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Changes in regulations boost entrepreneurship in Japan

May 21, 2012

Ambassador Hans Klemm

Image credit: Robert Eberhart

Recently the Stanford Program on Regions of Innovation and Entrepreneurship at the Stanford Graduate School of Business hosted the 4th annual Stanford Project on Japanese Entrepreneurship (STAJE) conference on Apr. 26-27. STAJE is an academic program that contributes to the understanding of entrepreneurship, firm growth, and institutions by studying the new entrepreneurial dynamic in Japan.  Faculty from over 20 universities, government officials including the U.S. ambassador to APEC, and business leaders presented their research and papers over the 2-day conference.

When one mentions the word “entrepreneurship,” Japan does not immediately come to mind.  Although Japan has as many startups each year as the United States – adjusting for the size of the economy - in many ways entrepreneurship is misunderstood in Japan. This makes it an ideal laboratory for researching and observing entrepreneurial behavior because it is an economy similar to the United States in many ways. So, if there are differences – and there is a popular perception that the differences are great – the study of Japan will sharpen our understanding of Silicon Valley and the world economy.


In the 1980’s, large companies that were entrepreneurial when they started, like Sony, Honda, Toyota, and Mitsubishi, became successful large companies and were envied around the world.  There was a great pride in Japanese electronics and manufacturing as Walkman and Camry became household names in Japan and abroad.  The Walkman was an innovative mobile music device, the first of its kind on the market long before the iPod launched in 2001. The goal for many, if not all, college graduates was to get a job with a Japanese company or government that offered the security of lifetime employment.

Along with the growth of the Japanese economy, personal incomes were growing as companies continued to expand.  The hallmark signs of Japanese wealth were lavishly displayed with the acquisition of second homes in Hawaii, impressionist art from renowned auction houses, the purchase of land and buildings around the world, and popular stories of luxurious travel and dining experiences.  Meanwhile, real estate and stock prices in Japan soared setting the stage for an asset bubble collapse similar to the U.S. experience in 2007. The Nikkei 225 stock price average peaked at over 30,000 in December of 1989. It remains less than 9,000 over 20 years later.


The persistent decline in Japanese asset values during the 1990s caused much policy, legal, and corporate strategic change.  As the Japanese economy reached its nadir after the collapse of its asset bubble, a broad business and policy criticism arose that the legal and informal institutional architecture of Japan was no longer relevant to a new economic age in a globalized setting. Moreover, the old banks were illiquid and had to be reorganized. New laws were passed affecting the formation, financing, and exit or dissolution of firms.

One example of the change was the reform of bankruptcy laws in Japan. During the 1980’s bankruptcy was used to recollect debt and to punish irresponsible managers.  There was a belief that bad decisions were not only a corporate responsibility, but also a personal one as well and therefore it was acceptable that a manager’s personal assets be seized in order to satisfy a corporate debt. This type of regulation may be partially responsible for perceptions of the risk adverse nature of the Japanese firms. Conversely, especially in Silicon Valley, failure is often seen as an opportunity to grow and learn from mistakes. Japanese policy-makers sought to emulate Silicon Valley where bankruptcy is viewed more as a normal and necessary element of the startup environment. Understanding this, in 2001 - 2003 reforms were enacted in Japan’s laws. These changes included lowering the maximum liability exposure that directors and CEO’s were subjected to from unlimited personal exposure in many cases to limited assets at risk.

In a recent paper, presented by STAJE research leader Robert Eberhart, they discover that “lowering failure barriers increases new firm performance and generates exceptional growth firms.”  Eberhart says, “using Japan as a laboratory, we were able to show that laws that make it easier to start firms determine whether one can be an entrepreneur. But easing the laws that punish bankruptcy determine whether one wants to be an entrepreneur. In this way, studying Japan helps us understand entrepreneurship everywhere.”


Nowadays Japan is dynamic and changing. High growth new firms like GREE, DeNA, and Rakuten are not well known outside of Japan but are profitable, large, and acquiring firms around the world as well as being responsible for employment of thousands. Japanese firms are acquiring manufacturing capacity in China and Korea as they focus on high profit components instead of name brands. Data from STAJE’s research shows that new firms that start in Japan in the last ten years now employ millions. In contrast, Sony recently terminated 10,000 employees in Japan. Mitsubishi, Mitsui, and Sumitomo have scaled back in many business units and Toyota lost market share over quality concerns. There has been a breakdown in the social contract system of job security through lifetime employment. Job security in a large company, once a mainstay of working for a Japanese company, is no longer as available and undergraduates coming out of college are now more willing to work for foreign companies or to try something on their own.  

Students are beginning to show interest in entrepreneurship and there is a feeling of doing something for oneself is more important than relying on the “salary man” job.  Venture capital firms and incubators are starting to sprout in Japan. Open Network Lab (Onlab) is Japan’s version of Silicon Valley based Y Combinator, an incubator that provides technology startups with mentorship, office space, and an introductory investment of approximately US$12,000 in exchange for equity.  Even large Japanese giants are getting into the game; NTT Investments, the investment division of Japan’s largest telecommunications company, NTT DoCoMo, has invested in B Dash Ventures, a venture capital fund started by Hiroyuki Watanabe, a veteran venture capitalist in Japan.

The research at Stanford is helping to make the dynamic situation in Japan understandable. STAJE recently hosted an event in Tokyo with the US Embassy with over 500 attendees listening to research and views. Last year, STAJE hosted the US undersecretary of State, Robert Hormats, Japan’s ambassador to the US,Ichiro Fujisaki, the US ambassador to Japan, John Roos and dozens of representatives from industry and universities in both countries. STAJE facilitated the new joint work between the National Venture Capital Association and the Japanese Venture Capital Association. Research from STAJE is being used by joint U.S.-Japan government commissions on innovation and entrepreneurship – of which both Eberhart and Professor William Miller are delegates - and the effort was recently featured in a joint communiqué of the White House and the Japanese Prime Minister’s office. STAJE has over fifty papers written and presented under its auspices and cooperated closely with the University of Tokyo.


Japan is a critical and exemplary part of the world’s cultural matrix that earned the respect of all around the world as Japanese people cooperated and showed its strength in the face of their disasters last year. As a famous researcher on Japan observed, Japan – a relatively small country – could not have become the 2nd largest economy in the world if it were not innovative and entrepreneurial. Its differences with the U.S. and other nations give researchers of entrepreneurship a powerful tool and laboratory. According to Professor William Miller, “culture is defined by the system in the environment, and when the system changes, the culture changes.” In Japan, research has shown that lowering failure barriers, such as reducing personal asset risk, increases new firm performance and contributes to an entrepreneur-friendly environment. Stanford’s Project on Japanese Entrepreneurship is leading timely and relevant research to help us understand not only Japan, but ourselves.