com/resources/alerts-and-publications/publications/japan-adopts-new-legislation-to-facilitate-

equity-crowdfunding-for-start-u/.

Lind, Michael. “Who’s Afraid of Industrial Policy?” Salon, January 31, 2012.

https://www.salon.com/2012/01/31/whos_afraid_of_industrial_policy/.

Komoriya 25

several advanced technologies that were still yet to be developed. The government invested great

sums into the semiconductor industry. The Apollo Space Program was the largest mobilization of

federal resources and capital in American history with Congress approving investment totaling

$146.5 billion (2019 dollars), seven times NASA’s budget in 2019.

The MIT Instrumentation Laboratory created the world’s first integrated circuit, or silicon

chip, working closely with Fairchild Semiconductor, a small startup based out of San Jose. This

led to the area in which these chips were developed in Santa Clara County to be known as

“Silicon Valley.”

Texas Instruments followed soon after in developing computer chips, a

necessary component of almost all electronic devices that we use today. These firms, that

previously specialized in selling to the government, expanded their operation and broadened to

the commercial sector as federal budgets decreased.

In later decades, the digital revolution

would take place with young entrepreneurs such as Bill Gates of Microsoft and Steve Jobs of

Apple building off computer technology NASA helped develop during the Apollo Mission.

Even today, the U.S. government plays a pivotal role in keeping Silicon Valley

competitive through research and development (R&D) funding, which observers refer to as a “de

facto” industrial policy. Government funding, through federal agencies and institutes, is

channeled through universities where researchers play a critical role in transforming government

Marketplace. “How the Moon Landing Helped Launch Silicon Valley,” July 19, 2019.

https://www.marketplace.org/2019/07/19/how-the-moon-landing-helped-launch-silicon-valley/.

“Apollo Guidance Computer and the First Silicon Chips.” Accessed January 16, 2022.

https://airandspace.si.edu/stories/editorial/apollo-guidance-computer-and-first-silicon-chips.

Dasher, Richard, Nobuyuki Harada, Takeo Hoshi, Kenji Kushida, and Tetsuji Okazaki. “Institutional Foundations for

Innovation-Based Economic Growth.” National Institute for Research Advancement (NIRA), July 7, 2015.

https://www.nira.or.jp/pdf/e_1503report.pdf.

“How NASA’s Apollo Program Kicked off Silicon Valley’s Tech Revolution - CNN.” Accessed January 17, 2022.

https://edition.cnn.com/2019/08/04/tech/nasa-management-apollo-silicon-valley-scn/index.html.

Komoriya 26

investment into scientific knowledge that can be used commercially. For example, the National

Institute of Health (NIH) invests more than $32 billion a year in life sciences research alone.

Economist William Lazonick explains, “Without NIH funding of the indispensable knowledge

base, VC and public equity funds would not have flowed into biotech.”

In sum, Ulrike Schaede of UC San Diego explains, “the whole Silicon Valley venture

ecosystem started with the government creating demand. The market then created a system

around that demand.”

Other economies have similarly created startup hubs and ecosystems

around government demand in specific fields. For example, the Israeli startup ecosystem

developed around the government’s demand for cybersecurity and intelligence.

HISTORICAL UNDERPINNINGS

Historically, the Japanese government has played a tremendous role in guiding the

economy. During the rapid economic growth period from the 1960s to the 1980s, the Ministry of

International Trade and Industry (MITI), one of the most powerful government agencies, was

credited with the nation’s success in several sectors and industries. The agency implemented

policies to protect target industries from foreign competition and promoted exports as a key part

of the country’s industrial policy.

After Japan’s economic bubble burst, MITI lost significant

National Institutes of Health (NIH). “Grants & Funding.” Accessed January 18, 2022. https://www.nih.gov/grants-

funding.

Lazonick, William. “The Innovative Enterprise and the Developmental State: Toward an Economics of ‘Organizational

Success.’” Institute for New Economic Thinking Annual 2011 conference Crisis and Renewal: International

Political Economy at the Crossroads Mount Washington Hotel, April 8, 2011.

https://www.ineteconomics.org/uploads/papers/BWpaper_LAZONICK_040811.pdf.

Komoriya, Kaito. “Ulrike Schaede on Japanese Startups and Her Book ‘The Business Reinvention of Japan: How to

Make Sense of the New Japan and Why It Matters.’” Asia Experts Forum (blog), December 27, 2021.

http://asiaexpertsforum.org/ulrike-schaede-japanese-startups-book-business-reinvention-japan-make-sense-new-

japan-matters/.

Nishijima, Shoji. “Japanese Industrial Policy.” The Perspective of the World Review, 2012.

http://repositorio.ipea.gov.br/bitstream/11058/6422/1/PWR_v4_n3_Japanese.pdf.

Komoriya 27

influence and merged with other agencies, effectively being disbanded. The Ministry of

Economy, Trade, and Industry (METI) was formed in 2001 and now has jurisdiction and

influence over broad policy areas from industrial and trade policies, energy security, and other

programs to promote the country’s economy and trade. Given industrial policy has historically

had a large impact on the growth of Japanese industries, the government has a tremendous

opportunity in developing the startup ecosystem to promote greater innovation and economic

prosperity to the nation.

MODERN INDUSTRIAL POLICY

Since 2000, the government has enacted several programs to fund an innovative startup

ecosystem. Japan is the third biggest spender on R&D behind U.S. and China, having spent

$172.6 billion in 2019. R&D spending makes up 3.2 percent of its GDP, the fourth highest in the

world.

Clearly, the Japanese government is investing sufficient sums in R&D. However, why

are more startups not emerging with such funding? A Brookings Institution report analyzed the

lack of innovation and startups in Japan despite the country having high levels of R&D funding

and patents: “While Japan spends more resources on R&D and files more patent applications

than the U.S. and Germany, the quality of Japanese innovation severely lags behind that of the

U.S. and Germany. We posit that this underperformance may be driven by differences in the

nature of government incentives for private sector R&D and in the public-private composition of

R&D expenditures in the three countries.”

OECD. “Research and Development (R&D) - Gross Domestic Spending on R&D - OECD Data.” Accessed January 18,

2022. http://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm.

Strauss, Dany Bahar and Sebastian. “Innovation and the Transatlantic Productivity Slowdown: A Comparative Analysis

of R&D and Patenting Trends in Japan, Germany, and the United States.” Brookings (blog), January 27, 2020.

Komoriya 28

In recent years, several new programs have been created to promote the creation of

startups through industrial policy. One of these programs created under METI is the New Startup

Loan Program. The loans provide unsecured, unguaranteed loans to founders starting a new

business from the National Life Finance Corporation or the Okinawa Development Finance

Corporation. These loans are appealing for startups given their low interest and generous loan

period of up to five years for working capital and seven years for equipment funding.

The Innovation Network Corporation of Japan (INNCJ) is a government-led fund to

boost investment in Japan’s startup ecosystem. The $2.5 billion fund was established in 2009

with 300 billion yen with most of the capital provided by the government. The rest of the capital

was contributed by 26 major Japanese corporations, including Toyota, Canon, as well as

Sumimoto and Mitsubishi Group companies.

Another industrial policy the government has pursued to support startups is the Fiscal

Investment and Loan Program (FLIP). This program uses capital raised through the issuance of

FLIP bonds to provide long-term, fixed, and low-interest loans and risk money to fields in the

private sector, especially in startups and SMEs.

The most significant program launched by the government is the J-Startup Program, a

joint project of METI and Japan External Trade Organization (JETRO). The initiative was

https://www.brookings.edu/research/innovation-and-the-transatlantic-productivity-slowdown-a-comparative-

analysis-of-rd-trends-in-japan-germany-and-the-united-states/.

Small and Medium Enterprises Agency. “Start-up Loan Program.” Accessed January 18, 2022.

https://www.chusho.meti.go.jp/sme_english/bestpractice/04/outline.htm.

Kushida, Kenji. “Innovation and Entrepreneurship in Japan: Why Japan (Still) Matters for Global Competition.”

Stanford Silicon Valley New Japan Project, n.d.

https://static1.squarespace.com/static/54b4afe7e4b096f7dca62bef/t/58fa9425414fb58ffd3ae4fe/1492816951138/SV

NJ+WP+2017-2+Kushida+-+Innov+and+Ent+in+Japan.pdf.

財務省. [Ministry of Finance] “What Is FILP?,” September 2018.

https://www.mof.go.jp/english/policy/filp/filp_report/zaito2018/pdf/filp2018_eng-0-1.pdf.

Komoriya 29

launched in 2018 with the goal of incubating “internationally competitive and winning startups

and [to] encourage them to provide new value to the rest of the world through their innovative

technologies and business models.”

The industrial policy is a form of “picking winners” in

which METI will select several promising startups nominated by experts in the public and

private sectors. With the nomination, METI will specifically help them expand their operations

overseas. METI will also create a support system termed “J-Startup Supporters,” made up of

large companies, venture capital companies, and accelerators. The government set the goal of

creating 20 unicorn startups with a private market valuation of over $1 billion by 2023.

Since

its inception, it has partnered with and supported 157 domestic startups.

There are several ways for governments to support startups through industrial policies,

many of which have already been enacted recently. The government should continue supporting

the initiatives and can expect a more thriving ecosystem in the coming years.

POSSIBLE POLICY PROPOSALS

The first way the Japanese government can further support the startup ecosystem is by

creating the demand in certain industries that could spur the creation of startups centered around

the field, as was the case with the Apollo mission. As Japan faces a host of future challenges,

from its shrinking population, energy dependence, and climate change, the government could

spur the demand around these problems. METI has already been doing this for the past decade

with its support of hydrogen energy in an effort to help Japan become more energy independent

and reduce its reliance on imported greenhouse gases. The government has been “lavishing

経済産業省. [Ministry of Economy, Trade, and Industry] “METI Launches New Initiative, ‘J-Startup’ Program.”

Accessed January 18, 2022. https://www.meti.go.jp/english/press/2018/0611_003.html.

Ibid.

Komoriya 30

billions of dollars to the industry” but is primarily supporting large conglomerates, such as

Toyota, Mitsubishi Heavy Industries, and Kawasaki Heavy Industries.

In future target

industries, METI should instead disperse its investments across a wide array of smaller firms and

startups to support creative innovation and a thriving startup ecosystem.

Another impactful change that the government could enact is to increase capital flow to

new, innovative startups indirectly through its pension fund. As previously mentioned, Japan is

home to the world’s largest pension fund, the Government Pension Investment Fund, with $1.6

trillion under management.

In the U.S., pension fund investment into private equity and VC has

dramatically increased in recent years as they seek higher returns and growth. American pension

fund investment in private equity rose to an average of 8.9 percent of holdings in 2021 with

capital in the sector rising from $300 billion in 2018 to $480 billion in 2021.

The Government

Pension Investment Fund plans to allocate only 1.6 percent of its portfolio to alternative

investments which include private equity and VC.

Clearly, there is enormous potential for

increased capital flow to the Japanese ecosystem if the Government Pension Investment Fund

and other institutional investors direct their funds toward VC. This would have the dual benefit

of providing higher returns than traditional fixed-income bonds to beneficiaries and supporting a

more capital-rich startup ecosystem in the long run.

The Economist. “Japan Inc Wants to Become a Hydrogen Superpower,” July 24, 2021.

https://www.economist.com/business/2021/07/24/japan-inc-wants-to-become-a-hydrogen-superpower.

Umekawa, Takashi. “Japan’s GPIF Posts Record Annual Return on Equity Rally | Reuters.” Accessed November 24,

2021. https://www.reuters.com/world/asia-pacific/japans-gpif-posts-record-annual-return-equity-rally-2021-07-02/.

Gillers, Heather. “Retirement Funds Bet Bigger on Private Equity.” Wall Street Journal, January 10, 2022, sec.

Markets. https://www.wsj.com/articles/retirement-funds-bet-bigger-on-private-equity-11641810604.

“Japan’s Biggest Pension Fund Eyes More Alternative Assets after Record Return.” Accessed January 18, 2022.

https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/japan-s-biggest-pension-fund-

eyes-more-alternative-assets-after-record-return-65293956.

Komoriya 31

CHAPTER III: CULTURAL DETERMINANTS TO START UPS

The Japanese startup ecosystem cannot be analyzed without looking at the country’s

unique culture that shapes its economy. It is hard to deny that culture has a significant impact on

the many factors that make up a thriving startup ecosystem. Specific cultural factors that impact

the Japanese startup ecosystem include, but are not limited to, risk aversion, longevity, the

lifetime employment system, and aversion to prominent entrepreneurs. These factors mostly

impact the ecosystem on a micro-scale by negatively impacting individuals’ desires to become

an entrepreneur in the first place.

Individual desire to become an entrepreneur and start a company among the Japanese

population is weak. In a global survey in which participants were asked the question “is

entrepreneurship a good career choice?” Japan ranked second to last with 24.6 percent of

respondents answering favorably. Comparable economies ranked much higher in the survey with

67.9 percent of respondents in the U.S and 53.6 percent of respondents in Germany answering

favorably.

However, with successful startups burgeoning in recent years, entrepreneurship as a

career choice is beginning to become less stigmatized. In an interview with the Asia Experts

Forum, Ulrike Schaede of UC San Diego explained, “Working for a startup is no longer a bad

thing at all. It's now hip, at least in Tokyo. Twenty years ago, if you said you work for a startup,

people would have said, ‘Did you fail in the shukatsu? You didn't get a job, so you work for a

startup?’ But now it’s a real and viable career path.”

World Bank. “TCdata360 - Open Trade and Competitiveness Data.” Accessed April 23, 2022.

https://tcdata360.worldbank.org/.

Komoriya, Kaito. “Ulrike Schaede on Japanese Startups and Her Book ‘The Business Reinvention of Japan: How to

Make Sense of the New Japan and Why It Matters.’” Asia Experts Forum (blog), December 27, 2021.

Komoriya 32

RISK AVERSION

One of the most important factors needed for an entrepreneurial culture is risk-taking.

Leaving one’s job and creating a company from scratch requires great sacrifice and risk.

However, risk aversion permeates Japanese society from its politics, economy, businesses, and

individuals. Pernille Rudlin, who has several decades working for major Japanese corporations

explained, “I have spent more than 45 years now living in or visiting Japan and working with or

for more than 200 Japanese companies, and one generalization I feel I can make, even though I

am well aware of the dangers of stereotyping, is that Japan as a nation – as well as Japanese

companies – are highly risk-averse.”

Looking back at Japan’s history, the economic bubble collapse in 1992, characterized by

increased risk-taking for greater returns and growth, led to today’s business culture in which

individuals and companies deliberately go through due process before deciding on important

matters. Schaede explains, “Japan’s go-go years were marked by heavy fluctuations in annual

growth rates and were often a wild ride. The highly leveraged growth machine was inherently

risky, and CEOs were looking for stabilizers.”

One method to analyze the risk aversion in Japanese culture is to look at the economy’s

savings rate, which is well-known to be higher than in comparable economies. Between 2000

and 2020, Japan’s average gross domestic savings, as a percentage of GDP, was 29.28 percent.

http://asiaexpertsforum.org/ulrike-schaede-japanese-startups-book-business-reinvention-japan-make-sense-new-

japan-matters/.

Rudlin, Pernille. “How Japanese Risk Aversion Explains Reactions to Brexit and Whether UK Should Join the

CPTPP.” Rudlin Consulting (blog), September 25, 2018. https://rudlinconsulting.com/how-japanese-risk-aversion-

explains-reactions-to-brexit-and-whether-uk-should-join-the-cptpp/.

Schaede, Ulrike. The Business Reinvention of Japan: How to Make Sense of the New Japan and Why It Matters,

Stanford Business Books, Stanford, 2020, p. 50.

Komoriya 33

During the same period, the rate was 19.13 percent in the U.S. and 22.43 percent in OECD

member countries.

During the COVID-19 pandemic, Japanese household savings reached a 20-

year high with the savings rate climbing to 35.2 percent.

The sharp rise in household savings

during COVID-19 explain how during times of uncertainty, Japanese people minimize their risk

at a much higher rate than in other countries.

Out of household savings, the composition in which assets are held also paints a picture

of the risk aversion that characterizes Japanese culture. In the average household, over 50 percent

of savings were held in cash, the safest form of investment. The same figure was only 14 percent

in the U.S. and 33 percent in the Euro Area.

Household financial assets held in equity and

investment funds were only 15 percent in Japan, while the same figure was 31 percent in the U.S.

and 28 percent in the Euro Area.

Besides skepticism towards the stock market due to sluggish

equity growth since the economic bubble collapse, this data again is reflective of the overall

Japanese attitude towards risk.

Risk aversion in the modern Japanese economy explains why individuals and businesses

have been slow to create and sell innovative ideas and products over the past two decades. Japan

scholar Ulrike Schaede explains:

World Bank. “Gross Domestic Savings (% of GDP) | Data.” Accessed April 23, 2022.

https://data.worldbank.org/indicator/NY.GDS.TOTL.ZS.

Matsuo, Yohei. “Japan Stimulus Payments Went to Savings, Not Spending.” Nikkei Asia. Accessed February 14, 2022.

https://asia.nikkei.com/Economy/Japan-stimulus-payments-went-to-savings-not-spending.

Altman, Alexandra. “Why Do Japanese Households Hold So Much Cash?” Federal Reserve Bank of San Francisco.

Accessed February 14, 2022. https://www.frbsf.org/banking/asia-program/pacific-exchange-blog/why-do-japanese-

households-hold-so-much-cash/.

Ibid.

Komoriya 34

The fear of causing an inconvenience makes people cautious and focused on preventing

mistakes. This can translate into high levels of risk aversion, and a strong preference for

anzen dai-ichi (safety first) options. In companies, it may result in a decision not to make

a bold investment, and in resistance to change. For individuals, it creates obstacles to

unorthodox career moves such as quitting a company and becoming an entrepreneur.

However, it is also important to acknowledge that the red tape and the slowness of the

system do have their benefits. For example, the Japanese financial sector was relatively

unimpacted by the 2008 financial crisis because Japanese banks and financial institutions had

limited exposure to collateralized debt obligations (CDOs) given the high-risk nature of the

instrument. The government’s lengthy due diligence in the approval process and the skepticism

of the banks minimized the economy’s exposure to the risky financial instrument.

According to

Schaede,

Stability and safety first – anzen dai-chi – are bound to remain a core value. In a country

with 1,500 earthquakes per year, there is just no other way. As a result, decision-making

will probably always remain slow – a word that, in Japan, often carries the positive

connotation of being careful and thorough. Due process is important, and uncertainty

creates anxiety. By necessity, slow means that Japanese companies may miss out on

windows of opportunity, but many in Japan prefer losing out over losing big. The slow

Schaede, Ulrike. The Business Reinvention of Japan: How to Make Sense of the New Japan and Why It Matters,

Stanford Business Books, Stanford, 2020, p. 34.

Sato, Takafumi. “Global Financial Crisis: Japan’s Experience and Policy Response.” Federal Reserve Bank of San

Francisco, n.d., 5.

Komoriya 35

approach reflects a societal preference, and in many ways, reflects, it is also proving

economical in terms of preserving the country’s social fabric, education, infrastructure,

and global status in times of crisis.

For the Japanese economy to become more innovative and support a dynamic startup

ecosystem, corporations and banks must be willing to increase their risk exposure for greater

returns whether it be in investing in new areas or acquiring strategic startups. For individuals,

Japanese society must change its perspective on failure and support those willing to take the risk

of venturing out and creating their own company.

LONGEVITY AND RESILIENCE

Related to Japan’s cultural aversion to risk is its emphasis on longevity. Japanese

companies are well known for their long-term stability and continuous operations throughout

war, economic crises, and pandemics. However, the country’s emphasis on long-term stability

comes into conflict with the dynamic economic model conducive to startups with high levels of

company creation and turnover.

This claim can be validated by simply looking at data on some of the world’s oldest,

longest-continuously running companies, the majority of which are Japanese. In 2019, Japan had

over 33,000 businesses that were over a century old. Out of these businesses, three were over

two centuries old, 140 were over five centuries old, and 19 had been continuously running since

Schaede, Ulrike. The Business Reinvention of Japan: How to Make Sense of the New Japan and Why It Matters,

Stanford Business Books, Stanford, 2020, p. 50.

Komoriya 36

the first millennium.

Out of the 5,586 companies older than two centuries across 41 countries,

56 percent of them were in Japan.

Yoshinori Hara, a professor at Kyoto University with

extensive Silicon Valley experience, explains that the Japanese cultural emphasis on

sustainability over quick profits is the major reason why Japanese businesses have such “staying

power.”

Many of these businesses are small and medium family-owned enterprises in the

hospitality and food industry. However, many globally known Japanese brands were founded

over a century ago. For example, Nintendo, the innovative video gaming company, was founded

as a playing cards company in 1889.

Other acclaimed companies from Suzuki to Yamaha to

branches of the Mitsubishi keiretsu were also founded in the late 1800s or early 1900s.

The quick turnover and lifecycle of American startups are in sharp contrast to the stability

that characterizes Japanese companies. On average, only 10 percent of startups actually succeed,

and the average lifespan of companies is 20 months.

The lenient bankruptcy laws and legal

codes allow for increased risk taking and for serial entrepreneurs to pursue a career of

continuously starting new business ventures. This model is characterized by high employee

turnover, layoffs, and employment insecurity. Given this business model conflicts with Japanese

Dooley, Ben, and Hisako Ueno. “This Japanese Shop Is 1,020 Years Old. It Knows a Bit About Surviving Crises.” The

New York Times, December 2, 2020, sec. Business. https://www.nytimes.com/2020/12/02/business/japan-old-

companies.html.

“日本企業의長壽要因및示唆點.” [Longevity of Japanese Companies] Accessed February 14, 2022.

https://www.bok.or.kr/viewer/skin/doc.html?fn=FILE_201803300723135521.pdf&rs=/webview/result/P0000537/20

0805.

Lufkin, Bryan. “Why so Many of the World’s Oldest Companies Are in Japan.” Accessed February 14, 2022.

https://www.bbc.com/worklife/article/20200211-why-are-so-many-old-companies-in-japan.

“Corporate Information : Company History.” Accessed February 14, 2022.

https://www.nintendo.co.jp/corporate/en/history/index.html.

Salesforce Canada Blog. “What to Do Immediately After Your Startup Launches.” Accessed February 14, 2022.

https://www.salesforce.com/ca/blog/2018/06/what-to-do-after-startup-launches.html.

Komoriya 37

ideals of longevity, the business model cannot simply be replicated in Japan. Instead, the two

models must coexist. Japanese legal codes and financial markets should encourage the cycle of

startup creation and bankruptcy by creating more lenient bankruptcy laws and increasing support

during downturns. For those startups that are successful, Japanese managers will lead companies

with their long-term vision in mind and have them serve the Japanese economy for decades and

even centuries to come.

LIFETIME EMPLOYMENT

Traditionally, the Japanese employment system is highly structured with the brightest

talent working for one company for the majority, if not all, of their career.

In the shukatsu recruiting system, university students go through a structured selection

process to secure a full-time job in the April of their penultimate year. The system was created

by Keidanren, Japan’s biggest business lobby of 1,300 of the country’s largest companies, to

hunt for talent during Japan’s period of rapid economic growth. In return, the system provided

lifetime employment to its new hires.

100

Ulrike Schaede describes how the system became an

important part of Japanese society:

In Japan’s postwar social contract, the government pushed large companies toward rapid

growth by offering subsidies and other support. And in exchange for this support, large

companies were tasked with providing corporate welfare, including not only pension but

also in-company healthcare, along with insurance, training, housing, and of course long-

term employment” (…) The responsibility of employees in this system was to work hard

100

Shibata, Mari. “Why Japan’s ‘Shūkatsu’ Job-Seeking System Is Changing.” Accessed February 14, 2022.

https://www.bbc.com/worklife/article/20190731-why-japans-shkatsu-is-disappearing-for-japanese-youth.

Komoriya 38

and allow the company to have complete control over their career paths, pay, promotion,

and retirement.

101

Due to this system, the most talented and skilled Japanese employees seek work at large

conglomerates that provide the greatest security and benefits rather than venturing and creating

their own companies. For those who do not commit to working at one company their entire lives,

their tenure rate is still much longer than that in the U.S. In Japan, by the age of 34, the average

Japanese employee had 3.1 jobs. The same figure was 7.4 in the U.S.

102

This system has made labor a fixed, not variable, cost. During economic and market

downtowns, companies are unable to lay off workers and cut costs. Moreover, this system

excludes foreign talent whose university graduation does not fall during the spring shukatsu

period.

Although the brightest talent seeks lifetime employment in large, stable companies, the

overall number of “non-regular” employees has steadily risen from 12.5 percent of the workforce

in 1988 to 59.1 percent of the labor force in 2019.

103

Non-regular employees do not derive the

full benefits that come with full-time employment and women make up the majority of this

group. These workers may be the key to attracting talent and employees in the startup industry.

Despite lifetime employment and the highly structured process of recruitment, there are

reasons to be hopeful for the future. The Keidanren has announced plans to abolish the job-

hunting schedule and the existing guidelines on how firms are to recruit graduates. These are in

101

Schaede, Ulrike. The Business Reinvention of Japan: How to Make Sense of the New Japan and Why It Matters,

Stanford Business Books, Stanford, 2020, p. 50.

102

Yamane, Linus. “Salariman- Japanese Economy (ECON142 PZ).” Pitzer College, October 13, 2021.

103

総務省. [Ministry of Internal Affairs and Communications] “Data: Survey of Labor Force,” 2019.

Komoriya 39

response to foreign firms providing more competitive salaries and faster career progression, as

well as changing preferences among Japanese youth on their future employment. These changes

will hopefully make the labor market more flexible and allow for the flow of talent to smaller,

startup companies rather than having established conglomerates retain them for the entirety of

their careers.

AVERSION TO PROMINENT ENTREPRENEUR

A famous Japanese proverb says, “the nail that sticks out gets hammered down.”

Although this may be an oversimplification, it can explain the relatively hostile climate towards

successful entrepreneurs and businesspeople who are ostentatious about their success and

achievements. While western societies place a high value on individuality, eastern societies,

including Japan, place a higher priority and value on conformity and harmony, known as “wa.”

Historically, with Japan’s mountainous and hostile terrain, early Japanese inhabitants had to rely

on each other to survive. In its agricultural past, farmers had to cooperate with each other to

maintain the shared irrigation system needed to grow rice and other products. Through

subsequent periods with the infusion of Confucianism, Buddhism, and feudalism, the concept of

wa was ingrained into Japanese society. Naturally, this has become an inherent part of Japanese

business culture from consensus-based decision-making, promotions, and even elevator

etiquette.

104

Although this consensus-based system was recognized as one of the drivers of

Japan’s rapid economic growth, it has also created a hostile environment for successful

104

Robert, Whiting. “The Concept of Wa.” POV | American Documentary Inc. (blog), January 17, 2006.

http://archive.pov.org/kokoyakyu/the-concept-of-war.

Komoriya 40

entrepreneurs. Indeed, several prominent entrepreneurs faced their downfall amid public outcry

and political interference.

105

The first example of this is Hiromasa Ezoe, founder of Recruit Holdings (then Recruit

Cosmos). Ezoe founded the human resources company as a job-hunting magazine publication for

university students. He sought to democratize the job market for graduates by disclosing

recruitment information. Since then, the company has expanded to several industries and is most

well known in the U.S. for its acquisition of job search engine “Indeed” and employer review site

“Glassdoor.”

106

Ezoe was seen as a maverick in Japan’s close-knit society. With Recruit Cosmos’s

financial success, the “playboy billionaire” was recognized as a “young zakai,” a young business

leader with political clout.

107

With this new fame and money, he led an extravagant lifestyle,

much to the dismay of the Japanese public. In order to fully be accepted in Japan’s “tight inner

circle of high-ranking government and business decision-makers,” Ezoe bribed political leaders

by gifting them low-priced shares in a Recruit subsidiary shortly before it went public. After the

company went public its share price skyrocketed, lining the pockets of several politicians.

108

According to seasoned Japan journalist Ian Buruma, “The problem was not so much the

corruption itself, which was hardly unprecedented, but the fact that an outsider had attempted to

crack the establishment by throwing around too much money, too brazenly. Mr. Ezoe had

105

Fukuyama, Francis. Trust: The Social Virtues and The Creation of Prosperity. First Paperback Edition. New York:

Free Press, 1996.

106

Recruit Holdings. “History | About.” Accessed February 18, 2022. https://recruit-holdings.com/en/about/history/.

107

Ries, Ivor. “EZOE: FROM RAGS TO RICHES TO RUIN.” Australian Financial Review, December 19, 1988.

https://www.afr.com/politics/ezoe-from-rags-to-riches-to-ruin-19881219-jl1et.

108

Sing, Bill. “Aftermath of a Scandal : Japanese Company’s Story Reflects Ties Between Business, Political Practices.”

Los Angeles Times, April 26, 1989. https://www.latimes.com/archives/la-xpm-1989-04-26-fi-1846-story.html.

Komoriya 41

become too big for his boots.”

109

In his memoir, Where is the Justice? Media Attacks,

Prosecutorial Abuse, and My 13 Years in Japanese Court, Ezoe states that there was no concrete

evidence against him and that “the sensational reports in the newspapers, TV news programs,

and weekly magazines fanned the public's fury and encouraged the prosecutors to pressure a

confession out of him.” Mentally and physically exhausted from the trial, Ezoe signed the

interrogation records and was found guilty by the Tokyo District Court.

110

Clearly, Ezoe, an

outsider, had shaken up Japanese business, political, and public society too much for his own

good. This experience would serve as a cautionary tale for future Japanese entrepreneurs.

Two decades later, entrepreneur Takafumi Horie would find himself in a similar situation

under the pressure of Japan’s conformist society. The “American-style internet tycoon” founded

Livedoor shortly after dropping out of the prestigious Tokyo University. The internet service

provider company started by merging a portal site with several internet services from news,

travel, to banking. He expanded his startup through hostile takeovers, unconventional and

controversial in Japan, to a $6.3 billion valuation.

111

Breaking Japanese norms, he was known for wearing T-shirts rather than suits, driving

around Tokyo in his silver-blue Ferrari, and flying off to Pacific Islands with models on

weekends.

112

However, in 2007 Horie was sentenced to two-and-a-half years in jail for security

109

Buruma, Ian. “Opinion | Carlos Ghosn Was Too Big Not to Fail in Japan.” The New York Times, February 5, 2020, sec.

Opinion. https://www.nytimes.com/2020/02/05/opinion/carlos-ghosn-japan.html.

110

Ezoe, Hiromasa. Where Is the Justice?: Media Attacks, Prosecutorial Abuse, and My 13 Years in Japanese Court, n.d.

111

Rampe, David. “A University Dropout Turned Internet Tycoon.” The New York Times, January 18, 2006, sec.

Business. https://www.nytimes.com/2006/01/18/business/worldbusiness/a-university-dropout-turned-internet-

tycoon.html.

112

McLannahan, Ben. “Takafumi Horie – Return of Japan’s Enfant Terrible.” Financial Times, May 18, 2014.

https://www.ft.com/content/6c099ae4-dab4-11e3-9a27-00144feabdc0.

Komoriya 42

fraud. He was found guilty of manipulating the earnings and stock price of Livedoor through

stock splits and the buy up of shares via “dummy companies.”

113

White collar crimes like the

ones committed by Horie are not unusual in Japan, and executives often receive suspended

sentences after pleading guilty and apologizing to the public. In 2013, a group of executives at

camera-maker Olympus committed a much larger financial fraud scheme but received suspended

prison sentences.

114

However, given Horie’s insistence on his innocence, the very public nature

of the case, and new regulator goals of cracking down on corporate misdeeds, Horie’s sentence

was unusually long.

115

“If he had just sort of shut up and taken his knocks like a ‘good Japanese’,

I don’t think he would have been punished as much,” said Keith Henry, founder and managing

director of Asia Strategy, a public policy advisory firm.

116

A Financial Times report echoes

similar views on the prosecution: “Prosecutors were building a case that “Horiemon” – so called

for his likeness to Doraemon, a catlike cartoon robot – was the embodiment of an aggressive and

unwelcome western-style market capitalism (...) He didn't know how to deal with the

establishment.”

117

Since being released from prison in 2013, Horie has expanded into a wide variety of

ventures from a chocolate tofu business, a celebrity eavesdropping app, and most notably

Interstellar Technologies, a “NewSpace” startup with the goal of reducing the cost of access to

113

Morse, Andrew. “Former Livedoor Chief Is Sentenced.” Wall Street Journal, March 16, 2007, sec. News.

https://www.wsj.com/articles/SB117400944838938879.

114

The Economist. “Up, up and Away,” August 31, 2013. https://www.economist.com/business/2013/08/31/up-up-and-

away.

115

Soble, Jonathan. “Japan’s Horie Sentenced to Jail in Livedoor Fraud.” Reuters, March 16, 2007, sec. Editor’s Picks.

https://www.reuters.com/article/us-japan-horie-idUST35896620070316.

116

Ibid.

117

McLannahan, Ben. “Takafumi Horie – Return of Japan’s Enfant Terrible.” Financial Times, May 18, 2014.

https://www.ft.com/content/6c099ae4-dab4-11e3-9a27-00144feabdc0.

Komoriya 43

space.

118

However, the public prosecution against Horie has had a deep impact on Japanese

societal views towards successful and public entrepreneurs. William Saito, a serial entrepreneur

and former advisor to then Prime Minister Abe, has spent the past five years trying to undo the

“dispiriting effect” of Horie’s downfall and punishment on the psyche of young Japanese

aspiring to create their own startup.

119

The arrest, known as the “Horie shock,” has encouraged

entrepreneurs to maintain a low profile.

120

The last and most recent example is Carlos Ghosn, the former chairman and CEO of the

Renault-Nissan-Mitsubishi alliance. The Brazilian-born Lebanese businessman achieved great

fame and success for turning the then struggling Nissan into one of the world’s most successful

automotive companies. Nicknamed “Le Cost Killer,” Ghosn reduced the debt and steered Nissan

into profitability through unconventional and controversial means (in Japan) by dismantling the

vertical keiretsu supply structure, laying off thousands of workers, and prioritizing performance

over seniority.

121

Japanese companies usually prefer CEOs and executives who do not take credit

for success and maintain a low profile. However, Ghosn did not fit this mold and was a regular at

World Economic Forum meetings, threw lavish wedding parties, and lived in luxury houses

around the world.

122

In 2018, Ghosn experienced a swift downfall by Nissan insiders accusing

118

Ibid.

119

The Economist. “Up, up and Away,” August 31, 2013. https://www.economist.com/business/2013/08/31/up-up-and-

away.

120

Oi, Mariko. “Where Are Japan’s Entrepreneurs?” BBC News, March 30, 2015, sec. Business.

https://www.bbc.com/news/business-32111959.

121

Ghosn, Carlos. “Saving the Business Without Losing the Company.” Harvard Business Review, January 2002.

https://hbr.org/2002/01/saving-the-business-without-losing-the-company.

122

Shane, Daniel. “Carlos Ghosn: Japan May Never Hire a Foreign CEO Again - CNN.” Accessed February 20, 2022.

https://edition.cnn.com/2018/11/30/business/japan-foreign-ceos-carlos-ghosn/index.html.

Komoriya 44

him of underreporting his earnings and using company funds to finance his lavish lifestyle.

123

What made the trial even more interesting was that Ghosn, accusing the Japanese justice system

of “guilty until proven innocent” and criticizing the rare granting of bail, escaped Japan in a

musical equipment box via private jet to Lebanon, where he now remains a fugitive.

124

Although

Ghosn by no means is innocent, this saga provides a cautionary tale for Japanese CEOs to

maintain a low public profile and not ruffle feathers within society. Although Nissan is in no way

a startup, Ghosn’s experience shows how Japan may not be ready for serial entrepreneurs and

public CEOs that serve as business and societal leaders, as in the U.S. and other countries.

As the three cases show, cultural attitudes in Japan create a rather hostile environment for

maverick entrepreneurs and eccentric business executives, considered by some as the backbone

of the American startup ecosystems. In many instances, the founders become the face of the

company themselves and serve as a powerful marketing tool. For example, Meta (formerly

Facebook) is synonymous with Mark Zuckerberg, Tesla and Space X with Elon Musk, Bill Gates

with Microsoft, Steve Jobs with Apple, and Jeff Bezos with Amazon. Many other companies

have similar ties to their founders.

More importantly, these public figures serve as a source of inspiration and motivation for

the next generation of young entrepreneurs. In the U.S. successful startup founders are often

glorified whether it be for the product or service created, the wealth generated, or societal

problem addressed. Seeing them in this positive and very public light, others (especially the

younger generation) are incentivized to pursue a career in entrepreneurship in their future. The

123

McLain, Sean. “Nissan’s Carlos Ghosn Arrested, to Be Ousted as Chairman Amid Financial Misconduct Probe.” Wall

Street Journal, November 20, 2018, sec. Business. https://www.wsj.com/articles/nissans-carlos-ghosn-arrested-to-

be-ousted-as-chairman-amid-misconduct-probe-1542634696.

124

Jordan, Dearbail, and Simon Jack. “Ex-Nissan Boss Carlos Ghosn: How I Escaped Japan in a Box.” BBC News, July

13, 2021, sec. Business. https://www.bbc.com/news/business-57760993.

Komoriya 45

public perception of famous entrepreneurs may be correlated with favorable public attitudes

toward pursuing a career in entrepreneurship in the U.S. and less favorable attitudes in Japan.

However, despite Japan’s tarnished past in its acceptance of prominent entrepreneurs,

several such founders have emerged on the global stage in recent years. Two CEOs that are

challenging the status quo of Japanese cultural norms are Masayoshi Son and Hiroshi Mikitani.

Masayoshi Son was born to ethnically Korean parents in 1957. Given the homogeneity

and xenophobic attitudes pervasive in Japanese society, he was bullied early in his childhood for

being of Korean descent. To this day he is still a target of xenophobic comments on Japanese

social media.

125

After graduating from UC Berkeley, Son returned to Japan and launched a

business focused on the distribution of PC software in 1981. Since its humble beginnings, the

company has expanded into telecommunications, e-commerce, finance, and more.

However, what he has been most famous for in the past few years is his entrepreneurial

ambitions. He has supported startups worldwide through the Softbank Vision Fund, the world’s

largest technology-focused investment fund with over $150 billion in capital (as of March

2021).

126

He is often in media headlines, whether it be his dealings with the struggling WeWork,

his close relationship with Saudi Crown Prince Mohammed Bin Salman, or his role as the

“Nasdaq whale.” His unconventional and “un-Japanese” style of negotiations and dealmaking

has also drawn attention. According to a Bloomberg report,

125

Nikkei Asia. “SoftBank’s Son Stands up to Anti-Korean Bigotry in Japan.” Accessed February 20, 2022.

https://asia.nikkei.com/NAR/Articles/SoftBank-s-Son-stands-up-to-anti-Korean-bigotry-in-Japan.

126

Savitz, Eric J. “SoftBank Boosts Size of Vision Fund 2 to $30 Billion.” Accessed February 20, 2022.

https://www.barrons.com/articles/softbank-boosts-size-of-vision-fund-2-to-30-billion-51620848432.

Komoriya 46

Son’s idiosyncratic dealmaking has confounded admirers and detractors for years. And

the latest frenzy has been no exception. In deal after deal, according to people involved,

Son pressed to meet founders face to face, encouraged them to take more money than

they wanted, and wielded his outsized checkbook as a weapon. Along the way, he rattled

rivals with his growing influence and changed the game of startup investing – for better

or worse.

127

He is also famous for his eclectic presentations with pundits claiming “[he] has been

defying PowerPoint conventions for years.

128

From a slide depicting the “Valley of Coronavirus”

with unicorns trapped inside to another of golden goose eggs to explain the company, he has

become famous for using eclectic images to demonstrate and explain difficult business concepts.

Although he is often criticized for his limited investments in Japanese startup companies

through the Vision Fund, he is an active proponent of change within Japanese society and

companies to create a more conducive environment for startups. Seeing a globalized education as

one way to address the lack of startups, he has set up the Masason Foundation to sponsor the

education of 240 young Japanese students studying abroad, mostly in the U.S. Controversial yet

well-respected within Japanese society, Son will hopefully serve as a beacon of inspiration to

millions of young Japanese looking to pursue a career in entrepreneurship.

The next maverick entrepreneur breaking societal norms and creating a personal brand

around his company is Hiroshi Mikitani. After graduating from Harvard Business School in

127

Elstrom, Peter, Pavel Alpeyev, and Lulu Yilun Chen. “Inside the Eccentric, Relentless Deal-Making of Masayoshi

Son.” Bloomberg.Com, January 2, 2018. https://www.bloomberg.com/news/features/2018-01-02/inside-the-

eccentric-unstoppable-deal-making-of-masayoshi-son.

128

Pfanner, Eric, and Alexander Martin. “Rakuten Touts English in Its Growth Push.” Wall Street Journal, November 12,

2015, sec. Tech. https://www.wsj.com/articles/rakuten-puts-english-on-growth-push-1447360200.

Komoriya 47

1993, he left his prestigious job at the Industrial Bank of Japan (now Mizuho) and founded

Rakuten with the vision of creating an “internet shopping mall.” Donning the jerseys of FC

Barcelona and the Golden State Warrior, Rakuten has grown into a global technology company

with its primary focus on e-commerce but with businesses in other areas from

telecommunications and more importantly VC. Like Son, Mikitani is seen in Japan as an

unconventional business leader. He is nicknamed “Mickey” by employees and runs a very casual

workplace environment, “a far cry from the typical Japanese corporate office, run by men in

black suits (…) who refer to each other using family names and formal titles.”

129

In 2011 after

getting the opinion of his followers on Twitter, Mikitani formally left the Japanese Business

Federation (Keidanren) group, criticizing it as being too conservative and resistant to enacting

reforms to help Japanese businesses become more competitive.

130

Criticizing Keidanren’s role as

simply protecting conventional Japanese industries, he now acts as the Representative Director

of the Japan Association of New Economy (JANE). This new business group is centered on the

companies and startups that developed Japan’s e-business and IT industries and calls for reforms

in Japan’s industrial structure to encourage innovation.

131

Most controversially, he enacted a

policy termed “Englishization” in 2010 where the official workplace language was changed to

English overnight in anticipation of Rakuten’s growing overseas businesses and operations. At

the time, only 10 percent of the staff could function in English, but Mikitani stated that any

129

Ibid.

130

Nagata, Kazuaki. “Rakuten Chief Defends Exit from Keidanren.” The Japan Times, July 2, 2011.

https://www.japantimes.co.jp/news/2011/07/02/business/rakuten-chief-defends-exit-from-keidanren/.

131

Mikitani, Hiorshi, and Ryoichi Mikitani. “The Power to Compete: An Economist and an Entrepreneur on Revitalizing

Japan in the Global Economy,” 1st Edition., 240. 4: Wiley, 2014.

Komoriya 48

employee who did not learn English within two years would be demoted.

132

Mikitani’s policy of

Englishization will be studied in greater detail in the chapter on global expansion. Mikitani, like

Son, is well-respected within Japan and will likely also serve as a role model to future Japanese

entrepreneurs. Recently, Soichiro Minami, an entrepreneur mentored by Mikitani, was minted as

a billionaire after the successful IPO of his company, Visonal Inc.

133

As Japan undergoes significant changes and develops into a more innovative startup

ecosystem, current and future successful entrepreneurs will be pivotal in being mentors, funders,

and a source of inspiration for the next generation of startup founders to come.

CHAPTER IV: THE ROLE OF EDUCATION IN PROMOTING ENTREPRENEURSHIP

One of the most important factors and ingredients for any thriving startup ecosystem is a

robust education system. From early preschool to the PhD level, education serves as the

backbone of human capital, one of the necessary components of startups. Various studies

conducted over the past two decades provide compelling evidence that there is a positive

correlation between educational attainment and entrepreneurial performance. These studies also

indicate that countries with higher rates of education also have higher rates of entrepreneurship

as a career choice.

134

132

Neeley, Tsedal. “Language and Globalization: ‘Englishnization’ at Rakuten (A) ^ 412002.” Harvard Business Review,

August 29, 2011. https://store.hbr.org/product/language-and-globalization-englishnization-at-rakuten-a/412002.

133

Lee, Yoojung, Min Jeong Lee, and Komaki Ito. “Entrepreneur Mentored by Rakuten Billionaire Becomes One

Himself.” Bloomberg.Com, September 30, 2021. https://www.bloomberg.com/news/articles/2021-09-

30/entrepreneur-mentored-by-rakuten-billionaire-becomes-one-himself.

134

Dickson, Pat H., George T. Solomon, and K. Mark Weaver. “Entrepreneurial Selection and Success: Does Education

Matter?” Edited by George Solomon. Journal of Small Business and Enterprise Development 15, no. 2 (January 1,

2008): 239–58. https://doi.org/10.1108/14626000810871655.

Komoriya 49

In this chapter, the role of education in promoting entrepreneurial behavior is first

analyzed. Next, the role of universities as centers of diffusing knowledge, research, and

technology is studied. Finally, the role of universities as venture capitalists themselves is

examined.

PROMOTING ENTREPRENEURSHIP AND RISK-TAKING IN EDUCATION

As analyzed in the previous chapter, Japanese culture creates an environment in which

entrepreneurial activity is stifled. One of the bedrocks of creating this culture of low risk-taking

is education.

Japanese schools are criticized for instilling a conformist mindset in Japanese youth.

Hiroshi Mikitani, one of Japan’s most successful entrepreneurs, states, “We are no longer in an

era in which we need a uniform education system to create blue-collar workers for factories.”

135

In the era of startups, creativity and ingenuity are essential in order to create innovative products

and services for consumers.

The Japanese education system was developed and modeled after the British education

system during the industrial revolution. Termed as “conveyor-belt education” by critics, pupils

are grouped by age into classes where the same content is presented in uniform ways and studied

from identical textbooks for each subject.

136

Although this model was successful in improving

Japan’s education level during the country’s rapid growth years, the system is obsolete and no

longer compatible with the dynamic economic model of the world today.

135

Mikitani, Hiorshi, and Ryoichi Mikitani. “The Power to Compete: An Economist and an Entrepreneur on Revitalizing

Japan in the Global Economy,” 1st Edition., 240. 240: Wiley, 2014

136

Ittoku, Tomano. “Transforming Japan’s Conformist Education System.” nippon.com, May 26, 2020.

https://www.nippon.com/en/japan-topics/g00831/.

Komoriya 50

The Japanese education system is guided by strict protocols and rules in most schools.

Such rules may include the type of pen or pencil allowed in class, note-taking, raising hands, and

how to speak when called upon.

137

In terms of physical appearance, strict rules control dress

code, hairstyle, and accessories allowed. Most controversial are rules on hair color in which

many schools require students to maintain their “natural” straight, black hair. Perms, braided

extensions, and dyed hair are strictly prohibited. For those who are born with naturally brown or

lighter color hair, there are many cases in which students are forced to die their hair black.

138

The class structure and subject matter also leave little room for individuality and

creativity. Classes of 40 kids are assigned and remain in the same room throughout the day with

subjects by different teachers taught to each cohort. It is common for students to remain in the

same class year to year.

139

All students in the same grade level study the same subject with very

few electives available to choose from.

140

This academic structure creates a dynamic in which

individuality and creativity are stifled and students are not able to improve upon their social

networking skills given the class structure.

Codified educational codes and norms create an environment in which risk-taking is

discouraged, individuality is looked down upon, and entrepreneurship is discouraged. All these

“soft traits” are desirable in dynamic entrepreneurial environments. According to the “Bracey

Reports” by Gerald Bracey, an American education policy researcher, “The educational system

137

Ibid.

138

May, Tiffany. “Japanese Student Forced to Dye Her Hair Black Wins, and Loses, in Court.” The New York Times,

February 19, 2021, sec. World. https://www.nytimes.com/2021/02/19/world/asia/japan-hair-school.html.

139

Cerantola, Alessia. “Why so Many Japanese Children Refuse to Go to School.” BBC News, December 23, 2019, sec.

Asia. https://www.bbc.com/news/world-asia-50693777.

140

Johnson, Marcia L, and Jeffery R Johnson. “Daily Life in Japanese High Schools.” Freeman Spogli Institute for

International Studies, October 1996. https://spice.fsi.stanford.edu/docs/daily_life_in_japanese_high_schools.

Komoriya 51

is ineffective in developing students' ability to think for themselves. If there is a need for

innovation in the economy, science, technology, culture, and other fields, creativity holds the key

to Japan's future. In the current system, which focuses on the ‘average’ student, it is difficult to

encourage originality, creativity, and an adventurous spirit.”

141

Besides the impact on an innovative startup environment, conformist and rigid rules have

led to detrimental results among Japanese students with absenteeism, bullying, and suicide rates

rising to all-time highs. Termed, futoko, the Ministry of Education defines these children as those

who did not attend school for more than 30 days for reasons unrelated to health or finance.

142

One of the most common factors reported by students was the rigid set of rules of Japanese

schools.

143

Between 2018 and 2019, absenteeism rates rose 31 percent.

144

In 2019, 332 cases of

school-age suicides were reported, the highest in 30 years.

145

Individuality and creativity are also stifled at the higher education level in universities.

As was previously described, the Japanese recruiting cycle is known as the shukatsu system in

which universities hire students in April of their penultimate year. According to Takayuki

Matsumoto, an Osaka-based career consultant, “Shukatsu is like Kabuki theater. It’s difficult

when you don’t fit the template.” Given this, he advises his clients not to be too assertive or ask

141

Bracey, Gerald W. “The Japanese Education System Is a Failure, Say Some Japanese.” Phi Delta Kappan 79, no. 4

(December 1997): 328–30.

142

Cerantola, Alessia. “Why so Many Japanese Children Refuse to Go to School.” BBC News, December 23, 2019, sec.

Asia. https://www.bbc.com/news/world-asia-50693777.

143

Ibid.

144

Ittoku, Tomano. “Transforming Japan’s Conformist Education System.” nippon.com, May 26, 2020.

https://www.nippon.com/en/japan-topics/g00831/.

145

BBC News. “Suicides among Japanese Young People Hit 30-Year High,” November 5, 2018, sec. Asia.

https://www.bbc.com/news/world-asia-46096626.

Komoriya 52

many questions.

146

Moreover, according to Ulrike Schaede, the shuktasu system has become so

standardized to the point that any signs of individuality among applicants have been lost.

Companies and HR managers choose candidates based on whether they fit the company’s

culture, not on the candidate’s individual knowledge or skill. Schaede describes, “Recruit

[Japan’s leading HR software company] began to advertise a particular outfit for the shukatsu –

black suit, blue tie, certain hairstyle – together with advice on how to answer the interview

questions. This had resulted in a bizarre annual event when long lines of well-educated 21-year-

olds queue up in interview venues, all dressed in the same way, and prepared to give the same

answers to the same questions.”

147

UNIVERSITY-INDUSTRY LINKAGES

While primary schooling influences the level of entrepreneurial activity and culture in a

country, higher education is where much of the innovation and research takes place. According

to a report for the National Institute for Research Advancement, two institutional foundations of

Silicon Valley are a labor market providing high quality mobile human resources and “industry-

university-government interaction that generates streams of innovative ideas, products, and

processes.”

148

146

Tabuchi, Hiroko. “Young and Global Need Not Apply in Japan.” The New York Times, May 29, 2012, sec. Business.

https://www.nytimes.com/2012/05/30/business/global/as-global-rivals-gain-ground-corporate-japan-clings-to-

cautious-ways.html.

147

Schaede, Ulrike. The Business Reinvention of Japan: How to Make Sense of the New Japan and Why It Matters,

Stanford Business Books, Stanford, 2020, p. 44.

148

Dasher, Richard, Nobuyuki Harada, Takeo Hoshi, Kenji Kushida, and Tetsuji Okazaki. “Institutional Foundations for

Innovation-Based Economic Growth.” National Institute for Research Advancement (NIRA), July 7, 2015.

https://www.nira.or.jp/pdf/e_1503report.pdf.

Komoriya 53

Given the importance of higher education-industry linkages, it is no surprise that the two

most entrepreneurial universities in the U.S. are in proximity to Silicon Valley: Stanford

University and UC Berkeley. Rankings on entrepreneurship are based on schools that have

created the most entrepreneurs and companies that raise the most capita. Both schools

significantly outperform other universities across the country in these ranking statistics.

149

One of the most pivotal ways in which universities support a thriving startup ecosystem is

by being a center of R&D. Government grants are allocated to universities in hope of research on

target areas of innovation. As discussed above, the U.S. government has been an instrumental

driver of innovation in the American startup ecosystem through its allocation of capital to

various institutions and more importantly universities that have “generated new knowledge as

well as (…) developed the capabilities of the future labor force.”

150

In response to rising

competition in technology from Japan, the Bayh-Doyle Act was passed in 1980 which permitted

universities, businesses, and non-profits that receive federal funds to claim ownership of ideas

and products created. Previously, the rights to such products and ideas were forfeited to the

federal government.

151

Thus, it allowed for the commercialization of government investment in

key R&D areas.

149

“Top 50 - The Top 50 Universities Producing VC-Backed Entrepreneurs.” PitchBook, n.d.

https://files.pitchbook.com/website/files/pdf/PitchBook_Universities_2018_2019_Edition.pdf.

150

Lazonick, William. “The Innovative Enterprise and the Developmental State: Toward an Economics of ‘Organizational

Success.’” Institute for New Economic Thinking Annual 2011 conference Crisis and Renewal: International

Political Economy at the Crossroads Mount Washington Hotel, April 8, 2011.

https://www.ineteconomics.org/uploads/papers/BWpaper_LAZONICK_040811.pdf.

151

Athanasia, Gabrielle. “The Legacy of Bayh-Dole’s Success on U.S. Global Competitiveness Today.” Accessed March

21, 2022. https://www.csis.org/blogs/perspectives-innovation/legacy-bayh-doles-success-us-global-competitiveness-

today.

Komoriya 54

Compared to their counterparts in the U.S., Japanese university-industry-government

linkages are weaker with top universities having comparably lower startup creation rates. This

difference with American higher education is due to several factors but most notably rules not

allowing faculty to work outside the university and the universities themselves having little

experience licensing technology. Moreover, given the dominance of large keiretsu firms in the

Japanese economy, much of the R&D was conducted in-house rather than through university

collaboration and funding.

152

However, the Japanese version of the Bayh-Dole Act was passed in 1999, allowing for

government-funded intellectual property to be claimed by universities and research institutes,

incentivizing researchers to commercialize intellectual property.

153

At the university level,

government measures were enacted to support technology licensing offices (TLOs) that lowered

the cost and barriers to commercializing innovations. Moreover, in 2004, national universities

became classified as independent organizations, which increased the flexibility of employment

constraints and the ability of professors and researchers to work as outside consultants and

advisors to companies.

154

After these measures were enacted, a greater number of startup

spinoffs from universities emerged.

Besides serving as centers of research and innovation, universities support startup

creation directly by providing various services and support through incubators. Startup

incubators are collaborative programs for entrepreneurs, usually in a physical workspace, that

152

Kushida, Kenji. “Japan’s Startup Ecosystem: From Brave New World to Part of Syncretic ‘New Japan.’” Asian

Research Policy, Vol 7. Shorenstein Asia-Pacific Research Center, 2016.

153

University Network for Innovation and Technology Transfer. “Bayh-Dole Act and Installation of Technology Transfer

Office.” Accessed March 21, 2022. https://unitt.jp/en/tlo/bayhdole/.

154

Kushida, Kenji. “Japan’s Startup Ecosystem: From Brave New World to Part of Syncretic ‘New Japan.’” Asian

Research Policy, Vol 7. Shorenstein Asia-Pacific Research Center, 2016.

Komoriya 55

help early-stage startups succeed through providing offices, seed funding, training, and

mentoring.

155

By supporting students in creating startups in universities, incubators allow for

greater industry-academia linkages and collaboration, necessary for a thriving startup ecosystem.

In the past decade, hundreds of incubators have been created in higher education, not only as a

result of industry trends but also because of demands for university curricula with more real-

world applications and job training skills.

156

Some notable programs include Start X at Stanford

University, Venture Incubation Program (VIP) at Harvard University, Berkeley SkyDeck at UC

Berkeley, and Delta-V at MIT. Although the programs differ in their support and resources, all

have the same goal of increasing entrepreneurial ambition in their students and startup creations

in their universities.

Although still lagging behind the U.S., top Japanese universities have followed this

incubator model. The University of Tokyo has led the way with 40% of total university startup

exits in 2018.

157

The university has four incubation facilities allowing for students and faculty to

commercialize research and findings, the largest being the “Entrepreneur Plaza.”

158

Moreover,

the university has a sizeable VC fund to support university startups, which will be discussed in

the next section. One of the most dynamic university incubation centers is Kyoto University

with its Innovation Hub Kyoto. The center’s mission is to help support biomedical-related

155

Gensler. “The Rise of Academic Incubators.” Accessed March 23, 2022. https://www.gensler.com/blog/the-rise-of-

academic-incubators.

156

“University Incubators Present New Growth Opportunities for Startups |Innovation Center | Emory University.”

Accessed March 23, 2022. https://hatchery.emory.edu/articles/university-incubators.html.

157

Ventures, Beyond Next. “上場している大学発ベンチャーまとめ.” [Summary of Listed Ventures from

Universities] Medium, May 15, 2018.

158

“東京大学産学協創推進本部. [University of Tokyo Industry-Academia Promotion Headquarters.] Incubation

facilities.” Accessed March 23, 2022. http://www.ducr.u-tokyo.ac.jp/en/activity/venture/incubation/index.html.

Komoriya 56

startups and turn research conducted at the university into business opportunities. The incubator

also benefits from Kyoto University’s research facilities at UC San Diego.

159

Despite these

resources, the programs are less developed compared to their American counterparts in

mentoring and supporting community networking.

UNIVERSITIES AS A SOURCE OF VENTURE CAPITAL

Venture capital is a vital source in any start-up ecosystem, as discussed above.

Universities have increasingly become crucial players in the startup world in providing their own

funding and endowments toward supporting student ventures. University endowment fund

returns have reached record gains in recent years with schools such as Duke University and the

Washington University in St. Louis achieving returns of more than 50%.

160

Universities with

greater allocations in VC funds outperformed their peers with less exposure. With VC

investments leading the performance in endowment funds, it is likely that investments in this

sector, specifically in student target funds, will also increase in the coming years.

Many American universities have their own dedicated venture funds to promote greater

university-industry linkages and promote startup creation among their students and alumni. One

notable fund is the House Fund, which has raised over $2 billion in capital to invest in startups

founded by UC Berkeley students and alumni.

161

Other such funds include the Innovation

Venture Fund of New York University, The Engine of MIT, and the Penn Wharton Innovation

159

“Aiming for Success in University Startups by Providing Support Utilizing the " Japanese Strengths ".” Accessed

March 23, 2022. https://www.link-j.org/en/interview/post-3612.html.

160

Chung, Juliet, and Eliot Brown. “University Endowments Mint Billions in Golden Era of Venture Capital.” Wall Street

Journal, September 29, 2021, sec. Markets. https://www.wsj.com/articles/university-endowments-mint-billions-in-

golden-era-of-venture-capital-11632907802.

161

The House Fund. “The House Fund - We Invest in Berkeley Alumni, Faculty, Students.” Accessed March 23, 2022.

https://www.thehouse.fund/.

Komoriya 57

Fund of the University of Pennsylvania. Besides VC funds, many universities also have “angel

networks” in which student entrepreneurs can connect with university alumni to secure early-

stage funding. From Columbia, University of Virginia, Duke, and Wharton, several networks

that support student-driven ventures exist throughout the American startup ecosystem.

Japan has been slower than the U.S. to pursue this new form of capital raising structure.

Previously, laws had prevented universities from directly investing in startup companies.

However, a legal amendment passed in 2022 now allows for universities to invest directly in

startups. This will allow the University of Tokyo, Kyoto University, Tohoku University, and six

other research universities to directly support these companies.

162

With government approval to invest directly in startups, universities have capitalized on

this new opportunity and have created their own VC funds. The University of Tokyo has taken

advantage on this new amendment and has supported over 310 startups to date through its two

funds. The IPC Fund 1 raised $2.1 billion and has invested in 25 companies. The AOI Fund 1 in

2022 raised another $2 billion for the UTokyo Innovation Platform Co. to further support

student-led ventures.

163

Another example is Kyoto University Innovation Capital (Kyoto-iCAP)

with over $130 million. The fund focuses on backing startups from research labs in healthcare,

biotech, and energy.

164

162

Hata, Asuka, and Kenjiro Suzuki. “University of Tokyo to Set up $536m Fund for School-Born Startups.” Nikkei Asia.

Accessed March 23, 2022. https://asia.nikkei.com/Business/Startups/University-of-Tokyo-to-set-up-536m-fund-for-

school-born-startups.

163

Ltd, UTokyo IPC-UTokyo Innovation Platform Co. “The Second Fund of UTokyo Innovation Platform Co. Comes to

Final Closing with JPY25.6 Billion, Involving 11 Institutional Investors.” Accessed March 23, 2022.

https://www.prnewswire.com/news-releases/the-second-fund-of-utokyo-innovation-platform-co-comes-to-final-

closing-with-jpy25-6-billion-involving-11-institutional-investors-301479330.html.

164

KYOTO UNIVERSITY INNOVATION CAPITAL Co.,Ltd. “Kyoto University Innovation Capital Co.,Ltd.” Accessed

March 23, 2022. https://www.kyoto-unicap.co.jp/en/.

Komoriya 58

Results of the concentrated effort in promoting university-industry linkages have been

positive in recent years. Over the past three decades, the number of university-affiliated startups

has exponentially increased. In 2017, the number of university startups rose 13 percent and

surpassed 2,000 for the first time. Tokyo University led the way with 245, trailed by Kyoto

University with 140, and other research universities creating the other newly formed

companies.

165

University startup creation remained strong in 2020 with 1,623 startups created

across 11 research universities with the University of Tokyo and Kyoto University remaining in

the lead.

166

All things considered, the quality of education pertaining to startups and innovation is

experiencing profound improvements. These trends will strengthen university-industry linkages,

allowing for greater innovative ideas from ambitious students, professors, and researchers to be

commercialized. This will contribute to revitalizing Japan’s startup ecosystem.

CHAPTER V: GLOBAL EXPANSION OF STARTUPS

In the late 20th century, Japanese companies dominated the electronic consumer market

around the world with companies like Sony, Panasonic, Toshiba, Sharp, Hitachi, and other

household names. In the modern economy, there has been no equivalent. Instead, American

companies with humble beginnings are now used by millions, if not billions, of consumers

worldwide from Facebook, Apple, Google, to Microsoft.

165

Nikkei Asia. “Japan’s University Startups Top 2,000 for First Time.” Accessed March 23, 2022.

https://asia.nikkei.com/Business/Business-trends/Japan-s-university-startups-top-2-000-for-first-time.

166

Statista. “Japan: University-Based Startups by Major University 2020.” Accessed March 23, 2022.

https://www.statista.com/statistics/895274/japan-university-based-startup-number-by-major-university/.

Komoriya 59

The question of whether Japanese startups must expand overseas to be successful is a

contentious debate. With a population of 125 million, some experts argue that Japan itself is

already a large enough market for startups to capture sufficient market share and revenue to be

“successful.”

167

This is the model that most Chinese startups have pursued.

168

Moreover, given

that the quality demands of Japanese customers are so high, if companies can succeed in Japan,

they can succeed in any market.

169

However, if Japan were to create truly global companies,

Japanese startup founders must have the intention of expanding overseas and catering to

international customers.

Another reason why it is in the best interest of startups to expand overseas is the shrinking

Japanese population. It is expected to decrease to 116.62 million in 2030, a 6.4 percent decline,

and drop lower to 99.62 million by 2054, a 20 percent decline.

170

With this increasingly

shrinking population, the market is bound to decline and no longer be as lucrative as before.

It is also important to note that the lacking presence of Japanese companies on the

international stage is not limited to startups. It is a nationwide trend. Japanese companies of all

sizes have lost their competitiveness and footprint in international markets. In 2000, 107

167

World Bank. “Population, Total - Japan | Data.” Accessed April 1, 2022.

https://data.worldbank.org/indicator/SP.POP.TOTL?locations=JP.

168

Yoon, Saemoon. “The 3 Pillars of China’s Booming Start-up Ecosystem.” World Economic Forum, June 17, 2021.

https://www.weforum.org/agenda/2021/06/china-booming-startup-ecosystem/.

169

Komoriya, Kaito. “Ulrike Schaede on Japanese Startups and Her Book ‘The Business Reinvention of Japan: How to

Make Sense of the New Japan and Why It Matters.’” Asia Experts Forum (blog), December 27, 2021.

http://asiaexpertsforum.org/ulrike-schaede-japanese-startups-book-business-reinvention-japan-make-sense-new-

japan-matters/.

170

“Population Projection for Japan.” Accessed April 2, 2022. https://www.ipss.go.jp/site-

ad/index_english/esuikei/econ2.html.

Komoriya 60

companies on the Forbes Global 500 list were Japanese.

171

In 2021, the figure dropped to 50

companies, a 50 percent decrease.

172

However, companies are beginning to expand again slowly. International M&A have

increased, companies have begun using English as their global corporate language, and efforts

are being made to recruit talented non-Japanese executives.

173

Some Japanese startups have begun expanding outward. The most notable in recent years is

Mercari, a Japanese e-commerce company. "We can't be successful globally without success in

the U.S.” said CEO Shintaro Yamada. “If a service is accepted in the U.S., it tends to become

universal."

174

To help grow its market share in the American market, an ambitious expansion

strategy was pursued by chief business officer John Laegerling, a former Facebook vice

president.

175

In this chapter, corporate policies of “Englishization” will be analyzed before studying the

inability of Japanese companies to export innovation, also known as the “Galapagos syndrome."

ENGLISHIZATION

The question of whether English is a necessary component of the Japanese startup

ecosystem is a hotly debated topic. In recent years, large, multinational countries across Japan

171

Fortune. “Global 500 2000.” Accessed April 2, 2022. https://fortune.com/global500/2000/.

172

Fortune. “Global 500 2021.” Accessed April 2, 2022. https://fortune.com/global500/2021/.

173

Iwatani, Naoyuki, Gordon Orr, and Brian Salsberg. “Japan’s Globalization Imperative | McKinsey.” Accessed April 2,

2022. https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/japans-

globalization-imperative.

174

Reuters. “Rare Japanese Unicorn Mercari Targets Rapid U.S. Expansion,” April 2, 2018, sec. Retail.

https://www.reuters.com/article/us-mercari-ceo-idUSKCN1H90VZ.

175

Mercari, inc. “Mercari Welcomes John Lagerling to the Management Team.” Accessed April 2, 2022.

https://about.mercari.com/en/press/news/articles/20170621_mercari_welcomes_john/.

Komoriya 61

have been making English their official corporate language given its importance in global

business. From Rakuten, Bridgestone, Honda, and Fast Retailing (parent company of Uniqlo),

companies have adopted English as their lingua franca as part of reforms to become more

competitive at the global level.

176

For example, as part of this nationwide effort, Softbank offered

employees a ¥1,000,000 (approximately $8,000) bonus for employees who score over 900 on the

Test of English for International Communication (TOEIC).

177

The most famous case study of Japanese companies adopting English is Rakuten, Japan’s

largest e-commerce company and dubbed the “Amazon of Japan.” In 2010, CEO Hiroshi

Mikitani announced that English would become the official language of the company’s 10,000

employees and that any employee who did not become fluent within two years would face

demotion.

178

Overnight, cafeteria menus, floor directories, and other office writings were

translated into English, stunning employees and corporate executives.

179

At the time, Rakuten

was pursuing global expansion, and Mikitani believed that language barriers were slowing down

his mission, from the integration of acquisitions, management of its global business units, and

general daily work. With this policy, the company has evolved from its humble roots to a true,

global e-commerce company with millions of customers across the globe. Moreover, 90 percent

176

Mikitani, Hiroshi. “Englishnization: Not Just for Rakuten Anymore | LinkedIn.” Accessed April 2, 2022.

https://www.linkedin.com/pulse/20140304144111-52782505-englishnization-not-just-for-rakuten-anymore/.

177

Prestowitz, Clyde. Japan Restored: How Japan Can Reinvent Itself and Why This Is Important for America and the

World. Tuttle Publishing, 2015. p. 209.

178

Neeley, Tsedal. The Language of Global Success: How a Common Tongue Transforms Multinational Organizations.

Princeton University Press, 2017.

179

Ibid.

Komoriya 62

of Rakuten’s employees succeeded in reaching Mikitani’s 2012 deadline to become proficient in

English.

180

Besides multinational Japanese companies, the knowledge and use of English are also

critical for startups seeking to expand into global markets and capture international consumers.

Besides having a better understanding of global consumers, English proficiency will allow for

high-skill expatriate workers to help companies grow globally. When asked whether knowing

English as a Japanese entrepreneur is necessary, venture capitalist and former Abe advisor,

William Saito said: “It is mandatory that you know English, but the global language isn’t English

– it’s broken English. Japanese are too stuck on trying to speak it perfectly when that’s not the

point. People need to realize that communication is essential and unfortunately they don’t teach

you communication in Japanese schools, they just teach you how to pass tests.”

181

Although Japan has been making promising gains in other factors that influence startups,

such as in education and financial markets, the country still remains inadequate in its adoption of

English. In 2021, Japan ranked seventy-eighth in terms of English proficiency, putting it in the

“low proficiency” range and below its Asian counterparts of Taiwan, China, Vietnam, and South

Korea.

182

Japanese English speakers must embrace the fact in most cases their English will not be

perfect and native. IBM executive Jean-Paul Nerrière coined the term “Globish” in 2004. A

180

Kinni, Theodore. “When a Japanese Company Adopted English as a First Language.” strategy+business. Accessed

April 3, 2022. https://www.strategy-business.com/article/When-a-Japanese-Company-Adopted-English-as-a-First-

Language.

181

Quigley, J.T. “Japanese-American Entrepreneur William Saito: I Only Bet on Those Who Have Failed.” Tech in Asia,

July 16, 2014. https://www.techinasia.com/japaneseamerican-entrepreneur-william-saito-bet-failed

182

“EF English Proficiency Index - A Ranking of 112 Countries and Regions by English Skills.” Education First, 2021.

https://www.ef.com/wwen/epi/.

Komoriya 63

combination of the words “global” and “English,” it is the common ground in which non-native

English speakers can adapt in international business.

183

According to Saito, “It’s not what you

know or remember or memorize, it is why and how you apply that. That is lacking from Japanese

education. The average Japanese person takes seven years of English classes, but I don’t know

where that goes. I bring up this issue whenever I speak with the Ministry of Education.” The

Japanese education system pays too much attention to the little things like grammar and

vocabulary and not to the actual practical, real-life use of English. According to Mikitani, “In

Japan, students spend as much as approximately 2,000 hours studying English during their 12

years of primary education. I believe that people could start to speak English even without

increasing the number of hours studied if we just changed the way English is taught.”

184

However, years down the road, the concept of a corporate lingua franca may not even be

necessary with advancements in artificial intelligence (AI) technology. Google, Microsoft, and

IBM are actively working on language translation technology.

185

With this advancement,

companies may not need an official corporate language because future technology will allow

employees to communicate without barriers or losses in translation.

Nevertheless, given the rapidly evolving world of technology and startups, Japanese

startup companies must be able to navigate global markets and hire high-skilled foreign

employees. In order to do this, it is mandatory that English be adopted by Japanese startups.

183

Mikitani, Hiorshi, and Ryoichi Mikitani. “The Power to Compete: An Economist and an Entrepreneur on Revitalizing

Japan in the Global Economy,” 1st Edition., 240. 54: Wiley, 2014. p. 48.

184

Mikitani, Hiorshi, and Ryoichi Mikitani. “The Power to Compete: An Economist and an Entrepreneur on Revitalizing

Japan in the Global Economy,” 1st Edition., 240. 54: Wiley, 2014. p. 148.

185

Kinni, Theodore. “When a Japanese Company Adopted English as a First Language.” strategy+business. Accessed

April 3, 2022. https://www.strategy-business.com/article/When-a-Japanese-Company-Adopted-English-as-a-First-

Language.

Komoriya 64

Compared to the other factors studied, English is still lacking and is holding back the Japanese

startup ecosystem from fully evolving and reaching its true potential.

GALAPAGOS SYNDROME

Named after the remote South American island chain, Galapagos syndrome describes

Japan’s increasing isolation from the rest of the world, and it is also associated with negative

sentiments of a country seeing itself in decline.

186

It can be used to describe several worrying

trends such as the inability of the Japanese people to speak English well or to explain why high-

potential Japanese employees do not want to work abroad. However, in this case, it will be used

to describe how Japan innovates independently within its domestic market and fails to export its

technological innovation to foreign markets and consumers. Because of this, it is also described

as “leading without followers” given Japan has led in many innovations, well before its

American competitors, but fails to attract widespread adoption globally.

187

“The IT revolution

has created structural shifts that are bringing the world together as if it were one continent,” said

Mikitani. “And yet, in Japan, people continue to prefer conventional frameworks, believing that

we should enjoy a separate, isolated kind of Galapagos Island. People here do not even try to

consider the global reality.”

188

To analyze this phenomenon, the telecommunications and

television industries will be analyzed.

186

Wakabayashi, Daisuke. “‘Galapagos,’ Japan (and Sharp’s) Buzzword.” Wall Street Journal, September 27, 2010, sec.

Japan Real Time. https://www.wsj.com/articles/BL-JRTB-5116.

187

Kushida, Kenji E. “Leading without Followers: How Politics and Market Dynamics Trapped Innovations in Japan’s

Domestic ‘Galapagos’ Telecommunications Sector.” Journal of Industry, Competition and Trade 11, no. 3

(September 2011): 279–307. https://doi.org/10.1007/s10842-011-0104-7.

188

Mikitani, Hiorshi, and Ryoichi Mikitani. “The Power to Compete: An Economist and an Entrepreneur on Revitalizing

Japan in the Global Economy,” 1st Edition., 240. 54: Wiley, 2014. p. ix.

Komoriya 65

The term is most commonly used to describe Japan’s innovation in telecommunication

technology. In the mid-1990s, Japanese technology companies develop highly advanced mobile

handsets, pioneering several high-end features seen in smartphones today.

189

However, these

technological advances were largely confined to Japan. Instead, it was Apple’s iPhone that led

the smartphone revolution in worldwide markets, followed by Samsung’s Galaxy smartphones

shortly after. An example of a feature pioneered by Japan is the Internet platform services

developed commercially in the late 1990s. Launched more than a decade earlier than Apple’s

App Store and Google’s Android store, the content ecosystem grew to revenues of over $16

billion in 2009.

190

The content ecosystem allowed for the creation of several Japanese

technological firms in e-commerce, gaming, and social networking services. However, consistent

with the Galapagos syndrome, Japan was not able to capitalize on this technological revolution

and capture global markets. In recent years, the Apple Watch gained attention for its wireless

payment system, using near-field communications chips. However, Japan has had this wireless

payment technology on phones and cards for over a decade but only domestically.

191

There are many other case studies that demonstrate Japan’s increasing isolation in global

markets and how it largely caters to its own domestic customers. In the television industry, Japan

has catered to its own market with the influence of large electronic companies. Japan used to

dominate the global flat-screen television market but has fallen behind Chinese and South

189

Kushida, Kenji E. “Leading without Followers: How Politics and Market Dynamics Trapped Innovations in Japan’s

Domestic ‘Galapagos’ Telecommunications Sector.” Journal of Industry, Competition and Trade 11, no. 3

(September 2011): 279–307. https://doi.org/10.1007/s10842-011-0104-7.

190

Kushida, Kenji E. “Entrepreneurship in Japan’s ICT Sector: Opportunities and Protection from Japan’s

Telecommunications Regulatory Regime Shift.” Social Science Japan Journal 15 (January 1, 2012).

https://aparc.fsi.stanford.edu/publications/entrepreneurship_in_japans_ict_sector_opportunities_and_protection_fro

m_japans_telecommunications_regulatory_regime_shift.

191

Nikkei Asia. “Kushida, Kenney: Repositioning ‘Galapagos Japan’ in the Global Cloud Era.” Accessed April 3, 2022.

https://asia.nikkei.com/Business/Kushida-Kenney-Repositioning-Galapagos-Japan-in-the-global-cloud-era.

Komoriya 66

Korean competitors in recent years. Consumers across the world have been demanding “smart

TVs” in which content platforms such as Netflix, HBO, and YouTube are integrated. However,

Japanese manufacturers have been actively preventing smart TVs from coming to Japan so that

they can focus on high-definition displays and sell 4k and 8k TVs. Besides this, there are many

other examples of how Japanese companies have been unable to export their innovation to

international markets despite being early leaders in those technologies and innovations.

Japan’s Galapagos syndrome is a major roadblock for startups seeking to expand globally

and create novel products and services for international customers. Japan in the past decades has

increasingly become more isolated from international markets, despite the advent of the internet

and infrastructure allowing for a more globalized world. Although the other factors analyzed in

this study show promising signs for the future of Japan’s startup ecosystem, the country must

focus on improving its competitiveness on the international stage by becoming more adept in

English and overcoming the Galapagos syndrome.

CHAPTER VI: INCREASING IMMIGRATION AND FEMALE PARTICIPATION

In startup ecosystems, human capital is of paramount importance. In past industries such

as manufacturing, there was less importance placed on the value of investing in human capital

and education given the physical nature of much of the work. However, the cutting-edge

technology of modern industries that define startups demands significant technical skill and

education. Thus, Japan must have the most highly skilled and trained labor force to develop a

burgeoning startup ecosystem. Moreover, Given Japan’s shrinking population and the

accompanying decline in its labor force and customer base, human capital productivity must also

improve.

Komoriya 67

Like many of the other factors studied, Japan is in a transition phase in its acceptance of

immigrants and its support for the female labor force. Although COVID-19 has been a

roadblock, Japan will likely open up and slowly become more accommodating to foreign

workers in the coming years.

192

IMMIGRANTS

In Silicon Valley, immigrants have played a paramount role in developing its startup

ecosystem. Many famous entrepreneurs have international roots. Elon Musk, the founder of

Tesla and Space X, was born in South Africa. Adam Neumann of WeWork immigrated from

Israel. Noubar Afeyan, the founder of Moderna Therapeutics, was born to Armenian parents in

Lebanon and immigrated to Canada, before studying at MIT. Besides these famous startup

founders, the CEOs of major technology companies such as Microsoft, Alphabet, and Twitter are

all Indian-born immigrants.

In accordance with these highly prominent entrepreneurs, a trove of data paints a picture

of the importance of the trans-national infusion of human capital in Silicon Valley. With a

population made up of residents that are 38 percent foreign-born, industries in Silicon Valley

have benefited from international entrepreneurs. The 2017 census study found the same figure to

be lower at 27 percent in California and 14 percent in the U.S.

193

In fact, a study between 2007

and 2012 found that first-generation immigrants create approximately 25 percent of new business

192

Komoriya, Kaito. “The Impact of Japans COVID-19 Immigration Measures on the Inflow of Foreign Labor into the

Country - Asia Experts Forum.” Asia Experts Forum, April 11, 2022. http://asiaexpertsforum.org/impact-japans-

covid-19-immigration-measures-inflow-foreign-labor-country/.

193

Massaro, Rachel. “2019 Silicon Valley Index.” Joint Venture Silicon Valley Institute for Regional Studies, 2019.

https://jointventure.org/images/stories/pdf/index2019.pdf.

Komoriya 68

ventures in the U.S. with the number exceeding 40 percent in some states.

194

Moreover, a 2016

study found that in 51 percent of total $1 billion unicorns startups, at least one cofounder was an

immigrant.

195

Not only do immigrants play an instrumental role in the creation of startups, but

they also play a paramount role in helping them expand. According to the same study, at least 81

percent of the companies analyzed had at least one immigrant helping the startups expand and

innovate through roles in key management or product development positions.

196

This trend of

immigrants playing an outsized role in creating and expanding startups is not only an American

phenomenon. A 2012 report found that immigrants were more likely to start a business than the

native population in more than 69 countries surveyed and analyzed.

197

The reason why immigrants are more likely to create a business of their own has been

widely studied and analyzed. Conventional explanations attribute host-country effects, such as

selective immigration policies, labor market discrimination, and availability of opportunities

within ethnic groups with high rates of immigration.

198

Another study suggests the hidden driver

of immigrant entrepreneurship, coined personality-based self-selection. The study finds that

those who decide to emigrate voluntarily and start a company are both associated with a high risk

194

Kerr, Sari Pekkala, and William R Kerr. “Immigrant Entrepreneurship in America: Evidence from the Survey of

Business Owners 2007 & 2012.” National Bureau of Economic Research, n.d., 83.

195

Anderson, Stuart. “Immigrants and Billion Dollar Startups.” National Foundation for American Policy, March 2016.

https://nfap.com/wp-content/uploads/2016/03/Immigrants-and-Billion-Dollar-Startups.NFAP-Policy-Brief.March-

2016.pdf.

196

Ibid.

197

Xavier, Siri Roland, Donna Kelley, Jacqui Kew, Mike Herrington, and Arne Voderwülbecke. “Global

Entrepreneurship Monitor 2021 Global Report.” GEM Consortium, 2012.

https://www.gemconsortium.org/file/open?fileId=48545.

198

Vandor, Peter. “Research: Why Immigrants Are More Likely to Become Entrepreneurs.” Harvard Business Review,

August 4, 2021. https://hbr.org/2021/08/research-why-immigrants-are-more-likely-to-become-entrepreneurs.

Komoriya 69

for tolerance.

199

This personality trait is essential for entrepreneurs given the high levels of risk

with starting a business and its threats of failure. Finally, an influential study by AnnaLee

Saxenian, current dean of UC Berkeley School of Information, argues that Silicon Valley

benefits from the economic bridges created with its home countries. It cites Silicon Valley’s

strong ties to countries such as Israel, allowing for strong software and intellectual property

creation. Silicon Valley also benefits from cross-national production networks with Taiwan and

the flow of immigrants from India that enables business process outsourcing.

200

While the U.S. and Silicon Valley have largely embraced immigrants and their

entrepreneurial ambitions, Japan has largely remained closed off. Japan is well-known for its

stringent policies against immigrants and foreigners. Among OECD nations, the country

consistently ranks near the bottom in terms of inflows of foreigners and immigrants.

201

With

COVID-19, Japan has enacted strict measures that have largely prevented all foreigners, despite

visa status, from entering the country for work, study, and tourism. Critics have been comparing

this policy to Japan’s centuries of isolation from the 1600s to the 1850s.

202

While these policies

banning foreigners during the pandemic have been popular among the broad public based on

opinion polls, business leaders have been lobbying the Japanese government to ease its travel

curbs given that Japan’s attractiveness for international business may wane.

203

These policies

199

Vandor, Peter. “Are Voluntary International Migrants Self-Selected for Entrepreneurship? An Analysis of

Entrepreneurial Personality Traits.” Journal of World Business 56, no. 2 (February 1, 2021): 101142.

https://doi.org/10.1016/j.jwb.2020.101142.

200

Saxeian, AnnaLee. Regional Advantage: Culture and Competition in Silicon Valley and Route 128. Harvard University

Press, 1996.

201

“OECD Databases on Migration - OECD.” Accessed April 12, 2022.

https://www.oecd.org/migration/mig/oecdmigrationdatabases.htm.

202

Inada, Miho. “Japan Lifts Covid-19 Ban on Foreigners’ Entry, but Scars Remain.” WSJ. Accessed April 12, 2022.

https://www.wsj.com/articles/japan-lifts-covid-19-ban-on-foreigners-entry-but-scars-remain-11645093890.

203

Ibid.

Komoriya 70

have impacted the ability of startups and technology companies to hire software engineers and

other critical positions from overseas.

To mitigate the economic damages of Japan’s shrinking population and labor force,

former Prime Minister Shinzo Abe, as part of his Abenomics policy, introduced reforms to

increase the flow of foreign laborers into the country, although most were temporary blue-collar

workers. After the legislation was passed, the Ministry of Labor data indicated how Japan had

reached record levels of foreign workers with the majority coming from China and Vietnam.

Many workers under this new policy are under temporary training schemes and will return to

their respective home countries with the skills acquired.

204

However, in relation to Japan’s

startup ecosystem, these policies have been targeting the manufacturing sector, and greater effort

must be put into attracting highly skilled and educated workers to help strengthen the startup

environment.

The support of foreign high-tech workers is paramount. According to Mikitani of

Rakuten, Japan is behind the rest of the world when it comes to IT education. According to the

entrepreneur, only 20,000 Japanese students graduate with degrees related to computer science or

programming. The same figure is much higher at 60,000 graduates in the U.S. and even more in

India and China.

205

To compensate for the lack of local talent, Japanese tech companies have

relied on foreign software engineers. Mercari founder and CEO Shintaro Yamada said that

foreigners make up 50 percent of the software engineering team in Tokyo and 70 percent of new

hires. “The decision to recruit more overseas engineers came naturally,” explained Yamada.

204

Nikkei Asia. “Five Things to Know about Japan’s Revised Immigration Law.” Accessed April 12, 2022.

https://asia.nikkei.com/Spotlight/Japan-immigration/Five-things-to-know-about-Japan-s-revised-immigration-law.

205

Mikitani, Hiorshi, and Ryoichi Mikitani. “The Power to Compete: An Economist and an Entrepreneur on Revitalizing

Japan in the Global Economy,” 1st Edition., 240. 54: Wiley, 2014. p. 150.

Komoriya 71

“When we made a plan for increasing the number of engineers, it was impossible to hire that

many people in Japan. We had to hire overseas people.”

206

However, past recruiting activities,

such as holding hackathons in Europe and inviting the best performers for internships in Tokyo,

have become impossible with the government’s ban on most foreigners due to COVID-19.

207

Other startups have been taking advantage of the pandemic by hiring increasing numbers of

foreign workers given their ability to work virtually from overseas. AI Inside, a Tokyo-based

startup that uses artificial intelligence to convert physical documents into electronic form, has

utilized online recruitment, interviews, and work to attract high-skill foreigners to the company.

20 percent of the startup’s employees are foreign nationals from 11 countries, and the company

has stated that despite the border situation, it will continue hiring oversea talent to help expand

its business both locally and globally.

208

Recognizing the importance of foreign high-tech workers in the creation and growth of

startups, Japanese localities have implemented specific programs to support their move and

business. Picked as one of Japan’s National Strategic Special Zones, the city of Fukuoka has

made great efforts to become a thriving startup hub, as discussed in more detail in the final

chapter. Most notable was the issuance of short-term Business Manager Visas, also known as

Startup Visas in 2014.

209

The visa allows foreigners to stay in Japan for up to a year while they

206

Suzuki, Wataru. “Japan’s Mercari to Boost Overseas Recruiting as Border Reopens.” Nikkei Asia. Accessed April 13,

2022. https://asia.nikkei.com/Spotlight/Global-Management-Forum/Global-Management-Forum-2021/Japan-s-

Mercari-to-boost-overseas-recruiting-as-border-reopens.

207

Ibid.

208

Nagumo, Jada, and Rurika Imahashi. “Japan Inc. Rushes to Hire Overseas Talent as Border Reopens.” Nikkei Asia.

Accessed April 13, 2022. https://asia.nikkei.com/Spotlight/Japan-immigration/Japan-Inc.-rushes-to-hire-overseas-

talent-as-border-reopens.

209

Forbes. “Why Both Japanese And Foreign Entrepreneurs Are Choosing Fukuoka.” Accessed April 13, 2022.

https://www.forbes.com/sites/japan/2019/03/04/why-both-japanese-and-foreign-entrepreneurs-are-choosing-

fukuoka/.

Komoriya 72

prepare to start their business before specific requirements in capital and employment are met.

The program has since spread to 13 other municipalities across Japan.

210

The program seeks to

promote entrepreneurship and the creation of new startups and is likely to lead to fruitful results.

However, Japan must also create programs to incentivize foreigners in software engineering and

supporting technical roles to help Japanese startups grow.

While it is clear that increased immigration would be a boon to the Japanese economy, it

is important to note how politicized the subject is in society. The topic is taboo, and the

government tends to avoid discussions of it for fear of losing support among voters.

211

The

Japanese government and the Liberal Democratic Party (LDP) have long struggled to balance the

need for workers from overseas and its conservative views on immigration. However, public

opinion surveys indicate the willingness of the general public to embrace and become more open

to immigration, despite longstanding perceptions of the Japanese people being xenophobic.

212

a 2018 Pew survey, 59 percent of Japanese believed that immigration would strengthen both the

country and the economy.

213

Given politics is guided by cycles of reformers and reactionists in

the LDP party based on popularity ratings, a future reformer prime minister may hopefully enact

drastic reforms to overhaul Japan’s immigration laws. These reforms will allow high-skill

210

経済産業省 [Ministry of Economy, Trade, and Industry] “Startup Visa.” Accessed April 13, 2022.

https://www.meti.go.jp/english/policy/economy/startup_nbp/startup_visa.html.

211

Komoriya, Kaito. “The Impact of Japans COVID-19 Immigration Measures on the Inflow of Foreign Labor into the

Country.” Asia Experts Forum, April 11, 2022. http://asiaexpertsforum.org/impact-japans-covid-19-immigration-

measures-inflow-foreign-labor-country/.

212

Jozuka, Emiko. “Japan Needs Immigrants, but Do Immigrants Need Japan?” CNN, December 7, 2018.

https://www.cnn.com/2018/12/06/asia/japan-immigration-bill-foreign-workers/index.html.

213

Stokes, Bruce, and Kat Devlin. “Despite Rising Economic Confidence, Japanese See Best Days Behind Them and Say

Children Face a Bleak Future.” Pew Research Center’s Global Attitudes Project (blog), November 12, 2018.

https://www.pewresearch.org/global/2018/11/12/despite-rising-economic-confidence-japanese-see-best-days-

behind-them-and-say-children-face-a-bleak-future/.

Komoriya 73

foreign workers to support Japan’s burgeoning startup ecosystem.

214

In order to do this, however,

other factors must also be considered, most importantly by making Japan more livable to

foreigners by improving English fluency levels.

WOMEN

Another solution that the Japanese government has looked at to address Japan’s shrinking

population is women. Japan is far behind its OECD counterparts in terms of gender equality in

the workforce. In 2021, the World Economic Forum’s Global Gender Gap Index ranked Japan

121st, wedged between Angola and Sierra Leone.

215

The low ranking was a result of the lack of

female leaders in business and politics. A 2017 government report found women to make up only

13 percent of managerial positions with the same figure found to be 44 percent in the U.S.

216

While the U.S. has better statistics in gender equality, female leaders continue to be left

out of key roles in Silicon Valley and the startup world. According to the 2020 Women in U.S.

Technology Leadership Report, published by Silicon Valley Bank (SVP), the gender gap still

exists with 42 percent of startups having at least one woman in an executive position and 40

percent having at least one woman on its board of directors.

217

Based on trends in other

industries and sectors, the representation of women in Japanese startups is even more

214

Kushida, Kenji, Interview with Kaito Komoriya, April 8, 2022.

215

“Global Gender Gap Report 2021 Insight Report.” World Economic Forum, March 2021.

https://www3.weforum.org/docs/WEF_GGGR_2021.pdf.

216

Larmer, Brook. “Why Does Japan Make It So Hard for Working Women to Succeed?” The New York Times, October

17, 2018, sec. Magazine. https://www.nytimes.com/2018/10/17/magazine/why-does-japan-make-it-so-hard-for-

working-women-to-succeed.html.

217

“2020 Women in US Technology Leadership Report.” Silicon Valley Bank, 2020.

https://www.svb.com/globalassets/library/uploadedfiles/content/trends_and_insights/reports/women-in-us-

technology-leadership-2020-silicon-valley-bank.pdf.

Komoriya 74

concerning. While the gender wage gap is well documented, a Boston Consulting Group (BCG)

report found that a significant discrepancy also exists in the capital raised by female and male

startup founders. In analyzing investment and revenue data across a period of five years, the

report found that the average capital raised by female-founded companies was $935,000, while

the same figure was $2.12 million for males.

218

Interestingly, despite the disparity averaging over

$1 million, female-founded companies were found to have better financial outcomes. Startups

founded and cofounded by women had average revenues of $730,000 compared to the $662,000

generated by male-founded startups.

219

The success of female-founded companies seems to also

be relevant to the Japanese case. According to William Saito, “We also lose 16 percent of the

GDP by not utilizing women. Out of the 19 investments I have, 15 are run by women. IRR-wise

[internal rate of return], they do about 20 percent better than the men. When companies ask me

for help finding country managers, I almost always recommend women.”

220

One champion for female equality in the workplace who has a prominent role in the VC

world is Kathy Matsui. In her past roles as Chief Japan Strategist at Goldman Sachs and

economic adviser to former Prime Minister Shinzo Abe, Matsui coined the term “Womenomics,”

which later became a part of Abenomics. This strategy sought to eliminate the obstacles to

greater female participation in the workforce to help mitigate Japan’s demographic pressures and

stimulate the economy.

221

After stepping down from her role at Goldman Sachs and the Abe

218

Boston Consulting Group. “Why Women-Owned Startups Are a Better Bet,” July 30, 2020. https://www.bcg.com/en-

us/publications/2018/why-women-owned-startups-are-better-bet.

219

Ibid.

220

Quigley, J.T. “Japanese-American Entrepreneur William Saito: I Only Bet on Those Who Have Failed.” Tech in Asia,

July 16, 2014. https://www.techinasia.com/japaneseamerican-entrepreneur-william-saito-bet-failed.

221

Matsui, Kathy. “Womenomics: Japan’s Hidden Asset.” Japan SPOTLIGHT: Japan Economic Foundation (JEF),

December 2007. https://www.jef.or.jp/journal/pdf/156cover04.pdf.

Komoriya 75

administration, Matsui co-founded M Power Partners with an all-female team of three financial

veterans with experience from Morgan Stanley, UBS, Credit Suisse, and Goldman Sachs. M

Power Partners seeks to invest the fund’s $150 million in startups that prioritize environmental,

social, and governance (ESG) values. The fund has a special focus on increasing female

representation in the startup space and seeks to empower them by increasing representation in

management and boards of portfolio companies.

222

It is hopeful that the fund creates a model

that motivates other VC funds and investors to recognize the power and profitability of female-

founded and female-run startups.

CHAPTER VIII: CONCLUSION

Up until recent years, Silicon Valley dominated the global startup scene with the great

majority of unicorns and innovative companies coming from the area. However, its dominance

has faded in recent years with startup hubs burgeoning across the world. Tech clusters have been

fueled by structural developments such as high-speed internet and smartphones.

223

In the 19th

century, Alfred Marshall coined the term “agglomeration economies,” explaining the powerful

force of clustering.

224

The same applies to startup ecosystems today. When cities gain a foothold,

activity is fostered around the area with increasing returns to scale. Suppliers move nearby,

222

Reynolds, Isabel, and Yoshiaki Nohara. “‘Womenomics’ Author Matsui Seeks to Bring ESG to Japan Startups.”

Bloomberg.Com, May 31, 2021. https://www.bloomberg.com/news/articles/2021-05-31/-womenomics-author-

matsui-seeks-to-bring-esg-to-japan-startups.

223

The Economist. “Can Silicon Valley Still Dominate Global Innovation?,” April 16, 2022.

https://www.economist.com/business/can-silicon-valley-still-dominate-global-innovation/21808708.

224

Alcácer, Juan, and Wilbur Chung. “Location Strategies for Agglomeration Economies,” 2010, 38.

Komoriya 76

making business easier. Nearby talent pools make recruiting easier. Just as importantly,

clustering allows for ideas to flow easily among entrepreneurs and employees from rival firms.

Based on this model, startup hubs have emerged across the world. Some examples

include Shenzhen in China, Lagos in Nigeria, Bengaluru in India, and Tel Aviv in Israel.

Japan has several contenders for cities that have the possibility of becoming the next

global tech hub. The Kishida government has embarked on its mission, “Beyond Limits. Unlock

Our Potential,” in which it seeks to build a startup ecosystem to compete against the world’s

leading hubs. As part of this overarching strategy is the Startup City Project Japan which looks at

eight cities across the country with the government cooperating with local government,

universities, and the private sector.

225

The strategy outlines four cities as potential contenders to

become global startup cities: Tokyo, Nagoya, Osaka, and Fukuoka. While all are notable

contenders and have their own strengths and weaknesses, two of the most compelling will be

studied in the conclusion of this thesis: Tokyo and Fukuoka.

TOKYO

The most obvious choice to contend as Japan’s Silicon Valley is Tokyo. James Riney of

Coral Capital explains, “If you can take Tokyo, you can take Japan. For better or for worse,

Tokyo is not only the Silicon Valley of Japan, but also the Washington D.C. of Japan, the

Hollywood of Japan, and the New York of Japan.”

226

Moreover, essentially every large

225

“Beyond Limits. Unlock Our Potential: Strategies for Creation of Startup Ecosystem to Compete with the World Top

Ecosystems.” 内閣府 [Cabinet Office], June 2019.

https://www8.cao.go.jp/cstp/openinnovation/ecosystem/beyondlimits_en.pdf.

226

Riney, James. “Why Tokyo Is a Great Place to Startup | Coral Capital,” September 9, 2019.

https://coralcap.co/2019/09/why-tokyo-is-a-great-place-to-startup/?lang=en.

Komoriya 77

corporation or investor has an office in Tokyo, allowing startups to reach almost any industry

and making it an easier prospect for corporation acquisition. The high-density population that

leads a relatively similar lifestyle is a huge structural advantage for reaching customers. Given

startups are operating on limited time, the strong transportation infrastructure and network allow

for the maximum number of meetings in a day.

227

Lastly, Tokyo is home to some of the

country’s leading universities including Tokyo University, Keio University, Waseda University,

and Tokyo Institute of Technology.

FUKUOKA

Another lesser-known city that has become a serious contender as Japan’s next startup

hub is Fukuoka. The seaside city is located in southeastern part of Japan on the island of Kyushu.

Soichiro Takashima was elected as Fukuoka’s youngest mayor in 2010 at 37 years of age. After

visiting Seattle and observing many similarities with his city, he embarked on a mission to turn

Fukuoka into an innovative startup hub.

228

He believes that the city can replicate the early

successes of Japan in the 20th century and help revive the Japanese economy.

The first advantage that Fukuoka possesses is its geography. Its location makes it a

gateway to its Asian neighbors like Hong Kong, Singapore, and Taiwan with the international

227

Ibid.

228

Springer, Kate. “Japan’s Fukuoka Poised to Be the Country’s Silicon Valley.” Accessed April 16, 2022.

https://money.cnn.com/2016/11/16/technology/fukuoka-startup-city/index.html.

Komoriya 78

airport only a 15-minute train ride from the center of the city.

229

Some startups in Japan have

relocated from Tokyo to Fukuoka in anticipation of expanding into the Chinese market.

230

Another significant advantage that Fukuoka has over the other potential hubs is its

demographics. While most Japanese cities suffer from a shrinking population and workforce,

Fukuoka is the fastest-growing major city in Japan outside of Tokyo. While the capital has been

draining talent and workers from the rest of the country, Fukuoka has resisted this trend.

231

Moreover, the Fukuoka populace is highly educated with Kyushu University serving as the

backbone for Fukuoka’s expansion into high-tech industries. The university is one of the most

famous in the country and has been selected by the government as one of 13 institutions to be a

gateway for international students. In 2016, Kyushu University had over 2,000 international

students with most studying areas in medical sciences, engineering, and information

technology.

232

Fukuoka has also been very successful in attracting foreign entrepreneurs. The city was

the first to create the Startup Visa that was previously discussed. The visa allows foreign

entrepreneurs to stay in the country while they establish their business. The program also

provides significant support and guidance. Moreover, the rent is 60 percent cheaper than that in

229

Nohara, Yoshiaki. “Startups Are Flocking to This Seaside City in Japan.” Bloomberg.Com, March 28, 2017.

https://www.bloomberg.com/news/features/2017-03-28/forget-tokyo-japanese-startup-founders-are-flocking-to-

fukuoka.

230

Gent, Edd. “Why Fukuoka Is Japan’s Most Innovative City.” Accessed April 16, 2022.

https://www.bbc.com/future/article/20190508-why-fukuoka-is-japans-most-innovative-city.

231

Nohara, Yoshiaki. “Startups Are Flocking to This Seaside City in Japan.” Bloomberg.Com, March 28, 2017.

https://www.bloomberg.com/news/features/2017-03-28/forget-tokyo-japanese-startup-founders-are-flocking-to-

fukuoka.

232

Ibid.

Komoriya 79

Tokyo, and the surrounding mountains and beaches make it an especially attractive place for

foreign entrepreneurs.

233

Fukuoka’s efforts to rebrand itself as a startup hub have so far been relatively successful.

The city has had the highest business opening rate out of all cities in Japan for the past three

years in a row at 7.2 percent.

234

While the city is still lagging behind Tokyo in key statistics, it

has set ambitious goals for years to come, such as creating one hundred startups worth over a

billion yen (or $8 million) by 2024.

235

CLOSING REMARKS

As Japan continues to face sluggish economic growth, a shrinking population, and a host

of other problems, drastic solutions are required. The promotion and creation of startups are a

solution to these ills given their outsized contribution to economic growth.

Yet the mainstream media and observers continue to criticize Japan for its lack of notable

startups. However, as this thesis argues, statistics and evidence suggest that much of these

arguments are largely definitional and inaccurate.

Although the country’s startup scene is behind that of other comparable economies,

specifically the U.S., there are reasons to be optimistic. The ecosystem is made up of several

different factors that are all interconnected. For example, it is likely that the country’s harsh

bankruptcy laws are what contributes to the risk averseness of its citizens. Given this, it is

necessary that holistic policies be put in place that takes the interconnectedness of the ecosystem

233

Gent, Edd. “Why Fukuoka Is Japan’s Most Innovative City.” Accessed April 16, 2022.

https://www.bbc.com/future/article/20190508-why-fukuoka-is-japans-most-innovative-city.

234

“Fukuoka Facts | Data about the Best of Fukuoka.” Accessed April 16, 2022.

http://facts.city.fukuoka.lg.jp/en/data/business-opening/.

235

Gent, Edd. “Why Fukuoka Is Japan’s Most Innovative City.” Accessed April 16, 2022.

https://www.bbc.com/future/article/20190508-why-fukuoka-is-japans-most-innovative-city.

Komoriya 80

in consideration. Many of the factors analyzed in this thesis are currently experiencing profound

changes through both domestic and foreign actors. Most notable of these factors are the

country’s financial markets, state capital allocation, culture, and labor force. However, greater

efforts must be put into the country’s education and global expansion. The government,

companies, investors, and citizens themselves all have a pivotal role in shaping these factors.

In the near future, we can expect Japan to create a thriving startup ecosystem, likely in

the cities of Tokyo and/or Fukuoka. Both Japanese and foreigners will hopefully be collaborating

on innovative ideas. Large, traditional keiretsu companies will likely coexist with more nimble

startups in helping them drive collaboration. All stakeholders will contribute to building creative

solutions to tackle some of Japan’s most pressing issues from its elderly population, climate

change, natural disaster prevention, and more.

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