Japan Giving Its Start-Ups a U.S. Education, With Limited Success

By EVELYN IRITANI

Sept. 10, 2000 12 AM PT

TIMES STAFF WRITER

An innovative experiment by the Japanese government to unlock the secret of America’s entrepreneurial energies has gotten off to a rocky start.

By placing a handful of their most promising high-tech start-ups in American business incubators for several years of intensive parenting, the Japanese hoped to pick up some tips on high-tech nurturing and, with luck, grow the world’s next technology giant-killer.

“Maybe we can create the next Microsoft, Yahoo or Sony,” said Shinya Fujii, the former Sony Co. executive in charge of the TigerGate 2000 program, an undertaking of the Japan External Trade Organization, or JETRO.

But six months after its launch, three out of five participating U.S. technology incubators--including USC’s popular EC2 Annenberg Center Incubator Project--have yet to find a suitable Japanese start-up from a disappointing number of applicants. With each passing day, the entrepreneurial gap between Japan and the United States widens further.

TigerGate’s slow start raises doubts about Japan’s ability to duplicate the environment that has helped make the U.S. a leader in technology innovation.

Even supporters of Japan’s good intentions question the wisdom of trying to transplant America’s high-tech sizzle to one of the world’s least hospitable climates for entrepreneurs.

However, Japan’s involvement in this effort illustrates just how badly it fears being left behind as the technology revolution reshapes the way the world lives, plays and does business.

“JETRO may be a little clueless in implementation, but they’re certainly in the right arena, the right ballpark,” said Jon Goodman, executive director of the EC2 incubator. “They’ve just got to figure out what the rules of the game are.”

Why should Japan, still the world’s second-largest economy despite a decade of stagnant growth, be worried?

The answer lies in such countries as Ireland and Israel, which in less than a decade have gone from being global laggards to shining lights, propelled to a large degree by a burgeoning high-technology industry backed by small-business-friendly government policies.

And the link between entrepreneurship and economic well-being is becoming more obvious by the day. Entrepreneurial activity accounted for as much as one-third of the difference in growth rates among 10 countries, in a recent study by Babson College, the London Business School and the Kaufman Center for Entrepreneurial Leadership. The level of entrepreneurial activity ranged from 8.5% in the U.S. to a meager 1.5% in Japan.

“Entrepreneurship facilitates economic adaptation,” said professor Paul Reynolds of the London Business School, a co-author of the report. “The U.S. is by far the most adaptive system there is.”

Countries such as Japan, Singapore and Malaysia have discovered just how hard it is to close that gap. These governments have invested millions of dollars trying to create a more entrepreneur-friendly world. That includes erecting wired business parks, dismantling lucrative state-controlled monopolies and expanding financial markets to create new avenues of cash for start-ups. The Japanese have even started up an entire college devoted to entrepreneurship.

But that turned out to be the easy part.

Entrepreneurship is as much a way of thinking as a strategic plan. It thrives in cultures where there is an openness to change, to new ideas, to creative differences. It falters when societies consciously or unconsciously restrict this creative chaos and diversity of thought through their laws, their schooling, their family pressures.

Among those leading the pack--the U.S., Canada and Israel--entrepreneurial activity is considered an “integral and accepted feature of economic and personal life,” according to the report. In countries with low entrepreneurial rates, entrepreneurship is a “structural and cultural anomaly.”

No surprise, then, that when Americans were asked whether starting a business is a respectable occupation, 91% said yes. When Japanese are asked, the figure plummets to 8%.

“Until the dinner-party conversation between parents and their children changes, you’re not going to change the tendency of people to get involved in start-ups,” Reynolds said.

The barriers to launching a new technology business in Japan remain daunting.

Launching a small business costs at least $750,000 to $1 million, even with declining real estate prices and reduced red tape. Venture capital, though gaining respectability, remains scarce. Bankers, already hobbled by a decade of huge debts, remain reluctant to loan money to newcomers. The education system does little to prepare budding capitalists, and a deep fear of failure remains a powerful barrier to any Japanese stepping off the traditional path.

“In Japan, they have a saying that the pheasant that flies, gets shot,” said Thomas O’Malia, director of the Greif Entrepreneur Center at USC.

In recent years, the Japanese government has taken steps to improve the climate for those hoping to spread their wings.

Through JETRO, the Ministry of International Trade and Industry and the Japan Small and Medium Enterprise Agency, the government has expanded its small-business programs, established technology parks and set up technology fairs in Los Angeles and other cities to match U.S. and Japanese technology companies.

Last year, the government created a new stock exchange for newly emerging companies. And it is considering lifting a ban on professors working for private institutions, a stricture that has impeded commercialization of technology and discouraged firms from seeking out new ideas.

With its aging population, Japan can hardly afford to keep any creative minds out of its entrepreneurial pool. Even now, Japan has 20% fewer men between 25 and 40 as a percentage of the population than most Western European countries.

Yet Japan’s restrictive immigration policies have prevented any influx of foreign-born talent, depriving it of the kind of imported creative energy that has been so instrumental in Silicon Valley’s success.

Jon Kaji, the former Tokyo trade representative for the state of California, has urged the Japanese government to build an immigrant bridge by tapping the expertise of the Japanese American business community. Kaji is trying to develop a program to bring would-be Japanese entrepreneurs to the U.S.

Kaji and others agree that one of the fastest ways to boost business start-up activity in Japan would be to bring more women into the game. In the United States, the start-up rate for women is 61% of the level for men. But in Japan, the female participation rate plummets to 38%.

Germany, which until recently has also lagged in business start-ups, is attacking this problem by targeting many of its new-business programs--including the creation of 200 innovation centers--at women.

But Japanese women have not merited such attention. As the primary caretakers of the home and family, women are still encouraged to give up their jobs when they have children. Child care is scarce and expensive. And women have had few places to obtain training in business development.

Goodman, the EC2 executive who calls herself a serial entrepreneur, declined an invitation to speak at a leadership seminar sponsored by MITI, the powerful trade agency, because previous programs were almost exclusively the domain of older Japanese men.

“I don’t feel comfortable any time I see only one kind of human,” she explained. “Only female. Only young. Only white. Only old. Because I know the criteria for selection is not excellence. I know when I talk to employees at Yahoo, who look like the bar scene in ‘Star Wars,’ I know for a fact that the criteria for selection must be excellence. What else have they got in common?”

Kumi Sato, the founder of Womenjapan.com, a popular women’s Web site offering entrepreneurial advice, is trying to send a different message to women who want to strike out on their own, particularly mothers interested in working from home.

“Japanese women have been extremely protected,” Sato said. “They have been taught to be cute and stay home, to cop out and quit when things get rough.”

When JETRO launched its TigerGate program last March, it invited representatives from five U.S. incubators--EC2, International Business Incubator in San Jose, Technology Innovation Center in Chicago, Incubator America in Arlington, Va., and Austin Technology Incubator in Austin, Texas--to Japan. More than 700 people attended its seminars in Tokyo and Osaka.

The incubator approach is regarded as highly successful, and Japan is hardly the only country anxious to duplicate the U.S. grow-a-firm model.

Scotland has provided support to Scottish start-ups housed in incubators in San Jose and several other U.S. locations. One of them--Atlantech Technologies, a software firm--was acquired by Cisco Systems earlier this year for $180 million. Dozens of other governments are starting incubator projects of their own back home.

TigerGate participants would be sent to a business incubator in the United States where their office rent and consulting costs would be covered by JETRO. Those chosen would have to pay other expenses, such as housing and transportation, which could easily add up to $500,000 annually for a staff of three.

A JETRO representative would also serve as a consultant to the Japanese start-ups, providing advice on everything from getting a driver’s license to wooing investors.

In the U.S., an offer of a subsidized shot at stardom would probably draw hundreds if not thousands of applicants.

But three months after the launch of TigerGate, JETRO had only received 28 applications. All but one of the companies were run by men.

Four have since been accepted at the San Jose incubator, which specializes in working with foreign firms, and two are under final consideration by the Arlington, Va., program.

But to the dismay of Akira Fukushima, the JETRO executive in charge of TigerGate in Southern California, EC2 rejected all applicants in the first round.

Officials at the USC-based program said most of the TigerGate applicants couldn’t clearly explain their businesses or hadn’t done the research to show why they could succeed in the United States.

JETRO plans to reopen the application process this month and promises to provide mentors this time who can help with business-plan development and language skills.

Said the disappointed Fukushima, “To me its very much a pity that no Japanese firms were admitted.” Then he brightens, perhaps recalling the admonition that in the entrepreneurial world, failure is good: “At least we got some good advice.”

Evelyn Iritani recently completed a fellowship at the Pacific Council on International Policy studying technology in Asia.

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Entrepreneurs and Growth

In general, the more entrepreneurship, the healthier the economy, a study of 10 industrialized nations concluded.

Entrepreneurship Rate

Average rate of entrepreneurial activity per 100 people

Denmark, Finland, France, Germany, Japan: Low 1.8

Italy, Britain: Medium 3.4

U.S., Canada, Israel: High 6.9

GDP Growth

Average quarterly growth in gross domestic product (1998)

Denmark, Finland, France, Germany, Japan: 0.41%