Paper short abstract:

Since 2000, Japan's Start-up ecosystem has changed dramatically. We analyze structural reforms related to financing startups, attracting entrepreneurs/labor, universities' roles in creating new companies, large firms' relations with new firms, and state policies targeting a healthier ecosystem.

Paper long abstract:

Over the last 15 years, Japanese leaders have strongly encouraged entrepreneurship, venture capital, and a greater role for universities in creating new firms and technology. They have embarked on many reforms to create a more vibrant ecosystem for startups, which are deemed critical to economic growth and job creation. This paper analyzes structural reforms in five key parts of the Start-up Ecosystem: finance, entrepreneurial talent/labor, universities, large firms, and the government.

The finance section analyzes venture capital firms—who runs them, where they get money from, and how much and in what type of firm they invest. It investigates legal changes, such as stock options, limited liability partnerships, and preferred shares, that make creating and investing in new companies more attractive.

Other reforms are decreasing major obstacles to entrepreneurship. These include reducing personal guarantees and stock buyback clauses that lead entrepreneurs to lose their personal assets if they fail. Changes in bankruptcy and employment laws, and attitudes toward failure and wealth, have also reduced disincentives. Many large companies' fragility also makes entrepreneurship more attractive.

Legal changes have transformed the role of national universities in the start-up ecosystem. Professors, once civil servants unable to earn extra pay, can now consult for and create new firms, boosting start-ups and technology transfer.

Large firms have long played a key role in Japan's National Innovation System, but reliance on closed innovation within their groups meant they, if anything, discouraged start-ups. Large companies are gradually shifting toward open innovation, acquiring new firms, and purchasing from new companies, thereby creating a healthier ecosystem.

Government reforms go beyond those mentioned above. As part of its "Third Arrow", Prime Minister Abe's Administration is creating huge venture capital funds at top universities, negotiating with banks to reduce personal guarantees, providing greater angel tax benefits, and linking Japanese entrepreneurs with Silicon Valley. Dozens of other government programs fund, educate, and train entrepreneurs and startups, and encourage large companies shift toward open innovation.

We assess these structural reforms since the late 1990s, and how and to what degree they are contributing to the emergence of a healthy Start-up Ecosystem in Japan.