Innovation and Entrepreneurship in Japan: Why Japan (Still) Matters for Global Competition Kenji Kushida, Stanford University

SVNJ Working Paper 2017-2

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Abstract

Throughthe1980s,Japanwassignificantinglobalcompetitionlargelybyshapingglobal

technologicaltrajectories,transformingmajorglobalindustries,andcontributingto

fundamentalinnovationsinindustrialproductionprocesses,creatingenoughwealthalong

thewaytopropelJapantotheworld’ssecondlargesteconomy.Aftertheeconomicbubble

burstintheearly1990s,however,otherplacessuchasSiliconValleyintheUnitedStates,

movedtotheforefrontoftransformingtechnology,industries,andproduction,creating

vastwealthalongtheway.WhileJapan’sroleinglobalcompetitionseeminglybecame

largelyirrelevantfromthe1990sonward,carefulanalysesrevealthatJapanwasinfact

transformingquietlyandgradually,butsignificantly.Inapatternof“syncretism,”Japan’s

economictransformationwascharacterizedbythecoexistenceofnew,traditional,and

hybridformsofstrategyandorganization.Thispaperexaminescoreareasofthe“new”and

emerging“hybrid”areas—thestartupecosystemandtheeffortsofselectlargefirmsto

harnessnewformsofinnovationfromoutsidetheircorporateborders.Japan’sstartup

ecosystem,thoughstillsmallcomparedtoSiliconValley,asiseverywhereelse,has

dramaticallytransformedoverthepasttwentyyearsthroughacombinationofregulatory

shifts,corporatetransformations,andtechnologicalbreakthroughsthathaveopenedup

vastnewopportunities.SomelargecorporationssuchasKomatsu,Honda,Toyota,and

YamahaareundertakinginnovativeeffortsofsortsunseeninJapan’srecenthistoryto

harnessSiliconValleyandotherstartupecosystemsintotheircorebusinessareas.

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Introduction Inthe1980s,Japan’ssurgingeconomyandindustrialcompetitivenesstookthe

worldbystorm.However,in1990,afteramassiveassetbubbleburst,Japan’seconomic

growthfaltered,anditsindustrialcompetitivenessdeclinedsharply.Japan’stakeoverofthe

world’smanufacturingandsoftwareindustries,whichmanyhadpredicted,never

materialized.Narrativesof“JapanasNumberOne,”orsomegovernment-industrialnexus

of“Japan,Inc.”posinganewmodelofsuccessfulcapitalism,oreven“BeyondCapitalism”

morphedintotalesoffailureandstagnation.1Titlessuchas“Japan,theSystemthat

Soured,”“Japan’sFinancialCrisis:InstitutionalRigidityandReluctantChange,”andbooks

withsubtitlessuchas“…theinstitutionaloriginsofprosperityandstagnation”probedthe

causesofJapan’sspectacularfaltering.2

Then,bythe2000s,theworldeconomyseemedtohavemovedon,andJapanwasno

longerdeemedsignificant.Whilesomefirmsremainedgloballycompetitive,suchasToyota

andahandfulofprecisionequipmentfirmssuchasMurataManufacturing,Japan’s

economicprowessseemedafarcryfromtheerawhenitsfirmsdominatedcriticalcutting-

edgehigh-techindustriessuchassemiconductors.

1Vogel,E.F.(1979).Japanasnumberone:lessonsforAmerica.Cambridge,Mass.,HarvardUniversityPress,Sakakibara,E.(1993).Beyondcapitalism:theJapanesemodelofmarketeconomics.Lanham,MD,UniversityPressofAmerica.2Katz,R.(1998).Japan,thesystemthatsoured:theriseandfalloftheJapaneseeconomicmiracle.Armonk,NY,M.E.Sharpe,Gao,B.(2001).Japan'seconomicdilemma:theinstitutionaloriginsofprosperityandstagnation.Cambridge;NewYork,CambridgeUniversityPress,Amyx,J.(2004).Japan'sfinancialcrisis:institutionalrigidityandreluctantchange.Princeton,N.J.,PrincetonUniversityPress.

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Yet,asthispaperreveals,whiletheworld’sattentionwasfocusedelsewhere,most

notablytherapidtechnologicalsophisticationandbreakneckgrowthofChina,Japanhas

actuallybeendevelopinginsignificantwaysthatmatterforglobalcompetition.

Largefirmsarebeginningtoembraceopeninnovation,lookingoutsidetheirown

corporateborderstofindsourcesofinnovation.WiththeriseofSiliconValleyasahubof

innovationproducingfastgrowthcompaniesthathavedisruptedexistingindustries,

reshapedtechnologicaltrajectories,andcreatednewproductionparadigms,thefrontierof

innovationnowpointstolargecompaniesharnessingexternalresources.LargeJapanese

companiesareincreasinglyseriousaboutinvestingin,partnering,andharnessingoutside

firmstoenhancetheircorebusinessofferings.Somehaveevensuccessfullyharnessed

SiliconValley,partneringwithstartupstoprovideessentialfunctionalitytotheirmain

productsandservices,asdescribedbelow.WithinJapan,thestartupecosystemhasgrown

significantly,withnewlevelsofpartnershipandcooperationwithlargefirmstoadjustto

therealitiesofinformationtechnologyintensivecompetition.Overall,theincreasing

diversityofJapan’seconomy,withlargefirmcorporatestrategiesdiverging,aburgeoning

startupecosystem,diversifyingelitecareerpaths,andafocusonacquiringnewstrengths,

suggeststhatJapanwillcontinuetomatter.Whilethefocusonsocialstabilityledtoalong

periodofslowadjustmentattheexpenseofgrowth,theincreasingdiversityinwhatisstill

averylarge,wealthy,technologicallysophisticatedandhighlyeducatedeconomyisnow

Japan’scorestrength.

WhyJapanMattered

Initsessence,Japan’spostwareconomicgrowthmatteredforglobalcompetition

notsimplybecauseits“miracle”growthfromtheashesofdevastationwasdramatic.Itwas

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becauseinnovationsthatoccurredwithintheJapanesedomesticindustrialcontextshaped

globaltechnologicaltrajectories,transformedmajorglobalindustries,andcontributedto

fundamentalinnovationsinindustrialproductionprocesses.

ThemostcriticalpostwarJapaneseinnovationwasintheautomobileindustry,

pioneeredbyToyota,withthe“leanproductionsystem,”analyzedinanMITstudy

“MachinethatChangedtheWorld,”andothersasafundamentalnewparadigmfor

manufacturingtowhichtherestoftheworldhadtoadjust.3Leanproductionentailed

minimizinginventorieswith“just-in-time”deliverywithinplantsandfromsuppliersthat

enabledunprecedentedflexibility,andmostfundamentally,empoweringassemblyline

workerstosuggestimprovementsandreduceproblems,reversingtheinformationflows

fromtop-downonlytobottomup.ThenewinformationflowsinJapanesecompaniesledto

studiesoforganizationaslessonsfortherestoftheworld.4

Japanesefirmssurgedintoglobalsemiconductormarkets,takingtopsharesina

varietyofareas,anditsconsumerelectronicsfirmsdrovemanyincumbentUSfirmssuch

asZenithorRCAoutofthemarket.

Japan’ssurgeintoglobalmarketswassupportedbyinnovationintheformof

deployingtechnologiesinventedelsewhereandbringingthemtosuccessful

commercialization.Whilesomereverseengineering,accomplishedpartlythrougha

relativelyweakintellectualprotectionregulatorystructure,didoccur,manyofthe

innovationswerereal.Forexample,Sharp’svisiontocreateahandheldcalculatorinanera

3Womack,J.P.,D.T.JonesandD.Roos(1991).Themachinethatchangedtheworld:thestoryofleanproduction.NewYork,N.Y.,HarperPerennial.4Aoki,M.(1988).Information,incentives,andbargainingintheJapaneseeconomy.NewYork,NY,CambridgeUniversityPress,Nonaka,I.andH.Takeuchi(1995).Theknowledge-creatingcompany:howJapanesecompaniescreatethedynamicsofinnovation.NewYork,OxfordUniversityPress.

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whentheywerelargedesktopdevicesthatrequiredexternalpower,ledtoToshiba

becomingthefirstfirmtosuccessfullymanufactureC-MOS*complementarymetaloxide

silicon)chips,whichlaterbecameacoretechnologyoftheentiresemiconductorindustry.

Seikopioneeredthecommercializationandmassmanufactureofquartzwatches,enabled

byadvancedprecisionmanufacturingandtheearlyadoptionofC-MOSchips,andledto

Seikosuccessfullyfilinghundredsofpatentstodominatethequartzwatchmarket.

JapanesefirmswerealsoattheforefrontofcommercializingLCD(liquidcrystaldisplay)

panelsforwatches,television,andlaptopscreens.Theseallfollowedapatternofcore

scientificbreakthroughsoccurringinAmericanlargefirmlaboratories,suchasBellLabs

andRCA,butalackofabilitytofollowthroughandimplementtheminproductsor

completesuccessfulmassmanufacturingprocesses.TheJapanesefirms,comingfrom

behindandlackingthescientificbasis,succeeded.5

AnotherpatternofJapanesesuccesswastoredefineproductcategories.Sony’s

portablecassettetapeplayer,theWalkman,forexample,tooktheexistingproductoflarge

desktopcassetterecorder/players,andremovedtherecordingfunction(againstindustry

wisdomandsomewithin-firmopposition),andaddingtheextrafunctionalityofportability,

whichrequiredminiaturizationandre-designingpartsforlowenergyconsumption.

Japan’scompetitivecapabilitieswereseenasnotonlyinmanufacturing,butalsoin

software.SophisticatedobserversviewedJapanesefirmsandgovernment-orchestrated

consortiaasacompetitivethreatforallotherswithtitlessuchas“Japan’sSoftware

5Sony’sco-founderlikedtheidea,buttheinventor’sdirectbosseswereagainstit,sayingthatpeoplewouldn’tbuyatapeplayerthathadnorecordingcapability.http://business.nikkeibp.co.jp/atcl/interview/16/031800001/052700007/?P=2&rt=nocnt

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Factories”and“Japan’sthreattoIBM.”6TopAmericancomputerscientistsalsosaw

crediblecompetitivepotentialinJapan’sartificialintelligenceintheearly1980s,witha

booksubtitled“…ArtificialIntelligenceandJapan’sComputerChallengetotheWorld,”

coveringfifthgenerationsupercomputinginitiativesthatharnessedpublic-private

initiatives.7

AsJapanburstontotheglobalcompetitivescene,amajorpuzzlebecamehowto

understandJapan’scompetitivestrengths.Wasitanexusofgovernment-business

collaboration(collusion)of“Japan,Inc?”Wasitstate-ledinsomeformwithsmart

bureaucratsguidingtheeconomy,8dynamicandentrepreneurialbusinessessucceeding

despitegovernmentinterference,ormoreabouttheinternationalsystemthatallowed

JapantoaccessexportmarketswhileprotectingitsowndomesticmarketsundertheUS

ColdWarumbrella?Evenasthedebatescontinued,Japan’scompetitivenessseemedto

dropprecipitouslyinthe1990s.

WhyJapanSeemedtoFallintoIrrelevance

Fromthe1990s,Japanseemedtoslideintorelativeglobalcompetitiveirrelevance.

Thiswastheresultofseveralfactorsthathititallatonce.First,amassiveassetbubble

burstin1990.Firmsflushwithcashborrowedonthebasisofever-risingrealestateprices

werehitwithmassivewrite-offs.Theexchangeraterevaluationafterthe1985Plaza

AccordalsohitJapanastheyenrapidlyappreciatedagainstthedollar,makingexports

6Anchordoguy,M.(1989).ComputersInc.:Japan'schallengetoIBM.Cambridge,Mass.,PublishedbyCouncilonEastAsianStudiesDistributedbyHarvardUniversityPress,Cusumano,M.A.(1991).Japan'ssoftwarefactories:achallengetoU.S.management.NewYork,OxfordUniversityPress.7Feigenbaum,E.A.andP.McCorduck(1983).Thefifthgeneration:artificialintelligenceandJapan'scomputerchallengetotheworld.Reading,Mass.,Addison-Wesley.8Johnson,C.(1982).MITIandtheJapaneseMiracle:TheGrowthofIndustrialPolicy,1925-1975.Stanford,CA,StanfordUniversityPress.

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moreexpensiveelsewherebyafactorofXwithinthespanofjustafewyears.Finally,and

significantlyforcompetition,thedynamicsofcompetitioningloballeadinghightech

industriestransformed—partlyasanadjustmenttotheJapanesecompetitivethreat.

The“ITrevolution”ofthe1990sintroducednewdynamicsofcompetitionintheIT

industry.TheadventofthePCsledtotheriseofmodulararchitecture,9whichenableda

decompositionofverticalintegration.10Valueshiftedawayfrommainframecomputersto

PCs,andfromfinalassemblerstotheoperatingsystemandcoreprocessor—Wintelism.11

BothweremovesawayfromJapanesestrengths.ManylargeUSfirmsthathadbeen

outcompetedbyJapanesecompetitorstransformedthemselvessignificantly—IBM,GE,HP,

andothers,abandoningthelongtimetenetsoflifetimeemployment,in-houseR&D,towards

an“openinnovation”or“NewEconomy”businessmodel.12Platformsbecameimportantin

competition,withfirmsthatmadeoperatingsystemsorsomeothersoftwareplatformon

topofwhichthirdpartiescouldflourish.13ThematurationoftheInternetintoanopen

globalplatformenabledSiliconValleytobecomethesourceofnotonlygame-changing

competition,butalsohighvaluefirmsincludingApple,CiscoSystems,andGoogle.Services

becamecriticaltosellingproducts;theAppleiPodorAmazonKindle,forexampleowetheir

9Baldwin,C.Y.andK.B.Clark(2000).Designrules.Cambridge,Mass.,MITPress.10Langlois,R.N.andP.L.Robertson(2002).Firms,marketsandeconomicchange:Adynamictheoryofbusinessinstitutions,Routledge.11Zysman,J.andM.Borrus(1997)."GlobalizationwithBorders:TheRiseOfWintelismAsTheFutureOfGlobalCompetition."IndustryandInnovation4(2):141-166.12Chesbrough,H.W.(2003).Openinnovation:thenewimperativeforcreatingandprofitingfromtechnology.Boston,Mass.,HarvardBusinessSchoolPress,Lazonick,W.(2009)."TheneweconomybusinessmodelandthecrisisofUScapitalism."CapitalismandSociety4(2).13Gawer,A.andM.A.Cusumano(2002).Platformleadership:howIntel,Microsoft,andCiscodriveindustryinnovation.Boston,Mass.,HarvardBusinessSchoolPress.

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successasmuchtoeffectiveintegrationwithonlinemarketplacesandabundantcontent

vis-à-visattractivenessofthedevicesthemselves.14

AsJapanesefirmsfacednewdynamicsofcompetition,theriseofotherAsian

manufacturers,notablyKorea,followedbyChina,rapidlythreatenedthemfromthelower

end.Koreanfirms,notablySamsungandLG,movedupthevaluechaintocompetewith

Japanesefirmsheadoninsemiconductorsandconsumerelectronics,eclipsingmanyofthe

JapanesefirmssuchasSony,NEC,andToshibabytheearly2000s.Chinesesuppliersalso

movedupthevaluechainwith“fastfollower”strategies15andaggressiveharnessing

inwardforeigndirectinvestment.16

JapanalsosufferedapatternofinnovationinwhichanumberofIT-related

industriesdevelopeddramaticallyinthedomesticmarket,butfailedtocaptureglobal

markets.Especiallyinmobilecommunications,whereasophisticatedecosystemofmobile

Internetplatforms,advancedhardware,andarobustcontentindustryflourished,Japan

becamea“leaderwithoutfollowers,”whereitclearlyledtheworldalongexpected

trajectories,butwithoutfollowers—Japan’smobileindustrywasdisruptedbythe

smartphonerevolutionbyAppleandGoogle.Inotherareassuchasmobilepaymentsvia

phonesandprepaidcards,Japanalsobecamealeaderwithoutfollowers—referredto

domesticallyasthe“GalapagosPhenomenon,”afterthegeographicallyisolatedislandsin

theSouthPacificthatledtodistinctbio-ecosystems.Theproblemfortheseadvanced

14Zysman,J.,S.Feldman,K.E.Kushida,J.MurrayandN.C.Nielsen(2013).ServiceswithEverything:TheICT-EnabledDigitalTransformationofServices.TheThirdGlobalization?CanWealthyNationsStayRichintheTwenty-FirstCentury?D.BreznitzandJ.Zysman.NewYork,NY,OxfordUniversityPress:99-129.15Breznitz,D.andM.Murphree(2011).Runoftheredqueen:government,innovation,globalization,andeconomicgrowthinChina.NewHavenConn.,YaleUniversityPress.16Huang,Y.(2003).SellingChina:Foreigndirectinvestmentduringthereformera,CambridgeUniversityPress.

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serviceswasthatthevaluewasheldbynetwork-owningfirmssuchascellularcarriersand

railroadgroupcompanies,whofailedtointernationalizetheirservices,leadingto

hardwareandcontentecosystemsbecomingtrappedinthedomesticmarket.17

Inshort,duringthe1990s,atthesametimethatJapansufferedtheburstofanasset

bubble,theUSexperiencedaresurgence,mostnotablyfromSiliconValleyanddrivenby

thecomputerindustry.USfirmsbecametheforefrontofsettingglobaltechnological

trajectories,globalindustrytransformations,andrevolutionizingproductionprocessesina

waythatbroughtinotherAsiancountries.

Japan’sGradualbutSignificantAdjustment:“Syncretism”

Japan’sadjustmentoccurredgraduallyandincrementally.Whilesomesawsimply

stagnation,carefulanalysessawprocessesofchangethatfollowedexistingpatternsof

institutionalreform,withgovernmentandindustryreformingthemselvesratherthan

throughexternalshocks.18Avoidingdrastic,suddenchangethatwouldleadtosocial

turmoil,reformsweregradualandincremental;ratherthanmasslayoffs,forexample,large

corporationsreducedheadcountprimarilythroughattritionandearlyretirement

incentives.Corporatelawreformsprovidednewoptionsforhowtoorganizecompanies,

butwerenotcompulsory.Accountingreformoccurredstealthily.Andwhilesome

previouslyprotectedsectorssuchasfinanceandtelecommunicationsunderwentdramatic

influxesofforeignfirms,foreignfirmswerebroughtintohelpsoftentheendofthe

17Kushida,K.E.(2011)."LeadingWithoutFollowers:HowPoliticsandMarketDynamicsTrappedInnovationsinJapan'sDomestic"Galapagos"TelecommunicationsSector."JournalofIndustry,CompetitionandTrade11(3):279-307,Kushida,K.E.(2015)."ThePoliticsofCommoditizationinGlobalICTIndustries:APoliticalEconomyExplanationoftheRiseofApple,Google,andIndustryDisruptors."Ibid.18Vogel,S.K.(2006).JapanRemodeled:HowGovernmentandIndustryareReformingJapaneseCapitalism.Ithaca,NY,CornellUniversityPress.

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“convoysystem”ofimplicitgovernmentguaranteesagainstbankruptciesinfinancial

sectors.19Deregulationenablednewstockexchangesforsmallmarketcapitalizationfirms,

corporatecoderevisionsenabledstockoptioncompensation,nationaluniversitieswere

reformedintoindependentorganizationstoincreaseflexibility,andregulations

surroundingmergersandacquisitionsmadeiteasierforcompaniestomerge,spinoff,and

createholdingcompaniestofacilitateavarietyoforganizationalforms.

TheJapaneseeconomicmodelthatemergedbytheearly2000swasmoreopen,

morediverse,andlesscohesivethanthepreviousmodel.20Thesystemmaybebest

characterizedas“syncretism”—thecoexistenceoftraditional,new,andhybrid

organizationsandpractices.21Thetraditionalincluderegionalbanksandsmallmedium

companies(SMEs),forexample,remainedrelativelytraditional,withbusinessmodelsand

internalorganizationslargelyunchangedfordecades.Thenewsegmentsincludeforeign

firmsandtherapidlydevelopedstartupecosystem.Hybridareas,whichrepresentlarge

swathsoftheeconomy,changedsomepracticesandorganizations.Examplesinclude,

traditionalkeiretsubanksmergingintothreemega-banks,semiconductordivisionsof

majorfirmsspinningouttocreatejointventurestotakethemoffthebooksforparent

companies,andagrowingmarketformid-careerhires,especiallyinIT-relatedindustries.

Thepointoftheconceptofsyncretismisthatnoteverythinghybridized—instead,there

wasacoexistenceoftraditional,new,andhybridareas.

19Kushida,K.E.(2010).InsidetheCastleGates:HowForeignFirmsNavigateJapan'sPolicymakingProcesses.Ph.DDoctoralDissertation,UniversityofCaliforniaBerkeley.20Vogel,S.K.(2006).JapanRemodeled:HowGovernmentandIndustryareReformingJapaneseCapitalism.Ithaca,NY,CornellUniversityPress.21Kushida,K.E.,K.ShimizuandJ.Oi,Eds.(2014).Syncretism:CorporateRestructuringandPoliticalReforminJapan,ShorensteinAPARC.

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AsignificantproblemforobservingchangesinJapanwasthatifonelookedfor

static,traditionalareas,onecouldfindthem,leadingtoconclusionsthatJapanwasstagnant

andresistanttochange.Yet,whenlookingsomewhereelse,onecouldalsofindnew

dynamicchange,withnewfirms,newpractices,andaltogethernewdynamicsof

competition.Theconceptofsyncretismexplainswhybothwereobserved;theycoexisted.

Thispaperfocusesonthe“new”and“hybrid”areas,whereJapanislikelytomatter

morethancommonlythoughtinglobalcompetition.Thepaperfirstdelvesintothe

emergingstartupecosystem,whichismoreeasilyobservableasacenterofdynamism.

Thenitturnstoexaminesomenotablelargefirminnovations.

II.Japan’sNewStartupEcosystem

Japan’seconomyhas,andislikelytoremaincenteredaroundlargefirms.However,

sinceanimportantcharacteristicofcurrentleadinginnovationsystemsistheabilityfor

largefirmstomakeuseofnewideasandtechnologiesdevelopedoutsidetheircorporate

borders—“open”innovation—wefirstlookatJapan’sstartupecosystem.

Anystartupecosystem,whencomparedtothatofSiliconValley,willlooksmallin

scaleandlessdynamicintermsofthespeedatwhichnewhigh-growthstartupsare

created.However,ifseenovertime,sincethemid-2000s,Japan’sstartupecosystemhas

developedconsiderably.AsJapan’soveralleconomiccontexttransformedgraduallybut

significantly,manyoftheimpedimentsforcreatingavibrantstartupecosystemhave

diminishedsubstantially.

Japaniscurrentlyexperiencingawaveofexcitingscienceandtechnologybased

startups.Ifthetrajectorycontinues,thisisjustthebeginning,withsuccessivegenerations

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ofstartupsenjoyinggreatersuccessatrapidgrowth,partnershipswithlargefirms,and

harnessingSiliconValley.

Ratherthandelvingintoanalyticalframeworkfirst,thispaperwillbemoreexciting

ifwejumpdirectlytoexamplesofstartupsthatillustratevariouscharacteristics.

ScienceandTechnology-basedStartups

First,Japanhasarelativelyhighdegreeofinvestmentinresearchanddevelopment

fromthegovernmentandthrougheducationalinstitutions.Japanhasbeensecondtothe

USbyfaramongadvancedindustrializedcountriesingovernmentexpendituresonR&D,

andahigherpercentageofGDPthananywhereelse.ChinasurpassedJapanbetween2005

and2010inabsoluteterms.However,thepointisthatscienceandtechnologybasedR&D

isoneofJapan’sstrengths.

GovernmentExpendituresonR&DYear 2005 2010 2013

Country Amount % GDP Amount % GDP Amount % GDP Japan 128,695 3.31 140,607 3.25 162,347 3.47 United States 328,128 2.51 410,093 2.74 456,977 2.74 China 86,828 1.32 213,460 1.73 333,522 2.01

Germany 64,299 2.42 87,883 2.71 102,573 2.83 United

Kingdom 34,081 1.63 38,166 1.69 41,743 1.66 France 39,236 2.04 50,765 2.18 57,987 2.24 South Korea 30,618 2.63 52,173 3.47 68,051 4.15

Source:OECDHigherEducationExpendituresonR&D

Year 2005 2010 2013

Country Japan 18,849 18,099 20,807

United States 51,725 60,374 61,227 China 9,449 18,053 22,874

Germany 12,218 15,996 17,157 United Kingdom 9,262 10,322 10,437

France 8,646 10,955 11,225 Korea 3,208 5,646 6,298

Source:OECD

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NotableJapaneseuniversityspinoutstartsbeginningtoappearafterregulatory

reforms,discussedlater.Forexample,Cyberdyne,whichgrewoutofTsukubaUniversity,

producesroboticsuitsthatassisthumanmovement.Foundedin2004,Cyberdynewasa

trailblazer,winningnumerousawardsinJapanandabroad,includingtheAmericanSociety

forArtificialOrgans,andtheIEEE/IRInventionandEntrepreneurshipAward.Cyberdyne

workedwithlargeGermancompanies,andreceivedaccreditationfromtheEuropean

Commissionin2013,developingtheworld’sfirstroboticremedialdevice.Thecompany

wentpublicinMarch2014ontheMothersexchange.FounderYoshiyukiSankaididnote,

however,thathadthecompanybeenfoundedinSiliconValley,itwouldhavegrownmuch

faster,sincetheearlyfundingcamefrompersonalassetsandbankloansduringJapan’s

venturecapitaldownturnintheearly2000s.

Spiber,foundedin2007,successfullycreatedsyntheticspidersilkbydecodingthe

geneticinformationoffibroin,aproteinthatisthemaincomponentofspidersilk.The

technologygrewoutofalaboratoryatKeioUniversity,withthen-graduatestudent

KazuhideSekiyama,alongwiththen-undergraduateJunichiSugiharamakingthediscovery

inearly2007andstartingthecompanylaterthatyear.Giventheunfavorableinvestment

climateimmediatelyfollowingtheglobalfinancialcrisis,ittookthemtwoyearstomakea

technologicalbreakthroughtoproduceartificialspiderthreadandsubsequentlysecure

venturecapitalfunding.In2012,thecompanyenteredintoanalliancewithanautoparts

supplierforToyota,KojimaIndustries,andtogethertheysetupafactoryformass

production.

AmorerecentfirmisNuProtein,foundedin2015bythreeprofessorsand

researchersatNagoyaUniversity,whoinventedanewmethodologyforsynthesizing

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proteins.CalledProteinSynthesisSystem3.0(PSST),comparedtoconventionalmethods

thatutilizee-coliwhichtakeabouttwoweeks,PSSTclaimsaboutfourteentimesfaster,

fiftytimestheamountofyield,andafargreaterarrayofproteinsthatcanbesynthesized.

Theresearchersfirstmadeanacademicimpactbyprovidingproteinssynthesisfor

particularexperiments,becomingco-authorsonovertentopacademicpapersinjournals

suchasNature.Thebusinessistosellproteinsynthesiskitsandsellingdifficultto

synthesizeproteinssuchashormonesandmembraneproteins,whichareexpectedtobe

usefultodiscovernewpharmaceuticalproducts.Thecompanyreceivedearlyfinancial

supportfromNEDO,andwonstartuppitchcontestsinJapanandSiliconValley.

Japanesenon-universityresearchlabs,inparticularRiken,Japan’slargestpublically

fundedresearchlab,hasalsoproducednewbasicresearchthathasenabledventurecapital

backedstartups.ThemostnotableisHealios,whichlicensedatechnologydevelopedby

RikenresearcherMasayoTakahashitouseiPScellstodeveloparegenerativetherapyfor

age-relatedmaculardegeneration.WhiletheRikenlabmethodswouldcostanestimated

$1millionpertreatment,medicaldoctorandserialentrepreneurTadahisaKagimotoset

outtodevelopafarlowercostlineofcellsusingthistechnology.Foundedin2011,Healios

receivedapproximately3billionyeninfundingfromagroupofJapanesefirmsinvolvedin

biopharma,includingSumitomoDainipponPharman,Nikon,ShinNipponBiomedical

Laboratories,andTella.ThecompanylistedontheMothersmarketinJune2015.

LargeFirms,ForeignFirms,andGovernmentasaSourcesofTalent

Largefirmstraditionally“lockedup”muchofJapan’sbesttalent.However,asthe

survivalofmanylargefirmsthemselvesiscalledintoquestion,andwithlifetimecareer

employmentpathsbecominglessattractive,youngeremployeesareincreasinglyleavingto

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formtheirowncompanies.Thisdynamichasdriventhecreationofsomenotablestartups,

whichabsorbfurtheremployeesastheygrow.Cerevo,forexample,ahardwarefirmthat

designsproductsthatconnecttotheInternettoprovidefunctionality,wasfoundedbya

formeremployeeofPanasonic,drawingengineersfromalmostallthemajorJapanese

consumerelectronicscompanies,suchasSony,Sharp,Panasonic,NEC,andothers.

UPQ,isaconsumerelectronicsstartupfoundedin2015thatmadeheadlinesby

introducing24highlyaestheticdesignproductsinitsfirsttwomonths,rangingfrom

smartphonestospeakers,aglasskeyboard,backpackwithbuilt-inbatteryforcharging

devices,achair,andotherthings.Theentrepreneur,YukoNakazawa,wasinhermidtolate

20s,andhadinitiallyworkedforCasiotodesigntheirmobilephones,butleftwhenCasio

withdrewfromthehandsetindustry.

SiliconValleyfirmsinJapanareanewsourceofentrepreneursandJapanesestartup

ecosystemplayers.Wantedly,arecruitingservicethatworksbymixingasocialnetworking

servicewithrecruiting,wasfoundedbyAkikoNaka,aKyotoUniversitygraduatewhohad

workedatGoldmanSachs,followedbyFacebook.Atthetime,Facebook’sJapanoperations

hadonlysixpeople,soitfeltlikeastartup.Nakarealizedthatthecurrentgenerationof

youngerworkerswereinterestedinfulfillmentfromtheirjobsratherthansimplysalary,

soWantedlymakesapointofnotallowingemployerstopostsalaries,butinsteadappealto

workers’potentialpassionforthejob.AsmajorJapanesefirmsbegantoincreasemid-

careerhires,andtheITindustryhasahighlymobileworkforcevis-à-visothersectors,

Wantedly,foundedin2010wasquicklyadoptedbyoverathousandcompaniesandten

millionusers.LargecompanypersonnelrecruitingbudgetseasilycoveredWantedly’sfees,

sothecompanybecameprofitableearlyon.

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DaisukeSasaki,theco-founderofFreee,aFintechfirmthatprovidesfinancialtools,

especiallyforSMEs,waspreviouslyemployedatGoogle.Thecompanywasfoundedin

2012,andaimedtofillun-serveddemandforaneasytouseaccountingsystemfor

companiesthatdidnotrequire,orfoundtoocumbersometheenterprise-gradeaccounting

softwarethatdominatedtheJapanesemarket.Co-founderRyuYokojihadworkedatSony,

andbetweenthetwoofthemFreeewasabletoenlist1600bankstointegrateintotheir

service,makingiteasyforuserstointegratetheiraccountingwithbanks.ItwasSasaki’s

interpersonalnetworksfrombeingatGoogle,whichinvolvedbusinesstripstotheSilicon

Valleyheadquarters,thatledtoanintroductiontotoptierventurecapitalfirmDCM,which

becamealeadinvestorintoFreee.

Soracom,foundedin2015,providesIoTsolutionsthroughaSIMchipwithcellular

connectivity,allowingdevicestoconnecttoleadingtelecommunicationscarrierNTT

DoCoMo’scellularnetwork,andSoracomprovidestheplatformwithaccesstostorageand

analyticsforconnecteddevices.Thefounder,KentaYasukawaandKenTamagawa,both

previouslyworkedatAmazonandhadworkedtofacilitatediffusionofAmazon’scloud

computingresources,AmazonWebServices.

Evenapatternofgovernmentemployeesleavingtocreatetheirownstartupsis

gainingmomentum.Forexample,AgriInfoDesign,whichprovidesanAndroidsmartphone

applicationthatusesGPStoenablefarmerstomovetheirtractorsinstraightlinesinthe

fieldforseedingandfertilizer,wasfoundedin2014byYasuyukiHamada,whohadbeena

seniorresearcherattheNationalAgricultureandBio-orientedResearchOrganization.He

startedoriginallyasaresearcherintheMinistryofAgriculture,ForestryandFisheries.The

app,whichprovidesanextremelylowcostsolutionfordevelopingcountriesandother

16

farminguserswhocannotpaythehighfeesforexistingautomatedtractorservices,won

severalstartuppitchcontests,includingtheTechinAsiaconference,InfinityVentures

Summit2015,andtheNewEconomySummit2016.

AsJapanesecompaniesincreasinglyembraceworkingwithstartupsandeven

buyingthem,newcareerpathsarebecomingpossible,providingexamplesforothers.For

example,YusukeAsakura,aUniversityofTokyograduate,workedforMcKinsey,then

startedhisowncompanymakingpre-smartphonecellularInternetservicemiddleware.

ThatcompanywaspurchasedbysocialnetworkingserviceproviderMixi,andAsakura

eventuallyrosetoCEOofMixiwhenthelatterwasfacingadownwardspiral.Asakura

successfullyturnedaroundthecompany,thenlefttostarthisnextventure—stillinhis

early30s.

LargeFirmsandStartups:GreaterSymbiosis

Startupecosystemsdonotfunctionunlessstartupscanpartnerwith,sellto,and

oftensellthemselvestolargercompanies.Japan’slargefirmswerehistoricallyhesitantto

doso,butthelandscapehastransformedconsiderably.Theoverallnumberofmergersand

acquisitionsinJapanincreasedfrom1707in2010to2285in2014,althoughthe

proportionofstartupacquisitionisasmallproportionofthetotal.22

Intermsofpartneringwithlargecompanies,theaforementionedfirmssuchas

recruitingserviceWantedly,andonlinebusinessaccountingserviceFreeefoundfavorable

environments.ForWantedly,theneedforlargefirmstorecruitnewtalent,combinedwith

largefirms’significantrecruitingbudgetsmadeWantedly’ssubscriptionpricesquite

22 Kariyazono, S. (2015). Japan as a Startup Nation. US-Japan Venture Capital Conference, Stanford University.

17

affordableforthem,andenablingWantedlytobecomeprofitableearlyon.Freeewasable

toenlist1600bankstointegratewiththeirservicesinordertoofferaccountingservices

thatintegratedwithbanks.

PreferredNetworks,foundedin2014byaTokyoUniversitycomputerscientist,

providesmachinelearningalgorithmsandtools.Japan’stopmanufacturersincluding

ToyotaandfactoryrobotproducerFanuchavepartneredwithPreferredNetworksto

jointlydevelopsystemsforfactoryroboticsthatenabletherobotstolearnnewmovements

andtasksbythemselveswithoutoperatorsprogrammingthem.

EvenSiliconValleyfirmssuchasGooglearebeginningtobuyJapanesestartups.

Whilestillararecase,Japanese robotics startup Schaft was purchased by Google in 2013.

Schaft was founded by University of Tokyo researchers focused on producing walking robots.

Schaft entered the US DARPA Robotics Challenge, making headlines by dominating the trial

round. However, once purchased by Google, the latter’s philosophical opposition to receiving

funding from DARPA, part of the US military, given to the competition’s winner, pulled Schaft

out of the final competition.23 This purchase represents a new pathway for Japanese startups,

since top tier Silicon Valley firms such as Google have rarely purchased Japanese startups.

TheDeepeningVentureCapitalIndustryandBroadSectoralVarietyofStartups

Japan’sventurecapitalindustryhasdevelopedsignificantly.Whilethesizeremains

farsmallerthanthatofSiliconValley,ortheUSingeneral,theamountsareactuallygreater

thanothernotableadvancedindustrializedcountriessuchasFrance,Germany,andtheUK.

23 Guizzo, E. and E. Ackerman. (2014). "Who is Schaft, the robot company bought by Google and winner of the DRC?" Retrieved June 1, 2016, from http://spectrum.ieee.org/automaton/robotics/humanoids/schaft-robot-company-bought-by-google-darpa-robotics-challenge-winner.

18

Figure1.VentureCapitalInvestmentAmounts(billionsUSD)FY 2010 2015 Japan 1.29 1.11 EU 4.26 5.91 Germany 0.97 0.87 France 0.80 0.84 UK 0.79 0.62 Israel 0.41 0.65 South Korea 0.96 1.78 US Total 23.52 59.70 Silicon Valley 9.39 27.76 Source:VentureEnterpriseCenter,GVCA,BVCA,AFIC,IVCResearchCenter,KVCA

*NotethatUK'sdataisasof2014. ThemostimportantqualitativeshiftinJapan’sventurecapitalindustryhasbeenthe

riseofindependentVCs.Thehistoricaldominanceoffinancialinstitutionfundswas

criticizedfornotincentivizinginvestorstopursuehighreturns.By2015and2014,

however,thelargestamountsofcapitalinvestedinnewfundswereforindependentfunds.

In2015,itwas35%,followedbycorporateventurecapital(CVC)at28%andfinancial

institutionVCsat18%.Forthepreviousyear,independentVCsreceived42%,withCVCs

receiving43%.SomeexamplesofindependentVCsincludeWorldInnovationLab,Globis

CapitalPartners,BDashVentures,andothers.

AnimportantdriverofJapan’sVCgrowthwasthecreationofsmallcapitalization

marketsinthelate1990s.Twocompetingsmallcapmarketswerecreatedin1999,

providingastablesourceofexitsinwhichVCscouldrealizereturnsfromtheirinvestments.

TherelativecostoflistinginJapan’ssmallcapmarkets,MothersandJASDAQ,isfarlower

thanotherAsianmarkets,andthescaleisfarsmallerthantheUSNASDAQ.24Ontheone

24 Riney, J. (2016). "7 Things Investors & Founders Need to Know about the Japan Startup Ecosystem." Retrieved 2016, June 1, from http://500.co/japan-startup-ecosystem-founders-investors/.

19

hand,thishinderstrulylargehigh-growthfirmsfromemerging,sinceoncefirmsarelisted

atasmallerscale,theytendtobecomemoreriskaverseandpursuestableratherthan

exponentialgrowth.Ontheotherhand,sinceitiseasiertoIPOinJapanthanintheUS,

JapaneseVCsmayactuallyfaceamorepredictableexitstrategyenvironment.25

Figure2.AmountsRaisedinIPO,Small-capMarketsinJapan,US

Average(million$) Median(million$) Japan(Mothers/JQ) USNASDAQ Japan(Mothers/JQ) USNASDAQ

2015 7.6 116.0 3.5 75.02014 8.7 121.6 5.7 65.0

Source:TokyoStockExchange,NASDAQ

TheInnovationNetworkCorporationofJapan(INCJ)isanoteworthygovernment-

spearheadedattempttosparkinvestmentsinJapan’sstartupecosystem.Establishedin

2009,itwasa300billionyenfundwith286billionfromthegovernmentand14billion

from26corporationswhichincludeJapan’smajorcorporationsincludingToyota,Canon,

andmanyfromtheSumitomoandMitsubishigroups.Additionalgovernmentguaranteesof

1800billionyeninloansenabledtheINCJtoinvestapproximately2000billionyentotal.

ThelifespanofINCJisfixedat15years,anditisrunbyamixofgovernmentofficialsand

privatesectorparticipants.Whilesomeanalysesmayviewthisgovernment-spearheaded

fundassimplycrowdingoutpotentialprivateinvestments,itmayalsobeviewedashaving

alegitimizingeffectforstartupsandotherventurecapitalfirmssuchasWiLthathave

receivedINCJinvestments.

25 Ibid.

20

Figure6showstheJapanesestartupsthatraisedthemostVCfunding(accordingto

publicallyavailablenewsanddatasources),aswellasfounders’backgrounds.Thisisa

usefulfigurebecausewecanseewhereVCswereplacinglargebets.

AkeyobservationisthatthesectoralvarietyofJapan’shighgrowthstartups

receivingthemostVCinvestmentisbroad.Forexample,Spiberdevelopssyntheticspider

webmaterial,withavastarrayofpotentialindustrialapplication,asitisanextremely

strong,lightweightmaterial.Freeeprovidesweb-basedaccountingsoftware,particularlyto

small-mediumbusinesses,atafractionofthecostoftraditionalaccountingsoftware

systems.Raksultookatraditionalindustrywithexcesscapacity—printing—and

reorganizedthesupplychainthroughacustomer-facingonlineinterfaceandefficiency-

optimizingITback-endthatconnectscustomerswithcapablefactoriesaroundthecountry

atlowprices.QuantumBiosystemsisacommercialDNAsequencer,Origamiisamobile

paymentservice,andSmartNewsdeliversnewsfeedscuratedtopeoples’preferencesas

revealedthroughsocialnetworkingservicesandotherpreferencestipulations.Thereare

evenfirmsdelivering3Dtissueengineeringtechnology,regenerativemedicineiPScell

analysisandmeasuringtools,commercialsatellitemicroimaging,andafreshfish

distributionplatform.

Whilemanyofthefirmsonthislistmaynotexistfiveyearsfromnow,thiswould

likelyindicateachurningofhighgrowthstartupsasexpectedforahealthyhigh-growth

startupsystem.Thepoint,however,isthatthereissignificantvarietyacrosssectors,and

thefirmsarebothBusiness-to-Business(BtoB)andBusiness-to-Consumer(BtoC)firms.

21

Figure3.MajorVentureCapitalFundraisingbyJapaneseStartups,2015

Company Amount Raised (billion yen)

Description Founder Education Previous Employment

Spiber 10.54 New-generation biomaterial development

Kazuhide Sekiyama

Keio University

Founded company while still a doctoral student

Metaps 4.89 Marketing tools and consulting service in mobile business

Katsuaki Sato Waseda University

Dropped out of university to start company

Freee 4.49 Cloud-based accounting software

Daisuke Sasaki

Hitotshbashi University

Google

Raksul 3.99 Commercial printing service

Yasukane Matsumoto

Keio University

A.T. Kearney

Megakaryon 2.54 Producing platelet products from iPS cells

Genjiro Miwa

University of Tokyo, Harvard University

St. Thomas Investments

Quantum Biosystems

2.4 Commercial DNA sequencer

Toshihiko Honkura

University of Tokyo, Columbia University

McKinsey & Company

Plus One Marketing

2.13 Mobility hardware products made by Japan

Kaoru Masuda

Waseda University

Dell Japan

Preferred Networks

1.9 Industrial IoT applications with AI

Toru Nishikawa

University of Tokyo

Software intern at a bio venture firm

Daisuke Okanohara

University of Tokyo

Google

AXELSPACE 1.89 Commercial microsatellite imaging and data service

Yuya Nakamura

University of Tokyo

University of Tokyo (Post-doc)

Treasure Data, Inc.

1.77 Cloud data management platform

Hiro Yoshikawa

Waseda University

Mitsui Ventures

GLM 1.69 EV Development / providing EV platform

Hiroyasu Koma

Kyoto University

Koma Enterprise

Origami 1.59 Mobile payment service

Yoshiki Yasui

Waseda University, University of Sydney

Doll Capital Management

iPS PORTAL 1.53 Instruments to analyze and measure iPS cells

Syosaku Murayama

Doshisya University

Teikoku Seiyaku Co., Ltd.

seven dreamers 1.52 R&D of carbon tool and medical equipment

Shin Sakane University of Delaware

Super Resin, Inc.

22

Money Design 1.5 Financial portfolio design with AI

Mamoru Taniya

University of Tokyo

Asuka Corporate Advisory Co., Ltd.

Tomoyoshi Hirose

Yokohama National University

Criteria Japan

CYFUSE 1.41 3D tissue-engineering technology

Koji Kuchiishi

Keio University

Mckinsey & Company

from scratch 1.29 Next-generation marketing platform

Yasuhiro Abe Nihon University

Link and Motivation Inc.

SmartNews 1.19 News discovery app Ken Suzuki Keio University, University of Tokyo

University of Tokyo

Ptmind 1.1 Data analysis and monitoring

Yuan Zheng Nihon University

Founded Ptmind while still an undergrad at Nihon University

Takashi Ando

Rikkyo University

OKWave Inc.

Money Forward

1.03 Online application for personal accounting

Yosuke Tsuji Kyoto University, University of Pennsylvania

Monex, Inc.

AnyPerk 1.02 Integrated perks and rewards platform

Taro Fukuyama

Keio University

Was developing an online social community service when picked up by Y combinator

FOODiSON 1.01 Fresh fish distribution platform

Tohru Yamamoto

Hokkaido University

SMS Co., Ltd.

JOMDD 1.01 Medical device incubator

Takahiro Uchida

Fukushima Medical University, Harvard University

Necess Medical, LLC

Retty 1.0 Social gourmet site Kazuya Takeda

Aoyama Gakuin Univeristy

NGI Group

LOCONDO 1.0 Shoes and fashion e-commerce service, buy first and then choose

Yusuke Tanaka

Hitotsubashi University, UC Berkeley

McKinsey & Company

Sources: Japan Venture Research Co., LTD

23

SocialNormChangesDrivenbyEconomicEnvironment,MaturationofSupport

Ecosystem

Theattractivenessofentrepreneurshipandworkingathighgrowthstartupfirmshas

increasedsignificantlyoverthepasttwodecades.Foreliteuniversitygraduates,the

possibilityoflifetimecareersatlargefirmsarelesslikelywhenthelongevityofthefirms

themselvesareinquestion.Inthelate1990s,staidfinancialinstitutionssuchastheLong

TermCreditBankandYamaichiSecuritieswentbankrupt,mostlargeelectronicsfirms

suchasNEC,Fujitsu,Sony,andotherslostinglobalcompetitionforsemiconductors,

telecommunications,andconsumerelectronics,sellingofforshutteringtheiroperationsin

thoseareas.ConsumerelectronicsfirmSanyowassoldtoPanasonic,withmanyofits

divisionssoldtoChinesefirmHaier,amassiveaccountingfraudwasuncoveredinToshiba

in2015,andinearly2016,Sharp,onceafront-runnerinflatpaneldisplaysandconsumer

electronicssuchasmobilehandsets,wassoldtoTaiwanesefirmFoxconn.Whilestablejobs

atlargefirmscontinuetobeattractive,theyarefarlesssothantwodecadesago.Alistof

theuniversitiesattendedbyfoundersofstartupswithtopfundraisingin2015revealsthat

almostallwerefromeliteuniversities.

Numerousstartuppitchcontestsandmajoreventscelebratinghighgrowthstartups

havebeentakingplaceinrecentyears.Audiencesnumberinthethousands,someare

focusedonhavingpolicyrecommendationarms,andtheoftenreceivenationalnews

coverage.Theseorganizationsandeventshelplegitimizeandpopularizeacultureofhigh

growthstartups.SomeincludetheannualNewEconomySummit,launchedin2013,

organizedbytheJapanAssociationofNewEconomy,setupbyJapan’slargest,listedonline

commercecompany,Rakuten.TheNewEconomySummitinvitedprominentSiliconValley

24

entrepreneurssuchasLarryEllison,founderofOracle,andthefoundersofstartupssuchas

Dropbox,Lyft,Box.com,andAndyRubinwhosecompanywasboughtbyGoogleand

becametheAndroidplatform.TheInfinityVenturessummit,whichbeganin2009,brings

hundredsofcompaniestoKyotoannually,andisahubforinvestors,entrepreneurs,and

largefirmstomeet.Lessbusinessfocusedandinspirationcommunitybuildingeventssuch

asSlushAsia,orchestratedbyFinishfirmSlush,tookplaceinTokyoin2016.Fromthe

government,theNewEnergyandIndustrialDevelopmentOrganization(NEDO),which

subsidizedtheR&Dofscienceandtechnology-basedstartups,pitchcontest,theNEDO

TechnologyCommercializationProgram,featuringstartupsthatenteredseveralroundsof

pitchcompetitionsaroundthecountry.Thefirstprogramtookplacein2015.

Finally,Japan’sstartupsupportecosystemismaturing,withanincreasingnumberof

supportactorssuchasaccountingfirmsandlawfirmsnotonlyprovidingservices,butalso

activelyorchestratingstartup-focusedeventsandservices.Forexample,TohmatsuVenture

Support,asubsidiaryofaccountingfirmDeloitteTohmatsu,hasbeensupportingweekly

“morningpitch”eventsat7aminTokyosince2011,expandingtoothermajorcitiesaswell.

Theyprovidemanyservicestoearlystagestartupsfreeofcharge,withtheaimoffostering

avibrantstartupecosystemfromwhichtheycanbenefit.Thecompanyhasalsosetupa

SiliconValleybranchtohelpJapanesestartupsenterSiliconValley.

WhilethereisnocomprehensivedatabaseofJapanesestartupsinSiliconValley,ties

betweentheJapanesestartupecosystemandSiliconValleyarestrengthening.26Several

JapanesewerepartoftheprogramsattopacceleratorssuchasYCombinatorand500

Startups.26TheStanfordSiliconValley–NewJapanProjectiscompilingadatabaseofJapanesestartupsinSiliconValley.http://www.stanford-svnj.org

25

Asseenfrommid-2016,Japan’sstartupecosystemhasdevelopedconsiderably,as

manyofthecharacteristicsoftheoveralleconomyhavetransformedtocreateanew

environment.

Figure4.SiliconValleyStartupEcosystemCharacteristicsComparedtoJapaninmid-100s,Japanin2016Silicon Valley Startup Ecosystem Characteristic

Japan in the mid-1990s: impediments

Japan in 2016: changes that facilitate startup ecosystem

Financial System: Venture capital

Bank-centered, traditional financial markets

New small cap financial markets, growing VC industry, rise of independent VCs

Labor Market: fluid, diverse, highly skilled

Long term employment with seniority ties creating illiquid labor markets. Best and brightest locked into large firms for entire career

Increasing labor mobility, especially in IT sector and with foreign firms. Lower prestige and opportunity with large firms

Industry-University-Government Ties

Numerous formal regulatory constraints

Active efforts by universities, private venture capital, and government to spin out successful startups with university technology

“Open” innovation with large firms and small firm symbiosis

Closed innovation with large firms in-house R&D and uninterested in business with startups

Firms more interested in open innovation, participation in VC funds, business with startups.

Social system encouraging entrepreneurship

Entrepreneurship seen as low prestige vis-à-vis large firms and government

Rising attractiveness of entrepreneurship as large firms enter competitive crises, increases cases of successful startups

Professional services ecosystem

Small size of professional ecosystem

Law firms and accounting firms setting up startup-focused practice areas to foster and benefit from growing startup ecosystem

University-relatedVCfundsUTEC(UniversityofTokyoEdgeCapital),andMiyako

Capital,affiliatedwithKyotoUniversity,havealsobeenactivelyworkingtospinout

26

technologiesfromtheseJapanesetopuniversitiesintohighgrowthstartups.UTECwas

establishedin2004,withapproximately$300millioninitsfunds,with9IPOsand8M&A

exitsbytheendof2015amongits65portfoliocompanies.Althoughstillatanearlystages

ofdevelopment,MiyakoCapitalwasgiven$60millionfromKyotoUniversityin2015.

III.LargeFirms:TheCoreofJapaneseIndustry

Itisoftenmorechallengingtoobservelargecompaniesundertakingbreakthrough

innovationofthesortthatstartupfirmsaimfor.Bytheirverynature,largecompaniesare

slower,andcarryfarhighercoststoundertakenewactivities.Andcomparedtostartup

firms,largefirmsrequiremassiverevenuestojustifynewlinesofbusiness.Therearea

varietyofforcesatworkthatconstrainlargefirmsfrommovingquickly,includingthe

“innovator’sdilemma,”inwhichlisteningtocurrentcustomersandoptimizingcurrent

supplierscanleadtomissedopportunitiesthatrequirejettisoningtheseactorinfavorof

somethingnewthatisnotyetprofitable;hence,largecompaniescangetdisrupted.27

Japaneselargefirmsareparticularlyslow,sinceenactingmeasuressuchasreducing

personneltendtobeaccomplishedthroughattrition,whichtakestime.Moreover,

unprofitablesubsidiariessuchassemiconductorshavebeenspunoutintojointventures

acrosspreviousrivals,lettingparentcompaniesmovethedivisionsandpersonneloffthe

books.

Thereare,however,firmswhoseinnovativeactivitieshavethepotentialtochange

technologicaltrajectories,affectcompetitivedynamics,andinfluencethelogicof

production.Whilenotallthefollowingexamplesmayberealized,theyareserious

27Christensen,C.M.(2000).Theinnovator'sdilemma.NewYork,HarperBusiness.

27

developmentsworthyofattention,andtheytendtobeunderappreciatedbothinsideand

outsideJapan.

Komatsu:ITFrontierinMassiveEquipmentDeployment

Komatsu,oneoftheworld’sleadingheavymachineryproducers,hasbeenatthe

forefrontofIT,andisboldlydevelopingintoaplatformplayerandleaduserofArtificial

IntelligenceinawaythathasrarelybeenseeninaJapanesefirm.

WithinJapan,KomatsuhasbeenwellknownforitspioneeringuseofITtoolsto

connectitsheavymachinery.UsingitssystemcalledComtrax,Komatsugathersdetailed

informationaboutallitsmachineryoperatingaroundtheworld.Itcanalertcustomersif

wearandtearonpartsrequiremaintenanceorreplacement.Itcanalsouseusagedatafor

demandforecasting,especiallyinpartsoftheworldwhereofficialgovernmenteconomic

statisticsmaybeunreliable.Komatsucanevenstoptheoperationofitsleasedmachineryif

theinstallmentpaymentsarelate,oralertcustomersiffuellevelsdecreasedespitenon-

usageofthemachinery,indicatingillegalfuelsiphoning.Thiswasallnewsfromtheearly

2000s.

Morerecently,evenastheworld’sautomobilemanufacturershaverushedafter

Google,Tesla,andAppletodevelopautonomouslydrivenvehiclesafteraround2012,

Komatsuhasactuallybeencommerciallydeployingfullyautomatedminingdumptrucks

since2008.ThishasnotbeenwellpublicizedoutsideJapanortheconstructionandmining

equipmentsectors.

Evenmoresignificantly,however,andnotobviousevenwithinJapan,isthat

Komatsuhasprogressedsurprisinglyfarinanother,contrastingareaofArtificialIntelligent

(AI)—thatofIntelligenceAugmentation(IA).WhileAItendstofocusonreplacinghuman

28

activity,suchaswithself-drivingautomobiles,theaimofIAistoenhanceandaugment

ratherthanreplacehumans.AIandIAarederivedfromcontrastingintellectualand

developmentparadigms.28

Komatsu’sIAsolutioninitsheavyequipmentallowsoperationsthatpreviously

requiredhighlyskilledworkerswithclosetoadecadeofexperiencetobeperformedby

relativenovices.Putsimply,itisasolutionallowinglow-skilledworkerstoperformhigh-

skilljobs,withintelligencebuiltintotheconstructionequipmenttoassisttheoperators.

InbothKomatsu’sAIandIAsolutions,itdeploystechnologiesacquiredfromoutside

thecompany.ThesensortechnologiesandAIsystemsforitsautomateddumptruckswere

procuredexternally,thenimprovedandintegratedinternally.FortheIA,theconstruction

equipmentusedtouseGPSsensors,procuredfromoutsidethecompany,tomapthe

terrainanddeterminethepositionofequipmentparts,butnowitusesdrones—also

procuredexternally.Moreover,thecompanyhaspartneredwithdronecompaniesthat

providewirelessdronesforlargeopenairoperations,andwiththosethatcanprovide

wireddronesforconstructionsites,enablingthelattertohoverwithoutrunningoutof

batterypower,strayingoutsidetheconstructionsite,andenablinghigherdatathroughput.

Komatsuisthereforeengaginginopeninnovation.

InpursuingopeninnovationKomatsuisharnessingSiliconValleyanditsUS

operations.ItinvestsinbothlargeandsmallboutiqueSiliconValleyventurecapitalfunds,

andsendsresearcherstobothStanfordUniversityandUCBerkeley.Itisusingadronedata

analysisplatformprovidedbySanFranciscofirmSkycatch.

28Markoff,J.(2015).MarchinesofLovingGrace:TheQuestforCommonGroundBetweenHumansandRobots.NewYork,EccoBooks.

29

Finally,andmostinterestingly,Komatsuisattemptingtomakeanopenplatform

thatwillconnectanydevicethatispartofaconstructionsite.Aslowcostsensorsusherin

aneraof“InternetofThings(IoT)”inwhichvariousdevicesconnecttonetworks,Komatsu

foreseesanearfuturewhereallsortsofdeviceswillcommunicatewitheachother.

Significantly,Komatsuintendstomaketheplatformopen,withouttakingownershipof

dataorcontrolofthirdpartyequipmentthatconnectstotheplatform.Byusheringinan

eraofsmartconstruction,Komatsuintendstoremaincompetitivewithitsownequipment

despiteallowinganyotherequipmenttoaccesstheplatform.Forprojectsthatcross

nationalborders,theyarelookingintobuildingabitcoinsolution.

TheJapanesegovernmentissupportingKomatsu’stechnologicalcapabilitiesasan

industrystandardforbidding.KnownasiConstruction,variablessuchastimeto

completionandcostcanbecalculatedasvariableswithvariousmachineryusageratesand

sitecharacteristicsasoptimizableparametersratherthanfixedvalues.

Yamaha:HarnessingSiliconValleywithaHumanoidMotorcycleRobot

In2015,asresearchanddevelopmentintoself-drivingautomobilesrapidlygained

momentum,YamahaMotorsdevelopedanautonomousmotorcycleridinghumanoidrobot

thatsitsonandridesaconventionalmotorcycle.ThiswasdonebyharnessingSilicon

Valley.

Source:YamahaMotors

30

In2015,YamahacreatedtheYamahaMotorVentures&LaboratorySiliconValley

(YMVSV).Thestoryofhowitwasestablished,andthethoughtbehinditprovides

importantcluesforothercompanies.SaijoHiroshihadbeenaroboticsengineerinYamaha

Motors.WhenYamahaMotorsdecidedtofigureouthowtoharnessSiliconValley,it

borrowedspaceinalocalSiliconValleyincubator,PlugandPlay,whereSaijospenttimein

2014.There,herealizedhowdifficultitwouldbeforasimplebranchofficeofalarge

Japanesefirmtooperatein,andmakeuseof,theresourcesavailableinSiliconValley.

WhenSaijodiscussedcreatinganewentityinSiliconValleywiththecompany’stop

management,hemadesurethatseveralconditionsweremet.First,theSiliconValleyentity

wouldbefreetodevelopandpursuebusinessopportunitieseveniftheywerepotentially

disruptivetoexistingYamahabusinesses.Thefearofdisruptionisoneofthereasonsthat

largefirmstendtohavedifficultypursuingnewbusinesslines—the“innovator’s

dilemma.”29

Saijoalsorecognizedtheneedforfastspeedindecision-making,whichcanonly

occurifenoughresourcesarecontrolledlocally.Therefore,Yamaha’sentitywasa

combinationofaCorporateVentureCapitalfirmandabusinessunit.Throughthis

autonomy,YMVSVwasabletomakesomeinvestmentsinaslittleastendays(toamobile

wifigridstartupfromVietnam),andengageinprojectsthatmighthaveencounteredsevere

pressuresforcompromisein-house.Forexample,puttingsensorsonmovingvehiclesto

obtainactiveandmoredetaileddataaboutairqualitymighthavebeenlimitedtoYamaha

motorcyclesifdevelopedsolelyin-house.

29Christensen,C.M.(2000).Theinnovator'sdilemma.NewYork,HarperBusiness.

31

Motobot,thehumanoidmotorcycle-ridingrobot,wasanimportantdemonstration

projecttothecompany’shomeR&Dlabsaswell.YMVSVpartneredwithSRIInternational,

theresearchinstitutethatbeganasStanfordResearchInstitutethatlaterdevelopedand

soldtheSirivoicerecognitionsoftwaretoApple.Theyco-developedtheMotobotin10

months,atafarlowerbudgetthanYMVSVhadinitiallyexpected.SRIprovidedtherobotics

expertise,butinthelaterstagesofdevelopment,Yamahaengineerswereabletocutthe

robot’sweightinhalf.Despitethelackofanimmediate,short-termmarketprofitability

projection,thefactthatYamahawaswillingtodothiswillalsobeamajormoralebooster

forthecompany.

Toyota:TheChallengetoAvoidDisruptionasLargestIncumbent

Toyota,byfarthelargestmarketcapitalizedfirminJapan,theoriginalcreatorofthe

world’snewproductionparadigmwith“leanproduction”hasbeenundertakingvarious

activitiestostayaheadofthecompetition.Theirgasolineelectrichybridenginefirst

introducedinthe1997,Prius,shiftedthetechnologicaltrajectoryoftheautomobile

industry.Justas“leanproduction”becamethestandardparadigmforhowtoorganize

automobilemanufacturingamongUSandEuropeancountries,gasolineelectrichybrid

enginesarenowofferedbymanufacturersaroundtheworld.

Toyota’smorerecentinnovationshavebeenmultipronged,astheautomobile

industryfacespossiblyunprecedentedchallengesfromartificialintelligencethatcancreate

automatedself-drivingcarsasspearheadedbyGoogle,ride-sharingcompaniessuchas

Uber,andelectricvehiclecompaniessuchasTeslaatthehighend,BYDinChinaand

elsewhere,andthepossibilityoflowcostproducersenabledbythefactthatelectricmotors

32

aremucheasiertomanagethangasolineenginesinproduction—eventheChinese

smartphonemanufacturerXiaomirolledoutanelectricvehiclemodelinmid-2016.

Toyotahassuccessfullydevelopedahydrogenfuelcellvehicle.Usinghydrogen

ratherthangasoline,itisacleanbutdifficulttechnology,andsofarToyotahasbeenthe

onlyautomobilemanufacturertointroduceafullmodelMiraisedan,firstintroducedin

Japanin2014,andinlimitedlocationsintheUSin2015and2016.Thequestionfor

hydrogenfuelcellvehicles,ofcourse,iswhowillbeprovidingtheinfrastructureneededfor

thenewenergysystem—thecollection,processing,anddistributionofhydrogenand

networkoffuelingstations.WithinJapan,thegovernmentisactivelysubsidizingthe

creationofhydrogenfuelingstations,aswellassubsidizingthepurchasepriceoffuelcell

vehicles.Willthisbeanother“Galapagos,”inwhichtheJapanesedomesticindustry

divergesfromglobalmarkets,evenifitisadvanced?ThelessonfromJapan’sITindustryis

thatwithoutabusinesslogicfornetworkcreationworldwide,anyhardwarethatrelieson

thatnetworkwillbetrappedinthedomesticmarket.Sofar,neithertheUSnorEurope,nor

mostindustrializingcountries,seempoisedtoassistororchestratethecreationof

hydrogenfuelcellnetworks.However,animportanthypothesisthatemerges,especially

whentakingintoaccountToyota’ssignificantR&DpresenceinmainlandChina,isthe

possibilitythattheChinesegovernment,forthepurposesofloweringairpollutionand

gainingfurtherenergyindependence,mayorchestratethecreationofhydrogenfuelcell

chargingstations.Ifthisoccurs,andtheChinesemarketcansignificantlyshifttowards

hydrogen,thenToyota’sfuelcellwillnotbetrappedinJapan’s“Galapagos,”asChinaisfar

biggerthanJapan’sGalapagos.However,sinceToyotawillnotdirectlydivulgetheircore

strategy,thisremainsahypothesisasseenfromtheoutside.

33

Toyotaisnot,however,puttingallitseggsinthefuelcellvehicle.Theyaredeploying

plug-inhybrids,whichcanbechargedfromelectricityoffthegrid,aswellasgasoline.

Toyotaisalsoinvestinginartificialintelligencewithanaimtocreateself-driving

vehicles.Theyaredoingsothroughsubstantialindustry-universityresearch,thecreation

ofanewresearchlabinSiliconValley,andinvestmentsintoventurecapitalinitiatives.In

2015,Toyotaannounced$25millionresearchinitiativeswithStanfordUniversityandMIT,

creatingnewresearchcenterswithAIrelatedprojects.Attheendof2015,Toyotaalso

announcedthatitwouldspend$1billionoverfiveyearsincreatingtheToyotaResearch

Institute(TRI)inSiliconValley,hiringateamincludingGillPratt,whorantheUSDARPA’s

roboticschallenge.

Alsoin2015,Toyotajointlycreatedaventurecapitalfundofapproximately$110

million,contributingaround$80,withtherestfromSumitomoMitsuiBankingCorporation

andaJapaneseassetmanagementfirmSparx.Thefundintendstotargetstartupsrelatedto

AI,robotics,andhydrogenfuel.

In2016,Toyotamadeastrategicinvestmentintoride-sharingserviceUberofan

undisclosedamount.ItmayinvolveleasingarrangementsforUberdrivers.Uber’s

competitorLyft,hadannouncedleasingplanswithGM,withreducedleasingprices

accordingtotheamountthatdriversusedthecarstoworkforLyft.

Fanuc:TowardsIntelligentAutomation

FanucisoneofJapan’smostcompetitivefirmswhosenameisfairlyunknownto

mostpeoplearoundtheworldnotinvolvedinmanufacturing.Itisoneoftheworld’s

leadingfactoryroboticsfirms,andhasheldanestimated60%oftheworld’scomputer

numericalcontrolsystemsformachinetools,and18%oftheworld’sfactoryroboticsshare

34

in2013accordingtoGoldmansSachs.30Fanuchighprecisionfactoryrobotscanbefoundin

factoriesservingApple,Samsung,Toyota,GM,andawidearrayofmanufacturing.Itisone

ofthe“bigfour”globalfactoryroboticsfirms,whichincludesABBGroupofSwitzerland,

KukaofGermany,andYasukawaElectric,alsoofJapan.

Fanuchasbeenasecretiveandclosedcompany,locatedawayfromTokyo,building

itsownfactoriesonlyinJapan,andevenrestrictingexternalemailexchangesofits

employees.However,itsfinancialsuccesswasextremetothepointthataNewYorkhedge

fundthatpurchasedastakeofitssharesinthehopeofconvincingittodispersesomeofits

morethan$8billionincashholdingstotheshareholders,notedthatthecompanyspends

$1billionannually,andgetsreturnsof$2billion,whichitholdsontoratherthangivesback

toshareholders.31

Fanuc’srecentstrategiesthatitannouncedincludecreatinganopenplatformfor

withinfactoriesthatcanbeusedbyanyotherentitytocommunicateandshareinformation

acrossmachinesandequipment.Increatingthissystem,Fanucco-developedtechnology

platformswithCiscoSystems,theleadingnetworkingcompanyfromSiliconValley.

Inthenextgenerationoffactoryrobotics,Fanucismovingaggressivelytoharness

artificialintelligence,inparticularmachinelearning.Theyhaveasubstantivetie-upwith

JapanesestartupPreferredNetworks,foundedin2014andfocusedondeeplearning,a

particularclassofalgorithmswithinthefieldofmachinelearning.ThegoalofFanucisto

pursueself-learningfactoryrobots,andinademonstrationinlate2015,theyshowedhow

30http://blogs.wsj.com/japanrealtime/2015/06/11/fanuc-aims-to-enhance-factory-robots-with-deep-learning/31http://www.japantimes.co.jp/news/2015/02/19/business/corporate-business/secretive-robot-maker-fanuc-targeted-by-activist-investor-loeb/#.WOvXrFPyuUk.(Fullletteravailableat:http://www.marketfolly.com/2015/02/third-point-q4-letter-fanuc-new-position.html)

35

arobotcouldself-learnataskofstackingcylindricalobjects,whichwouldhavetaken

approximately8hourstoprogrambytechnicians,inapproximatelytwohoursbyitself

withnopriorabilitytohandlethoseobjects.

In2016,GMawardedFanucitsinnovationawardforsuppliers,forFanuc’s“Zero

DownTime”systemthatgathersreal-timedatafrommachinesandordersparts,oralerts

thecompanybeforemalfunctionsoccur.

Fanucisthereforeahighlyprofitablecompanyfocusedonfutureinvestmentinthe

areasofartificialintelligenceandso-called“InternetofThings(IoT)”connecteddevices,

andisanintegralpartofglobalproductionnetworksandsupplychains.

Honda:SurprisinglyOpenInnovationinSiliconValley

HondaisharnessingSiliconValleyinasurprisinglyopenmanner.Itopenedbasic

computerscienceresearchofficesinSiliconValleyin2000,andin2005itestablished

corporateventurecapitalentity.In2011,itdecidedthatratherthananinvestment

operation,itcouldbetterharnessSiliconValleybycreatinganopeninnovationlabto

partnerdirectlywithstartups.ItcreatedtheHondaSiliconValleyLab(HSVL)thatyear,

withtwomajorinitiatives,theHondaXcelerator(established2015)andHondaDeveloper

Studio(2014).

TheHondaXceleratorisuniquebyprovidingfundingforprototyping,accesstotest

vehiclestotest,takedata,andrefineprototypes,collaborationworkspace,andmentors

fromwithinHondaitself.Ineffect,Hondaisofferingstartupstheresourcestodevelop,test,

andrefinetheirproductsandservicesinajointdevelopment-typearrangement.

Significantly,however,Hondaisnotinterestedinmonopolizingtheoutcomes.Startupsare

freetoselltheirproductsorservicesdevelopedintheHondaXceleratortoanyother

36

automobilefirmoranybodyelse.Theviewisthat,havingco-developedtheoffering,Honda

willbefirsttomarketintheslow-movingautomobiledevelopmentcycle,givingitan

advantage.Withoutallowingstartupsopenaccesstopartnerwithwhomevertheywantas

anendresult,Hondarealizedthatitwouldbeunabletoattractpotentiallyvaluable

startups.

TheHondaDeveloperStudiofollowsasimilarparadigm,focusedoncreatingan

ecosystemofdevelopersforaplatformtoaccessautomobileinfo-tainmentsystems.Since

smartphonesfaroutpaceautomobilehardwarefordevelopmentcycles,havingaplatform

thatcanallowappdeveloperstoaccessandcontrolportionsofautomotiveinfo-tainment

systemswasseenascritical.OfferingaccesstotestvehiclesandHondaengineeringteams

allowsdeveloperstoacceleratetheirdevelopment.Numerousdevelopersarepartnering

withHondainthisway,withanearlynotablepartnerincludingSiliconValleystartup

Drivemode,whichprovidesadriver-friendlyinterfaceandfunctionalityforAndroid

phones.

TheheadofHonda’sSiliconValleylabsisNaokiSugimoto,whostartedhiscareer

withRecruit,andwasinchargeofdevelopingtheircorporatewebservices.Sugimotothen

attendedtheUCBerkeleyHaasSchoolofBusinesstogetanMBA,foundinghisown

successfulITcompanythatwaspurchasedbyRecruitin2001.Afterspendingseveralyears

asaconsultantandventurecapitalinvestor,hejoinedHondain2005.Takinganoutsider’s

perspective,andbringinginsiderknow-howandinterpersonalnetworksfromSilicon

Valley,hewasabletoorientHSVLintoanopeninnovationorientation.

InapubliceventatStanfordUniversity,wheninconversationwiththefounderof

Drivemode,YoKoga,SugimotoandKogaoutlinedthevariouschallengestheyovercameto

37

workwithheadquarters,suchasreworkingthestandardcorporatenon-disclosure

agreementsthatwereentirelyinappropriateforSiliconValleyandnotatalloptimizedfor

workingwithstartups(suchasrequiringthebootstrappedstartuptocarrymultimillion

dollarsworthofinsurancetoworkwithHonda.)32Aspartoftheecosystem,experiences

andexperimentsundertakenbythosesuchasSugimotoprovidelearningopportunitiesfor

otherJapanesefirmsattemptingtolearnspecifictechniquestoincorporateoutsidefirmsin

theirinnovationprocesses.

Conclusion:WhyJapanStillMatters

Thispaperendswiththequestion:doesJapanstillmatterintheworld’spolitical

economy,andifso,why?Thispaperbeganwithahistoricalvantageofwhenandwhy

Japanmatteredmost.Japanalteredtechnologicaltrajectories,transformedindustries,and

createdanewproductionparadigminthe1970sand80s.Sincethen,itsimpacthas

decreasedasprimarilyUSstartupsfromSiliconValleytooktheleadintheseareas,anditis

notclearwhetheritwillexertthislevelofinfluenceontheglobaleconomyinthefuture.

TheadventofInformationTechnology(IT)hasradicallyincreasedthespeedofindustrial

changeanddisruption,andshiftedthefocusofvalue-addedactivityawayfromJapan’shigh

growthstrengthsinmanufacturing.Moreover,theworld’spoliticaleconomicconfiguration

haschangeddramatically,withtheendofthebipolarColdWarstructureandtheriseof

variouscountries,notablyfromAsia,enteringglobalcompetition.

However,itisalsoclearthatJapanhasbeenwrittenoffprematurelyandtoooften.

Visitorsareoftensurprised,afterreadingaboutJapan’scrisis,stagnation,anddecline,that

32SiliconValley–NewJapanSummit2016.StanfordUniversity.Oct4,2016.

38

theTokyoareaisvastlymoremodern,clean,efficient,andtransportationnetworksare

incredibleintheprecisionandscope.

Japan’stransformationhastakentheformofsyncretism,inwhichtraditional,

hybrid,andneworganizationalformsandpracticescoexist.Afocusonthenewandhybrid

areasrevealsignificantchange.Thecontextsurroundinglargefirmshasshifted

significantly,althoughgradually,leadingtoagreateropennessandcollaborationwith

newerfirms.Mostoftheexplicitandimplicitdomesticmarketprotectionsnolongerexist,

andfirmsarefreertofailthaneverbefore,leadingtogreaterpressuretoinnovateand

adapttosurvive.

Largefirmsareinherentlythetargetsfordisruptionbynewfirms.Inthecurrent

paradigmsofinnovation,enabledbytherapiddeploymentofITtools,“open”innovationin

theformofpartneringwithstartupfirmsismoreimportantthanever.

Japan’sstartupecosystem,bothintermsofproducinghigh-growthstartupfirms,

andasasourceofideasandpotentialnewcollaborationsforthelargefirmstoavoid

gettingdisrupted,isdevelopingrapidly.WhileanystartupecosystemcomparedtoSilicon

Valleylookssmall,Japan’sstartupecosystemisactuallysizablevis-a-visotheradvanced

industrializedcountries,andhasbeendevelopingalongapromisingtrajectory.In

particular,scienceandtechnologyresearchanddevelopmentintensivestartupshave

beguntoappear,highlightingsomeofthechangedaspectsofJapan’sstartupecosystem.

Whilesomeofthenotablestartupsaretrailblazers,theyprovideexamplesforothersto

follow.

Itishardertoobservedisruptiveinnovationinlargefirms,sincetheirprimaryfocus

tendstobeonavoidingdisruption,andadjustingtopotentialdisruptions.However,as

39

shownbytheexamplesofToyota,Komatsu,YamahaMotors,andFanucinthispaper,they

areembracingpotentiallydisruptivetechnologicalchange.Whilenewtechnological

trajectoriessuchasautomateddrivingwerespearheadedbySiliconValleyfirms,thereare

meritstobeingrapidadopters.Aslargefirms,theydohavethepotentialtotransformtheir

respectiveindustries.Komatsu,inparticular,embracingbothartificialintelligenceand

intelligenceaugmentation,makingfulluseofnewdronetechnology,andconsideringthe

orchestrationofanopenglobalplatform,isseeingotherfirmsrushtofollowitstrajectory.

Fanucmaybeabletotaketheleadincorporatingmachinelearningintofactoryautomation

robots,leveragingitsexistingexpertiseanddeepintegrationintovariousmanufacturers’

operations.Whileitmightnotbethesespecificcompaniesthattakethelead,their

underappreciatedpotentialrepresentingJapan’sunderlyingindustrialstrengthiswhatthis

paperaimstohighlight.

NewsetsoffirmsbridgingJapaneselargefirms’existingstrengthandSiliconValley-

stylenewfirmcreationarealsoassistingthetransformation.WorldInnovationLab(WiL),

forexample,a400millionyenventurecapitalfundwithinvestorsfromlargeJapanese

firmsandthegovernment-spearheadedInnovationNetworksCorporationofJapanwith

officesinbothTokyoandSiliconValley,aimstoaddvaluebytakingtheunderutilized

intellectualpropertywithinlargefirmsandspinsthemoutintocompanieswithSilicon

Valleymanagement.

DemographicChangeasOpportunitiesfromResourceScarcity

Beyondtheobservationsthatitistheworld’sthirdlargesteconomyandhasavery

largepooloftechnologicallysavvy,adeeppocketedmiddleclassalsoprovidesamarketfor

40

variousITservices.Japan’srapidlyagingpopulationandshrinkingworkforceareactually

opportunities,fromboththepolicyandtechnologystandpoints.

Japan’sdemographicchallengeisactuallyanopportunityfordeployingartificial

intelligenceandhumanactivity-replacingalgorithmicautomation.Politicaldebatesthatare

likelytooccurelsewhereaboutreplacinghumanlaborbyautomation,AIandroboticsin

Japancanbeseenasanecessaryaugmentationofashrinkinglaborforce.Inanerawhen

searchingforhighqualitydataiscriticaltoimprovingalgorithms,theabundanceofdata

thatcanbegatheredfromJapan’sagingsocietyintermsofhealth,lifestyle,andmachine-

humaninterfacesthrougheldercarerobotsorcompanions,forexample,canbehighly

valuable.Thequestion,ofcourse,iswhobestgathersandusesthisdata,butJapanis

unmistakablyaleaderintheglobaladvancedindustrialcountrytrendofdemographic

change.

GovernmentPolicy:PotentiallytoFosterDeployment,Experimentation,Market

Access

Governmentpoliciesintermsofdirectsubsidiesorindustrypromotionareless

likelytoworkinthecurrenteraofrapidIT-enabledtransformations.Theeraof“Japan,Inc.”

ifiteverexisted,nolongerapplies.

However,unknowntomostobserversbothinsideandoutsideJapanthatarenot

partofthebiopharmaindustry,Japanesegovernmentregulationshaveactuallyledto

potentialindustryleadershipinanimportantnichearea.ArevisionofthePharmaceutical

Lawthatcameintoeffectin2014enabledregenerativemedicine,whichutilizesgrowing

newcellsfromtheiPScell(astemcellalternativethatdoesnotneedtobeharvestedfrom

41

ahumanembryo),tobringproductstomarketduringclinicaltestingintwoyears.

ShrinkingthetimeneededfromaroundtentotwoyearsmadeJapan’stimeframethe

shortestamongadvancedindustrializedcountries.Thisledtoawaveofregenerative

startupsfromaroundtheworldtoopenbranchesinJapanandconducttrialsinJapanas

well.SomeJapanesestartupssuchasSanBio,forexample,werefoundedinSiliconValley

butmovedtoJapanwhentheregulatorychangesenabledapotentiallyfastertimeto

market.Whileitisstillearlytotellwhethertheseregulatorychangesactuallyenabled

Japantobealeaderinregenerativemedicine,thefactthatoneoftheareaswhereJapan

waslongcriticizedforbeingslow—clinicaltrialsandpharmaceuticals—hasmovedtobea

fastmover,evenifasmallmarketsegment,issignificant.Ifthisparadigmcanbeappliedto

pharmaceuticals,theremaybethepotentialtodosoelsewhereaswell.

Anareawhereprogressivepolicymakingcanbebeneficialisintheusageof

individualdata.Sincetheavailabilityandusageofbehavioralandbiometricdatawillbe

criticalinallareas,rangingfrombiotechtofinancialtechnologies(Fintech),thearrayof

Internet-connecteddevicesandsensors(knownasthe“InternetofThings(IoT)”)and

artificialintelligence,governmentpolicythatencouragestheuseofsuchdatamaybe

beneficial.Forexample,standardsofprivacythatstipulatesufficiencylevelsof

anonymizationandprotectionthatenablecompaniestouseorselldatacollectedfrom

individualscanbeuseful,haspotential.Ratherthanfearopen-endedliabilityorthe

potentialforpubliccriticismleadingtocompanieshoardingdataoutofcaution,

governmentstandardsthatenablethemtosafelyuseandcontributeanonymizeddata

couldspurtheircollectionanduse.

42

Governmentmeasurestofacilitateincreasedefficiency,suchasdigitalsignature

regulationsthatcanreducetransactioncostsforthevastamountofpaperformscurrently

beingmailedandstoredinfilecabinetsandhandledbyhumanworkhours,arealso

beneficial.

Historically,sinceithasbeenlargeleadfirmsdeployingITtoolsthathaveledto

leapsforward,Japan,withitsconcentrationoflargefirms,spurredbycompetitionand

cooperationwiththenewlyburgeoningstartupecosystem,hasthepotentialtotakesuch

leaps.

Thus,whilethereisnocohesivemodeloftheemerging“newJapan,”thispaperhas

shownthatthereareclearlyareasinwhichJapanmatters,bothinbuildinguponits

existinglargefirmsstrengths,andfromanunderappreciatedbutsignificantlytransformed

newhighgrowthstartupecosystem.Thedemographicchangeasasourceofdataandacute

needforavarietyofhealthcarerelatedservicesshouldalsobeseenasanotsimplyaseries

ofconstraints,butsignificantopportunityforwhyJapanmatters.

43

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