It’s a Small World! ―Contemplating Japanese Entrepreneurship

Faculty Fellow, RIETI

Serendipity refers to a lucky encounter, an accidental discovery, or general good luck. Fostering entrepreneurship and stimulating innovation that are a result of serendipity are too numerous to count. The birth of the US-based Google (established in 1998) came about with the chance encounter of two graduate students at Stanford University. A service that began with a group of students at Harvard University later led to the formation of Facebook (established in 2004). Encounters are a catalyst of entrepreneurship and innovation.

Expectation of Entrepreneurship and Its Reality

There are a lot of expectations for entrepreneurship in Japan, largely thanks to the decline of Japanese manufacturing firms, which had once taken the world by storm. Looking abroad, relatively young firms such as the US's GAFA (Google,, Facebook, and Apple), as well as China's Tencent (established in 1998) and Alibaba (established in 1999), have increased their presence. That could be why start-ups called unicorns, which offer the prospect of a high market capitalization (1 billion USD or more), have gained so much attention, which is reflected in efforts such as J-Startup, a program launched in 2018 to provide support for start-ups from Japan's public and private sectors (Note 1). Recently, the activities of start-ups that provide new technology and new business models, such as Mercari, Inc. (established 2013) and Preferred Networks, Inc. (established 2014), are receiving a lot of interest.

One of the recent arguments on entrepreneurship has to do with the development of an entrepreneurial ecosystem or start-up ecosystem, which benefits from the interdependence of organizations and individuals (e.g., Acs et al., 2017). In an effective entrepreneurial ecosystem, the interaction among various actors and factors drives sustainable entrepreneurship. Entrepreneurship and innovation are created through relationships between potential entrepreneurs, and angel investors and venture capitalists who invest in new businesses, as well as large existing firms, university researchers, and accelerators.

However, comparing Japan's current entrepreneurship both internationally and historically, we cannot exactly describe Japanese entrepreneurship as dynamic. As pointed out again and again in the White Paper on Small and Medium Enterprises in Japan, the business start-up rate since the collapse of the bubble economy has stagnated. According to findings from the Global Entrepreneurship Monitor (GEM), which is an international entrepreneurship research project, Japanese entrepreneurship is ranked quite low internationally. Not only is the percentage of people with experience starting a business low, but the percentage of people acting as angel investors to start-ups is also low. Moreover, there is a general lack of entrepreneurial attitudes, which are necessary in entrepreneurship and take the form of being able to make use of entrepreneurial networks (knowing other entrepreneurs), perceiving business opportunities, and gaining skills and knowledge require to start a new business (Takahashi, et al., 2013; Honjo, 2015).

The Small-World Phenomenon

While Japan's current shortcomings are apparent, there is an interesting relationship among actors and factors in Japan. Compared to other countries, we find that Japan has a high rate of entrepreneurship when limiting the scope to people who already possess the required skills and knowledge at the time when they discover a business opportunity (Takahashi, et al., 2013; Honjo, 2015). Also, compared to other countries, we find a high rate of angel investment among investors who have an established entrepreneurial network (Honjo, 2015; Honjo and Nakamura, 2019). Additionally, in Japan, the rate of angel investing is approximately five times higher for people with entrepreneurial experience than for people with no entrepreneurial experience, and that rate is higher than in many Western countries, including the United States (Honjo and Nakamura, 2019). That is, while the rates of entrepreneurial activities and angel investment are low on average in Japan, they are dynamic when considerations are limited to certain people, such as those who already possess the required skills and knowledge, entrepreneurial experience and an entrepreneurial network when they discover business opportunities.

While entrepreneurial activities and investment based on close relationships among certain people are seen in Japan, viewed from a different perspective, this only underscores the fact that there are a lot of people for which entrepreneurship is wholly unrelated. This is further evidence of the finding that "people [are] not interested in business start-ups" mentioned in the White Paper on Small and Medium Enterprises in Japan (Small and Medium Enterprise Agency, 2014, 2017). In other words, a great majority of people in Japan work at existing firms and pay attention to their savings and mortgages, but generally, they are not interested in business start-ups or angel investments. The scope of the entrepreneurial ecosystem is small, and most organizations and individuals are not sufficiently involved in the ecosystem. The Japanese entrepreneurial ecosystem is characterized by a small-world phenomenon based on close relationships among a limited number of people (Note 2).

In this situation, encounters are limited, reducing the probability of new encounters. Considering that the population will decrease in the future, that reduction will only continue to accelerate. If we are looking to become a society that generates entrepreneurship, a new outpouring of people and funds from existing organizations to the entrepreneurial ecosystem is needed. There is a need for a movement that runs counter to the customary practices of Japan's established firms and economy, that incorporates changes in careers, spinoffs from existing firms and a shift from bank deposits to risk capital.

The Role of Universities

Another characteristic of Japan is that people with an undergraduate or graduate education are less involved in entrepreneurship than in other countries (Note 3). While universities have an important role in creating high-tech start-ups that incorporate new technology, there is still a possibility that universities are not serving this function adequately. In this regard, Japanese education about entrepreneurship is insufficient, and it has been suggested that there is a need for new entrepreneurial education (White Paper on Small and Medium Enterprises in Japan, 2014). However, it is difficult, in the first place, to specify the educational material necessary to foster entrepreneurship and innovation. Also, it is unimaginable that successful entrepreneurs lacked this entrepreneurial education. We will have to wait and see what the future results tell us regarding the need for entrepreneurial education (Note 4).

It goes without saying that encounters when one is young have a large influence on later life. Encounters with new people and technologies during one's youth, when one's absorptive capacity is high and obligations are low, often lead to businesses. Firms such as Google, Facebook, and Microsoft were created out of encounters with people and technologies at university. The creation of euglena Co., Ltd. (established 2005), which is a very promising start-up in Japan, was sparked by the encounter with Euglena (a genus of single cell flagellate eukaryotes) at a university. Such encounters with people and technologies lead to entrepreneurship and innovation.

For the entrepreneurial ecosystem to function more effectively in Japan, it would be valuable to break away from this current small world circumstance. To achieve this, we need places where people who want to work on cutting-edge research and people who want to embrace the challenge of business are able to get together. As expectations for “university-launched new ventures” rise, I hope that universities and other institutions of higher education will play the role of "platforms" by providing open, welcoming, and thought-provoking environments where people know they can go to have such "encounters (Note 5)." Hubs where people who want to work on cutting-edge research can meet people who want to take on the challenge of business could be the very catalysts that create the serendipity that we need.

July 2, 2019
  1. ^ See the Ministry of Economy, Trade and Industry's website for details. [accessed June 16, 2019]
  2. ^ The small-world phenomenon shows that there is a short distance (path length) between nodes and that it is easy to connect each node to another (e.g., Milgram, 1967; Watts and Strogatz, 1998). In this article, however, the term is being used in the sense of "a limited network."
  3. ^ For example, in an analysis using the above-mentioned GEM data, there is a higher likelihood in other countries that people with an undergraduate or graduate education will conduct angel investment, but such a trend is not well seen in Japan (Honjo and Nakamura, 2019).
  4. ^ With respect to the effects of an entrepreneurial education program conducted at a college (post-secondary school) in the Netherlands, the results obtained by Oosterbeek et al. (2010) using a difference-in-difference (DID) approach showed that the program does not have the intended effects, such as increasing students' self-assessed entrepreneurial skills.
  5. ^ Regarding university-launched new ventures, see, for example, the Ministry of Economy, Trade and Industry's website. [accessed June 25, 2019]
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  • Small and Medium Enterprise Agency, 2017. White Paper on Small and Medium Enterprises in Japan, Nikkei Printing Inc.
  • Acs, Z.J., Stam, E., Audretsch, D.B., O'Connor, A. (2017) The lineages of the entrepreneurial ecosystem approach. Small Business Economics, 49, 1-10.
  • Honjo, Y. (2015) Why are entrepreneurship levels so low in Japan? Japan and the World Economy, 36, 88-101.
  • Honjo, Y., Nakamura, H. (2019) The link between entrepreneurial activities and angel investment: an international comparison. RIETI Discussion Paper Series, 19-E-017, Research Institute of Economy, Trade and Industry.
  • Milgram, S. (1967) The small-world problem. Psychology Today, 1, 60-67.
  • Oosterbeek, H., Van Praag, M., Ijsselstein, A. (2010) The impact of entrepreneurship education on entrepreneurship skills and motivation. European Economic Review, 54, 442-454.
  • Watts, D., Strogatz, S. (1998) Collective dynamics of small-world networks. Nature, 393.

August 13, 2019

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