Japan Not Starting Enough Startups

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The World Economic Forum’s Global Competitiveness Report groups countries roughly by: • Those that have a large share of primary goods in their total exports (Tonga, Morocco…) • Economies where scale-intensity is the major driver of development (Argentina, South Africa…) • Innovation-driven economies, which includes Japan, USA and UK. These produce unique goods and services created via sophisticated and often pioneering methods

Today, Japan’s small to medium firms do create innovative new technology and provide 70% of the nation's employment. They also embody one of Japan's most important business concepts - the contract between companies and society that ensures high employment and harmony. Japan at both a structural and societal level therefore should embrace startups.

Global Comparison

Looking at this methodically, some interesting figures were released recently in the Global Entrepreneurship Monitor’s (“GEM”) Global Report. In recent years, around $25 billion or 0.2% of GDP of venture capital has been invested annually in American companies, about $9.5 billion or 0.05% of GDP in European companies and about $3 billion or 0.05% of GDP in Japanese companies. Among the G7 nations, Japan ranked higher than Italy (0.01%) equaled France (0.05%) but was lower than Canada (0.08%) the United Kingdom (0.09%) and the United States (0.20%).

These figures are for all forms of venture investment: what is really interesting is where the money goes. When you divide the investment between “Seed, Start-Up, Early-Stage” (roughly owner-operated less than 3 years in business) and more mature companies receiving venture capital, Japan’s investment in early stage is near zero (along with Serbia, Croatia and New Zealand) and staggeringly behind innovators such as Israel which has total venture investment of 1.03% of GDP of which 0.43% is in early stage start-ups.

In addition to venture capital, informal investment needs to be considered. This is where start-ups get funds from the founders themselves or the 3Fs (Family, Friends and Foolhardy strangers). On a national level, informal investments flow almost instantaneously into the economy as entrepreneurs spend the investments to buy goods and services. Informal investment therefore supports many jobs indirectly. Japan has huge domestic reserves of savings, much of which is hidden under mattresses so how much of this money is being used for start-ups? The answer is “not much”. Japan (along with Korea and Malaysia) put less than 1% of GDP into informal investment – a marked contrast with China’s 11%.

Consequences

Turing back this trend is more social than it is structural for starting a business is still regarded as poor career choice. Indeed, for last year’s university graduates the stability of Japan Rail made it the preeminent employer of choice.

By perpetuating such attitudes and under spending on start-up investment, Japan is failing to generate the number of small companies needed to maintain the supply of unique goods and services needed to support an innovation-driven economy. In terms of Japan’s SMEs providing 70% of the employment, this is not a big issue for with birth rates at a near all time low and 17M skilled workers retiring in the next 20 years, Japan is already facing labour shortages: in essence, a fall in SME generated employment has become a solution to a problem Japan does not want to have.