Reigniting Japan's Entrepreneurial Energy

When I lecture at universities on innovation and entrepreneurship, I show students a slide (below) of the top 50 innovative companies in the world and the year they were founded (the list source is not important, but in this case, it was from Business Week). Besides the fact that only four Japanese companies are listed here, there are some other striking points to note:

1. No world-class companies have been founded in Japan since 1946; and

2. Japan's major companies (and others on the list) grew out of a time of crisis in that nation's history.

(Actually, there are at least five unique points in this slide - maybe a future post...)

This begs the question we will deal with first: Why? And another essay will look at what kinds of innovative companies we can expect to emerge from this current crisis, caused by unprecedented natural (and manmade) disasters.

Japan's defeat in 1945 unleashed a wave of entrepreneurial energy that stunned the world as it swamped global markets three decades later.

It began in burned-out cities with demobilized soldiers desperately seeking rice to put on the table and a way to recover their shattered pride. With nothing to lose, they had no fear of taking risks in order to succeed.

In Shinagawa, Sony's founders, Masaru Ibuka and Akio Morita, tinkered with rice cookers and radios. In Hamamatsu, Soichiro Honda strapped small engines on bicycles. On the very edge of Hiroshima's blast radius, survivors at Toyo Kogyo scrambled to produce three-wheeled trucks under the Mazda brand.

This desperate entrepreneurial energy drove postwar Japanese to amass more wealth in the span of a single lifetime than any generation of human beings in history. For awhile their momentum seemed so unstoppable that rivals began to contemplate the likelihood of "Japan as Number One."

Then, the momentum suddenly disappeared after 1991.

At first, the meta-shock of a bursting Bubble Economy seemed to explain it. But 20 years later this country is still nowhere near regaining its mojo. Even Japan's strongest competitors now seem to be losing steam. Korean upstarts like LG and Hundai are overtaking Panasonic, Honda and Nissan. America's Apple and Dell are surpassing Sony and Toshiba. Even General Motors, recently arisen from the grave, looks like it might recover its global crown from Toyota.

What happened here - and why?

Even after 20 years, Japanese still don't know what hit us. But now that it's clear the problems will not solve themselves, we need to answer a fundamental question: Why did Japan's entrepreneurial drive disappear?

Who am I to answer this question?

Born to Japanese parents who immigrated to Los Angeles, I grew up in California's "techno-geek" culture. So it seemed perfectly normal to start a software company in my college dorm at age 19. Without disturbing anyone's parents, friends and I could stay up all night coding for clients like NEC and Toshiba. But when a Japanese client announced a sudden visit on route home from a trade show, I knew he'd be shocked to find where his code was coming from. So we had to set up an office over the weekend.

From that haphazard start, we went on to establish I/O Software as global leaders in data security. Nine years later, in 2000, Microsoft adopted our core authentication technology, BAPI (Biometric Application Program Interface), into the Windows operating system.

For a veteran of California's freewheeling entrepreneurial start-up scene, the Japanese business world was a stark contrast. To my eyes, the problems were clear.

Many large Japanese companies became global without globalizing. Monocultural teams, devoid of foreign-language skills or global awareness, focus narrowly on domestic concerns and fail to spot emerging wants and needs in distant markets.

Given Japan's love of order and organization bureaucracy spreads in companies like kudzu vines: the bigger the tree, the thicker it grows. After three postwar generations, initiative and decision-making in Japanese companies have been strangled by bureaucratic process.

Add to that the Godzilla of bureaucracy, government functionaries who seek order and conformity in all things. Not so long ago they unabashedly quashed "excessive competition" for fear of "market confusion." No wonder we ranked 187, between Mexico and Zambia, in a global ranking of the ease of starting a new business.

Japan's major companies sprouted, almost literally, after a forest fire: the postwar period when bureaucrats and zaibatsu were in disarray. Over 60 years, along with government, they have grown like a grove of sugi, the tall Japanese cedars whose thick canopy prevents any sunlight from reaching the forest floor below.

True, small-and-medium-size enterprises (SMEs) are thick on the ground in Japan. Over 80% of Japanese firms have less than 40 employees. They generate 70% of GDP, but few grow to major scale. And that is a problem.

Since 1975-76, when Microsoft and Apple were founded, the U.S. has consistently produced a stream of entrepreneurial ventures that have become pillars of the economy, including Amazon, Dell, Google, Oracle and many others. You can count the equivalent Japanese newcomers on one hand - and on the other hand you can count established Japanese players that consistently rank among global innovators.

Arriving in Japan in 2005, I expected to find legions of frustrated entrepreneurs waiting, like Egyptians, for Twitter to signal the onset of revolution. "After all," I thought, "Japan has tens-of-thousands of brilliant engineers and scientists. Surely, with dreams stifled by corporate bureaucracy and academic hierarchy they must be yearning for liberation." As mentor or venture capitalist, I imagined myself unlocking the door.

Instead, I discovered that only 12% of Japanese dream of being their own boss, versus 49% of Chinese. And where 73% of Americans respect entrepreneurs, only 32% of Japanese feel the same way. This goes a long way toward explaining why Japan has the lowest rate of "Total Entrepreneurial Activity" as a percentage of GDP among the OECD nations: 3.2%.

Japanese have been conditioned to fear and avoid risk in every aspect of life. Today's youth, coming of age in a harsh economy, are even more risk-averse than their elders. Not only are fewer willing to risk venturing overseas, a growing contingent of hikikomori won't even risk leaving their bedrooms.

These kids are the product of schools - micromanaged by Kasumigaseki bureaucrats - that energetically stamp out any trace of individuality, creativity, ambition or appetite for risk. Conditioned to memorize and regurgitate the answers to maru/batsu (right/wrong) questions, they enter university with few critical thinking skills and scant ability to debate or discuss.

These kids come from families obsessed with "what the neighbors might think." If young Taro were to start his own business, and it failed, the family name might be stained forever. Worse, if Taro made a pile of money in his 20s, the Watanabes next door might presume he was a gangster.

To be an entrepreneur is to take on risk, intelligently gauging and mitigating it. As we know from the U.S., failure is part of the learning process. Only 18% of successful American entrepreneurs succeed with their first venture.

Why has Japan's entrepreneurial drive disappeared? I say it's because our national dream has shrunk to little more than a safe step on a predictable escalator. Get into a good university and ride up to graduation. Then get into a safe company, stand obediently to one side, and ride patiently up the escalator to retirement.

How can we turn this around? That is the subject of another post. Your comments are always welcome.

Post 3/11 (continued)

(...continued from last week)

While change is inevitable after so much devastation and loss of infrastructure, the question becomes: what form and character will those changes take? And how much change will result from how much human energy unleashed?

One cruel scenario is the possibility that this disaster wounds Japan’s ossified postwar paradigm but leaves intact its stultifying bureaucracy (corporate and governmental) and the conformist systems of education and advancement that sustain it. Japan suffers without achieving rebirth.

Assuming that Japan does find the momentum for change, the second question is: What if this momentum takes Japanese society in a negative direction?

Some historians cite the upheaval following the 1923 Kanto Earthquake – a disaster of much greater magnitude that leveled the capital and killed more than 105,000 – as precursor to the 1930s militarism that led the nation into a much worse manmade disaster that culminated with our first two nuclear tragedies. Japan compounds tragedy with foolishness that brings further tragedy.

Worst case stated, I believe an optimistic scenario much more likely to unfold.

Across the Middle East, we have seen systems far more change-resistant than Japan’s topple in weeks as citizens shed their apathy and discovered common cause. Online social media has been the catalyst.

I feel a similar wave gathering strength in Japan. Driven by that innate Japanese disaster reflex, people have shed their apathy and are riveted to the news and social media. With no barriers to free speech, the Japanese web is abuzz with discussions of disaster relief, nuclear fact versus fiction, alternate energy sources, conservation… and politics. Impromptu aid efforts and protest movements are springing up. Rumors abound but propaganda and cover-ups quickly get exposed. The momentum for change is bottom-up.

Populism might provoke a slight up-tick in ultra-nationalism, but to little consequence. Japanese thought and fashion is much more intertwined with the Western democracies than it was in the 1930s. But with no shared passion for guns, religion, lower taxes or libertarianism, America’s Tea Party leaves Japanese cold. The Western trends that catch youthful imagination here are mostly green and lefty. If you want an audience, offer organic, sustainable, alternative energy surfing.

Sneer all you like at the objects of youthful idealism; young Japanese are unlikely to join the nation’s coming wave of entrepreneurialism without some sort of motivating passion. Few are driven to be entrepreneurs by desire to be their own boss.

Those that do take the plunge face fewer barriers than their parents did. Twenty years ago it was nearly impossible to reach a international audience without massive support from large corporations with access to mass-media and control of key station-front retail locations. Today, a web-savvy 20-year-olds can hope to capture imagination from Hokkaido to Okinawa and the world.

Its magnitude remains to be seen, but we can anticipate a coming wave of youthful creativity and productivity in Japan. In circumstances like these, it’s hard-wired. Foreign investors, direct and indirect, have a key role to play in encouraging it.

As the next Honda or Sony is will inevitably be born from this crisis, to foreign angels these shoots spell opportunity. Given the proper amount of support and encouragement built on top of an already strong innovation base, these foundlings may one day make adoptive parents proud.

So if a fund manager or prospective direct investor were to ask me how they should view Japan right now, this would be my answer. If you play the weather and not the climate I have no advice. But if you are among those whose investments are informed by awareness of the fundamental forces of natural evolution, then Japan is an intriguing place to be.

If looking for a bellwether, watch for reform of Japan’s electoral law that prohibits candidates’ use of social media once an election has been called. A restriction of democracy that is almost Egyptian, this reduces politicians to driving around in annoying loudspeaker trucks blasting nothing more sophisticated than, “My name is Tanaka, please vote for me.”

Japanese are finally in the mood to talk about change. Given an opportunity for thoughtful discussion they will vote to make it happen. Your comments are always welcome.