Issues Facing the Japanese Economy in 2012 (January 2012)

What It Takes to Stimulate Entrepreneurial Activity:
Entrepreneurs and coaching entrepreneurs to assist them

Faculty Fellow, RIETI

A quarter of a century has passed since entrepreneurial activity began to wane in Japan. Throughout this period, overall economic activity has also remained stagnant. Will this trend change in 2012? What will it take to make it happen?

Dormant entrepreneurial activity

Every year, BusinessWeek magazine publishes a list of the world's most innovative companies. Those ranked among the top 30 from Japan are all long-established companies. Needless to say about Toyota and Honda, even relatively young companies such as Nintendo and Fast Retailing (better known as Uniqlo) were founded before Japan's postwar high-growth period came to an end. In contrast, the top three companies—Apple, Google, and Microsoft—were all established in or after the mid-1970s, and the three Chinese companies that have entered the top 30 in the latest ranking were formed in the late 1980s or thereafter. In Japan, the number of self-employed business owners, those who are supposed to support the base of the business community, decreased by about four million in the past 10 years (the number of business owners and their family members totaled 7.68 million in 2010). And against this backdrop, the average age of business owners is rising.

Since 1999, the Global Entrepreneurship Monitor (GEM) has been conducting an annual survey of entrepreneurial activity in countries around the world. The survey findings over the years, which allow for country-to-country comparison, show that the level of entrepreneurial activity in Japan has been consistently one of the lowest among advanced economies. The GEM survey was launched in 1999 by an international consortium of researchers, led by those from Babson College in the United States and London Business School in the United Kingdom, based on the hypothesis that a country's economic development is closely associated with its entrepreneurial activity. The purpose of the survey is to find out: 1) whether there exists any difference in entrepreneurial activity across countries; 2) whether economic activity and entrepreneurial activity are interrelated; and 3) if any difference in entrepreneurial activity exists, what are the factors underlying the difference.

Based on data collected in the survey, the GEM has been developing an indicator called Total Entrepreneurial Activity (TEA), which represents the combined ratio of nascent entrepreneurs involved in setting up businesses and entrepreneurs owning and managing new businesses established less than three and a half years ago within the age group 18-64. The TEA value for Japan was 3.23 in 2010, the second lowest among the 59 economies that participated in the survey. The relative ranking of countries participating in the survey has remained almost unchanged since 1999, when the survey was first conducted. In the 2011 GEM survey, from which data will be released in late January, the TEA ranking of countries remains unchanged although the overall level of TEA values has increased.

Then, why do we see very few business startups in Japan? The GEM attempts to explain this by exploring differences in entrepreneurial attitudes in general and perceptions about capabilities required to start a business. Specifically, Japan has been found to have the following key characteristics: 1) low percentage of people who are able to recognize business opportunities; 2) low percentage of people possessing skills and knowledge required to start a business; 3) low percentage of people who consider starting a business is a desirable career choice; and 4) low percentage of people who believe that successful entrepreneurs are highly esteemed in their society. Other characteristics include a low ratio of female participation in entrepreneurship and a low availability of angel investors. Japan is among the lowest ranked in each of these indicators as in the TEA ranking.

Two sides of entrepreneurial activity

How can we change this situation? Based on the survey findings, there are many things that can be said with certainty about entrepreneurial activity. For instance, new jobs come mostly from new businesses, not from existing ones, and more than 50% of newly created jobs come from rapidly growing businesses that account for only a few percent of companies in Japan. Considering these facts, it seems strange that entrepreneurial attitudes in Japan are far less forthcoming than in many other countries. But there must be some rational reasons for such negative perceptions.

Suppose that the number of new companies increases by 100 per year as entrepreneurial activity becomes more prevalent. This does not mean that we see 100 new businesses established every year. It means a net increase of 100 new businesses every year, for instance, 1,000 new companies established and 900 of them going out of business within a year. When we have 100 surviving new businesses year after year, our business community will develop more layers of companies and be rejuvenated as a whole. Stimulation of entrepreneurial activity typically occurs in a locally concentrated manner, for instance, in a particular geographical region or a specific industrial sector. Given this, we need to be aware of how entrepreneurial activity is perceived in a regional community as a basic unit of economic activity.

Entrepreneurial activity, by nature, does not fit well into the hosting local community, though this may not be an appropriate expression. This is because the fact that entrepreneurial activity involves novelty and many entrepreneurial attempts are doomed to fail is perceived to be irreconcilable with stability and continuity, both of which are essential elements of a local community. Furthermore, the entry of new players often leads to severer competition, particularly when the market is limited in scope.

There has been a significant increase in the number of young entrepreneurs who have achieved appreciable success in Japan. It also bears comparison with other countries in the level of media attention on entrepreneurship. The aforementioned negative perceptions about entrepreneurial activity, however, seem to stem from more familiar facts observed at hand.

While conducting a survey focusing on a local community as a basic unit of economic activity, we often encounter those people who take interest in the fact that many startups go out of business quickly rather than the fact that a number of new businesses are being started. Entrepreneurial activity tends to deliver negative results before producing positive results. About 20%-30% of newly formed businesses will be gone within several years, although there are some differences depending on the type of industry. On the other hand, very few startups grow and achieve success in a visible manner within the first several years. Likewise, it is rare that an initiative to revitalize the local economy gets on the right track from the start. There would be many trials and errors in the initial stage of such a project, and visible success often comes after a series of failed attempts.

In order to overcome such negative aspects of entrepreneurial activity, which are immediately observable and come forth before any positive result, there must be those entrepreneurs who can guide and coach others. Such coaching entrepreneurs do not have to start a business anew on their own. What is expected from them is to introduce new ideas to the hosting local community and play a coordinating role by acting as an interface with the community. It is well known that the presence and roles of opinion leaders are important in promoting and disseminating new concepts or ideas. These opinion leaders, however, do not necessarily belong to the progressive segment of society. Rather, opinion leaders can be defined as those who are highly influential and play a pivotal role as a network hub for communication within the existing society. These opinion leaders' attitudes toward entrepreneurial activity are particularly important in Japan.

Attempts to stimulate entrepreneurial activity by stimulating potential entrepreneurs and efforts to promote public understanding of the importance of entrepreneurial activity and achieve a balance between existing policies and those designed to promote entrepreneurial activity are the two wheels of the chariot. What is envisioned here is identical to the conditions required to facilitate the spread of new ideas and products. Creating an environment in which coaching entrepreneurs can come into play easily is just as important as nurturing entrepreneurs. Implementing policy measures based on a full understanding of the relationship between these two goals is one of the prerequisites to the stimulation of entrepreneurial activity in Japan.

December 28, 2011

December 28, 2011

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