Kaito Komoriya CMC '22 interviewed Dr. Ulrike Schaede on December 9, 2021.
Many observers of the Japanese economy emphasize a weakness in the startup culture. What role can the government play in directly helping startups succeed? Should they pursue a laissez-faire approach or a more hands-on approach through policies such as “picking winners”?
In general, the government is vital for any startup culture. Silicon Valley started because the U.S. government wanted to go to the moon. So, it invested in the semiconductor industry, and companies such as Texas Instrument and Fairchild soon took off. The whole Silicon Valley venture ecosystem started with the government creating demand. The market then created a system around that demand. After the successful Apollo project, Silicon Valley moved on from semiconductors into other fields like the internet. Likewise in Japan, the government could support a startup ecosystem by creating demand for new technologies then help a startup community grow around that.
The difference with Silicon Valley is that the Japanese government is still thinking about having a say in picking winners rather than having the market do that. That's just a different way of looking at things. Because Japan’s industrial policies after World War II were so stacked in favor of large firms and viewed small firms as losers, a culture of wanting to work in a large company was established. Since the government stacked the system against small firms, clearly it has a role in creating a more level playing field. This is what the Japanese government has been doing for the last 20 years, and the efforts are bearing fruits. The new government policy called “J Startup” is still a policy of picking winners. Yet the market is also beginning to pave its own path. Softbank, Rakuten, DeNA, and other companies are very much creating winners outside whatever the government is doing.
Your book describes how the presence of large conglomerates and keiretsu firms impact Japan’s startup ecosystem, and it also notes that this model has been breaking down in recent years through strategic repositioning and the pressures of foreign activist investors. Can we expect this trend to continue in creating a more conducive environment for small startups?
There’s a lot of research on innovation ecosystems, but the one thing they overlook is the role of large companies in sustaining a startup ecosystem. When a venture capitalist and/or an angel investor invests in a startup with high potential, they're making a calculation with the exit in mind. In Silicon Valley, 20% of exits are through IPOs where companies go public, and 80% of exits are M&A, or selling the technology to a large company. In Japan, the trend has been 80% IPO and 20% M&A. Japan has an unhealthy preponderance of exits through IPO. The current system pushes companies prematurely to the stock market and depresses valuations. The market for M&A in Japan is truncated because large firms don't buy startups. One reason is the long-standing system of self-sufficiency, or doing everything in-house with big corporate R&D. A second reason is a fear of interrupting the culture because of the attitude of “we have our way of doing things.” Large companies could simply buy the technology, but they don't necessarily want to merge their employees with those from startups. As a result, it's very difficult for Japanese startup companies to find a buyer.
If I were a policymaker in Japan, I would “nudge” or shame large companies into participating in the ecosystem by proactively engaging with startup companies and buying them. There may be a supply challenge because there's this long-standing idea in Japan that the goal of owning a company is to become the CEO long-term. That has to change. On the startup side, what we need is for the ecosystem to be more lubricated, liquid, and resilient. Startup founders must give up the idea that they will hang on to their technology forever. They should just sell it and start a new company and become a serial entrepreneur. Tying this all back, for that to happen, there needs to be demand. So, if I were a policymaker, I would try to lubricate the market for corporate assets in general, and for startup technologies in particular.
The answer to your initial question about keiretsus is more complicated. The horizontal keiretsus, like the Sumitomo Group and the Mitsui Group, with the exception of the Mitsubishi Group, are no longer what they used to be. The keiretsus are changing into more strategic players, and the main banks are also reaching out beyond their boundaries. However, the vertical keiretsu still exists with the subcontractor system. In industries where the vertical keiretsus are still strong, a startup would have a difficult time entering. However, with the breaking out of the supply chains around the globe, it is now much easier for new suppliers to enter a vertical supply chain within Japan. The system of the postwar keiretsus and main banks is continuing to break down and is opening access to large company buyers for small firms.
In your book, you referenced how some companies allow their employees to take time off to pursue a startup with the guarantee that they can return. You also noted new laws that allow Japanese employees to hold two jobs concurrently. Are these programs having an impact? Are there additional ways policymakers can encourage Japanese workers to pursue careers in startups?
This “dual job system” I write about might be a bit confusing because people immediately think of gig workers who might work in one place in the morning and another in the evening. However, there is a second type of dual job called sogo shoku kengyo. This is special because conventionally when you take a job there is a labor contract saying you’re not allowed to work at a different company. What Japan has done in this new hatarakikata kaikaku workstyle legal reform is to explicitly enable companies to allow this. Half of Japan's largest companies have already changed their business rules to allow employees to pursue a dual-career track. For example, you could work for Panasonic as a career track “salaryman” and work for a startup company at night.
Why would Japanese companies want this system? It is triggered by the looming labor shortage. Japan, of course, is a fast-aging and fast-shrinking society. By 2030, the Japanese labor force will be 10% less than it is now. By 2050, that figure will be 30% less. This is not good if you are an employer, so the hunt for talent has arrived. Employers are very eager to attract the best university graduates. Most talented young Japanese don't want to be “salarymen” anymore. Working for a Japanese company as a salaryman requires a lot of patience, stamina, and perseverance. The dual job system in my view is a solution to this issue. Japanese companies are seeing these trends and are giving young talent more options to grow much faster into decision-making positions. When a company hires a group of employees, they soon realize who the talent is and grant them the option of pursuing a dual job with the promise that they can return on a special career track. This gives employees an opportunity to both works for large firms and even start their own. If they fail after two years, they can come back to the company, infused with new ideas and greater potential for open innovation. The small firm also gets top talent from the best universities and companies. To put it simply, this system allows the large company to be more innovative and to keep their talent while infusing large company knowledge and innovation into smaller startups.
However, I don’t believe this career track dual job system will ever grow large. For the system to stay what it is, it must remain small. If it grows too large, it will eventually undermine the entire system.
What is the role of foreigners in the Japanese economic model in light of the role of immigrants as the backbone of innovation in Silicon Valley? Can the Fukuoka model of issuing “startup visas” be applied more broadly in Japan?
First, it’s important to note that just because Silicon Valley does something, it should not be the only way to operate. The U.S. is a country of immigrants. That's not Japan's model, and I don't think it has to be. What is a necessary ingredient is idea generation through cross-fertilization, not just immigrants themselves.
If you bring in a bunch of people from completely different backgrounds like Silicon Valley does, there are also transaction costs from language to culture. The Fukuoka model of providing aid and visas to highly accomplished foreigners is a good idea in theory. They may not be bound as much by the norms of behavior in Japan. They’re not replacing anybody but adding to the brain pool. That's a good model. The biggest challenge for Japan in attracting such people is not the visa. I don't even think Japan is particularly restrictive at all. It has always been welcoming to foreign ideas, historically. The question is language. Can you, as a foreigner, start a company in Japan, without being fluent in Japanese? I don't think that the answer is yes. You must have Japanese speakers in your company. You can't just take an American or German company and simply place it in Fukuoka.
It's not clear to me that you need a certain percentage of foreigners to be successful. But given the labor shortage, for the Japanese economy to accomplish innovation on a large scale, it’d be helpful to attract foreigners.
However, most Japanese are currently opposed to new entry because of this pandemic, so the current situation might set us back. Just a few days ago, there was a survey where the vast majority of Japanese, about 80% plus, was very much not in favor of letting foreigners in during this pandemic. But leaving that aside, Japan has always been welcoming for very high-level engineers, STEM people, bankers, doctors, and CEOs.
How are Japanese universities contributing to the startup ecosystem? Is there a “Stanford” of Japan in terms of fueling innovation and creating entrepreneurs? How can Japanese universities reform their curriculum or their networks to promote greater entrepreneurship?
The University of Tokyo has for the last 20 years been very active, and it's only one of many. In Osaka all the way to Fukuoka, universities are doing a lot with significant amounts of money involved. The government has many programs for promoting entrepreneurship and startups from the EDGE Program to the Excellence program. Then there are the private universities like GLOBIS that are teaching Japanese entrepreneurship, and I'm not even mentioning all the players involved.
On the education side, I don't think Japan is behind at all. The biggest challenge in designing these institutional reforms is the question of whether entrepreneurship can be taught. There are diverging opinions on this issue. Some people think that entrepreneurs have a particular persona and that if you wanted to teach it, you would have to teach it in kindergarten or middle school. They are able to take very calculated risks and never take no for an answer. Japan has a challenge with this mindset because Japanese in kindergarten learn that the answer is always yes and that the nail that sticks out gets hammered. If somebody tells you to do something, you say yes. The other half of the researchers believe that entrepreneurship can be taught, or at least the tools can be instructed. We can't really give a person a persona, but what we can do is to teach them the tools like business models, business canvas, minimum viable product, and design thinking. Japanese universities are teaching those tools now in large numbers.
When the next generation of people enters the job market, they're going into the shukatsu, the recruitment process, which is also being phased out. When you graduate from a U.S. university in June, you can still apply for a job right away. You don't have to waste a year and wait for the shukatsu to start. Everything is changing slowly. And as that happens, I think it'll be much easier for startups to find their spot not only in the economic and business hierarchy but also in the employment world. 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.
How can Japanese startups go global? Many criticize the startups for only serving the domestic market. For example, are policies such as Rakuten’s “Englishization” a promising strategy to promote startup globalization?
Japan’s “Galapagos Syndrome” is an interesting phenomenon. It explains how Japanese businesses develop global products for their own market in isolation. Japan beats itself up over it, but it's totally understandable if you just do the math. Japan is the world's third-largest economy and the world's 11th largest country. It is too big to be overly concerned with the world because there's a sizable domestic market. Japan's an affluent country with a lot of consumers that like to shop, and they’re very sophisticated. Japan is too big to be like Denmark or even Germany, and it is too small to have this global market like the U.S. Thus, it’s caught in the middle. The same case is with language. In small European countries like Finland, Denmark, or the Netherlands, they speak three to four languages. In a small country, you have to be global if you want to do anything or read anything. The Americans don't have to be global because their market is so big. Japan also has the issue of language. There's no urgent need to speak English fluently or set out immediately as a global business, but to grow beyond Japan, English would be essential.
All things considered, if you really want to grow your company, you have to, at some point, get beyond Japan. That's the dilemma. The “Galapagos Syndrome” claims that Japan only invents for the Japanese market, but I think that's too harsh. In fact, from a business strategy perspective, or if you were a consultant, you would probably advise a startup to first cater to Japan. If you can win in Japan, where the quality demands are so high, you should easily be able to sell elsewhere around the globe.
But then people get stuck, and they don't go abroad. What can be done? I would advise every Japanese startup to hire a foreigner because the foreigner could help Japanese startups to have a global mindset from the get-go. That foreigner doesn't have to be an engineer, although it could be. It could be the chief marketing officer or even the CEO. Not everybody in the company must be able to speak English. A global mindset would make Japanese companies so much more successful in influencing product design, the product layout, and the design thinking around customer needs. You don’t need large-scale immigration or large-scale “Englishization,” but the infusion of a global mindset would certainly be helpful.