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Recently, the Japanese Ministry of Economy, Trade, and Industry (METI) opened the Japan Innovation Campus in Palo Alto, California, designed to integrate Japanese startups into the Silicon Valley information technology and innovation hub. This initiative is part of the Kishida administration’s broader efforts to prioritize the startup industry, evidenced by the 2022 Integrated Innovation Strategy. The administration seeks to reinforce mechanisms for initiating and growing startups, increase research and development (R&D) using tax incentives, and expand the Small Business Innovation Research (SBIR) program.
Why does Japan, which was once renowned for exporting the world’s cutting-edge technology, require such dedicated efforts to spark innovation once more?
Despite being one of the world’s largest economies, Japan has comparatively ranked low in innovation, startups, and entrepreneurship. The United Nation’s 2022 Global Innovation Index ranked Japan 13th in the world, which is a far cry from the 1970s and even 2007 when it ranked seventh in the world. In 2022, the number of unicorn startups in Japan was on par with smaller economies like Sweden and Mexico.
Historically, Japan’s dependence on large firms for its successful postwar economic strategy now hinders innovation because larger organizations tend to resist disruption and changes due to bureaucracy. The Global Entrepreneurship Monitor (GEM) found that, compared to other developed countries, government policy enabling mergers creates immense challenges for new Japanese firms to compete with established companies.
Japan’s struggle to innovate is also cultural. While Japanese consumers are open to buying goods and services from new firms, attitudes surrounding entrepreneurship prevent Japanese businesses from capitalizing on these demands. GEM found that 47 percent of Japanese adults reported having a fear of failure and a global low of 3.2 percent reported having entrepreneurial intentions. One underlying cause of this hesitancy to become entrepreneurs is historical career path expectations for Japan’s elite university graduates, who would traditionally join large corporations or the government.
Things are changing for Japan, however, due in part to the COVID-19 pandemic. Experts believe that the pandemic has accelerated innovation by causing great disruptions to previously established business practices and trends. Many established businesses such as those in the automobile industry had to reduce operations or shut down during the pandemic, creating space for entrepreneurs. Furthermore, more large corporations are outsourcing innovation to these smaller firms using their R&D budgets, which is what automotive giant DENSO did with Kyoto University’s FLOSFIA Inc. startup to develop an improved semiconductor in 2018. Partnering with established corporations enables startups to leverage market access and mentorship that had allowed larger companies to outpace them originally.
Regarding past cultural hesitancies, the prestigious educational backgrounds of some of the leading startups’ founders indicate a growing social legitimacy of creating or joining these smaller firms. Venture capital in Japan has reached comparable levels as those of European countries like France and Germany, indicating stable future growth. These and other factors, such as demographics and accelerating inflation, have brought the Japanese startup ecosystem to a tipping point.
Along with the launch of the Japan Innovation Campus in Silicon Valley, the Japanese government is making great efforts to encourage innovation through the growth of the startup industry. At the national level, Japan now offers a tax break for corporations that buy startups to encourage mergers and acquisitions (M&A) transactions. Recently, seven Japanese startups attended an entrepreneurial boot camp, run by METI and JETRO’s Beyond JAPAN program, held at UC San Diego with the goal of preparing domestically well-established firms for advancing in the U.S. market. Additionally, the consultancy platform LaunchStarz, which helps Japanese and U.S. startups reach each other's markets, became a partner of Beyond JAPAN.
Another METI program, J-Startup, is designed to select the best domestic startups through rigorous vetting and to integrate them into a network of venture capitalists, corporations, government bodies, and the like. The program advertises a wealth of public and private advantages such as preferential offerings of facilities, referrals, publicizing through government media, and even preferential treatment in granting subsidies. Likewise, the Japan External Trade Organization (JETRO) has a network that supports over 700 startups annually through mentoring and several acceleration programs.
This is not to say that the Japanese government is only now prioritizing innovation and startups. Since 2015, the Ministry of Defense’s Acquisition, Technology & Logistics Agency (ATLA) has centralized and streamlined R&D and project management for developing defense technologies. That said, it appears that the government has recently dedicated more attention and resources to innovation beyond military and dual-use purposes, and it is also soliciting the United States for greater collaboration in that realm.
Though innovation in Japan has historically stagnated, analysts and businessmen alike have a positive outlook thanks to disruptions from the COVID-19 pandemic and gradual shifts in mindsets surrounding entrepreneurship and business practices. Now, Japan’s most valued startups represent many industries such as deep learning, biotech, space technology, networking, and energy. The rise of Japan’s startup ecosystem could be an indication that Japan is sowing the seeds for a larger leadership role in the global economy during a time of domestic economic revival. As such, policymakers and business professionals from around the world should pay attention to these startups’ and the government’s next moves in innovation.
Mary Black was a research intern with the Japan Chair at the Center for Strategic and International Studies (CSIS).