The more effective approach is to simply stop practices that impede the emergence of entrepreneurs and create a fertile environment in which they can naturally grow. To that end, Japan’s government could usefully embrace the following series of measures to stimulate real and sustainable entrepreneurship. To hammer home the message that the government’s role needs to be “stopping” not “starting,” I call these …
One: Stop propping up dead trees – By artificially prolonging the existence of enterprises that would otherwise disappear, the government actively prevents the emergence of new growth. Quick dispatch of the remains of failed companies would free up capital, labor and customers. Importantly, this would clearly signal commitment to a level playing field and that Japan looks forward not back.
Even where corporate failure is not a factor, government policy needs to address the bureaucracy’s strong tendency to favor entrenched interests over new market entrants, home-grown or foreign. This actively hampers the emergence of new entrepreneurial ventures.
Two: Stop trying to pick winners – Any effort by bureaucrats to determine which ventures or industries merit government support is doomed to failure. Given that even savvy venture capitalists expect two out of three ventures to fail, no amount of bureaucratic scrutiny is going to be any more accurate. Worse, direct grants are prone to what economists refer to as “regulatory capture,” which means that the lion’s share of any funding goes to the favored clients of political interests. Government grants create a moral hazard that distorts entrepreneurial activity.
Three: Stop stifling entrepreneurial energy in infancy – Japan’s mandatory school curriculum, implemented nationwide without deviation, is designed to produce a uniform product. Learning centers on rote memorization and the pursuit of one right answer. The underlying lessons that creative problem-solving and risk-taking (the core skills of entrepreneurship) are wrong and counter-productive. Thus, anyone who survives a Japanese education with his or her entrepreneurial instincts intact represents a failure of the system.
Therefore, the most profound step government could take to stimulate entrepreneurial energy is to stop systematically squeezing it out of the nation’s youth. Given that, in the U.S., many successful entrepreneurs started in their mid-20s, an effective Japanese effort that began with high-school students could produce an initial crop of entrepreneurs within a decade.
Realistically, though, any meaningful change to Japan’s education system would likely take a decade, if it succeeded at all. A more certain route would encourage diversity, allowing private schools to follow alternative curricula without sacrificing graduates’ ability to enter university.
Four: Stop stigmatizing failure – As mentioned in an earlier post, entrepreneurship is about the ability to accept the fear, the reality and the lessons of failure. But despite its celebration of gambare spirit (battling against all odds) Japanese society imposes a heavy stigma on failure. From university-entrance exams through loan applications and the bankruptcy process, any record of failure is a black mark. By contrast, lack of ambition seldom attracts criticism.
The government could usefully lead the way in “changing the atmosphere” around this issue. For starters, bureaucrats might well review all governmental procedures and criteria to weed out instances where those who have “tried-and-failed” face discrimination. Beyond that, the nation’s leaders could usefully articulate the message that “trying and failing is okay; failing to try is not.”
Five: Stop penalizing risk – Instead of tasking bureaucrats with deciding which ventures deserve government funding, stop penalizing private investors who support entrepreneurs. Angel investors in the U.S. can write off losses on failed investments, those in Japan cannot. While this may diminish tax revenues in the short run, over the long term we can expect such provisions to generate increased economic activity and thereby a net gain in tax revenue.
Angel investors have a key role to play in any new venture. Their decisions to participate are typically based on an informed appraisal of the entrepreneurs’ character, skills and motives. They are often motivated by skills and experiences that give them informed insight into the business opportunity. And as their own funds are at stake, angels are concerned to see that funds are spent wisely. The tax system should stop penalizing them.
Next week, I will post the remaining five government roles that should be stopped. In the mean time, your comments are always welcome.