Chapter 2 Japan

Firm Size

In contrast to being hailed as essential motors of the postwar model, Japan’s big businesses were named by some critics in the 1990s as inhibitors of innovation and the cause of unemployment. As part of the fallout, national and provincial governments made efforts to boost startup activities across Kobe, Kyoto, Osaka, Tokyo, and beyond (e.g., see Harris 2016; Fujisaki 2017; X-Hub TOKYO 2017; Osaka Innovation Hub 2020). In this context, efforts were implemented with the ambition of promoting new enterprises to revitalize national high-technology competitiveness. The Kobe City Government, for example, partnered with 500 Startups to establish an accelerator that would both boost local entrepreneurial activity and link the startups with large Japanese firms and banks as well as startup hubs around the world (author interview, Kobe, June 25, 2018).

In line with this litany of startup-themed plans, global media has increasingly covered Japanese startup efforts in positive terms. For instance, a June 2023 TechCrunch article asserted that “the Japanese government has also promised enthusiastic assistance to boost the startup ecosystem” (Park 2023). It was Kishida’s December 2022 aim to increase annual startup investments by tenfold by 2027 that featured in the piece.

However, startup efforts have not come outside of the wishes of lead firms or main banks. Instead, the keiretsu have “lobbied the government for reforms that would expand their options” but not undermine their position (Vogel 2018, 87). To this end, Anis Uzzaman, founder and chief executive of Pegasus Tech Ventures, a VC fund active in Japan, noted that “large Japanese corporations have slowed down quite a bit” and that “the current government’s initiative can help” as startups boost Japanese corporations’ innovativeness (Park 2023).

Startups are often positioned in Japanese policy as a resource to fuel established firms’ innovativeness. METI bureaucrats speak of the continued need to drive industrial revitalization, with an emphasis on encouraging startups alongside the keiretsu-led open innovation system (Kantei 2014). The innovation system was to shift from “one dominated by in-house R&D conducted at major corporations toward one based on networks among innovators by strengthening ties between university research laboratories and venture firms” (Vogel 2018, 107). In 2003, METI initiated a study to look at the potential for corporate spin-offs; finding that keiretsu spin-offs were more promising than independent new firms, METI wanted to encourage a venture movement that was embedded in the activities of the big companies (METI 2003). This finding helped substantiate initiatives that sought spin-offs that would have close engagement with the keiretsu rather than truly independent startups. Collectively, while attention on startups as innovation resources has proliferated in Japan, it continues to be embedded in existing interfirm relations. Said another way, startups serve oligopolistic competition (and thus Mark II prowess) rather than creative destruction dynamics.

In this open innovation spirit—but before the specific language of open innovation was coined in 2003—a series of cluster-building activities was implemented, as METI bureaucrats had closely studied Michael E. Porter’s “Clusters and Competition” (Yamawaki 2002). Regional governments established incubation facilities that rented offices to startups and provided them with assistance in the form of financing, legal affairs, management, and technology development. The Innovative Cluster Plan and the Industrial Revitalization Corporation efforts epitomize METI’s catchphrase of enabling “regional clustering” from 2000 (Vogel 2006, 86). The Cluster Plan and the Venture Laboratories initiative enable collaboration by providing research facilities located in universities with the aid of incumbents. Again, telling of the ambition of integrating with big businesses, once the METI’s Organization for Small & Medium Enterprises and Regional Innovation (SMRJ) division, was set up in 2004, it launched the Business Startup Support Fund in which it invests alongside private (often corporate) VC funds (Seki 2008). Another illustration is the 2005 Program for Strengthening Functions of Organizations for Support of Local SMEs, which paired senior advisers to share their operational expertise with fledgling firms.

Since the concept of open innovation has proliferated, it has been used extensively in the Japanese approach. The Japan Open Innovation Council was established in 2015. In the years that followed, policy makers regularly named open innovation in their media engagements. For instance, at the Shibuya QWS Symposium in 2018, Tokyo Governor Yuriko Koike specified the aim of promoting open innovation, which constitutes linking together major corporations, financial institutions, foreign investors, investors, universities and venture companies. In our own fieldwork, the open innovation lexicon was used in each interview. An example comes from an official at the Osaka City government, who explained that their aim is to: bring the innovation ecosystem together—that includes entrepreneurs, big companies, venture capitalists, angels, mentors, universities and government since we, the Osaka City government—and the big companies—believe in open innovation (authors’ interview, Osaka, June 26, 2018).

White papers such as those on Open Innovation and the Venture Challenge 2020, published by the cabinet and several ministries, further reiterate the commitment of the Japanese government to fuel startups as part of the keiretsu-led open innovation system (METI 2020b). METI Minister Yoshiaki Ishii asserted that “rather than simply supporting startups,” the aim is to incorporate “a mechanism to develop VCs and strengthen cooperation between large companies and startups to accelerate open innovation” (Newswitch 2018). Again, this points to the persistence of a big business–led paradigm and continued proximity to a Mark II paradigm.

METI’s flagship startup program, the J-Startup Initiative, reiterated this approach when it was announced in June 2018 with the aim of helping to build twenty unicorns by 2023. The J-Startup Initiative is run in collaboration with the keiretsu leaders. METI and keiretsu representatives together select startups for the program (Ikeda 2018; Kuzina 2018).⁴ What is more, METI’s Takuya Fukumoto explained the long-term aim includes the keiretsu acquiring participating startups, since, “as an exit strategy for startups, there is the option of mergers and acquisitions by large corporations.” Fukumoto added that “through the J-Startup initiative, I hope to increase collaboration between startups and large corporations” (Forbes Japan 2018). According to the METI Journal, the J-Startup Initiative collectively aimed to expand overseas, win government procurement bids and “create chances for them to establish relationships with executives of large companies” (METI Journal 2020).

METI partners with the Tokyo Stock Exchange to award Japanese companies for their startup collaborations to achieve digital transformation. For instance, Sumitomo was named one of METI’s Noteworthy DX Transformation Companies in 2021 for its efforts to enhance its “global corporate venture capital (CVC) fields and by setting up an accelerator business in the hardware domain” (Sumitomo Corporation 2021). This all bodes for startups as firms operating within an industrial setting in which established firms continue to lead.

Another telling illustration of which size firm is the ultimate beneficiary comes from the 2022 “Startup Development Five-Year Plan.” The plan explains that “it has become clear that even large, existing companies using older technologies can stay in business if they engage in open innovation, such as through M&A with startups and collaborations with startups to introduce new technologies” (Cabinet Secretariat 2022, 1). An open innovation tax credit was launched in 2021 to encourage corporations to invest in startups, as it offered a 20 percent credit on the money invested. This was extended in 2023 to incentivize startup acquisitions, as a METI-led set of government agencies launched an open innovation tax credit commensurate to the 25 percent of the money spent acquiring a startup.

As these policies show, startup largesse is not intending to disrupt the position of Japan Inc. In turn, efforts to encourage open innovation has been widely reflected by big business in Japan. Notably, Toyota has created the Toyota Open Labs to connect with innovative startups globally (Toyota 2023), and Nissan has a partnership with Plug and Play to collaborate with startups for “the benefit of our global customers” (Nissan 2018). To be sure, Japan’s startup plan conceives of new entrants as resources to help Japan Inc. stay in business. In this way, while there has been a rise in the role of startups, Japan’s startup capitalism retains large firms as its essential innovation engines. Startups are resources for incumbents, not disruptors that pose an existential threat to established firms.

Employment

The lifetime nature of Japan’s employment system—which reinforced its big business–led model—has dissipated somewhat since the 1990s. It is worth beginning with the observation that, in the Showa era, the perceived risk associated with starting a new business enterprise was exceptionally high. Nobuyuki Hata and colleagues (2007, 173) explain that “accepting the challenge to create a new startup literally meant being prepared to die. This inevitably reduced the number of entrepreneurs in Japan.” Thus, changes have, at least implicitly, sought to widen the pool of prospective entrepreneurs by updating cultural norms. This has been done by slowly dismantling the features that incentivized lifetime employment (e.g., the nonportable pension fund system), by encouraging a culture of risk-taking, and by working to attract foreign talent.

Change began in the pension fund system, as the problem of relatively persistent unemployment in the 1990s prompted policy makers to pass regulations that facilitated pension fund portability (Streeck and Yamamura 2003). The portability meant that employees could take their pension savings with them when they moved jobs.⁵ This meant that midcareer moves could be made without incurring the significant loss of accumulated pension savings. This then enabled more movement in the labor market, as people could move across firms. Also, over the 1990s, the Japanese welfare state expanded, which notionally reduced the centrality of private pensions in life savings.⁶ In the same period, there was also an unprecedented rise in unemployment rates—from just over 2 percent to nearly 5 percent by the end of the decade—as persistent poor performance for firms across industries led to widespread layoffs. Collectively, this all augured for a less permanent understanding of work; lifetime employment was less incentivized due to the pension portability, and a rise in layoffs meant that there was less certainty that one could spend their career with the same firm.

Along with the loosening of restrictions on the labor market, an important bedrock for employment in R&D-centric high-technology startups was laid in this period. Reticent to take on a permanent headcount, companies began using short-term contracts to hire R&D workers. These entailed higher wages and significant bonus elements. The result was that technical talent was being socialized into employment practices that favored greater short-term compensation over long-term job security and pensions.

Labor market fluidity was also boosted by the experience of young people entering the labor force. New hires were not made, which disproportionately affected young people (Ahmadjian and Robinson 2001; Chuma 2002). There were fewer permanent contracts at the keiretsu, so the prospect of working at a startup did not seem as risky to recent graduates as it would have in the previous era. Talented graduates now compared experience with a startup with unemployment rather than with a well-paid, long-term career.

Another boost for entrepreneurship came from changes to bankruptcy laws. The Japanese legislature (the Diet) reformed insolvency laws in 1999 (Levy 2000). Prior to the reforms, it had been difficult to declare bankruptcy, so if an entrepreneur started a business and failed, they would be stuck with their nonperforming company as an ongoing liability. This “zombie company” phenomenon scared potential entrepreneurs from taking the risk, which had an overall dampening effect on startup activity (Goto and Wilbur 2019).

More movement toward a Mark I employment setting has been seen in policy on stock options and taxes. Since the early 2000s, stock option treatment has slowly adapted toward encouraging employment at startups. First, issuing stock options to employees—a derivation of the Commercial Code’s easing of stock option allowances (Itami 2005)—began in 2003, when SoftBank offered it to their employees, ushering in this LME practice.⁷ Twenty years later, this was significantly expanded when the government acted to ameliorate tax liabilities for nonpermanent employees. In August 2023, the government adjusted the tax system such that startups could more easily offer stock options to external individuals—including “freelance programmers, designers, and management consultants—people doing side jobs” (Nikkei Staff Writers 2023b). Such tax reforms mark an advance toward fluid labor markets in which shares of ownership in a company can be offered to individuals without full employment contracts. This again suggests a move in the direction of a Mark I paradigm.

To help young members of the labor force gain experience without missing out on the opportunity of entering a lifetime employment track upon university graduation, policies have encouraged internships at startups. The METI’s 2004 Challenge Community Creation Program worked to establish the mechanism of internships as a viable early career activity. Despite this initiative, it would be another decade before midcareer job markets advanced, with startups offering employment agency services and social norms about permanent employment slowly changing.

Collectively, Japan’s employment environment has seen shifts away from its permanent character toward more fluidity and even some encouragement for entrepreneurship. Speaking to this trajectory, an entrepreneur based in Kobe asserted that the “lifetime employment idea is not real. So, startups seem less risky, because people know permanent employment is not secure” (authors’ interview, Kobe, June 25, 2018). As his sentiment suggests, it is no longer considered uncouth to leave a job midcareer or to try to build a startup (Fahey 2018; Gagne 2018). In a similar vein regarding the changing norms around employment, Yoshiaki Ishii, of METI, commented that “more and more people who graduate from the University of Tokyo are not only aiming for large corporations and government offices as it used to be, but are also starting their own businesses” (Newswitch 2018).

However, this is not to say that the system has been revolutionized. Kenji Kushida (2023, 1) asserts that “Japan’s lifetime employment system in large companies is alive and well” and that the rise of startup employment has grown “in parallel with corporate Japan’s traditional employment system.” Kushida’s analysis aligns with other arenas in which the rise of startup activity and promotion has come within the existing keiretsu-led system. One of our interviewees at the Kobe City Government noted that “if you go out of a permanent contract, you can’t easily go back in” (authors’ interview, Kobe, June 25, 2018). In fact, startups in Japan are said to continually suffer from a lack of access to talent because of the relatively limited job switching.

There is mixed evidence that job mobility is growing and startup-centric employment is expanding. According to Ambi, a job placement website, the midcareer job market has grown, with midcareer switches growing to 21.1 percent of all job switches in 2018—an increase of 13 percent from 2017 (Suzuki and Nakai 2022). Yet, the overall duration of full-time jobs decreased by only 0.2 years between 2016 and 2020, with Japan’s average job tenure of 12.5 years in 2020 still significantly longer than the United States (4.1 years) and the United Kingdom (8.6 years) (Suzuki and Nakai 2022).

In addition to efforts to boost flexibility in the Japanese labor market, several open innovation–labeled policies have been deployed to bolster the availability of talent. This has primarily been done in the context of attracting foreign talent. The launch of Cool Japan in 2013 epitomizes rising efforts to attract foreign entrepreneurs and to forge better bridges with global startups (Satoh 2023). The National Strategic Special Zones, also initiated in 2013, strive to accept entrepreneurs and diverse foreigners in a bid to further creativity and address Japan’s demographic challenges by attracting foreign talent (Nikkei Staff Writers 2023a). In 2015, METI launched its Strengthening Global Venture Ecosystem initiative, which aims to build a bridge of innovation (kakehashi) between Silicon Valley and Japan. Also in 2015, the Immigration Bureau of Japan launched the Startup Visa in National Strategic Special Zones, which reduces the visa requirements in relation to funding and employees for foreign entrepreneurs. In addition, Startup Visa rules were further relaxed in 2023 as a means of attracting foreign talent to start a business in Japan (Nishino 2023).

Along with these attempts to increase the presence of foreign entrepreneurial talent, efforts have been made to encourage local entrepreneurial talent to be more globally minded. As part of the five-year startup plan, the government is “sending 1,000 entrepreneurs and businesspeople overseas to expand global networks and bases for Japanese startups” (Nagata 2023). This builds on the 2015 Japan External Trade Organization (JETRO) Sido program, which has been sending entrepreneurs to Silicon Valley for short stays. In a desire to expand beyond Silicon Valley (e.g., to Los Angeles, San Diego, and Austin), JETRO has expanded its foreign immersion programs for Japanese founders. It launched the Beyond Japan Zero to X program in 2023 to send “dozens of entrepreneurs and businesspeople” to “build relationships and skills” (Nagata 2023). The X-Hub Tokyo’s Outbound Program also launched in 2023, which similarly strives “to support the overseas expansion of Tokyo startups in order to create globally active startups from Tokyo” (Tokyo Metropolitan Government 2023).

Undoubtedly, the various regulatory changes to enable career movements, the attraction of foreign talent, and concerted efforts to foster an international (Silicon Valley–styled) mindset among Japanese entrepreneurs point to some degree of a shift toward a more flexible labor market. However, this does not mean movement is entirely toward Mark I. Startup employment experience and the availability of foreign entrepreneurs are also framed as a means of big businesses accessing and developing talent. For instance, METI’s Yoshiaki Ishii asserts that “young and mid-career workers at large companies [could] add a secondment to a venture-backed company to their career path” (Matsugae 2018). METI followed through on offering such a mechanism; employees at big companies, including Honda Motors and Fujitsu, were able gain experience in a startup by receiving a subsidy so that they do not have to “leav[e] the companies they work for” (METI 2022). Thus, the aim of some flexible employment provisions is about benefiting the staff of incumbent firms, improving their talent, and assisting startups.

Overall, while lifetime employment has become less common since the early 1990s in Japan, the labor market still serves established firms and lacks fluidity in key ways. In practice, leaving a well-paid corporate job remains risky, even though pensions are portable and midcareer movements are more common. Also, some of the fluid mechanisms involve de-risking experience in startups through internships and secondments so that talent can remain focused on careers with established firms. This increased flexibility serves a Mark II aim: because employees can gain startup experience, big businesses benefit from employees with new ideas, more creativity, and a willingness to take risks. So, while the face of the changes augurs for Mark I, it also leans toward an open innovation version of Mark II.

Finance

It was Japan’s so-called financial keiretsu who first took the initiative of acting as investors in startups in the 1980s.⁸ VC investments were made by main banks and insurance companies rather than independent asset managers as in Silicon Valley (Kenney et al. 2002). Japan’s banks transformed the American VC model—which was based on equity investments in early-stage companies—and instead adapted the notion of VC as debt-based financing for later-stage firms (Hata et al. 2007).

By the mid-1990s, excitement about equity-based VC was rising. In 1995, the Venture Plaza was launched, providing opportunities for VCs to meet investors and management partners (Rowen and Toyoda 2002). Afterward, in 1999, the SMRJ Venture Fund was created to invest in startups within seven years of founding. As a boost to early-stage equity-based financing, in 1997, the National Tax Agency implemented Japan’s first-ever tax incentive to encourage angel investors. The Angel Tax was implemented “to jump start high-risk/high-return investment” (Ibata-Arens 2005, 101). Regulatory changes also paved the way for early-stage equity investing. In 1997, the Limited Partnership Act for Venture Capital Investment was passed, enabling the use of the Silicon Valley–consistent LP structure, which helped VC managers slightly ameliorate the risk of their activities (Kenney et al. 2004).

The late 1990s saw more advances that augured for movement toward a Mark I variety of innovation financing. Significantly, the government helped launch startup-friendly stock markets, which gave high-growth startups the important initial public offering (IPO) exit pathway. The Market for High-Growth and Emerging Stocks (known as Mothers) on the Tokyo Stock Exchange and Centrex on the Nagoya Stock Exchange were initiated in 1999 (Japan Exchange Group 2020). Shortly thereafter, in March 2000, SoftBank helped push for the creation of Japan’s version of NASDAQ—JASDAQ. Throughout the creation of these market institutions, SoftBank served as a role model, normalizing these activities in the Japanese context. In the late 1990s, SoftBank was increasingly “seen as the flagship of the ‘new economy’ in Japan, based on entrepreneurship, venture capital and internet startup companies” (Lynskey and Yonekura 2001, 1). It began a series of successful overseas technology investments, and in so doing, SoftBank helped to transplant the Silicon Valley VC approach to Japan.

In the early 2000s, various state entities ramped up their credit-based financing for startups, which encouraged a widening of the entrepreneurial pool, again suggesting more of a Mark I variety flavor. In 2001, the Japan Finance Corporation (JFC) launched the New Business Financing Program, which provided small firms with unsecured loans (Uesugi 2006). The offering of unsecured loans meant that startup founders could take a loan to help grow their business without using their personal assets, such as their home or car, as collateral. This helped to reduce the financial risk associated with starting a company. In a similar vein, the Small & Medium IT Startups Support program, launched by METI in 2003, provided financing for startups’ development and commercialization. In the same year, METI also initiated the Program for Training Venture Capitalists to enhance the skills for the burgeoning Japanese VC market.

However, policies to advance equity markets were established in line with Japan’s historical orientation toward a Mark II logic. For instance, in 2014, the National Tax Agency offered investors in venture funds the ability to accumulate 80 percent of loss reserves as a deduction from future tax liability (PKF 2015). In an effort to encourage corporations to invest in startups, the Open Innovation Tax Relief Program was adopted in December 2021.⁹ Yoshiaki Ishii, speaking to the involvement of big business, emphasized the government’s intention to boost exit opportunities by saying that it had been “taking measures to encourage M&A” such as the tax exemptions (Newswitch 2018). In a similar way, Hisaaki Terasaki, the director general of the Office for Strategic Policy and ICT Promotion for the Tokyo Metropolitan Government, described the strength of the Tokyo startup ecosystem as offering “the best opportunities for startups to access world-leading companies, talent and cutting-edge technologies” (Startup Genome 2020, 165).

In line with a Mark II logic, efforts have encouraged corporations such as Toyota, Fanuc, and Hitachi to actively take equity stakes in the startups. JETRO lists several corporate VC arms as “key players in the Japanese innovation ecosystem,” including Mitsui, Nippon, NTT DOCOMO, and Sony (JETRO 2023). Their VC arms have, in some cases, been established for decades. For instance, Sumitomo established its first VC fund, Presidio Ventures, in Silicon Valley in 1998 (Sumitomo 2022). In describing their corporate VC aims, the company explains they strive to “deploy effective collaboration strategies to actively integrate cutting-edge technologies and innovation in order to increase the value of existing businesses and create new businesses for the next generation” (Sumitomo 2022).

In addition to their corporate VC funds, Japanese corporations even manage funds of VC funds. Honda, for instance, runs a “fund of funds that provides insights through several LP positions in VC funds in Europe and Asia” (Mind the Bridge 2020, 12). Explaining Sony’s launch of their first VC fund in 2016, Sony Innovation Fund CIO Gen Tsuchikawa explained the venture would drive Sony’s “next business” stage by investing in startups to acquire “new technologies and new markets, new business models, and talents familiar with new fields” (Tsuchikawa 2020).

Sometimes Japan’s big businesses even collaborate in startup investing, which aligns more with an open innovation version of Mark II. For example, Alliance Ventures was created in 2018 by Renault and Nissan each providing 40 percent of the fund, with Mitsubishi contributing the remaining 20 percent (Welch et al. 2018). In publicizing the combined effort, the companies explained that “global automakers are seeking to marry their manufacturing prowess with the nimbleness of startups that are working on electrification, artificial intelligence and autonomous driving—technologies that are transforming the industry” (Welch et al. 2018). The marked proliferation of corporate VC funds suggests that Japan’s conglomerates and banks are looking to startups for new areas of growth, with their cutting-edge technologies and entrepreneurial talent, in line with an open innovation variety of Mark II.

Speaking about the prevalence of VC investment by Japanese corporations, James Riney, a partner at 500 Startups Japan, remarked that “pretty much every corporate has a startup program” (Russell 2019). CB Insights (2021) shows that Japan’s share of corporate VC, as a share of national VC activity, is greater than in other countries.¹⁰ Industry analysts note that corporate investors speak of striving to obtain startups’ technologies and talented staff (aka ‘acqui-hiring’) (Kaneko 2022). In this way, Japan’s network economy has grown in the direction of policy makers and big business aiming for startups to benefit established national strengths.

In addition to the centrality of keiretsu, national and regional startup initiatives involve the main banks as core partners. Japan’s main banks are essential backers for equity-based schemes such as accelerators and VC funds. The 500 Kobe program—which takes the form of a seven-week intensive accelerator—costs 120 million yen to run, with the Kobe City Government paying half and the remaining funding coming from sponsoring banks Sumitomo Mitsui Banking Corporation (platinum sponsor) and Nomura Securities (authors’ interview, Kobe, June 25, 2018). Sumitomo Mitsui is a particularly active investor with its two funds: Japan Co-Invest and SMBC Venture Funds. This involvement of contemporary versions of Japan’s main banks in startup-centric initiatives underscores the idea that these banks (along with keiretsu) remain key finance players that are to be central to this new capitalism.

Partially state-owned banks and money managers also allocate finance for equity investments in startups (Inagaki 2018). In June 2022, Kishida’s cabinet announced that the mammoth Government Pension Investment Fund (GPIF), with its US$1.5 trillion under management and which provided crucial capital for the keiretsu in the postwar period, would become a key source of financing for the country’s startups, as tens of millions would be allocated toward venture capital investments (Nikkei Staff Writers 2022; Slodkowski and Sugiura 2022). Once a stalwart of the patient capital provided by the developmental state, Japan’s partially state-owned Post Bank has also been entrusted with investing in the country’s growing unicorn cohort. In June 2023, the Post Bank’s president explained that “there are too few unicorns in Japan,” so the bank would leverage its network of 24,000 postal branches to identify high-potential startups, in which it would invest a total of US$7 billion (Kono 2023).

Despite efforts to encourage venture capital activity, some contend that Japan’s initiatives have not delivered. Japan’s startup and VC community have been vocal about their concerns that Kishida’s new capitalism can deliver meaningful results (Suzuki 2022). Efforts are seemingly underway to attract more international investors in Japan’s startup innovation. Notably, in a bid to strengthen Japanese VC funds’ ability to raise money from international investors, 2023 regulatory changes removed the cap on foreign investors needing to allocate 50 percent of their fund to Japanese companies (Takeuchi 2023). The challenge of attracting international money to Japanese VC has perhaps been most incisively shown through the fact that Masayoshi Son’s SoftBank Vision Fund, which launched with US$100 billion under management in 2017 as the world’s largest-ever VC fund (Economist 2018c), invests almost exclusively outside of Japan.¹¹

Collectively, conglomerates, main banks, and pension funds are major investors in Japanese VCs and startups, which points to relative continuity on the postwar Mark II financing mode. Movement toward boosting VC speaks to some shift toward a Silicon Valley model, but this has been done in tandem with big businesses as key investors and partners. Thus, Japan’s financing for innovation has a hybrid nature in which equity financing is increasingly availed for startups but conglomerates and main banks play an outsized role (relative to corporate VC in other countries) as startup investors.

Innovation

By the 1990s, Japan had already advanced from catch-up to compete at the world’s technological frontier. As such, policies strove to improve radical innovation via R&D, intellectual property rights, and technology transfer from universities. Efforts to promote startup innovation and creativity coincided with the 1993 election. In that year, the National Tax Agency amplified the generosity of the tax deduction for SMEs’ special experimentation and research expenses from 6 percent up to 12 percent. The emphasis was on R&D and creativity, as the Diet passed the SME Creative Business Promotion Law in 1995. In 1999, there was a revision to the SME Basic Law that was aimed at encouraging small firms’ innovation through state-provided credit (Seki 2008, 174).

In the late 1990s, there was a wave of policy adoptions inspired by Silicon Valley in spirit and name. The Industrial Revitalization Law in 1999 included the Japanese Bayh-Dole Act, named after the 1980 US law that dealt with IP from federally funded research (Vogel 2018, 104). The act aimed to encourage the patenting of research results from across the open innovation system (Committee on the History of Japan’s Trade and Industry Policy 2020). Also, in ways more consistent with a Mark I orientation in the sense that it strove to widen the entrepreneurial pool, the Japanese version of the US Small Business Innovation Research (SBIR) program was launched in 1999 “to help SMEs enhance their technology-development capability and to support their creative business activities” (Goto 2009, 36).¹²

In the 2000s, Japanese firms were developing state-of-the-art technologies when a new problem came to the fore: the Galapagos Syndrome. This refers to Japan’s technological leadership and innovation being limited to its domestic market, or “leading without followers” (Kushida 2011). For instance, in the early 2000s, Japan’s cell phone industry was said to be world-leading, but the advances did not diffuse to international markets. Since the rest of the world did not take up the technologies, its innovations became an island (i.e., the Galapagos) rather than a global market leader. The salience of the Galapagos Syndrome was an important driver in the shift toward policies enabling a startup-fueled, internationally oriented open innovation system. Policy makers spoke of wanting to make a concerted effort to be globally relevant, so they pursued strategies to expand to numerous international markets (e.g., see Iwamoto 2017; Iwasaki 2016). So, Japan’s innovation initiatives took a distinctly open, international character. In an interview, an Osaka City Government official responsible for industrial promotion explained that the “phrase [Galapagos Syndrome] triggered the open innovation movement by large companies” (authors’ interview, Osaka, June 26, 2018).

In the spirit of open innovation systems that deliver incumbent-led advances, the early 2000s also saw an uptick in government efforts to promote new ventures in geographical clusters alongside universities and in partnership with government and big businesses. In 2001, METI launched a Regional Cluster Plan across nine regions. The plan had three intentions: to improve productivity, spur innovation, and foster new business creation. It targeted nineteen clusters across the country and was coordinated by national and regional METI bureaus (Ibata-Arens 2005, 92). The plan aimed to enhance the competitiveness of Japan through industrial clusters formed by local SMEs and venture businesses utilizing seeds from universities and other research institutions (Boyer 2003, 180).

Other programs took this startup-fueled cluster approach to open innovation forward. The Comprehensive Support Program for Creation of Regional Innovation, launched in 2006 by the Japan Agency of Science and Technology (JST), established an S&T incubation program in advanced regions. METI’s Innovation Network Corporation of Japan launched in 2009 with a hybrid mission of investing in startups to help build unicorns and provide essential capital to established corporations struggling in the throes of the global financial crisis (Wells 2017). Commenting on this overall trajectory, Takuya Hirai, the former minister of state for Science and Technology Policy, noted that it is now known that “startups will be central players” and that “large firms are embracing open innovation in addition to their own R&D” (Rao 2020).

The rationale for striving to link established firms with startups has to do with the contemporary nature of frontier technologies and startups’ speed and way of thinking being infused into large firms. In an interview, the chairman of the Japan Venture Capital Association, Soichi Kariyazono, explained that “the fourth industrial revolution, which creates innovation through the combination of technologies from different industries and different customer groups, is driving us to open-innovation through collaboration with startups” (Newswitch 2018). The director of METI’s Startup and New Business Promotion Office, Hajime Furuya, similarly asserted that policies like the J-Startup Initiative can “create a significant impact on society by combining technologies and business models of startups with the business resources of large companies and help them develop as bases of larger growth” (METI Journal 2020). Startups are construed as resources that layer digital and technological prowess into established businesses. For this reason, Takuya Hirai noted their belief that “large firms are embracing open innovation in addition to their own R&D” (Rao 2020). In another demonstration of faith in the benefits that startups can bring to Japan’s big firms, Takuya Fukumoto, the director of Industrial Finance within METI’s New Business Policy Office, explained that “if fast-moving startups are linked with large companies and research institutions that have the technical and management resources, they will definitely be able to compete globally in the future” (Forbes Japan 2018).

As these statements illustrate, in Japan, policy makers strive for radical innovation by fostering mutual benefits for startups and incumbent firms. There is no expectation of the creative destruction of the big companies, but there is the assumption that startups will boost the innovation capacity of established firms and will simultaneously best achieve their own scaling-up by interacting with incumbents.

Social Purpose

Domestically focused social purpose, particularly the pursuit of equitable and stable economic growth, has underpinned the movements of these reinforcing institutions. Japan’s startup capitalism began with the throes of the Heisei recession, which began in 1991. The recession was the result of the bubble bursting after the yen’s sharp endaka (appreciation against the US dollar) due to the Plaza Agreement in September 1985.¹³ Though the bubble burst was primarily a financially induced one (Grimes 2001; Koo 2009), the resulting malaise fueled a push for change to the socioeconomic system. It prompted calls for greater transparency in policy making and a crisis of legitimacy in the Japanese model vis-à-vis the US model (Jackson 2003). Even though the crisis was not caused by MITI’s actions, it informed the sense that the bureaucracy, including the MITI, should change tack.

The pressure had to do with the merits of cross-shareholding, permanent employment, and the reliance on the keiretsu for export-led growth and technological upgrading systems, which all came under attack as the recession wore on in the 1990s. It spurred less confidence in the Japan Inc. model, including the state-business relations, lifetime employment, seniority-based pay, consensus decision-making, the main bank system, and corporate networks (Kato 2001). Marie Anchordoguy (2005, 64) asserts that it was acknowledged that the previous policies and institutions had become “much less effective in nurturing growth and technological advances,” and as such, “state and business leaders increasingly contested the norms underlying these arrangements and tried to modify them.” Collectively, there was a push for changes toward a Mark I model in terms of more fluid labor markets, a greater role for startups, and a boost for equity financing as the capital source for radical innovation (Pempel 1998).¹⁴ However, this did not come completely or quickly; for instance, the Japanese corporate governance code only changed in 2015 to require the reporting of cross-shareholding. The transparency into crossholdings would apply downward pressure on the oligopolistic competition model.

So, while the big business–centered model did not unravel in the 1990s, startup promotion was incorporated as a means of addressing unemployment challenges. Several policies were initiated to encourage entrepreneurship as an alternative to lifetime employment by reducing the risk associated with working for high-stakes startups. A senior manager at the Kobe Enterprise Promotion Bureau explained that “in the early 2000s, the people who were doing entrepreneurship were [perceived as] arrogant and looking to make a quick buck” (authors’ interview, Kobe, June 25, 2018).

Efforts were aimed at changing cultural norms around entrepreneurship to make it more acceptable and even desirable. One of the policies that sought to promote entrepreneurship is the Japan Venture Awards, initiated by the SMRJ in 2000, which promoted entrepreneurial role models. Other initiatives include METI-organized Silicon Valley study trips to popularize startup activity in Japan. Tohru Akaura, a partner at Incubate Fund in Tokyo, recalled that “in 2005 or 2006, the METI hosted a study group called the ‘Virtual Silicon Valley Study Group’ with the goal of revitalizing Japan” such that society embraced startups and VC (Incubate Fund 2020). In this way, METI was bringing together members of the Japanese innovation system with a view toward further encouraging an entrepreneurial culture.¹⁵ As a related means of encouraging risk-taking related to startups, in 2008, the JFC began offering Re-Challenge Support Loans that target entrepreneurs who have tried to start a business and failed in an effort to ameliorate stigmas around failure.

In the contemporary era, social challenges, such as underrepresentation and exclusion, have been invoked as the purpose motivating startup initiatives. For instance, the Kishida cabinet’s 2022 agenda that boosted use of government pension funding for startup investments asserted that “fostering start-ups is the key to promoting the dynamism and growth of the Japanese economy and solving social problems” (Slodkowski and Sugiura 2022). The METI’s 2013 Micro Enterprise Revitalization Project strives, in collaboration with private financial institutions, to help micro enterprises led by women and young people. As another example, Carin Holroyd (2022) detailed the way that Japan’s Society 5.0 coordinates academia, industry, and government to deliver its aims. And Tokyo Governor Yuriko Koike explained in a speech that the regional government created a system called APT Women to bring together talented women entrepreneurs to create new ventures based on new demands.¹⁶ Such diversity efforts have been echoed by VC industry bodies. The Japan VC Association set a diversity target of 30 percent of senior leadership positions to be held by women, foreign nationals, and other underrepresented demographics (Chou and Suzuki 2024). Japan’s startup capitalism, then, increasingly aims to drive innovation-led economic growth and social inclusion as it evolves.

While the social purpose portrayed in the launch of Japan’s startup policies is often domestically oriented, startup promotion is also positioned as contributing to economic statecraft around critical technologies. Startups are construed as boosts to big businesses’ capabilities in the context of Japan’s plans to revive its status as a powerhouse in the global semiconductor industry. Semiconductor efforts centered on the creation of a new joint venture called Rapidus, which is “backed by the government and Japan’s biggest corporations, and IBM” (Inagaki 2023). The aim is to have this new entity achieve mass production of two-nanometer node chips by 2027—which would be a significant jump from the current forty-nanometer capability. Rapidus was formed by veteran Japanese semiconductor executives. Its partners are foreign research institutes (e.g., in Belgium), foreign firms (ASML in the Netherlands and IBM in the United States), and numerous Japanese firms and main banks—Toyota, Sony, NTT, NEC, Kioxia (Toshiba), Softbank, Denso, and Mitsubishi UFJ Bank (Shivakumar et al. 2023). The incumbents and main banks collaborate directly with startups globally as a means of bolstering their firms’ capability to deliver. For instance, Sony Semiconductor Solutions has a lab in Silicon Valley (San Jose) that “provide[s] tools and working space to selected startups and enterprise companies” (Mendez 2023). Sony Semiconductor partnered with Silicon Catalyst in 2021 in order to “expand Sony’s access to new innovations in sensing solutions development and facilitate Sony’s ability to create strategic relationships with pioneering young companies that are developing technologies complementary to Sony’s internal innovation” (Silicon Catalyst 2021). Sony is just one of the many Japanese partners leading the country’s efforts to compete at the global frontier in semiconductors. Like the other big firms in the joint venture, it is leveraging startups around the world to fuel its abilities.