ISQ, MRQ, Thesis, and Flow
ISQ: How can Japan improve its entrepreneurship?
MRQ: Why is entrepreneurship less common in Japan than other developed countries?
Thesis: Entrepreneurship is less common in Japan than other countries because of unique economic revolution, institutional environment, and cultural factors.
- History of Entrepreneurship in Japan
- Post-war Capitalist economy
III. Contemporary Economic Factors
- Current Institutional Environment
- Private Investors/stock market
- Government role
- Sociocultural Factors
- Social climate
- Educational factor
- Conclusion: the future of entrepreneurship in Japan
Stopping the Start-ups: Challenges to Entrepreneurship in Japan
Japan is well known for its many successful businesses; names like Sony, Mitsubishi, Toyota, or Nintendo are famous worldwide. In contrast, when American businesses are discussed around the world, names of entrepreneurs like Mark Zuckerberg, Steve Jobs, Jeff Bezos, or Bill Gates often enter the conversation as exemplars of entrepreneurial spirit, rather than the companies they founded—Facebook, Apple, Amazon and Microsoft. This suggests fundamental differences between the business styles and economic objectives of these two countries. Unlike in the United States of America (USA), entrepreneurship has been generally weak compared to the strength of the older and traditional companies, such as those above, which maintain the dominant economic market position in Japan. How weak has it been? In his book, The Economics of Entrepreneurship, Simon C. Parker shows that, the rates of nascent entrepreneurship out of a whole entrepreneurs in the thirty-one countries, one-hundred percent is same as one, is “0.081 in the USA, 0.014 in Japan”(9). This difference is clear enough, but there are many differences between any two countries, cultures, or economies. These differences might merely be stylistic differences, no more economically harmful than difference between the way Japanese businessmen bow and the Americans shake hands when greeting. However, the problem is that the Japanese economy has not consistently grown for approximately twenty years. According to data from the World Bank, Japan reached its peak of Gross Domestic Product (GDP) of $5.4 trillion in 1995, when the so-called ‘bubble economy’ burst. Since then it has remained, except for a spike in 2012, well below that figure. In 2016, it only reached $4.9 trillion. Compare this to the growth of North America, where, since the mid-90’s, American GDP has grown consistently from $8.5 trillion to $21 trillion in 2016. Clearly, Japan has an economic problem on its hands.
This raises several questions. Is the lack of entrepreneurship in some way harmful to the Japanese economy? If so, how can Japan improve entrepreneurship to help stimulate economic growth? To answer these questions, it is important to understand first why Japan lacks entrepreneurs. Understanding the factors that challenge entrepreneurial growth in Japan’s specific economic and business environment can provide these answers. Based on the evidence in the following analysis, it is clear that there are three critical forces that influence the lack of entrepreneurship in Japan, and pose significant challenges to the aspiring entrepreneur: the historical development of Japanese business, contemporary institutional environment, and prevailing cultural attitudes.
The first reason for the rarity of entrepreneurship in Japan lies in its history of business development from its pre-modern feudal economy to its modern post-war capitalist economy. The pre-modern period is called the Edo era, between 1603 and 1868, when 200 to 300 daimyo, or feudal lords,had fiefdoms of more than 11.682km2 and were organized under the leadership of shogun who is the leader of both military and a region. They governed every fiefdom or ryochi. The daimyo had an absolute power and controlled all citizens in his fiefdom. Ordinary citizens, either noumin who made farm products, or samurai who protected people of the upper class and enforced the laws, could not start up their own businesses. Actually, they could think their own business such as agriculture and selling commodities and start their own small shops or businesses, but they were obligated to ask daimyo for permission, and daimyo tend not to say yes because they do not want to make noumin and shogun has money and power. Furthermore benefits and income from these kinds of businesses were forced to give to the daimyo. Because of this, not so many samurai and noumin started their own business, except for samurais who wanted to get a good reputation with the daimyou to elevate their status. In the pre-modern period, some daimyou have started making money instead, but they could not make their business spread without restrictions because of the strict hierarchy of the Edo bakufu . The political and economic structure in Japan, however, underwent drastic change during the period known as the Meiji Restoration. In her book, Comparative Entrepreneurship Initiatives: Studies in China, Japan, Chikako Usui says many prominent merchants refined financial institutions and business practices that were “usually considered pre-conditions for economic modernization. Yet, until the Meiji Restoration, they could not develop modern entrepreneurship because they were tied to the existing feudal order” (37). However, they managed to make this bank system after Meiji era because of hierarchy. If the bank system had been completed and matured by companies such as Mitsui, the largest sales bank; Konoike, which is used to be an important bank for Edo bakufu but now is a shipping company; and Sumitomo, which is now adopted into Mitsui, then citizens with ordinary status could have started up their own company. In contrast, in 1790, in the USA, just fourteen years after the independence of America, the American government had already enacted a comprehensive patent law which helps the right of new to improve industrial innovation. This means that American government already had begun to encourage entrepreneurship at the same time Japan was struggling to establish a currency system when Japanese government was struggling about currency system. Furthermore, in his book, A Brief History Of Entrepreneurship, Joe Carlen says that “clearly enterprise had been an integral element of the American project long before the late nineteenth century, when both the scale and ingenuity of American entrepreneurship would rise above all others” (165). Consequently, both American and Japanese pre-modern history have affected their contemporary states of entrepreneurship.
However, not only has the pre-modern history of these nations influenced their current conditions of entrepreneurship, so too has their modern history. The second historical factor that influenced the lack of entrepreneurship was Japan’s shift from the feudal economy to a modern industrial economy, during the years of the Meiji era, 1868-1912. After the Meiji restoration, government, financial and economic system, law, culture and religion changed. The shinoukoushou institution, which is the status difference between military class or samurai and farmers or merchants like hyakusyou or chounin finished. Moreover, anyone became able to own their own land and money. Thanks to these changes, Japan shifted from an agriculture-based feudal system to an industrial parliamentary system, rather than farmers, fishing and kajiya which is sword making. In addition, the government changed Bakufu from the Bakufu system to quickly became an Imperial Power as nihonteikoku, the Empire of Japan. However, despite the fact that hyakusyou and chounin were permitted to have their own money and land, the descendants of shogun and daimyo still had enough money to control hyakusyou or chounin thanks to the connection with government. Then, imperial Japan cooperated with these kind of descendants made some new Japanese industries such as Tomioka silk-reeling factories. As a result, they gained stronger power than that of Edo era. Then the government gave an access to establish companies not for lower class people, but the descendants of higher class. This kind of company was not made by entrepreneur but by the government. The other origins of lack of entrepreneurship in Japan is related to the unusual motivation of Meiji entrepreneurs to start up companies. In his book, A Re-Examination of Entrepreneurship in Meiji Japan; The Economic History Review, Kozo Yamamura mentions that “Meiji entrepreneurs appears to be that the Meiji entrepreneurs possessed unusual degrees of patriotism, shikon shisai (the soul of the samurai with business acumen), and profits could be a “by-product”of their activities” (144). Political leaders and capitalists made money to spread their authority. As result, they made their own company as “by-product” during the phase of spreading their power. Although the transformation from a feudal to industrial system enabled Japan to rapidly modernize and assume global power, it also created the conditions for problems with entrepreneurship later.
The current lack of entrepreneurship in Japan was also influenced by the changes of the post-war period. During World War Ⅱ, the Japanese government were able to make strong weapons like Yamato Gunkan which was one of the biggest warships in the world. After the war, the Japanese government was totally ruined by the war, but the American government was still tried to control this technology, and they thought the reason why Japanese government were able to make expensive warships was A cartel of industrialists known as Zaibatsu. Then, the USA decided to force the dissolution of Zaibatsu to make them not invest in the Japanese government because of their power and money which might oppose the American government. At that time, as Zaibatsu gained a power to control the Japanese economy, so the dissolution of the Zaibatsu was intended to diminish their power and increase competition, which was also expected to open the Japanese economy to new entrepreneurs, including those from the US, and it also had expected to make Japanese economy open to new entrepreneurs. However, the dissolution of the Zaibatsu cartels did not succeed perfectly, and Zaibatsu survived by the American government pressure. For instance, one of the oldest companies, Mitsubishi Holdings, which used to be a Zaibatsu, is still main bank in 2017. This survival is a proof of the failure of the Zaibatsu dissolution. Thus, Zaibatsu was still able to gain a power to control Japanese economy, and the hierarchy did not changed. Therefore, the failure to dissolve the Zaibatsu dissolution influenced the difficulty to startup company for common status people.
The lack of Japanese entrepreneurship is not only related to Japanese history, but also contemporary economic factors such as the banking system, private investors and government role. The first important factor that discourages entrepreneurship in Japan is the banking system. Compared to other countries such as France, Spain, Switzerland, the UK and the USA, neither return on assets (ROA), nor return on equity (ROE) shows negative result. Both ROE and ROA indicated the degree of how efficiently they gain the profit. For instance, regarding ROA, in her article, Analysis of the Efficiency and Profitability of the Japanese Banking System, Elena Loukoianova shows that “In 2005, the overall average ROA of Japanese banks was below that of banks in other industrial countries like the United States and the United Kingdom, except Germany” (17). In ROE, Loukoianova also shows that ”while return on equity (ROE) in Japan has improved, albeit unevenly, over the period 1999-2005, the net interest margin has steadily declined” (19). These two indicators show how invest way of Japanese banking is low profitability. Loukoianova concludes by using the Z-indexes which indicates risk-taking degree that the reason for Japanese banking system’s comparatively low profit is “their low level of risk taking” (19). Because Japanese banks avoid as much risk as possible, they invest only in long-standing, stable companies rather than unstable and risky new ventures. This risk-aversion approach to banking may promote stability, but it prevents Japanese entrepreneurs from accessing the venture capital they need to start up new companies.This banking system has also done very little to allow the Japanese economy to grow since the crash of the bubble economy in the late 1980s/early 90s.
The second economic factor that hinders entrepreneurship is the lack of private venture capitalists. It is much easier now for non-public and private investors to invest in companies because websites and applications of investing make it simple and easy to do. However, Japanese private investors tend not to invest in startups and take a risk, in the article “Japan’s Startup Funds Hit Post-crisis High in 2016.”, the article says that in 2016, “USA funds invested in backing startups amounted to $44.238 billion, and even Europe funds invested $5.748billion” ( par. 5). In contrast, the article says , “Venture Investing in the US and Europe Are Totally Different Industries” Victor Basta shows, in 2016, “Japanese funds dedicated to backing startups amounted to $2.45 billion, the largest sum since 2008 amid the rise of university-linked and larger independent venture capital funds.” This indicates the fund of angel investors for startup-phase company in the USA is eighteen times that in Japan. In his book, International Financial Statistics Yearbook 2008, Robert Edwards shows that, in the investment of other sectors which is including not only investment for startups, but also for other sections such as stable companies, in 2016, decrease of debit is “64.78 billion” in Japan, “123.79 billion” in the USA. This means that the total investment in the USA is about twice as much as it in Japan. By combining the above, angel investors investment in startup companies in the USA nine times as many times as Japanese angel investors. This difference lead to one out of nine less opportunities of Japanese entrepreneurs than the USA entrepreneurs.
The third problem for entrepreneurship in Japan is that the Japanese government provides little support for entrepreneurs. The governments of developed country usually helps entrepreneurs start up company with some programs because of the fact that it will more or less positively affect economies of them. However, there are some dependency on a degree of level of government program, and Japanese government comparatively launches less programs than the other developed country. In a 2016 rating of government entrepreneurship support programs by the Global Entrepreneurship Monitor (GEM), of the 65 main developed economies, the USA for example, ranked 30th, while Germany ranked 3rd and France 7th. Japan did not even rank. Even a country like Greece, which has experienced dramatic economic recession, ranked 64th (Global Entrepreneurship Monitor pp. 141-142). It indicated how Japanese government does not care about entrepreneurship. This difference clearly influences the lack of entrepreneurship in Japan.
There are not only historical and economic factors but also socio cultural factors that discourage entrepreneurship in Japan. In the above, there are two kinds of factors, historical and financial, which is related to a lack of the Japanese entrepreneurship. In addition, The socio cultural factors are also problems for the Japanese entrepreneurship. In his article, “What’s so Entrepreneurial about Intrapreneurs?” The Small Business Economics, Aloña Martiarena says “the conceptual framework adopted here is the utility maximisation, which will represent the preferences of individuals over three main dimensions: financial reward, degree of risk aversion and entrepreneurial ability” (29). She mentions that the risk-aversion degree and entrepreneurial ability are factors for entrepreneurship other than the financial factor. The first one being the Japanese tendency toward risk-aversion. As stated above, even city banks tend not to take a risk when they invest in companies in Japan, so Japanese atmosphere is still more difficult to take a risk and start doing something which the others do not do. Japanese education in elementary school, for example, teachers tend to educate children that follow the others with using Japanese words, which literally means “reading the air”, indicates that Japanese have to follow the others and take care of atmosphere. Then, Japanese children start recognizing change and unusual as evil, and they grow up and enter into stable company rather than taking a risk and startup companies. In his article, “Entrepreneurship and Risk Aversion.” Small Business Economics, Kamhon Kan also indicated that “the degree of risk aversion has a negative impact on the decision to become self-employed” (473). Furthermore, startup in Japan has problems with legal fund systems. In the article, “Taizo Son, Mistletoe Founder, on Japan’s Start-Up Culture.” Taizo Son whose brother is CEO of Softbank which is most aggressive company for venture companies in Japan says that,
”Many of the formidable barriers to starting a company in Japan, in particular the legal requirement for $100,000 of capital to set up a publicly traded company; the near-impossibility of a bank loan; and a stringent guarantor system, have been softened in recent years. The difference now is significant. […] The Japanese demand too much quality. (par.18-19)”
This comment indicated both bank problem and risk-aversion problem in for Japanese entrepreneurship. These Japanese barriers to start up company including risk-aversion and financial problem still need to be solved.
The second reason why Japanese worker tend not to start up company is unwelcoming social climate for entrepreneurship. As stated above, Japanese children tend to be educated with the concept of following the others and being same as the others. This education shapes Japanese cooperativeness, but at the same time, it shapes social climate as being a worker instead of being a leader. This social atmosphere also shapes Japanese passive social climates. For example, if you ask university students about the image of entrepreneurship, they tend to say the negative word of dangerous, risk and unsafe. In contrast, if you ask it to american student, they would say the word of challenge or something like a positive image. In his book, Shutting Out The Sun, Zielenziger Michael mentions that “ everything seems the same and is made exorbitantly expensive so that only a very few could have the ability to pursue their own passions” (98). This social climate also related the reason why Japanese students tend to get a job from non-venture company like Mitsubishi and try not to start up their company. Japanese students have been looking for stable life and similarity with other students, it makes that “Japan’s malaise is that it gradually shifted from prompting winners to prompting losers” (Zielenziger 105). These comment exactly mentions that the Japanese social climate does not follow challenging spirits.
The third reason for rarity of entrepreneurship in Japan is the structure of education in Japan. In social climate and risk-aversion, these problems were influenced by educations in the childhood, but academic and entrepreneurial educations also affect the Japanese entrepreneurship negatively. Compared to Japanese universities, american universities tend to give more opportunity to study entrepreneurship as course and major. In a 2016 rating of Entrepreneurial Education at School Stage by the GEM, of the 65 main developed economies, the USA for example, ranked 27th, while Germany ranked 45th and France 44th. Japan did not even rank like same as rating of government entrepreneurship support programs (Global Entrepreneurship Monitor pp. 145-146) The quality of entrepreneurial education is related to the number of entrepreneurs in each country. In addition, considering general educational factor rather than entrepreneurial education, Simon says that “former pupils of high-quality British public- sector secondary schools are significantly more likely to become self-employed than pupils of other school” (118). However, in his book, “University Rankings in Japan.”Higher Education in Europe, Akiyoshi Yonezawa says that “Japan has a highly diversified mass higher education system, consisting mainly of private institutions. In their highly developed and matured “market”, higher education institutions have been ranked in terms of selectivity for many years” (1). It means that Japanese general education seems not to be a hinderance to entrepreneurship. These educational factors indicates that only an entrepreneurial education affects lack of the entrepreneurship in Japan.
Clearly, any young person growing up aspiring to be an entrepreneur in Japan, perhaps dreaming of being the next Steve Jobs or Mark Zuckerberg, faces a range of unique and formidable challenges that neither of these American entrepreneurs faced. As has been shown above, Japan ranks statistically far below the USA in entrepreneurial business. Added to which, Japan’s economy has been in a plateau for approximately twenty years. So then, how can Japan improve the entrepreneurial climate to help stimulate overall economic growth? To answer this question, several important historical, economic and cultural challenges to entrepreneurship have been identified. In Japan’s pre-modern history. The restrictions of Tokugawa Bakufu and daimyo were hindrances, and even in the modern Meiji era, the daimyo and bakufu became the industrial leaders when the Tokugawa Bakufu became the Empire of Japan, and preserved their economic power. Furthermore, even after World War Ⅱ, some zaibatsu maintained control of the market because of the failure of the zaibatsu dissolution. These historical changes affected Japanese entrepreneurship by denying access to the emerging industrial economy to any aspiring entrepreneur. In terms of economic factors, it has been revealed that the Japanese government tends not to provide support programs for entrepreneurship. Nevertheless, even the ROE and ROA of the banking system is low, and the number of private investors is smaller than that of the USA. The Japanese sociocultural climate of risk aversion and conformity hinders the development of entrepreneurial spirit in Japan. In spite of the fact that education is important for entrepreneurship, the Japanese entrepreneurial education maintains a low standard; yet, at the same time, basic education in Japan seems not to directly and negatively affect entrepreneurship.
In 2020, the Olympics Games will be held in Tokyo. This event will bring hundreds of thousands of people to Japan from every country in the world. With them will come hundreds of millions of dollars of personal investment in Japan, even on the scale of retail products. This event can provide profitable and exciting opportunities for aspiring entrepreneurs not only because of the influx of foreign capital but also because of the global exposure. Significantly then, the Olympics offer an atypically low risk business opportunity. It represents a chance for Japan to create a new and better environment for entrepreneurship, starting with the young aspiring entrepreneurs who must seize this unusually low-risk opportunity. Secondly, the government can also take advantage of the lower risk to provide some support programs and investment funds for entry-level entrepreneurs. The banks could also utilize the lower risk involved with the Olympics to offer low-interest start-up loans, perhaps with ownership conditions. The education system can introduce some entrepreneurial courses. Whether or not Japan uses these opportunities remains to be seen. What is evident though, is these solutions can become a test for Japan. If they succeed, perhaps long after the Olympics have passed, these implementations can be permitted to continue, and therefore develop a new environment in which entrepreneurship can thrive. Entrepreneurship has never truly begun in Japan, and this may have slowed overall economic growth in comparison to other economies like that of the US. However, with promising opportunities like the Olympics on the horizon, perhaps Japan will finally allow startups to start.
Basta, Victor. “Venture Investing in the US and Europe Are Totally Different Industries.”
Tech Crunch. 7 Jun. 2017. Web. 9 Nov. 2017.
Carlen, Joe. A Brief History of Entrepreneurship. USA. Columbia Business School (2016). Print.
Edwards, Robert W. IMF E-Library, and International Monetary Fund. International
Financial Statistics Yearbook 2008. International Monetary Fund, Washington (2008). Web. 9 Nov. 2017.
Global Entrepreneurship Monitor. GEM 2016/2017 Global Report. GEM. 9 Nov 2017. Web.
“Japan’s Startup Funds Hit Post-crisis High in 2016.” Nikkei Asian Review. 20 Mar. 2017.
Web. 9 Nov. 2017.
Kan, Kamhon, and Wei-Der Tsai. “Entrepreneurship and Risk Aversion.” Small Business
Economics, vol. 26, no. 5, 2006, pp. 465-474.
Lewis, Leo. “Taizo Son, Mistletoe Founder, on Japan’s Start-Up Culture.” FT.com (2017)
Web. 9 Nov. 2017.
Martiarena, Aloña. “What’s So Entrepreneurial about Intrapreneurs?” Small Business
Economics, vol. 40, no. 1 (2013): pp. 27-39. Web. 8 Nov 2017.
Simon C, Parker. The Economics of Entrepreneurship. UK. Cambridge
University Press, Cambridge (2009) Print.
The World Bank. GDP Growth (annual %). 1961-2016. Washington DC. Web. 14 Nov 2017.
Usui, Chikako. Comparative Entrepreneurship Initiatives: Studies in China, Japan, and the USA. Palgrave Macmillan. New York, (2011). Web.
Yamamura, Kozo. “A Re-Examination of Entrepreneurship in Meiji Japan (1868-1912).” The
Economic History Review. vol. 21. no. 1(1968): 144–158. Web. 2 Nov 2017.
Yonezawa, Akiyoshi, Izumi Nakatsui, andTetsuo Kobayashi. “University Rankings in Japan.”
Higher Education in Europe, vol. 27, no. 4, (2002) pp. 373-382. Web
Zielenziger, Michael. Vintage, Shutting Out The Sun. How Japan Created Its Own Lost
Generation (2006) Print.