Social Business in Japan: a Snapshot of a Flourishing Movement
In 2015, the Cabinet Office estimated that there were 205,000 social businesses in Japan, employing some 5,776,000 people and adding 16.0 trillion yen to the economy — the equivalent of 3.3% of GDP.
To give an idea of how significant this is — the entire agricultural sector contributed 1.2% to Japan’s GDP in 2018.
And with the recent boom of interest and activity in the UN Sustainable Development Goals (SDGs), sustainability, circular economy, social innovation and other similar fields in Japan, the social enterprise space is likely to continue its upward trend.
But what exactly constitutes a social business, and what do they look like in Japan?
Japan’s Definition of Social Business
The term “social business” can mean different things to different people.
Broadly speaking, they are organisations striking a balance between social objectives and financial goals, sitting somewhere between profit-maximizing corporations and ‘traditional’ charitable organisations.
Japan’s Ministry of Economy, Trade and Industry (METI) defines social businesses as organisations that primarily focus on addressing societal problems through business practices, and have the following characteristics:
- Social mission (社会性): the organisation’s core mission is to tackle societal issues.
- Feasibility (事業性): adheres to strong business principles and carries out its operations in a sustainable and financially viable way.
- Innovation (革新性): creates social value by developing, deploying or mainstreaming new products or services.
Social Business: Performance & Trends
A 2014 study by the Japan Finance Corporation (JFC) — a public corporation wholly owned by the Japanese government — found the following from a survey of social businesses in Japan.
- 75% of social businesses reported losses from the previous fiscal year (i.e. they were ‘in the red’).
- 75% of social businesses reported gross annual revenues of less than 50 million yen (approx. 500,000 USD) in the previous fiscal year.
This study suggests that the majority of social businesses are small-scale, and few are able to cover their expenses solely from earned revenues, with many relying on grants, subsidies and donations to ensure long-term viability.
A few other insights from JFC on the social business sector were:
- The Prominent Role of Women: In companies engaged in social business, 31.6% of representatives were women and the average percentage of women employees was 68.7%. In contrast, for companies not engaged in social business, the figures were 8.1% and 34.3% respectively, indicating that women play an important role in this sector.
- People Problems: The top two barriers to success for social businesses cited were recruitment and upskilling of employees. This points to a need to develop and attract top talent to the social business sector for its long-term growth and success.
- Little Debt Finance: Only a quarter of social businesses took loans from financial institutions. These loans tended to be financed by regional financial institutions, such as local banks and Shinkin banks (cooperative financial institutions serving SMEs and local residents).
Legal Structures in Japan for Social Businesses
A legal structure that is specifically designated for social businesses in Japan does not exist.
METI recognises that organisations identifying as social businesses are made up of a number of different legal structures. They can be:
- Nonprofit Organisations 非営利活動法人（NPO法人）
- General Incorporated Associations 一般社団法人
- Joint Stock Corporations 株式会社
- Limited Liability Companies 有限会社, 合同会社
- Other (e.g. Workers Collectives, Sole Proprietors, Unions and Foundations)
In this 2011 report by METI, almost half (46%) of social businesses were nonprofit organisations, whilst for-profit organisations (i.e. Joint Stock Corporations and LLCs) made up 20%.
Pros and Cons of Different Legal Structures
Each legal entity type has its own strengths and weaknesses. To list just a few:
- Certified Nonprofit Organisations can enjoy strong levels of trust with members of the public; however, they may require more time and effort to establish and oftentimes require regular reporting and upkeep to maintain. Donors to certain ‘approved’ nonprofit organisations may also be able to enjoy tax breaks, incentivizing charitable giving.
- General Incorporated Associations are easy to set up, and can provide both for-profit and nonprofit services. They can also receive donations and apply for many philanthropic grants — however, donors are not able to receive tax breaks, lessening the incentive for charitable giving. They also generally cannot take equity investment.
- Joint Stock Corporations are easy to set up (however, non-Japanese nationals require a lump sum of startup capital), may have higher levels of trust from large corporations when it comes to delivery of “business services” like consulting, and can take equity investments. However, they generally cannot receive donations and apply for most philanthropic grants, and may encounter scepticism when carrying out services for public good which don’t generate an obvious/immediate financial return.
*Note: these are very broad generalisations. There are many exceptions!
This table below, adapted from a 2016 survey of 1,000+ social businesses in Japan, explores the key drivers for why founders chose their given entity type.
A Bright Future
Social businesses are growing rapidly in popularity and number thanks to a range of drivers, including government measures/incentives (eg. grants to incentivize social entrepreneurs in rural areas), universities (more of which are beginning to offer courses on the topic), events and competitions (e.g. Nikkei Social Business Contest and Hult Prize), philanthropic organisations such as the Nippon Foundation, increasing coverage by mainstream media, a thriving impact investing sector, and influential organisations at the forefront of the movement like Borderless Japan and ETIC.
As a kaddaisenshinkoku (課題先進国)— a country facing a number of globally unprecedented challenges, such as its ageing population — Japan is under pressure to quickly shift its know-how, skills and resources to solve these problems head-on, or face dire consequences. This new wave of social entrepreneurs and their ground-breaking businesses will likely play an important role in overcoming these challenges for decades to come.
Thanks for reading! For more on social business and social innovation in Japan, see some of my other posts here:
