But a new and less tangible form of innovation is quietly taking hold – one that could transform Japan into one of the world’s most important drivers of the global technological revolution.
Japan has a proud history of innovations that it has offered the world. There are numerous examples of Japanese prowess at monozukuri (the art of making things) and these innovations – backed by high levels of technical expertise and production efficiency – have been drivers of Japanese soft power alongside karaoke, anime and sushi.
But recently success stories of this scale have become far less frequent. Japan missed the dotcom revolution, resulting in few front-running high-growth IT or tech startups originating there. It is widely acknowledged that the country is a difficult place for startups to flourish.
According to the Global Entrepreneurship Monitor in 2018-19, the percentage of Japan’s adult population involved in early-stage startups was just 5 per cent, one of the lowest rates among advanced economies. The US – the startup superpower – had nearly 16 per cent, while India had double the Japanese figure.
Based on the volume of startup investment, China has rapidly strengthened its status to become the second largest venture capital world power after the US. It captured a quarter of this investment in 2016, while India and Japan absorbed 2.6 per cent and 0.7 per cent respectively.
Reflecting the wider global startup boom, a few unicorn companies startups valued at over $1 billion – have surfaced in Japan in recent years, such as software developer Preferred Networks and eBay-style flea market app Mercari. But there are still nowhere near enough Japanese startups in terms of numbers.
Taking the challenge
Fortunately, signs of improvement are on the horizon. Young Japanese people are increasingly taking on the challenge of setting up their own startups although their numbers are still small.
Ventures are gradually becoming a viable career choice for some of Japan’s best talent. There is steady growth in the flow of gifted youth from educational institutions like the University of Tokyo and from established employers like major banks into new ventures.
Japan is also seeing solid expansion in the supply of funds for high-risk investments and supportive government policies for startups.
But the country’s more immediate potential lies apart from Japanese companies starting new businesses from scratch. Great growth could come from Japanese corporations investing in companies and businesses outside the country’s borders. Just as Japanese manufacturers used to look abroad to high-growth markets to drive export-oriented growth, a small but increasing number of firms are now attempting to achieve growth by investing in the fastest-growing tech companies abroad.
This hypothesis is supported by statistics from the Bank of Japan and the Ministry of Finance. Individuals hold the cash equivalent of $9.3 trillion and Japanese organisations have built up $4.2 trillion in reserves. If done correctly, deploying these vastly underutilised resources can be a key and viable source of growth.
There is no reason for Japanese companies only to invest locally. In order to internalise the high overseas growth, companies can use the vast surplus funds to purchase stocks of some of the fastest-growing tech startups outside Japan. This is a powerful growth and innovation strategy for Japan. Realising innovation through the power of investment is a reversal of the traditional Japanese way of thinking, going beyond the typical idea of a workman creating objects or an illustrator creating content to be commercialised.
The art of investing overseas should be grasped as a proudly Japanese innovation, while setting out to create a global IT company originating from Japan.
Moving from manufacturing to investing abroad
Japanese telecommunications company SoftBank decided not to use its enormous, stable cashflows from domestic business to merge, acquire or invest in other Japanese businesses. It chose instead to invest in overseas tech companies, particularly artificial intelligence innovators. It established the $97 billion Vision Fund 1 by leveraging its own cash and Japanese risk capital to assemble risk capital from abroad. The fund invested large sums of money into mega-unicorns such as Uber and Oyo, as well as companies working on research and development for autonomous driving.
SoftBank is expected to set up Vision Fund 2 at a similar scale, about $108 billion, in the latter half of 2019. Similarly, the Japan Bank for International Cooperation – Japan’s government-backed development bank – contributed equity to a fund for start-ups in the Nordic and Baltic regions.
This was followed by other firms which set up similar corporate venture capital funds for investment in the United States, Europe and Israel.
These movements could mark the beginning of an evolution from a Japan that manufactures to a Japan that invests abroad, an idea once thought to be “heretical” for a country with deep faith in its manufacturing industry. The overseas technologies that attract investments can then be brought back to Japan to bring about more innovation through their application to the country’s social problems, such as its ageing society. Shifting from manufacturing to investment might just be the key to Japan innovating innovation itself.
Ren Ito is chief executive of Mercari Europe, the international arm of Japan’s first unicorn startup running the fastest-growing marketplace app in Japan, the US and the UK. Ren is also Senior Fellow at the New York University School of Law.
First appeared in East Asia Forum Quarterly.