Growing a Japanese Entrepreneurial Habitat
Professor Edward A. Feigenbaum, Kumagai Professor of Computer Science Emeritus, Stanford University

Governments around the world, including Japan, continue to study the Silicon Valley recipe for growing new technology companies and industries. Even our clients ask us “What makes Silicon Valley so special? Is it possible for Japan to create the same framework?” The presence of Stanford University is often cited as a major factor, not only for the smart, ambitious students and professors it attracts but also because of the University’s support of innovation and entrepreneurship. No one knows this better than Professor Edward A. Feigenbaum, Kumagai Professor of Computer Science Emeritus, Stanford University. Prof. Feigenbaum has worn many prestigious hats during his 30+ year affiliation with Stanford: from Chair of the Computer Science Department, to Local Startup Founder, to Chief Scientist of the Air Force, to noted Author. In addition to artificial intelligence and expert systems, Japan is often a topic of Prof. Feigenbaum’s research and publication. His most recent endeavor “The Japanese Entrepreneur: Making the Desert Bloom” was published in Japanese in December of 2002. The book discusses the keys to inspiring entrepreneurship in Japan through Special Entrepreneurial Zones (SEZ) and is particularly timely- the Japanese Diet has been debated the creation of special economic zones since last year. Earlier this month, Prof. Feigenbaum discussed the key themes of his book through a seminar arranged by Stanford’s Asia/Pacific Research Center. This month's Bridge Builder features a summary of Prof. Feigenbaum’s discussion of the hurdles to entrepreneurship in Japan and how an SEZ would remove these barriers.

The Barriers

“Conservative, modest goals of entrepreneurs”: Entrepreneurship in Japan is by no means insignificant. Every year sees its new crop of small “mom and pop” businesses and small ventures. But small is how things stay because entrepreneurs in Japan do not dream of creating new industries or revolutionizing old ones. Japanese entrepreneurs are often individuals with an aversion to management and bureaucracy yet who still want a comfortable life and salary. Such entrepreneurs tend to pursue low risk, low return business models.

“Cultural fear of failure”: Risk aversion is a natural aspect of Japanese society that extends to entrepreneurship. Not only is it not considered “noble” to fail, but those who fail know that social and financial difficulty can only be the result. Failed business owners are likely to be held personally responsible for their outstanding debts and obligations. Failure is a serious matter, not a “learning experience”, as it can be in the US.

“Venture capital and financing not yet mature”: A strong entrepreneurial environment needs financing provided by professionals with the right experience, motivation, and support. Venture capital is simply too scarce in Japan and those firms that exist are too wide in their coverage often investing small amounts of money over many companies. A key aspect of financing is the so-called “exit strategy” for shareholders. Mergers and Acquisitions are rarely used in Japan because a buyout is considered to be one form of failure. The only real “exit” is an IPO, which takes a significant amount of time in Japan.

“Personnel: best people join big companies”: Startups in Japan have little appeal for top University graduates because they present high risks without high returns. In addition, there is tremendous social pressure from parents to work at famous, big, and most important, stable companies. For talented “middle-management” already ensconced in Japan’s large corporate culture, there is little incentive to leave the secure, company career track because if they do so and fail, there is no way back.

“Customers, including government, do not buy enough from venture businesses”: Japan does not have a law requiring government to purchase from small businesses. In the US, the Small Business Act sets aside a substantial portion (as much as 15%) of government budgets for small businesses, specifically to encourage new business growth. Another program, small business “innovative research” (SBIR) funds research from small companies. The impact of such purchases over time can be significant.

The SEZ solution

Professor Feigenbaum suggests that these barriers to entrepreneurship can be overcome if the right environment or “habitat” is created. He recommends that Japan use its Special Zone program to consider a Special Entrepreneurial Zone Experiment (SEZ), which at relatively low cost will show how startups can be born and raised in Japan. A key tenet of the SEZ is that participating habitat companies come by invitation-only so that only the most suitable players are involved. Cooperation with regional industry and universities is also considered a must. The SEZ’s purpose would be to create some major “winning” companies (the next Honda or Sony for example). Success of the SEZ would be judged by the performance of a portfolio of startups- not just one or two companies in isolation.

Professor Feigenbaum’s book outlines in specific detail how the SEZ would work. For example, to ensure the VC and financing function is working properly, SEZ Management should be experienced with high-tech startup management and seed (or “angel”) investment. Entrepreneurs, on the other hand, should have fast-growth, often risky, business plans. To reduce the high risk factor, Regional Local Companies (RLCs) also need to be involved. RLCs, in exchange for equity participation, should commit jobs to people in unsuccessful startups and lend management for limited periods of time to help such startups get off the ground. Finally, the Government should play no small part in the SEZ. Similar to the US Small Business Act, the SEZ should contain a “buy buy buy” initiative involving buying commitments from regional governments and large companies.

Professor Feigenbaum concluded his discussion by emphasizing that relative to many expensive large construction projects under discussion as part of the Special Zone program, the SEZ experiment is relatively inexpensive and could have major consequences. He points that even his book’s translator, a Deputy Chief Editorial Writer for Nikkei has said that “It’s time to stop talking and DO something!” to stimulate entrepreneurship in Japan.

The English text of Professor Feigenbaum’s “The Japanese Entrepreneur: Making the Desert Bloom” is available for download. The Japanese version, “Kigyoutokku de nihon keizai no fukkatu wo” is published by Nihon Keizai Shimbunsha and is available for purchase online. For more information on Stanford’s Asia/Pacific Research Center please see their website.

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