Commentary: Don't Shortchange Your Entrepreneurs, Japan

Thanks to the pioneering efforts of a startup called Tokyo Metallic Communications Corp., Japan is poised for a takeoff in broadband services. Nearly 40% of the country's Net users have high-speed connections at home, and a half-million more are signing up monthly. Too bad Tokyo Metallic, the first Japanese company to offer fast Internet links over phone lines, isn't around to reap the rewards. It vanished 18 months ago, after bankers cut off funding.

Tokyo Metallic isn't the only promising startup to be dragged down by Japan's economic woes. Last year, nearly 20,000 small companies went belly-up, 5% more than in 2001. Don't expect this year to be any better. Banks, burdened by a mountain of bad debts, are expected to leave many more businesses stranded. Some 40% of Japan's small and midsize enterprises said in a survey last year that their financial position was deteriorating. That's up nearly 10 percentage points from 2001.

Time to act? The government thinks so. Claiming to recognize the importance of startups in creating future growth industries, Prime Minister Junichiro Koizumi has won lower house approval for an economic-stimulus package. The bill includes $12.7 billion in financing for distressed small and midsize companies, plus a security net for displaced workers.

Koizumi's heart is in the right place, but his strategy is flawed. The problem: It's unlikely that a young tech venture in the mold of Tokyo Metallic, with no heavyweight political connections, would qualify for help under the plan. You can bet your last yen that the crusty old politicians who dominate the ruling Liberal Democratic Party will direct the aid to hometown favorites in sunset industries such as construction, transportation, and small manufacturing. "The money won't go to the right companies," says Joichi Ito, president of Neoteny Co., a Tokyo-based venture-capital firm that seeds tech startups. "When the government starts distributing a lot of funds, it becomes pork barrel."

The solution? Koizumi should start by setting up a fund managed by outside experts, not bureaucrats or politicians. Bankers, entrepreneurs, and tech-industry pros can be recruited to screen eligible companies on the basis of their technology, business model, and potential for success. There's a precedent for this. Several years ago, the Ministry of Economy, Trade & Industry launched a $120 million fund overseen by senior execs of major tech companies that helped Neoteny and other venture capitalists get off the ground. That could serve as a model for a larger government program.

Then Koizumi should think about creating conditions to foster more ventures. According to a survey called the Global Entrepreneurship Monitor (GEM), just 1.8% of Japanese workers are new entrepreneurs--down from 5.2% in 2001. By comparison, 10.5% of America's working population and 14.5% of South Korea's are considered to be new entrepreneurs, defined as managers or founders of companies that have been in business less than 42 months. Moreover, Japanese investors have little interest in funding risky startups. GEM found that venture capital represented just 0.04% of gross domestic product in 2001, one-tenth the U.S. level. The government could help by reducing the capital-gains tax and offering tax breaks for those investing in new ventures. "We have to offer many kinds of incentives to nurture startups," says Yoshio Nakamura, senior managing director of the Keidanren, Japan's largest business-lobby group.

At the same time, the Prime Minister must hack away at the red tape that continues to hamper business. Granted, new bankruptcy laws make it easier for failed entrepreneurs to try their hand again. And changes in the labor laws and pension systems mean switching jobs is now less burdensome. But try setting up a business in Japan. To create a kabushiki kaisha--a company with stock--you'll need to dish out about $3,000 for registration and fees for the legal scribes required to properly fill in the half-dozen forms. And don't forget your minimum $85,000 in startup capital.

Koizumi seems to understand that Japan can only benefit from more entrepreneurial activity. Now he needs to realize that serving up fresh pork isn't the way to nurture the young business leaders the country so desperately needs.

By Irene M. Kunii

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