Japan Studies -- Entrepreneurial Encounters

Back to Contents of Issue: January 2000

by William Hall

The decline in the rate of entrepreneurial startups in Japan has led to much weeping and gnashing of teeth in the media on how Japan is falling behind in the entrepreneurial race, especially versus the U.S. Opinions on the perceived causes of this are many-deficiencies in the educational system, societal constraints, lack of entrepreneurial spirit among Japanese, unfavorable banking practices, overly restrictive government regulations, a lack of funding, and so on.

But the fact is, much of the media's wailing is anecdotal in nature, despite the existence of solid data addressing at least some of these perceived causes. The Japanese government's Small and Medium Enterprises (SME) Agency recently commissioned a major study examining entrepreneurs, along with a mirror image report looking at providers of venture capital to entrepreneurs. The first survey comprised a large sample of 3,610 interviews with entrepreneurs and covered, among other topics, individual motivations for launching a business, perceptions of what efforts would be required, and expectations of growth (see sidebar). Fieldwork for the two studies was completed prior to the recent government announcements on plans to promote venture companies as well as prior to the announcements of the two new stock markets in Japan targeted at venture companies (Nasdaq Japan and Mothers). Therefore, they can be considered as a useful baseline from which to track the future growth of entrepreneurial companies in Japan.

Success: In response to the question on the qualities required to be a successful entrepreneur, Decisiveness/positiveness (59%), Wide circle of connections (48%), and Perseverance/tenacity (30%) were the top three responses given by entrepreneurs (see chart at left below). In the mirror image survey, providers of venture capital gave Flexibility in responding to changes in the environment (48%), Decisiveness/positiveness (36%), and Sincerity (28%) as their top three choices.

Overall, the entrepreneur responses tend to have a narrower hands-on focus, while the responses of the providers of venture capital show a broader perspective, presumably based on experience with a larger number of startups. For those companies with demonstrated high sales growth rates (more than 10% annually) and high profit rates (net profit to sales ratio of greater than 5%), an attempt was made to find correlations between high growth/high profit and a series of demographic/situational factors. These latter factors included whether the company was private or incorporated, the age at which the entrepreneur started the company, previous job held, type of job held by the founder's father, the amount of capital invested at startup, and previous experience of failure in starting a company.

For high growth companies, Age When Company Started was the major and only factor that showed a consistent correlation. The younger the founder when a company was started, the higher the probability of high growth; with those starting after 45 years of age having a 10% lower probability of achieving high growth compared to their younger colleagues. For high profitability, age is also the key correlation factor, but the age range is more evenly spread-up to the age of 55. For those starting a company after 55, the probability of obtaining high profits is slim.

The Japanese government has identified the creation of small and medium enterprises as a critical element for the future health of the Japanese economy, helping to ease the growing unemployment problem, especially among the older group. The data above, however, suggest that it will be difficult for older ex-employees to create successful startup enterprises. Failure: Thirty-five percent of the sample said that they had experienced failure in establishing an earlier company prior to establishing the current one. An additional 20% said that their previous attempt was neither a failure nor a success, meaning that 55% of the sample had been involved in at least one earlier startup. (Fifteen percent of the sample reported having had two or more failures.)

Seventy-one percent of those who had failed in the past had closed the operation within two to three years of launch, including 46% within the first two years. Lack of Management Know-how (47%) and Inadequate Marketing (43%) were the two major reasons given for failure (see chart at right below). Interestingly, 68% of the sample with experience of failure stated that this had been beneficial, although there was no statistical correlation between past experience of failure and high growth and high profitability in one's current company.

While the entrepreneur study did not cover companies that are no longer in existence, it nevertheless demonstrates that there is a cadre of entrepreneurs in Japan whose attitudes to failure and starting up again are not that different from their counterparts in the West.

In the black
Sixty-four percent of the sample reported that they got into the black on an individual year basis within three years of startup; 41% reported being in the black on a cumulative basis within three years. While these figures may seem high, it should be remembered that companies that folded after never making it into the black are not covered. In any event, it would appear that, in Japan, a startup might face cash flow problems for a period of up to three years.

Samurai at the gate
What does all this show? The entrepreneurial spirit is alive and well in Japan-far more so than the bleating of the popular media would indicate. The Prime Minister's Office conducts a regular Employment Structure Survey, and one section of this survey identifies the number of people having the intention to start their own company. The 1997 survey identified some 1,240,000 potential entrepreneurs, with almost 60% of these being less than 40 years of age. But for this entrepreneurial spirit to bloom, the obstacles created by bank lending practices, government regulations, tax policies, and the like need to be eliminated.

William Hall (williamh@isisresearch.com) is president of the ISIS/RBC/CORAL Group, which provides market research and consulting services in Tokyo.

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