Japan’s challenge is entrepreneurship, not innovation

Japan’s challenge is entrepreneurship, not innovation

Effectively deploying and scaling innovation through entrepreneurship is the challenge, and more importantly in the Japanese model, intrapreneurship.

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KPMG in Japan

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In its rise from post-war devastation to a world economic superpower, Japan has demonstrated tremendous capacity for innovation, particularly in terms of building on and improving existing products, technologies and ideas. The rise of companies like Panasonic, Sony and Toyota showcase the ingenuity of post-war Japan and the innovation that transformed many of its companies. For example: Panasonic consistently ranks #1 in terms of new patent filings globally; Japan sits #3 in terms of total patents filed by country; and in research and development, Japan is ranked second only to Israel in terms of the percentage of R&D spend compared to GDP.

Given Japan’s success stories and deep technological prowess, a lack of innovation isn’t the country’s biggest challenge – spend any time looking at the patent portfolios of Japanese companies or considering Japan’s frontier position in areas such as stem-cell research, and this becomes clear. Rather, the challenge is effectively deploying and scaling innovation through entrepreneurship, and more importantly in the Japanese model, intrapreneurship.

Historically, Japan’s model of innovation has been based on concentrating engineering and business talent in large companies designed to scale innovation from within. But, as organizations grow, it becomes more difficult to sustain the entrepreneurial spirit necessary to take sufficient calculated risks. In particular, when new technologies or business models have the potential to threaten the incumbent business, large organizations may be structurally incented to circle the wagons and protect the status quo, and inhibit the adoption of new technologies or ways of thinking. This has led to an environment of “closed innovation” in Japan which has, from the latter part of the 20th century, often limited companies’ ability to effectively absorb and implement new ideas, technologies and business models from outside the organization.

This is exacerbated by structural and cultural incentives in Japan to value risk-mitigation higher than opportunity-creation; in the West we tend to romanticize the concepts of disruption and creative destruction as the path to a dynamic society, whereas in Japan contemporary business culture and social incentives reinforce stability rather than risk-taking.

The above have combined to discourage large companies from investing resources to scale potentially disruptive products and technologies, and to also discourage difficult organizational decisions that may make economic sense but potentially disadvantage key incumbent stakeholder groups. As a result, a common global narrative seems to have emerged that Japanese companies are unable to innovate effectively to compete in today’s fast-changing environment. Layer on Japan’s well known challenges of a shrinking and aging population, and it’s been easy for people to dismiss Japan as a “has-been” whose best days are behind it.

On the ground in Japan, however, a different picture emerges. Among many senior executives at Japan’s biggest trading houses and banks – the infrastructure of the Japanese economy – there is a clear understanding that the status quo is unsustainable and Japan needs to chart a new path towards entrepreneurship and intrapreneurship, opening up their approach to innovation and adopting more global business practices while still leveraging existing strengths. Some examples:

Rethinking organizational structures and systems

A number of large organizations in Japan have realized that their current compensation systems reward risk aversion by promoting and compensating based on seniority rather than achievement, and are rethinking their approach. For example, one of Japan’s biggest electronics companies recently made headlines by announcing that they would create a single global executive performance evaluation system which would create more opportunity for foreign executives to achieve key leadership positions. Other top public companies have hired outsiders – even non-Japanese – take on C-level roles, something exceedingly rare 10 years ago. Additionally, several leading companies here have recently realigned corporate structures so that instead of separate “Japan” and “global” business units, the organization primarily is structured around industries or product lines, helping innovations be more rapidly scaled throughout the entire global organization (including Japan). Several well-known companies here have gone as far as making English the official company language – even in the Japan home office.

Adopting an open innovation mindset

Many senior executives recognize the need to expose themselves to new ways of thinking. For example, a Japanese bank executive I know recently went to Silicon Valley to investigate the entrepreneurial way of thinking. Rather than stay in a luxurious expense-account hotel, this 50-something executive lived in a share-house for several weeks with a bunch of young entrepreneurial aspirants in order to better understand how entrepreneurs think, live and work. He is not alone – speaking to many other senior Japanese executives, a consistent theme is a high level of curiosity about emerging technology and business trends in markets outside Japan. As another example, a Japanese friend in a large advertising company here met directly with over 150 different companies last year spanning Asia and North America to identify new technology and business opportunities, while researching countless more.

Aggressively pursuing corporate venturing

The limited partners (LPs) in a recent new fund by a leading US seed fund include a wide range of Japanese banks, trading houses and transportation companies. Their principal goal is not to generate a financial return – rather, it is to learn more about the venturing business and be closer to emerging, potentially disruptive technologies and business models. Going further, some trading houses have global venture investment budgets in excess of US$100 million annually to identify and bring in-house emerging technologies from outside the business.

Throughout its history Japan has shown a capacity to undergo wrenching change and emerge successful – for example, the opening of its borders and transition from a feudal system in the late 1800s; or its rapid emergence as a democratic industrial powerhouse in the post-war period. Today, Japanese companies are well aware of the challenges facing them to successfully cultivate entrepreneurship and intrapreneurship on a large scale, and many are taking the necessary steps forward. In upcoming blogs, we’ll look more at some of the specific barriers to entrepreneurship in Japan and how the nation is tackling them.

 

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About the author

Paul Ford works in KPMG’s Transaction Services at the Tokyo office. His operations experience as a senior finance, legal and HR executive in the technology industry provides him with unique insights during the transaction process, particularly in viewing and addressing issues from a client perspective. In 2014, Paul launched KPMG FAS’ Internet Deal Advisory due diligence practice and has personally led the due diligence of over 25 internet / software business M&A transactions since 2012, both in-bound into Japan for foreign clients and overseas on behalf of Japanese clients.

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