Redefining Japanese innovation

Asia World

Author: Ren Ito, Mercari Europe

Japanese innovation has long been synonymous with craftsmanship and design excellence, from the Sony Walkman and Nintendo game consoles to hybrid cars, futuristic toilets and high-speed rail. But a new and less tangible form of innovation is quietly taking hold — one that could transform Japan into one of the world’s most important drivers of the global technological revolution.

Japan's IT company Softbank Group president Masayoshi Son announces the company's first quarter financial result ended June in Tokyo on 7 August 2019. Softbank posted 1.12 trillion yen for net income for three months, a 257 per cent increase from the previous year (Photo:Reuters/Yoshio Tsunoda/AFLO).

Japan's IT company Softbank Group president Masayoshi Son announces the company's first quarter financial result ended June in Tokyo on 7 August 2019. Softbank posted 1.12 trillion yen for net income for three months, a 257 per cent increase from the previous year (Photo:Reuters/Yoshio Tsunoda/AFLO).Japan has a proud history of innovations that it has offered the world. There are numerous examples of Japanese prowess at monozukuri (the art of making things) and these innovations — backed by high levels of technical expertise and production efficiency — have been drivers of Japanese soft power alongside karaoke, anime and sushi.

But recently Japanese success stories of this scale have become far less frequent. Japan missed the dotcom revolution, resulting in few front-running high-growth IT or tech start-ups originating in Japan. It is widely acknowledged that Japan is a difficult place for start-ups to flourish.

According to the Global Entrepreneurship Monitor in 2018–19 the percentage of Japan’s adult population involved in early-stage start-ups was merely 5 per cent, one of the lowest rates among advanced economies. The United States — the start-up superpower — had nearly 16 per cent, while India doubled Japan.

Based on the volume of start-up investment, China has rapidly strengthened its start-up status to become the second largest venture capital world power after the United States. It captured a quarter of this investment in 2016, while India and Japan absorbed 2.6 per cent and 0.7 per cent respectively.

Reflecting the wider global start-up boom, a few unicorn companies — start-ups valued at over US$1 billion — have surfaced in Japan in recent years, such as software developer Preferred Networks and Ebay-style flea market app Mercari. But there are still nowhere near enough Japanese start-ups in terms of numbers.

Fortunately, signs of improvement are on the horizon. Young Japanese are increasingly taking on the challenge of setting up their own start-ups although their numbers are still small. Ventures are gradually becoming a viable career choice for some of Japan’s best talent. There is steady growth in the flow of gifted youth from educational institutions like the University of Tokyo and from established employers like major banks into new ventures. Japan is also seeing solid expansion in the supply of funds for high-risk investments and supportive government policies for start-ups.

But Japan’s more immediate potential lies apart from Japanese companies starting new businesses from scratch. Great growth could come from Japanese corporations investing in companies and businesses outside of Japan’s borders. Just as Japanese manufacturers used to look abroad to high-growth markets to drive Japan’s export-oriented growth, a small but increasing number of Japanese firms are now attempting to achieve growth by investing in the fastest-growing tech companies outside Japan.

This hypothesis is supported by statistics from the Bank of Japan and the Ministry of Finance. Individuals hold the cash equivalent of US$9.3 trillion and Japanese organisations have built up US$4.2 trillion in reserves. If done correctly, deploying these vastly underutilised resources can be a key and viable source of Japan’s growth.

There is no reason for Japanese companies only to invest locally. In order to internalise the high overseas growth, Japanese companies can use the vast surplus funds to purchase stocks of some of the fastest-growing tech start-ups outside Japan. This is a powerful growth and innovation strategy for Japan. Realising innovation through the power of investment is a reversal of the traditional Japanese way of thinking, going beyond the typical idea of a workman creating objects or an illustrator creating content to be commercialised.

The art of investing overseas should be grasped as a proudly Japanese innovation, while setting out to create a global IT company originating from Japan.

Japanese telecommunications company Softbank decided not to use its enormous, stable cash flows from domestic business to merge, acquire or invest in other Japanese businesses. It chose instead to invest in overseas tech companies, particularly artificial intelligence innovators. It established the US$97 billion Vision Fund 1 by leveraging its own cash and Japanese risk capital to assemble risk capital from abroad. The fund invested large sums of money into mega-unicorns such as Uber and Oyo, as well as companies working on research and development for autonomous driving.

Softbank is expected to set up Vision Fund 2 at a similar scale, about US$108 billion, in the latter half of 2019. Similarly, the Japan Bank for International Cooperation — Japan’s government-backed development bank, JBIC — contributed equity to a fund for start-ups in the Nordic and Baltic regions. This was followed by other Japanese firms which set up similar corporate venture capital funds for investment in the United States, Europe and Israel.

These movements could mark the beginning of an evolution from a Japan that manufactures to a Japan that invests abroad, an idea once thought to be ‘heretical’ for a country with deep faith in its manufacturing industry. The overseas technologies that attract investments can then be brought back to Japan to bring about more innovation through their application to Japan’s social problems, such as its ageing society. Shifting from manufacturing to investment might just be the key to Japan innovating innovation itself.

Ren Ito is CEO of Mercari Europe, the international arm of Japan’s first unicorn start-up running the fastest-growing marketplace app in Japan, the United States and the United Kingdom. Ren is also Senior Fellow at the New York University School of Law.

This article appears in the most recent edition of East Asia Forum Quarterly, ‘Japan’s leadership moment‘, Vol. 11, No. 3.

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