Entrepreneurship Hits a Cultural Wall

When the United States hit bottom economically a decade ago, it turned to the young and the restless in places such as Silicon Valley to remake its aged economy. The success that followed surpassed the wildest expectations of most foreigners, who had written off America’s mature economy, and even many Americans.

Japan now finds itself in similar straits. Its economy has been in a nine-year downturn, its big companies are shedding workers by the thousands, small companies are gasping for air, and unemployment just keeps rising.

But don’t look for an explosion of job-creating entrepreneurship here any time soon. This tradition-bound nation has placed some daunting barriers in the way of its entrepreneurs and venture capitalists.

These include not only financial, legal and regulatory hurdles but also more subtle impediments deeply rooted in the tradition, family structure, education and general bias toward manufacturing over newer economic sectors.

“It would be difficult for a Japanese Bill Gates to create Microsoft here,” says Hiroki Takeuchi, senior economist with the Shida Entrepreneurial Research Institute.

Although Japan recently announced several steps to improve conditions for start-ups, critics say Japan is adopting the trappings of entrepreneurship without the underlying philosophy: a willingness to encourage small companies even if they threaten well-established players.

One of the biggest challenges for a start-up in any society is finding money. In Japan, however, it is particularly daunting.

Notably absent are many of the financing mechanisms that have successfully incubated high-tech companies in the United States and raised them in stages to full maturity.

“Risk money hasn’t existed in Japan,” says Minoru Muranaga, general manager with NK Solution Partners Ltd. “If you can’t spread the risk, you won’t have much Japanese venture business.”

According to the Japan Small Business Corp., 90% of venture financing in Japan comes from banks, securities and insurance companies--tradition-bound institutions that often eschew risk and insist on sizable collateral.

Entrepreneurs say more flexible financiers seem more often motivated by bureaucratic prodding or some fad than any real understanding of their ideas.

“They loaned us all this money all of a sudden, then pulled it all out,” says Yuichiro Itakura, author of a bestseller on his failed computer start-up company. “Anything with the word ‘multimedia’ in it, they would lend money to.”

A second barrier is Japan’s tangled regulatory web. Foreign newcomers often criticize Japan’s infamous bureaucrats, but Japanese newcomers are equally victimized by a system heavily biased toward the status quo. One study done earlier this decade supposedly found that more than 60 permits were required to move a bus stop.

In addition to a predictable blizzard of necessary forms, approvals and other paperwork, one of the worst impediments is the cost of incorporating: more than $83,000. “If you’re just out of high school, that’s a lot of money,” says Isao Matsushima, 25 and president of Crayfish Co., a Web site designer.

The tax and legal codes also tend to work against those without a track record. Japan has traditionally discouraged stock option distributions, limited partnerships, stock swaps, initial public offerings for companies without profits and takeovers unless minority shareholders approve--all mechanisms widely used by California entrepreneurs.

Beyond the visible regulations, there is a second, more daunting layer of shadow regulations. Vaguely written laws give Japanese bureaucrats wide discretion to change the rules--or rule against change--as they see fit.

“Basically the system prevents any existing players from going under,” says Tetsuo Komori, a partner with consulting firm McKinsey & Co. Japan.

While big, established companies in most countries have many advantages over upstarts, the breach is often enormous in Japan, in part because big companies sometimes help shape the rules.

“Ministries don’t have their own staff, so they’ll often get people from large companies to write some new standards--a bit of a disadvantage for smaller companies,” says Chikara Kanzawa, a principal in Kanzawa Consulting, partial owner of a new venture fund.

Bureaucrats also tend to favor big, established players for a more personal reason: their retirement plans. Although it’s starting to break down, Japan’s amakudari, or “descent from heaven,” system sends senior bureaucrats to high-paying jobs with large companies they regulate just before retirement. Those who buck the system may find this lucrative avenue blocked.

A third broad impediment is Japan’s highly traditional business culture. A paralyzing web of cross-shareholdings and long-standing restrictions on holding companies, management buyouts and takeovers limits financing flexibility for any but the most stellar success stories, increasing the chances of failure.

“Japan has so many smaller companies,” says Yoshitaka Tanaka, president of Tanaka Group, a small venture capital company. “Unfortunately, most of them stay that way.”

In a variety of ways, Japan’s fuzzy shareholder system and preference for non-confrontation can further blunt a young company’s potential. Some venture capitalists are reluctant to ask for financial disclosure clauses for fear of hurting an entrepreneur’s feelings. Many entrepreneurs, for their part, are reluctant to share control.

“For many, it’s like selling off your soul,” says Hideaki Mutoh, chief executive of Next, an Internet real estate company founded in 1997.

This often means a lack of guidance at key points in the young company’s life. The American “angel” system, whereby a financier may provide advice, contacts and nonmonetary support, is virtually nonexistent here. And Japanese directors are loath to force out a company founder, no matter how poor a manager he might be.

Thus Japan’s relatively few mega-success stories have been both visionaries and good organizers--the likes of Sony’s Akio Morita, Matsushita Electric’s Konosuke Matsushita and Honda’s Soichiro Honda.

“Shareholders can’t exert their authority,” says Itakura, the author. “In Japan, if a company is 100%-owned by a venture capitalist, he still can’t fire the CEO,” because managers and banks often carry more weight than shareholders.

Another disincentive is the Japanese stigma against failure. While the United States tends to admire the plucky fighter who fails three times before succeeding, Japan is much less forgiving. This can discourage risk-taking. Bankruptcies can take up to a decade to arbitrate. Top executives bear personal responsibility for company debts. Stumble, and financing quickly dries up, business colleagues shun you and even your kids may be bullied at school.

“I tell entrepreneurs that in Japan, you have to keep winning until you die, because they’ll even take your house if you fail,” Tanaka says. “There’s no second chance.”

Nor have Japanese start-ups tended to attract the brightest. Japan’s education system encourages people to conform, work with the group and respect authority. This still routes most overachievers into Mitsubishi, not some unheard-of company. “In Japan, being the same as everyone else is safe,” Kanzawa says. “That’s why it’s hard to create innovative systems.”

Even the payoff is viewed differently from across the Pacific. Whereas the United States tends to lionize its rich, brash upstarts, Japan more often views newfound wealth with suspicion.

“This is a country where people run away embarrassed after they win the lottery,” Crayfish’s Matsushima says.

This discourages people from really going for it, says Hiroyuki Tahara, general manager of corporate development with Nikko Securities. “The United States comes from a hunter-gatherer tradition. Japan grew up as a farm society where it wasn’t good to make more money than everyone else.”

It hasn’t always been that way. Japan has had freewheeling periods of entrepreneurship in its history. After 1860, the ranks of today’s giant trading companies were created as Japan opened to the West. A second wave of entrepreneurs flourished after World War II. More recently, Softbank, a software distributor and major shareholder in dozens of Internet ventures, has found a place in Japan’s corporate world.

Yet these periods have been relatively brief and tended to coincide with a major upheaval in Japan’s business world. Once things settle down, it becomes very difficult for newcomers.

The Japanese government is trying to change that. It has earmarked $399 million for venture programs in 1999, a 40% increase, as part of Prime Minister Keizo Obuchi’s effort to create 770,000 jobs by early next century.

The result has been a blizzard of new Web sites, advisory programs, loan guarantees and legal reforms aimed at encouraging new ventures and eliminating some of the many disincentives.

New laws aim to spur holding companies, ease restrictions on stock options and boost merger and acquisition activity. And the Ministry of International Trade and Industry has outlined 15 target industries--health care, biotechnology, multimedia and others--that entrepreneurs should go into, and has provided incentives for those that do.

But some critics say that proves their point.

In effect, the government is returning to the business of picking winners and losers, a throwback to Japan’s earlier industrial strategy. It amounts to a ham-handed attempt at officially sponsored entrepreneurship, itself a contradiction in terms.

“Japan is just trying to import the surface parts of venture culture, not the deeper meaning,” Itakura says. “That’s why it’s not working well.”

* MANAGERS JOIN UNIONS: Mid-level managers are turning to unions to fight their layoffs. C14