June 3, 2002
The start-up rate for new businesses in Japan is 4%, the lowest rate among industrialized countries. It has been popular to explain this phenomenon by pointing to the peculiarities of Japanese culture. These explanations are, however, misdirected.
During Japan's era of rapid growth, the rate of new business start-ups was at a level of near 10%. From the Taisho Period (which started in 1912) until very recently (excluding World War II and the turbulent period that followed), the number of businesses consistently increased. The fact that there were more business openings than closings underscores this point. The past decade of low business start-ups has been an anomaly when viewed from the perspective of the past century.
Culture, therefore, does not explain the relatively low entrepreneurial activity in Japan in recent years. Rather, the answer lies somewhere else. The White Paper on Small and Medium Enterprises in Japan 2002 argues that the cause has to do with the country's transition to a lower rate of economic growth and the decline in the income ratio between entrepreneurs and salaried workers (i.e., operating income of a proprietorship versus wage income).
While a stagnating business environment has stamped out many of the opportunities for new business start-ups, this income disparity offers little incentive for a person to leave his job to become an entrepreneur. When I was a boy, the image we had of entrepreneurs was that they were a fat cats rolling in money. This is no longer the case. To begin with, the income that an entrepreneur can expect to receive these days is not worth the risk that comes with starting up a new enterprise.
Why has there been a decline in the income ratio between entrepreneurs and salaried workers?
One clue may be found in the work (1978) of Robert Lucas, the 1995 recipient of the Nobel Prize in Economics. He argued that automation had the effect of raising the income of labor vis-a`-vis that of management. This, in turn, resulted in a decline in both the numbers of business start-ups and of entrepreneurs. Lucas demonstrated this phenomenon by developing detailed mathematical models. But it is difficult to use these models to explain the long-term trend of an increasing number of business start-ups in Japan.
I believe the decline in the income ratio between entrepreneurs and salaried workers, which fell below parity after the 1990s, has to do with Japan's aging workforce. In the seniority-based wage system, an aging of the workforce equates to an increase in average salary. This acts to widen the income gap between entrepreneurs--whose relatively low income increases little with age--and salaried workers. At the same time, it gives experienced, skilled workers little incentive to make the transition to be entrepreneurs. Thus, Japan's aging workforce and seniority-based wage system may very well explain the decline in the rate of new business start-ups.
Moreover, in the seniority-based wage system, the salaries of older aged workers (who comprise the core of Japan's current workforce) are predicated upon the accrual of in-house training. This makes it difficult for a worker who has failed in an attempt to start a business to try again, given the period needed for him to regain wage parity with co-workers and to recharge his battery so to speak. Consequently, failing at being an entrepreneur can greatly narrow one's remaining career options.
Japan's aging workforce and labor system, with its in-house training and seniority-based wages, has made it unusually difficult to create a truly entrepreneurial society--that is, one with a fluidity of individual employment choices and behaviors.
Author, Takehiko Yasuda
Visiting Fellow, Research Institute of Economy, Trade and Industry (RIETI)
Director, Research Office, Small and Medium Enterprise Agency
Editor-in-Chief, Ichiro Araki
Director of Research
Research Institute of Economy, Trade and Industry (RIETI)
e-mail: araki-ichiro@rieti.go.jp
tel: 03-3501-8248 fax: 03-3501-8416
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The opinions expressed or implied in this paper are solely those of the author, and do not necessarily represent the views of the Ministry of Economy, Trade and Industry (METI), or of the Research Institute of Economy, Trade and Industry (RIETI).
