Japan and Entrepreneurship: Culture Under the Microscope.
Japan is known for a lot of things including Samurai, the iconic Shinkansen (Bullet Train), vending machines on every street, and an increasingly popular media presence in the world through the anime medium. One thing they are not known for is entrepreneurship. In fact, it might be more accurate to say the Japanese are known for exceedingly low levels of entrepreneurship.
Inc.com reports that according to a list put out by Approved Index, Japan is ranked as the 4th least entrepreneurial country in the world. A quick Google search confirms with titles such as:
- The Entrepreneurship Vacuum in Japan: Why It Matters and How to Address It
- Where Are All the Entrepreneurs Gone in Japan?
- A Startup Scene That’s Not So Hot: Japan’s Entrepreneur Shortage
These articles describe the situation in Japan as it currently stands, and also some inputs which lead to the low entrepreneurship levels. However, in looking at the institutions and policies Japan leveraged during the 1950’s onward to pursue rapid economic growth, I found references to certain cultural practices which indeed helped the country grow into one of 5 largest economies in the world, but also may have stymied the long term development of entrepreneurship in the country.
Before we begin, it will be useful to develop our reasons for focusing specifically on the importance of entrepreneurship in the economy.
Investopedia.com describes several positive effects of entrepreneurship on the economy, three of which are listed below:
Entrepreneurs create new businesses.
The development of new industries, or new businesses in existing industries, can support other industries and improve efficiency. For instance, entrepreneurship in the information technology sector can lead to more efficient operations in agriculture or transport by mapping out higher yield crop production cycles, or more efficient shipping routes.
Entrepreneurs add to national income.
By creating new businesses, entrepreneurs create additional value in the market, which result in additional economic activity registered as an increase in national income. These new businesses also require labor and so create new job opportunities which equivalently increase the national income. Further, additional wealth generation can be positively reinforcing as it may allow for additional savings rates which can then be used to invest into further economic development.
Entrepreneurs create social change.
From Investopedia: “through their unique offerings of new goods and services, entrepreneurs break away from tradition and indirectly support freedom by reducing dependence on obsolete systems and technologies. This results in an improved quality of life, greater morale and economic freedom.”
In a 2007 paper by Koellinger, Minniti, and Schade, titled “I think I can, I think I can”: Overconfidence and entrepreneurial behavior, the authors examine the proclivity for entrepreneurship across a number of popular factors. Of particular interest is a comparison across countries.
The authors classified research participants into one of four categories:
- Nascent entrepreneurs claimed to have been engaged in start-up activities during the 12 months preceding the survey, to have been full or part owners of the new business, and to have paid wages to the owners or others for a period not exceeding 3 months.
- New entrepreneurs claimed to be managing and owning a business at the time of the survey, and to have paid wages for at least 3 months but no more than 42.
- Established entrepreneurs owned all or part of a business they helped manage, and had paid wages or profits longer than 42 months.
- Non-entrepreneurs were classified as not belonging to any of the previous entrepreneur categories.
Using the United States as a baseline, the authors found that the Japanese were 2.8% less likely to be a nascent entrepreneur, 0.9% less likely to be a new entrepreneur, and 0.6% more likely to be an established entrepreneur, with the first two results being statistically significant and the last not being statistically significant.
The authors further presented data on the absolute percentages of each country which aligned with the entrepreneur classifications. In the United States, nascent, new, and established entrepreneurs made up 6.5%, 2.9%, and 5.5% respectively, while the numbers for Japan were 2.3%, 0.7%, and 5.3% respectively.
Clearly, Japan has a shortage of entrepreneurs in its economy, at least relative to the United States, and this difference may be contributing to different growth rates in recent decades. In particular, despite being a “developed nation” for a longer time than Japan, the United States has overall had a larger economic growth rate since 1995. Of particular interest are the periods from 1995–2000, and from 2001–2007 where the United States’ growth rate is significantly above Japan’s. The 1995–2000 period corresponds to the Dot Com era, a well-known and direct consequence of entrepreneurial activity in the country. The 2001–2007 period is more ambiguous but a look at the number of companies founded in this period is telling. Using data from Wikipedia, we see that at least 483 companies were established during this period in the United States, which included large firms like YouTube (2005) and Facebook (2004), while in the same period in Japan only 30 companies are listed as being established.
Ezra Vogel argues in his book Japan as Number One: Lessons for America that the Japanese system of education and Japanese political system provide examples of successful Japanese constructions which the United States of America would do well to emulate. Originally published in 1979, the book examines these Japanese constructions in the period after World War II, especially during Japan’s high growth period post 1949. Vogel emphasizes the importance of a culture of education, both in scope and rigor, that undoubtedly aided Japan in maintaining its impressive growth rate, as well as how this culture of education permeated the political infrastructure of the time. However, looking ahead to the present, we can make a comparison between the United States and Japan today, with an eye to the long term impact of this culture, particularly on entrepreneurship.
By examining the research regarding entrepreneurship incentives presented above, I will argue that the very cultural factors Vogel attributes to the Japanese high growth period are hindering the long-run development of entrepreneurship in the country, and consequently dampening the growth rate of the economy.
To provide some context for the following discussion, I will note here that the Japanese workplace is largely male dominated. I will focus on the period after the one described in Japan as Number One up to present day, and consequently will focus on male incentives for entrepreneurship as this period is largely comprised of a male workforce: 67% of full-time employees in 1992. Of course, moving forward Japan will do best if it can develop its female population to engage in entrepreneurship and most of the factors discussed below will be applicable to this part of the population as well.
In Japan as Number One, Vogel emphasizes the contribution to economic growth from the Japanese bureaucracy. He notes, “the key decisions in the ministry are made by the permanent bureaucrats rather than by the politicians”, and, “most of the legislation is in fact drafted by bureaucrats rather than by [politicians]”. Vogel goes on to describe the status associated with becoming one of these bureaucrats: “Furthermore, the elite bureaucrat enjoys a prestige that extends far beyond mere utilitarian acceptance of his authority. His family are buoyed by his states and share in his success”. This introduces one of the main hindrances to entrepreneurship in Japanese society during this period.
In a 2010 paper by von Eden, Gurven, and Kaplan titled Why do men seek status? Fitness payoffs to dominance and prestige, the authors note “men are motivated to pursue status because of fitness gains”. If this result holds true for Japanese society in the period under discussion, then we find several obstacles to entrepreneurship as a consequence.
By making bureaucratic jobs the roles of highest prestige in the economy, then many men, and sometimes women, will gravitate towards these jobs. Consequently, there is a relative disincentive to pursue entrepreneurship for these individuals in favor of a job in the bureaucracy, which limits the number of individuals pursuing entrepreneurship in the economy.
Further, the Japanese central government adopts an attitude of “funnel to the top: highest ability, broadest experience, longest service”. This leads to an additional problem because these talented individuals pursuing membership in the elite bureaucracy are unlikely to leave to engage in entrepreneurship activities due to a premium on long service with the organization to advance. In private industry this also appears to hold. In an article on btrax.com, Reina Hashimoto notes, “Japanese are encouraged to stay in one company by the monetary rewards. These are company sponsored payments independent of the person’s salary. The longer they stay the higher the company sponsored payout is to them.”
The bureaucracy roles focus specifically on recruitment from law faculties. From Japan as Number One: “Within Tokyo University, the ablest students enter the Law Faculty, which in fact provides training for public administration, with secondary emphasis on political science and law. The top graduate of the Law Faculty enter the most prestigious ministries and agencies”. This focus on the ablest students entering the Law Faculty limits the number of capable people entering STEM fields. There is a general consensus that STEM education is closely tied to entrepreneurship in recent decades, as supported in articles like, “Why STEM Education is a Gateway for Entrepreneurship”, and “To Spur Entrepreneurship, STEM Education in the Spotlight”. By placing an emphasis on talented members of the Japanese population going into the Law Faculty, there are less talented individuals pursuing STEM education, and consequently less talent in the economy outfitted for entrepreneurship. The bias away from STEM and towards law shows itself in the data[1]. In 2011, the United States had a 28.3% STEM composition for tertiary education graduates compared to 23.2% in Japan, and in the same year the percentage of law graduates in the United States is only 2.1% contrasted with 6.7% for Japan.
Beyond the effect of the prestige of the bureaucracy, the Japanese learning culture may itself be hindering the development of entrepreneurship in the country. Vogel notes of the educational culture, “University education may be more important for certification than learning, and the social atmosphere may impede probing, but it does not impede groups of students from continuing to learn, nor does it impart such confidence that student can consider themselves expert before they begin their employment.” There may be an argument to be made about entrepreneurship itself requiring a willingness to probe in order to create something new, but we will focus the argument on the latter portion of the statement, the failure of the learning culture to instill confidence in the population.
In the paper by Koellinger et al. the authors also explore the confidence which would-be entrepreneurs have in their skills. In particular they inquire as to whether research participants “believed they had the knowledge, skill and experience required to start a business.” They found that a belief from participants that they had the required inputs to start a business as described, led to a 5.6% increased likelihood of being a nascent entrepreneur, a 2.6% increased likelihood of being a new entrepreneur, and a 3.9% increased likelihood of being an experienced entrepreneur, all statistically significant relative to a baseline of non-entrepreneur research participants.
From the sample population, 55% of United States respondents answered yes to the question about their ability to start a business, whereas only 11% of Japanese respondents answered similarly. The data seems to play out the effect of the Japanese learning culture on individual confidence, and consequently indirectly reduces the incidence of entrepreneurship in the country.
Based on the arguments and evidence presented here, it would seem that the very attributes Vogel endorses about the Japanese learning culture and political system circa 1979 in Japan as Number One: Lessons for America, would later go on to hold the country back from growing as quickly as comparable nations such as the United States or the United Kingdom. In an economic development course I am currently taking, we note that one of the major questions with which we need to grapple in economic development is when to change the existing development strategy. For Japan, it would seem that time is now.
Footnotes:
[1] A note on the data from the OECD. The dataset reported several categories of data instead of a composite “STEM” category. The numbers used in the calculation were a combination of “Science”, “Life Sciences”, “Physical Sciences”, “Mathematics”, “Computing”, and all “Engineering” categories. The Law graduate numbers were found from a separate source authored by Herbert Kritzer of the University of Minnesota Law School.
