Stigma of failure holds back Japan start-ups (Financial Times Article)

When the seafood processing company that Kazuo Honda worked for in Japan’s western city of Nagasaki went bust, he did something vital for the future of the world’s third-largest economy: he founded another company. In setting up Nagasaki Takara Foods, Mr Honda joined the thinning ranks of Japanese willing to take on the challenge of building a business in a market suffering anaemic economic growth, declining demographics and chronic deflation. Such bold souls are unfortunately increasingly rare. Between 2007 and 2009, new company registrations fell from 95,363 to 79,902, according to Ministry of Justice data. Policymakers fret that a paucity of new companies is undermining growth and making it hard for Japan to innovate fast enough to stay competitive against China or South Korea. “There are too few start-ups, so we are considering all kinds of policies that might be used to encourage them,” says Banri Kaieda, minister for trade and industry.
Entrepreneurs could certainly do with extra encouragement. While launching a business anywhere is no picnic, Japanese start-ups face cultural, funding and regulatory hurdles much higher than counterparts in the US, for example. Not least, notes Mr Honda, is an unforgiving tradition of viewing business failure as a personal disgrace. Small company bankruptcies often involve the total ruin of their owners, with an accompanying grim toll in resulting suicides.

And the stigma means very few survivors ever get the chance to try their entrepreneurial luck again. “What’s different about Japan compared with the US is that here you only get one chance,” says Mr Honda, citing Walt Disney’s return from bankruptcy to found the US media empire that bears his name. By contrast, Japan adheres to a corporate culture more akin to the exacting code of Japan’s samurai warriors. “From olden times, if you were defeated in battle you committed seppuku [ritual suicide by slicing the belly, also known as hara-kiri],” Mr Honda says. “That’s in our genes, so people don’t try if they think they might fail.” John Roos, a former Silicon Valley lawyer who is now US ambassador to Tokyo, agrees that the social and financial costs of failure are a major restraint on the commercialisation of Japan’s formidable reserves of ingenuity. “You need to give entrepreneurs second chances,” says Mr Roos. “Disruptive technologies and new companies take a lot of risk, and if you take risks in business you are not going to succeed all the time.” Nor, Mr Roos notes, do successful Japanese entrepreneurs enjoy the adulation accorded their US counterparts. Some business founders do get a generally positive press, such as Hiroshi Mikitani, who has built Japan’s largest shopping website and started the country’s first new baseball team in 50 years. But mainstream media have tended to focus more on scandal-stained counterparts such as Takafumi Horie, a spiky-haired internet entrepreneur convicted of securities fraud in 2007. Fortunately, it was not a search for personal glory that prompted Mr Honda’s act of corporate creation. He felt a sense of responsibility for being unable to prevent the collapse of his previous company, in which he had a junior management role.

A visit to the local “Hello Work” job centre yielded no obvious opportunities. Starting a new business was unlikely to yield riches, he thought, but would at least give people jobs and help keep the money “moving around”. Now, though still engaged in a daily battle for corporate survival, Mr. Honda glows with pride when he tells visitors that he employs 30 former fellow Hello Work jobseekers at his processing plant and nearby shop. He also has some valuable suggestions for policymakers wondering how to smooth the path for other new companies in a country where venture capitalists and angel investors are rare and banks are often suspicious of start-ups. In Mr Honda’s case, a Y10m state-supplied credit guarantee and a Y20m labour ministry subsidy were crucial to setting up his business.

But he has a point when he suggests more generous support could be justified, given the contribution that new companies make to the local tax base and the outsize personal burdens shouldered by Japanese entrepreneurs. And if Japan tamed its tendency to prop up “zombie” companies – hopeless cases kept in motion by state subsidies and banks unwilling to recognise their loans are lost – then there would be more in the kitty to take a punt on new ventures. “I’d like the finance people to take on a little bit more of the risk,” as Mr Honda puts it. “If they don’t, then only fools will ever start companies.”

DISCLAIMER: This article was taken from the Financial Times, written by Mure Dickie, originally published February 22, 2011.