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“The Dismal Software Industry in Japan -
Will It Be Disrupted
Or
Will It Discover Its Own Way Like U.S. Players?”
Historical Analysis of Japan and U.S. Software Market and
1
Comprehensive Analysis of Status Quo of These Two Countries.
Are There Ways to Improve Disadvantageous Situation in Japan?
Masashi Suzuki
Sumitomo Corporation
2012-2013 The Walter H. Shorenstein Asia-Pacific Research Center
Corporate Affiliates Visiting Fellow
2
Outline
Abstract:............................................................................41 Where we stand now:..........................................................5
1.0 Preface.....................................................................................................51.1 Outline of Status Quo: Software Industries in Japan and U.S..................................7
2 Historical Analysis of Software Business in Japan and the U.S...........112.1 Chronological Analysis..............................................................................112.2 Item Analysis...........................................................................................162.3 Venture Capital History..............................................................................192.4 Historical Analysis Summary.......................................................................22
3 Current Situation of Software Business in Japan and the U.S.:...........263.1 Profitability of Software Business in Japan and the U.S.......................................263.2 Package Software Business in Japan and the U.S...............................................273.2.1 Software Companies in Silicon Valley............................................................323.2.2 Cloud Computing.....................................................................................343.3 Popularity of IT/SW Companies as Employer in Japan and the U.S........................353.4 Entrepreneurship in Japan and the U.S............................................................373.4.1 Entrepreneurial Education...........................................................................443.4.2 Entrepreneurial Movement..........................................................................473.4.3 Intrepreneurship.......................................................................................473.5 Venture Capitalists in Japan and the U.S.........................................................493.5.1 Venture Exit to Recoup Investment................................................................553.5.2 Corporate Venture Capitals..........................................................................593.5.3 Angel Investment......................................................................................623.5.4 Crowdfunding..........................................................................................64
3
3.6 System Integration Business in Japan and the U.S.............................................653.6.1 Business Structure in Japan.........................................................................703.6.2 Cloud Computing.....................................................................................723.6.3 Immigration Policy...................................................................................733.7 User Companies in Japan and the U.S............................................................733.8 Education in Japan and the U.S.....................................................................773.8.1 Computer Science.....................................................................................783.8.2 ICT Education.........................................................................................803.8.3 Entrepreneurial Education...........................................................................823.8.4 English Education in Japan..........................................................................823.9 Innovation in Japan and the U.S....................................................................833.10 Mindset in Japan and the U.S.......................................................................853.11 Role of Government in IT/SI business in Japan and the U.S.................................863.11.1 Immigration Policy...................................................................................89
4 Conclusion:...................................................................91Bibliography:...................................................................103
About Author：................................................................112
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Abstract:Japan has suffered from ‘lost two decades’ since its bubble economy burst in early 1990s.
Yet its current economic outlook is bleak. OECD predicted Japan’s real GDP growth would be just
0.7 percent while world economy is expected to grow by 3.5 percent. In order to overcome this
severe situation, it seems wise to bolster the largest industry section in the country first – information
and communication technology (ICT) industry. In 2010, ICT industry accounted for 10.6% in real
GDP, which is considerably larger than the second industry, wholesale. Moreover its direct and
indirect contribution to real GDP has been significant 38 percent in five years from 2004 to 2008.
However prediction of Japan’s ICT industry in near future is not promising. According to
IDC Japan, six year compound annual growth rate (CAGR) of ICT market starting from 2011 will be
mere 0.3 percent. This figure is stunningly lower compared with 5.2 percent projection of IT
spending in U.S in 2013. And domination of U.S. vendors in major profitable area in ICT industry
represented by packaged software does not appear to change sometime soon in Japan.
If we, Japanese, still have an intention to change the situation and make it better, we first
have to recognize the history and tipping point in it, comprehensively analyze the factors which
made the differences between Japanese ICT vendors and the U.S. ones which have dominant share
in major area of ICT, scrutinize status quo in these two countries thoroughly, then finally consider
practical but essential measures based on our own strength and weakness to improve our position in
this competitive global world.
5
In this paper, I would like to focus on software business which is predicted to grow at a
CAGR 3.4 percent in the coming years1 even in this dismal situation of Japan, and especially on
packaged software2 business which has been surprisingly lucrative in the U.S., instead of system
integration or customized software development business which consist of most of Japan’s IT
service business, in order to explore the possibility of revitalizing Japan’s ICT/SW industry and
eventually Japan itself.
1
IDC Japan, “Domestic Software Market,” IDC Japan, 2013, http://www.idcjapan.co.jp/Press/Current/20130417Apr.html.2 Here I define ‘packaged software for business’ as traditional ones like Microsoft Office and Oracle DBMS but also I include ones which have been traditional packaged software form but now are offered in forms of cloud computing. The latter example can be software offered by SalesForce.com.
6
1 Where we stand now:
1.0 Preface
Being a bit exhausted, raising my head at my desk and looking around the office
where I am in, I find myself I am not the only one who are working overtime. In fact, almost
two-thirds of workers are still working there even though it is 10pm already… .
This situation is not unusual in information technology (IT) vendors, especially
software ones in Japan. Some miss the last train since they work even after midnight and take
cabs to go back home in order to come to the office at 9am next morning. Tight schedule,
rigid requests from customers, too many internal reporting, emergent bug fixes, urgent
troubleshootings and so on and so forth from morning to midnight, or worse, from morning to
next morning. Figure 1-0-1 illustrates the example of what I described above in the form of
pictures taken around midnight – sleepless Japanese IT vendors. Pretty bad.
7
Figure 1-0-1 ‘Sleepless’ office buildings of Japanese IT vendors
On the other hand, Figure 1-0-2 is a picture taken at midnight in front of a building of
the most respectful IT company and the largest downloadable application software platform
provider in the world – Apple Inc. That no light was lit inside showed nobody was working
there then.
Figure 1-0-2 Apple building at midnight
In macroeconomic perspective, it does not matter a lot how much or until how late
employees in one industry work, but what matters is how much they earn as a result of
economic activities. There are acute differences between Japan and U.S. in that regard. The
biggest system integrator in Japan, NTT Data, whose headquarter is shown above; net margin
in FY2011 was no more than two percent. Whereas that of the biggest IT vendor, IBM, is well
above fifteen percent.
As long as I know, people working in IT companies in Japan are very diligent and
provide quality work but financial end results of them are considerably poor. On the other
8
hand, in the U.S. workers are said to work more effectively and as a consequence they are
enjoying growth and high profitability from IT businesses.
This paper describes why these differences have appeared in two countries’ history
and argue how we could potentially improve the situation in Japan. For that, it offers overview
and related data of current situation of IT businesses in Japan and U.S. in the first sections.
1.1 Outline of Status Quo: Software Industries in Japan and U.S.
In 2011, estimated size of Japanese domestic software market was 2.15 trillion yen,
approximately 240 billion U.S. dollars3 and its CAGR from 2011 to 2016 is predicted to be
3.2 percent.4 In software industry in Japan 86 % of revenue comes from customized software
development business. (This figure jumps up to 91 % when excluding game software sector.)5
While dependency on custom software development business is crucially high in Japan, its
near future prediction is controversial: almost 60 % of user companies say they will reduce
customized software development, on the other hand 40 % of vendors say the business around
it will increase for a while.6
Unlike in U.S., packaged software sector has been historically weak and as of 2012
its sales revenue accounts for only 7.5% in IT service industries.7 And unlike other industries
in Japan, export of packaged software is insignificant – in 2004 its amount was only $355
million as opposed to $4,051 million of import from overseas.8
3 I converted all dollar figures using 90 yen to a dollar in this paper.4 IDC Japan, “Announcement of Japanese Domestic Market of Software,” IDC Japan, 2012,
http://www.idcjapan.co.jp/Press/Current/20120523Apr.html.5 Ministry of Economy, Trade and Industry (METI), Specified Service Industry Dynamic
Statistics Fiscal 2011, METI, 2012.6 METI, Current Situation of Information Service Industry. METI, 2012.7 Japan Information Technology Service Industry Association, Basic Statistic Research Report
2012, 2012. http://www.jisa.or.jp/statistics/download/basic2012.pdf.8 Tatsuo Tanaka, Selectivity and Productivity of Software in Japanese Companies, 2010.
http://www.rieti.go.jp/jp/publications/dp/10j027.pdf
9
Global presence of Japanese vendors other than Nintendo in the software market is
indiscernible. As an example, in the case of database management system (DBMS) which is
crucial software component in large systems, Fujitsu and Hitachi are two major vendors in
this area in Japan, but combined market share in the global market is only 1.9%. Not even
close to global dominant vendors: Oracle, IBM and Microsoft.
Like in U.S., in Japan cloud computing is a new trend for usage/offer of software and
user companies have high expectation toward it since it could reduce cost and give better
flexibility for their operation and planning of information systems. Prediction of the Japanese
market varies from 190 to 300 billion yen (from $2.1 to $3.3 billion) in 2015. Although many
admit it is a disruptive technology which could change the landscape of software and ICT
industry, its absolute yen amount will be rather small as compared to almost 10 trillion yen
market size of the overall software industry. And the transition from traditional IT system to
cloud computing seems a sort of gradual in Japan.
Japanese government, especially METI, is trying to facilitate ICT policy, but because
their roles and responsibilities are scattered in the silo of METI, Ministry of Internal Affairs
and Communication (MIC) and Ministry of Education, Culture, Sports and Science and
Technology (MEXT), many of the policies laid out by them have appeared less powerful and
effective, historically.
A dismal sign of IT and software industry in Japan is unpopularity among new
college graduates in the country. Out of 20 categorized industries, popularity of ‘IT Service
10
and Software’ sector is positioned as 11th in Japan. But unfortunately its unpopularity rank is
7th among them.9
Although for a long period of time the necessity of investment to startups including
IT ones from institutions especially venture capitals (VCs) has been discussed in Japan, things
have not been improved substantially. In fiscal 2011 (from April 2011 to March 2012),
Japanese venture capital firms made investments of \2,289 billion ($28.7 billion) and it was
just nineteenth part of the amount invested by VCs in the U.S.10 There are not only
quantitative challenges but also qualitative ones as well in Japanese VCs.
In the U.S., software industry, especially packaged software sector, and information
technology itself played huge roles in its modern economic history. The software and related
services sector’s real contribution to GDP exceeded $261 billion and experienced a real
annual growth rate of 14%, compared with a real annual growth rate of two percent of all the
U.S. industries in 2007. Software industry has outpaced the rest of the economy in each year
since 2003 to 2007. In 2008, while the U.S. reported massive $677 billion deficit on
international trade in goods and services, the packaged-software sector contributed an
estimated $36 billion surplus as a top contributor to the trade performance. And it is widely
known IT dramatically improved labor productivity of industries in the U.S. extensively: IT
was responsible for two-thirds of total factor growth of productivity between 1995 and 2002.11
9 Nikkei Human Resources (Nikkei HR), Survey findings on job hunting activities of undergraduate college students and graduate students in Tokyo, Nikkei HR, 2011.http://www.nikkeihr.co.jp/news/news_111213.phpThis research was conducted to the undergraduate college students and graduate students who were going to graduate from their schools in March 2013.
10 Venture Enterprise Center (VEC), The Survey of Venture Capital Investment Trends in Japan for Fiscal Year 2012 (Preliminary), VEC, 2013. http://www.vec.or.jp/wordpress/wp-content/files/The_Survey_of_Venture_Capital_Investment_Trends_in_Japan_for_Fiscal_Year_2012.pdf
11 Business Software Alliance (BSA), Software Industry Facts and Figures. BSA, Year unknown. http://www.bsa.org/country/public%20policy/~/media/files/policy/security/general/sw_factsfigures.ashx
11
Those strong trends have been partially created by venture capitals. They invested
$456 billion into over 27,000 companies during 1970 and 2008 and those venture capital-
backed companies have employed more than 12 million people and generated nearly three
trillion dollars in revenue in 2008.12 HP, Intel, Apple, eBay, Oracle, Adobe, Salesforce.com,
Brocade, Cisco, Yahoo!, Netscape, Google, YouTube, Facebook, Twitter are the ones of the
well-known VC success stories worldwide. Software companies are, contrary to Japan, quite
popular employers in the U.S. Figure 1-1-1 is a table of popularity ranking of companies as
employers among college students in the U.S. and illustrates software companies, led by
Google, attain significant favorability.
12 IHS Global Insight, Inc. Venture Impact (fifth edition), IHS Global Insight, Inc., 2009.http://www.nvca.org/index.php?option=com_docman&task=doc_download&gid=482&Itemid=93
12
2 Historical Analysis of Software Business in Japan and the U.S.
In this chapter, I would like to compare and analyze the historical origin and
background of software business in Japan and the U.S. in order to clarify the root of
difference of status quo stated above. I will analyze two country’s history in two ways. First,
chronological analysis lines up historical events and movements in decades from 1950s.
Second, to explore the difference I compare them on an item by item basis. There are a lot
overlaps of points in those two approaches, but having two different perspectives for this
study should be helpful to make the differences clear.
2.1 Chronological Analysis
Figure 2-1-1 below reconstitutes historical events related to software business in
chronological order.
Age Japan U.S.
13
1950 ・First serviceable computer system using domestically produced mainframe computer which was seat reservation system for Japan National Railway (JNR) and called ‘MARSI’ was developed. Hitachi, as a computer manufacturer, and JNR, as a user and lead project manager collaboratively developed this system.(1959)13
・Roles of development between two parties were as below:13
JNR Hitachi
Decision of program and record specification X
Drafting program specification and flow chart X
Filling program in coding sheet X
Check of flow chart and coding sheet X
Input/compile/debug of coding sheet X
Generation of data for test X
System test X X
Documentation X X
Education of maintenance and operation staff X X
・Back in those days business application system was developed mainly by user companies since 1)there were not enough engineers 2)system integration business and industry were not established 3)the profitability of hardware sales was high 4)lack of engineers in computer manufactures to assign to particular application system13
・Computer system manufactures began to focus on producing the tools for developing application software to user corporations rather than providing application software itself. 14
・IBM supported the formation of users group such as ‘SHARE’ for sharing software routines. This helped user companies favor developing software by themselves rather than buying them.19
・FORTRAN, first higher level language was introduced in 1957 and it improved productivity of programming for in-house development and lessened bottlenecks for it. Adoption of FORTRAN made user companies further favor ‘making’ software in-house rather than ‘buying’ them. 19
13 Hiromichi Ishikawa, Hiroshi Sekikawa, IT Innovations and Transfiguration of System Integration Business, Takasaki Economics University Laboratory, 2008.http://www1.tcue.ac.jp/home1/sanken/pdf/44-1/44-1ishikawasekikawa.pdf
14 W. Edward Steinmueller, The U.S. Software Industry, An Analysis and Interpretive History, Economics of Technical Change Maastricht Economic Research Institute in Innovation and Technology at University of Limburg, The Netherlands,1995.http://www.merit.unu.edu/publications/rmpdf/1995/rm1995-009.pdf
14
1960 ・Information system organizations in user corporations studied how to incorporate their business operations and practices into their information system collaboratively with vendors, and internally developed and operated those system based on the studies.15
・There were not significant number of external system development vendors , if any, those are relatively small. Thus enterprise information system was handled by internal organizations. 18
・Sponsored by Defense Department etc. to develop a ‘common business language’, COBOL was specified in 1960. IBM offered COBOL in 1962 and RPG in 1960 with its less expensive general purpose machines IBM 1401 series.14
・Those higher-level languages supported productivity gains and blunted demand for external programming services in developing software in user companies. 14
・Software companies had little contact with non-governmental customers and suffered in marketing. (~1965) 19
・Software procurement from external vendors were less than 10% among user companies. (late 1960s) 19
・Stanford University established Computer Science Department in its School of Engineering. (1965) 16 The School of Engineering was founded in 1925, and engineers graduated from it fostered the development of the technology industry in California, and helped found more than 800 companies. 17
1970 ・Movement arose to spin off information system organization and set up
・Independent software vendors (ISVs) improved their position based on below
15 KPMG, Challenges and Required Functions for Modern Information System Organizations, KPMG, 2011.http://fas-group.kpmg.or.jp/knowledge/fas-group-newsletter/2011/__icsFiles/afieldfile/2012/12/06/201109_bps.pdf
16 Stanford Computer Science, “Department Overview,” Stanford University, http://www-cs.stanford.edu/info.
17 Stanford Engineering, “History”, Stanford University, http://engineering.stanford.edu/about/history.
15
subsidiaries mainly in banks. Facing a lack of engineers to develop online system, it was hard for banks to employ them as bankers due to restriction for labor management. And the regulation to banks prohibited them from expanding their business fields to information services. Therefore they set up information system service subsidiaries and let them operate banking operations.18
・Unbundling sales of software and hardware by computer manufacturers (1977 -lagging ten years behind IBM)19
・After the unbundling, tendency and trend of computer manufactures to develop software for user companies, especially ones in keiretsu family, rose up. Transactions within keiretsu group were less profitable but less risky.18
・Computer makers choose low profit but secure business in the ‘keiretsu’ family as opposed to more risky but potentially high profit software development. They did not have much motivation to take risk or have little choice under their keiretsu parents. 18
three factors. (1970s) 19 ・Unbundling sales of software and
hardware by IBM (1969) ・IBM System/360 family released in
1964 unified operating system and it promoted development of software applications.
・Development of minicomputer industry led by vendors like DEC.
・Began experiencing significant problems in in-house software development, programming and maintenance. 19
・Programmers tried to system complicated to shelter their positions
・too complex to set meaningful KPI・hard to specify large software systems
properly・disappointment with quality・getting too political to handle those
issues
1980 ・General companies other than banks actively began to set up information system subsidiaries as a form of
・Emergence of mass packaged software market for personal computers. Three largest vendors: Lotus, Microsoft,
18 Hitoshi Kogure, “Spin-Off and Outsourcing Information System Organization,” Hitoshi Kogure, 2013, http://www.kogures.com/hitoshi/opinion/bumon-outsourcing/index.html.
19 Robert E. Cole, Shinya Fushimi, An evolutionary and comparative perspective of Japanese Enterprise Software Industry, Haas School of Business, UC, Berkeley, Mitsubishi Electric Corporation, 2009.http://www.haas.berkeley.edu/groups/online_marketing/facultyCV/cole_robert_evolutionary_perspective.pdf
16
diversification. It was a win-win situation for parents companies who can spin off IT operation as a non-core business and for new subsidiaries which can have a stable customer which is a parent of them, and earn revenue externally, and exert expertise of themselves.20
・Need for utilizing strategic information system, SIS, made user companies not only systemize existing business operation but also begin outsourcing their IT tasks to system integrators and external consultants.20
・Development of information system tended to be larger and human resource for them came to insufficient. As a result user companies began to acquire external engineers and in case of sub systems they undertook outsourcing whole development to third parties. 20
AshtonTale (database) 14
・Rapid growth of sales of application software for Sun Microsystems workstations (UNIX base). 14
・Problems in in-house software development had been recurring14
・Many companies discovered investment in in-house system development was waste of resource
・Need to focus on companies’ core business
・Growing challenge to catch up with the pace of technological changeRise of movement from in-house
information system development to external procurement
・Computer Science Corporation(CSC), EDS and big accountancy firms moved into large system integration services. Especially EDS provided comprehensive services to user companies. 19
1990 ・User companies tried to curtail cost due to recession after the burst of bubble economy in 1991.21
・User companies were influenced by cost cutback effect of outsourcing contract between IBM and Eastman Kodak Company in 1989 (so-called ‘the Kodak Effect’)20
・Across-the-board outsourcing of
・Global deployment of packages software grown rapidly and independent and system software producers in US gained very large market share. 14
・US : 88% ・Japan : 60%
(Market size is just one quarter that of the U.S. and Europe）
20 Yano Research Institute, Research on Strategic Aspects of Information System Subsidiaries, Yano Research Institute, 2007. http://www.yano.co.jp/press/pdf/267.pdf
21 Wikipedia, “System Integrator,” Wikimedia Foundation, 2013, http://ja.wikipedia.org/wiki/%E3%82%B7%E3%82%B9%E3%83%86%E3%83%A0%E3%82%A4%E3%83%B3%E3%83%86%E3%82%B0%E3%83%AC%E3%83%BC%E3%82%BF%E3%83%BC.
17
information system related works to external specialized vendors came to be recognized reasonable by large number of user companies and based on the concept information system organization as a back-office section remote from manufacturing and sales sections were spun off and made into subsidiaries.19
・In the trend of shifting from SIS to BPR(Business Process Reengineering), information system organizations themselves were required to pursue effectiveness. The notion that for general companies information system operations and tasks were not their core business field and non-core business have to be essentially streamlined become wide spread. As a consequence in their information system organizations in headquarter there remained minimal personnel to be able to operate and maintain those systems and functionalities to coordinate with system integration vendors. And operations subsequent to design and development were spun off from headquarter.14
・Europe : 60%・The most obvious explanation for the
international competitive position of U.S. companies could be as follows: 14
・First mover advantage.・Early adoption by U.S. user
companies. (In Japan and Europe, rate of utilization have historically lagged behind.)）
・Support for basic and applied research in software by DARPA etc.
・Government R&D policy・The early development of computer
science education in U.S. universities
・The linking of personal computers into extensive networks, partially promoted by network operation system vendor Novell.
Figure 2-1-1 Japan/U.S. chronological IT history analysis table
18
2.2 Item Analysis
Figure 2-2-1 shows comparisons of history of Software business, summarized by
events and perspectives.
Perspectivesand Events
Japan U.S.
Origin of Computer Industry
Formation of three computer manufacturers: Fujitsu, NEC and Hitachi (mid- to late 1950s).
Military and scientific activities (during and immediately after World War Two).
Interest turned towards business objectives. (1950s)
Computer Science Education
Computer science department exists only in Tokyo University of Technology. (as of 2010)22
Stanford University established Computer Science Department in its School of Engineering. (1965) 23
At Stanford, The School of Engineering was founded in 1925, and engineers graduated from it fostered the development of the technology industry in California, and helped found more than 800 companies. 24
Dawn of mainframe era
Release of the IBM 360/370 series. (1964)Its product architecture became global industry’s de facto.
Unbundling software and hardware
Following IBM, vendors unbundled software from hardware. (1977)
From a fear of anti-trust action by the U.S. Dept. of Justice, IBM unbundled software from hardware pricing. (1968)
Software as User firms spun off their MIS Initially computer vendors provided
22 Wikipedia, “Computer Science Department,” Wikimedia Foundation, 2012, http://ja.wikipedia.org/wiki/%E3%82%B3%E3%83%B3%E3%83%94%E3%83%A5%E3%83%BC%E3%82%BF%E3%82%B5%E3%82%A4%E3%82%A8%E3%83%B3%E3%82%B9%E5%AD%A6%E9%83%A8.
23 Stanford Computer Science, “Department Overview,” Stanford University, http://www-cs.stanford.edu/info.
24 Stanford Engineering, “History,” Stanford University, http://engineering.stanford.edu/about/history.
19
business (management information system) divisions due to their expensive cost. (1970)
Those subsidiaries developed software for parent companies.
Computer vendors turned software development organizations into either internal divisions or spun-off subsidiaries.
All above stream formed ‘vertical markets’ including computer vendors, software development entities and user firms.
Based on the relationship of keiretsu, those customized software development businesses were low-risk, low-return.
application development tool for user companies.
User companies developed their own software using those tools. (1960s)
Independent software vendors (ISV) started to manufacture software to market to broad user companies. (1965-1970)
Role of government
Government officials had not be able to predict paradigm changes caused by IT.25
Wasted 25 million yen in ‘Project Sigma’. Originally to improve the situation then where engineers was short for requirement of the industry by providing infrastructure usable freely by software developers, but went nowhere without any achievements. (early 1980s)25
MITI (Ministry of International Trade and Industry, former
Support for basic and applied research in software by DARPA etc.
Government R&D policy generated first mover advantages in global market.
25 Tomo Matsubara, “The Root Cause of Decline in Japan’s Software Industries,” NikkeiBP, 2007. http://itpro.nikkeibp.co.jp/article/COLUMN/20070306/264055/
20
METI) sponsored multiple alliances between Japanese and non-IBM U.S. computer manufactures to compete against IBM but this led Japanese market highly fragmented in terms of operating system.26
Origin of ‘system integration’business
In IBM mainframe era, computer/software vendors provided custom application system at/after the time of delivery of hardware. Following the initial delivery, they offered maintenance, administration and upgrades service to end user companies.
They came to be called ‘system integrator’. (1990s)
Mainframe systems became complex. (1980s)
User company’s internal development capability including one to catch up with then-latest technology became controversial.
Computer Sciences Corporation (CSC), EDS, big accountancy firms began to offer system integration services.
Rise of Open Architecture
Open architecture software represented by Sun Microsystems’ object-oriented software, JAVA, started to penetrate in the market. (early 2000s)
Acceleration of adoption of open-source software (OSS) like Linux, Apache, PostgresSQL.
Provided wide variety of software and compatible hardware, made system integrators hard to ‘enclose’ customers by vertically integrating systems. This phenomenon generated severe competition in the market.
Figure 2-2-1 Japan/U.S. IT itemized analysis table
2.3 Venture Capital History
In the U.S. IT industry, the existence of venture capitals and investment from them
have been literally a crucial factor in its dynamic history. Venture-backed employment share
in industries such as software, telecommunications, semiconductors, networking/equipment
26 Rieko Mashima, The Turning Point For Japanese Software Companies: Can They Compete In The Prepackaged Software Market?, Berkeley Technology Law Journal, Date unknown.
21
and electronics/instrumentation are 81%, 74%, 74%, 59% and 51%, respectively. Their
strategy to invest in early stage, high risk, high potential, innovative venture companies in
which both the potential for great profit and the risk of complete loss are considerable has
worked for decades.27
In Japan, there also are companies which have been backed by VCs and went public
and exist at present like Capcom, DISCO, ROHM, Internet Initiative Japan (IIJ), Lifenet
Insurance Company, but their contributions and impacts to society are rather smaller than
those in the U.S.
To trace the root of the differences in the two countries, in this section I compare
their history of venture capital industry.
In the U.S. first VC fund, American Research Development Company, was formed in
1946 by Georges Doriot. It had a big hit with its $70,000 investment in 1957 in DEC which
went public in 1968 with a market capitalization of $335 million.29
In 1958 VC industry has jumped by the passage of Small Business Investment Act of
1958 which officially allowed the Small Business Administration (SBA) to license private
Small Business Investment Companies (SBICs) to help with financing and managing small
entrepreneurial businesses for addressing a major gap existed in the capital markets for long-
term funding for growth-oriented small businesses. Additionally, it was a countermeasure to
foster entrepreneurial and technological companies to compete with the Soviet Union in the
midst of the Cold War. The SBIC program had its highest ever year in 2010 and the program
27 IHS Global Insight, Inc, Venture Impact (fifth edition), NVCA, 2009. http://www.nvca.org/index.php?option=com_docman&task=doc_download&gid=482&Itemid=93
22
and the original SBIC vehicle founded in 1958 are still alive and healthy and continue to
license and contribute capital to SBIC funds.28
In the 1960s VC firms began to organize limited partners who acted passively in
funds to hold investments in which the investment professionals served as general partners. 29
And during this period private equity funds including VC funds adopted a compensation
structure generally called ‘2 and 20’ which is widely in use even today, in which limited
partners pay an annual management fee of around two percent and an around twenty percent
of carried interest or ‘carry’ which is a share of the realized profits of the fund to general
partners.
It was not until 1978 that VC experienced major expansion. The US Labor
Department relaxed certain of the Employment Retirement Income Security Act (ERISA)
restrictions, under the ‘prudent man rule’ thus allowing corporate pension funds to invest in
the asset class and providing a major source of capital available to VCs.29
From 1970 to 2008, total venture investment amounted to $456 billion and number of
companies invested by VCs accumulated over 27,000.27
In 2010, there were 462 VCs actively involved in investment and $176 billion
managed capital with 1183 funds in the U.S.29
In Japan, first VC, Kyoto Enterprise Development, was born as late as a quarter-
century after American Research Development Company was formed, in 1972. After this,
eight VCs including the current largest VC, JAFCO, were established mainly triggered by
liberalization of rules for initial public offerings on the Over-The-Counter (OTC) market
28 Wikipedia, “Small Business Administration,” Wikimedia Foundation, 2013, http://en.wikipedia.org/wiki/Small_Business_Administration.
29 Dan Siciliano, Venture Capital An Overview, Rock Center for Corporate Governance, 2013.
23
(later renamed JASDAQ OTC market). This was called as ‘First VC Boom‘ in the VC
industry in Japan.30
Second boom appeared after first investment partnership was formed in 1982 and
sixty plus VCs were established in that period. While the investment partnership was modeled
after limited partnerships in the U.S., there were not governing laws regarding it. Then they
maneuvered a framework of ‘voluntary partnership’ in Civil Code to get it closer to the U.S.
version of limited partnerships, but still they had problems that it did not guarantee limited
liability of the partnerships.30 It was not until 1998 that Japanese government put LPS law into
effect and limited liabilities of limited partnerships which resulted in facilitation of money
inflow to venture businesses by those partnerships.31
In 1990s, after the economy bubble burst and in the sluggish economy, businesses of
startups and activities of VCs became stagnant. The government implemented assistance
measures and new stock exchange markets for startup companies were established: in 1999
Mothers (Market of the High-Growth and Emerging Stocks) and in 2000 NASDAQ Japan.
They aimed at making it easier and faster for emerging companies to conduct initial public
offerings. JASDAQ OTC also relaxed its rigid initial listing requirements. During this period
Softbank group, Hikari Tsushin, U.S. based VCs and trading companies entered in this
VC/VB market and sought investment opportunities.32
30 Mitsumasa Murase. Venture Capitals in Japan – Evolving Business Model. JAFCO, 2001. http://www.21ppi.org/pdf/thesis/011212_21.pdf
31 Wikipedia, “Act on Limited Liability Partnership Conducting Investment Business,” Wikimedia Foundation, 2013, http://ja.wikipedia.org/wiki/%E6%8A%95%E8%B3%87%E4%BA%8B%E6%A5%AD%E6%9C%89%E9%99%90%E8%B2%AC%E4%BB%BB%E7%B5%84%E5%90%88%E5%A5%91%E7%B4%84%E3%81%AB%E9%96%A2%E3%81%99%E3%82%8B%E6%B3%95%E5%BE%8B.
32 Mika Kaneyuki, Brief summary of Japanese venture capital industry, 2002. http://www.venturevaluation.com/vv_web/files/Japanese_VC_market_0.pdf
24
At present there are approximately 200 VCs in Japan, and similarly to the U.S. where
top 10 firms raising 69% of funds, top 20 VCs’ investment accounts for over 80% of all.33 As
mentioned in the preceding chapter, in fiscal 2011 (from April 2011 to March 2012) venture
capital firms made investments of \2,289 billion ($28.7 billion) and it was just nineteenth part
of the amount invested by VCs in the U.S.34
Historically there are not only financial but also several structural challenges in VC
industry in Japan as argued in Kenichi Ohta’s dissertation.35 I will refer to those issues in a
subsequent VC related chapter.
2.4 Historical Analysis Summary
Japan has over half-century history of computer system but it is less dynamic and
short in individual areas when compared to that of the U.S. First, there were computer
vendors which NTT had ‘fed’, but they could not significantly succeed in global market
especially in packaged software arena because they stuck to low-risk/low-return custom
software development business, so-called ‘vertical integration’, particularly in keiretsu (cross-
shareholdings) family since the unbundling of software and hardware of IBM mainframe
computers in 1970s. The same applied to IT subsidiaries of user companies including banks.
User companies have been lacking knowledge and understanding of importance of IT, thus
some of them spun off IT organizations. Majority of user companies left customized system
development tasks to system integrators, did not assign CIOs, not leverage best practice of
33 METI, Survey on the Infrastructure for Construction of Database of Investment Trend, METI, 2008. http://www.meti.go.jp/policy/newbusiness/vcdb.pdf
34 Venture Enterprise Center (VEC), The Survey of Venture Capital Investment Trends in Japan for Fiscal Year 2012 (Preliminary), VEC, 2013. http://www.vec.or.jp/wordpress/wp-content/files/The_Survey_of_Venture_Capital_Investment_Trends_in_Japan_for_Fiscal_Year_2012.pdf
35 Kenichi Ohta, Industrial Structure Adjustment and Fostering Venture Business. Mizuho Capital, 2011. http://www.nikkeicho.or.jp/50thsympo/essay_pdf/Oota.pdf
25
packaged software and reduce cost by developing information system from scratch. And
overall, then they did not utilize IT well to improve their productivity. Supposedly the
characteristic of Japanese to put great emphasis on details kept user companies preferred
custom software based on their existing business practice and operations. Customized
software for corporate users accounted for no fewer than 85% of total software market (2007)
and conversely the packaged software is mere 15% (2011) in Japan.36
IT education, especially computer science, did not take off while in the U.S. it was
widely available from 1960s. Venture capitals have not been a vital player in Japan’s IT
business world. Contrary to U.S. ones, they could not have affluent funding from corporate
pension funds. They are not seasoned and experienced like U.S. venture capitalists who come
from successful startups, have MBAs, have deep knowledge and experience of business
operation in certain areas. As a result, a size of total VC funds has been one twentieth of the
one in the U.S. for a long period of time. Japanese government, especially represented by
METI has been somewhat not assertive and consequently incoherent for this matter. For
example, in early 1960s MITI organized multiple alliances of Japanese mainframe
manufactures to catch up with U.S. competitors, notably IBM, but it lead to a silo of operating
systems (OS) and ‘lock-in’ of their customers into vertically developed systems due to the
incompatibility of the OS which arguably made them less motivated for manufacturing
globally competitive packaged software which could have worked on unified OS.19
This might be just a truism, but the U.S. has a longer history of IT, software and
ecosystem around them than the one in Japan. We are not necessarily able to judge it as better
if it is longer, but as we saw in the chronological analysis obviously it has a long and dynamic
36 Japan Electronics & Information Technology Industries Association (JEITA), Year 2011 Software and Solution Service Market Size Research Findings, JEITA, 2012.http://home.jeita.or.jp/cgi-bin/page/detail.cgi?n=424&ca=1
26
history. We can reasonably assume the severe competitions for survival in the industry in the
U.S. for several decades eventually had generated global competitiveness in the areas such as
mainframe computer, network, PC and enterprise packaged software.
A series of events related to competition for survival in the industries in the U.S. have
been as follows: first, in 1950s and 60s user companies preferred software developed in-house
with mainframe computers because of the existence of users groups to exchange software
components and introduction of high level languages whose developments were partially
sponsored by government (especially Defense Department). Therefore main demands in the
software industry were customized software developed by in-house system engineer on the
mainframe computers, and thus software provided by ISVs had had difficulties in marketing
in 1960s. From 1970s to 1980s user companies experienced problems due to complexity of
application systems they developed in-house. Consequently they sought for external software
coming as a form of packaged software from ISVs and system integration offers from system
integrators. ISVs gradually had gained their position through the occurrences like unbundling
of software and hardware sales of mainframe computers by IBM, the release of unified IBM
operation system of its mainframe product family, the emergence of market of minicomputer
and personal computer and the technology advancement in network arena represented by
LAN to connect PCs and computers. ISVs had grown their business over the years and usage
of packaged software had become principal way (78%) to develop enterprise information
system, which meant they defeated their competitors (in-house system
development/developer) and upturned their market share in the industry. And since around
early 1990s, eventually the U.S. software vendors have enjoyed their significantly high
market share in the global market. This huge success in software industry was partially
27
accounted by abundant funds flowed into innovative companies like Oracle and Adobe from
venture capitals which had existed in the U.S. since 1946.
28
3 Current Situation of Software Business in Japan and the U.S.:
In preceding chapter, I focused on history aspect; in this chapter I will clarify current
situation of software business and perspectives around it. Things are not simple at all, there
are eleven areas I categorized: profitability of the IT business, package software market,
popularity of the industry, startups, venture capitals, system integration business, user
companies, education, innovation, mindset and government roles.
3.1 Profitability of Software Business in Japan and the U.S.
One of the main goals of business is earning profit. Two important aspects regarding
it: one is that the larger, the better. But the other one is that the larger in comparison with sales
revenue, the better because it means stability and efficiency of the business. The latter is
called profitability and there is a striking difference with the regard between in companies in
Japan and the U.S.
Figure 3-1-1, a table of sales revenue, net income and net margin over sales revenue,
shows the rough image of profitability of IT business in both countries. Among those top level
vendors the average profitability ratio (Japan vs. U.S.) of packaged software vendors is 1 : 2,
of system integrators is 1 : 3.3, of total IT vendors is 1 : 11. Because those vendors I picked
are sample and the number of them is small, those ratios are just to give rough image.
Yet it is clear Japanese IT companies’ profitability is significantly lower than that of
U.S. companies’. Since over ninety percent (game section exclusive) of software sales
revenue is generated from customized software development business in Japan, low
profitability of system integration business has a comparative problem. METI claims its cause
is the industry sector’s ‘pyramid-like multi layer structure’ which I will address in chapter 3-
29
6-1 and less scalability of the business whose output is basically proportional to the number of
human resource input.37
Based on the historical analysis in the preceding chapter, I claim that IT and software
companies or subsidiaries which were spun off from parents companies from 1970s in Japan
have been in a challenging position to charge higher fee for whatever they serve for their
customers especially for their parent companies because of their subordinate nature. And that
tough position unfortunately might have spread across the industry because those companies
could did their sales activities to outside keiretsu family and had to compete each other.
Cultural explanation could be applied here. In Japan, respect to technology and jobs
related to IT is supposedly less than in the U.S. And there is a mental constitution based on a
cliché: the customer is king. Those could lead the price tag of their works lower. From cost
perspective, there is possibility that Japanese put too much time and effort in quality of
software. According to Michael A. Cusmano, quality of Japanese software was 20 times better
than that of the U.S.38 That could make net margin of software sold in Japan lower if they
spend too much time and effort in their offering. Although the price and cost analysis of
software are remarkably difficult because software vary on project by project, product by
product and other lots of conditions, I suspect Japanese IT and software vendors have been
good at pricing on their offering. I expect future scientific and comparative study on this
matter.
37 METI, Information Related Policy Fiscal 2008, METI, 2008. http://www.ipa.go.jp/about/news/event/ipax2008/pdf/IPAX2008_OSC1_yahiro.pdf
38 Michael A. Cusmano, Software Development Worldwide The State of the Practice, IEEE Software, 2003.
30
3.2 Package Software Business in Japan and the U.S.
In Japan revenue from package software excluding game sector was $6.7 billion and
accounts for only 9.3% of overall software industry. (Note the figure arguably comes from
the revenue of package software developed by companies especially ISVs.) In the U.S., its
figure is $145 billion [Figure 3-2-1] and the ratio in its software industry was said to be from
60% to 70%.39 [Figure 3-2-2]
Figure 3-2-1 U.S. Packaged Software Industry Revenues 1999 to 2009
39 Tatsuo Tanaka, Selectivity and Productivity of Software in Japanese Companies, Economy Industry Laboratory, 2010. http://www.rieti.go.jp/jp/publications/dp/10j027.pdf
31
U.S. Packaged Software Industry
Revenues1999 to 2009
(NAICS)144.6
151.7142.8
130.7
112.3104.7
94.3102 105.5 103.5
119.9
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009(P)
$Bill
ions
Source: Census Service Annual Survey
Figure 3-2-2 Ratio of Sales Revenue: Package vs. Customized Software
Those data suggest that Japan versus U.S. ratio of packaged software industry is
about 1 : 22. According to BSA40, spending for packaged software in 2008 as a worldwide
ratio is Japan: 7% and the U.S. 46%, then the two countries’ comparative ratio is 1 : 6.6.
[Figure 3-2-3]
Figure 3-2-3 Worldwide Spending, Packages Software – 2008
40 http://www.bsa.org/country/public%20policy/~/media/files/policy/security/general/sw_factsfigures.ashx
32
For comparison, Japan versus U.S. ratio of IT service market worldwide is 9% : 41%,
to simply put it is 1 : 4.6. Therefore, based on the overall IT market size comparison (1 :
4.6), we can say that Japan use packaged software lesser (1 : 6.6), but more importantly they
create it much lesser (1 : 22).
This situation can be perfectly explained by the imbalance of import and export of
packaged software: in Japan in 2004 export amount of software was only $355 million as
opposed to $4,051 million importing from overseas.8 41 [Figure 3-2-4]
Sources: JISA, Unit: Million yen, Blue: Import, Red: Export
Figure 3-2-4 Japan’s Import and Export Amount of Software
Imbalance in the U.S. appears in the opposite way: in 2009 export amount of
packaged software was $2,631 million as opposed to mere $344 million for importing from
overseas.42 [Figure 3-2-5]
41 I assume almost all amounts are about packaged software since customize software is crucially hard to import and export.
42 Tim Miles, Software and IT Services Industry Data, OTEC, 2010.
33
Figure 3-2-5 U.S Packaged Software Trade (Balance) 2000 to 2009 (HTS)
As we can see from Figure 3-1-1, net margin of packaged software business is much
higher (in my samples almost twice), situation in which they depend heavily on custom
software business is constitutionally a big problem in Japan. This problem is well
recognized there and several papers from METI have pointed out this issue but I have not
seen governmental initiatives directly address on this matter.
According to Tatsuo Tanaka’s study on selectivity of packaged software versus
customized one8, heavy dependency on custom software in Japanese companies can be
explained by the tendency of Japanese companies to leverage their own know-how to
keep/enhance competitiveness nurtured with the long-term employment system. On the
other hand, since competitiveness of the U.S. companies lay in the flexibility of human
resource among organizations in companies and among enterprises, the U.S. companies have
34
U.S. Packaged Software Trade
2000 to 2009 (HTS)
0
500
1000
1500
2000
2500
3000
3500
$ M
illio
ns
Exports 2728 2249 2069 1795 1795 2062 2059 2674 2979 2631Imports 804 712 700 801 926 908 679 586 453 344Trade Balance 1924 1537 1369 994 869 1154 1380 2088 2526 2287
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: USITC
chosen packaged software to reduce cost and lead time of deployment at the expense of the
usability of software.
Above analysis seems reasonable from user companies’ side, yet I would like to add
conceivable reasons which have led Japan way behind of the U.S. competitors in the
packaged software market: mindset to seek opportunities in global market, the lack of
international human resource who are able in languages such as English and understand
global IT market and actual business operation of multinational companies, the lack of
understanding of information technology business which led user companies to spin-off IT
organizations which eventually brought up high dependency of user companies on system
integrators especially those in keiretsu family, the lack of motivation in computer
manufactures and system integrators to develop globally competitive software and proper
evaluation system associate with it, little number of emerged software venture companies
due to the lack of VC money, the lack of entrepreneurial education, the lack of computer
science education and so on and so forth.
Those points are covered in this chapter but I listed them in this section because this
disadvantageous situation of Japanese IT vendors in packaged software market might be
disruptive when user companies begin fully shifting their information system to cloud
computing. We may not be seeing the full picture of cloud computing yet, it is natural for
providers of cloud service to try to lock their customers in their cloud and make it hard to get
out from them. If Japanese vendors do not have applications or middleware which are now
offered as packaged software, then when that time comes they could be vendors to offer just
place (e.g. datacenter) to host customer’s cloud system and help them move customers’
current system to the U.S. competitors’ cloud as system integration work. The whole point of
this paper is for Japanese vendors to avoid the possible dismal situation.
35
3.2.1 Software Companies in Silicon Valley
As discussed in the preceding section, the U.S. software companies are dominant in
Japanese market and actually dominate the global market. [Figure 3-2-1-1] Although some of
the best software company’s headquarters locate in New York (e.g. IBM), Washington (e.g.
Microsoft) etc, most of them are located in Silicon Valley. This can be partially explained by
the concentration of VCs and investment by them in Silicon Valley. Data from NVCA and
IHS also shows California is way ahead in revenue and employment of venture-backed
companies.12
Sources: Shinya Fushimi, Mitsubishi Electric Corporation, ‘Why Only Nintendo?’, 2008
[Figure 3-2-1-1] Global Software Product Market
Figure 3-2-1-2 is a list of top twenty-five software companies in Silicon Valley in
terms of revenue. With it, in relation to problems raised in the last sector, I would like to
suggest two points.
First, the total revenue over four quarters as reported by those companies was $128
billion dollars, equals to \11.5 trillion. Suppose that creating truly successful and lucrative B
to C companies is extremely selective (i.e. Google), and middleware (i.e. Oracle DBMS) is
36
highly technology-intensive to catch up with for Japanese companies, still B to B application
seems technically developable area for them based on the facts that most of them have been
developed and marketed in Japan. If there were an equivalent of Silicon Valley ecosystem in
Japan and if those B to B application companies generated by it have created revenue like
described above, the impact to GDP would not be negligible given that GDP growth will be
below one percent in a coming couple of years.43 If excluded those B to C application and B
to B middleware company’s revenue, it adds up to $35 billion and that would account for
about 0.6% of Japan’s GDP in recent years.
3.2.2 Cloud Computing
Second, the rise of cloud computing and vendors related to it.
Like in U.S., in Japan cloud computing is a new trend for usage/offer of software and
user companies have high expectation toward it since it could reduce cost and give better
flexibility for their operation and planning of their information systems. Predictions of the
Japanese market size vary from 190 to 300 billion yen (from $2.1 to $3.3 billion) in 2015.
Although many admit it is a disruptive technology which could change the landscape of
software and ICT industry, its absolute yen amount will be rather small as compared to almost
10 trillion yen market size of the overall software industry. And the transition from traditional
IT system to new cloud computing seems a sort of gradual in Japan. And the definition of
cloud computing itself is somewhat cloudy in the market and software vendors are shifting
their packaged software product to cloud application service with careful consideration for not
lowering existing revenue.
However in the U.S., by taking a look at Figure 3-2-1-1, some B to B companies such
as Citrix, Ariba and NetSuite already have their main business domain in cloud computing.
43 OECD, 11/2012
37
And continuously middleware like Oracle and VMware are and will be crucial part in cloud
based system because anyway they are needed in systems and computers.
Japanese vendors do not have strong presence in global software market as of now
but they could go worse if they stick on to system integration/custom software development
business model.
With those above two points in preceding two sections, from Japan’s perspective,
trends and movements of global software companies should be carefully observed over years
and have to be recognized as a possible chance and risk. Desirably Japanese vendors should
take steps ahead of global competitors.
3.3 Popularity of IT/SW Companies as Employer in Japan and the U.S.
Among many challenges Japan has now, one of the most problematic issues is less
popularity and what is even worse, unpopularity of IT and software jobs among new college
graduates in the country. Since Japanese companies conventionally recruit recent graduates
from universities, colleges and professional schools, the popularity of companies and
industries by the fresh graduates is vital for their competitiveness.
Figure 1-1-1 illustrates favorability of companies among college students in the U.S.
and Japan. There we can see IT companies especially software ones like Google, Microsoft,
Facebook and Amazon attain significant popularity in the U.S. Since attractiveness of an
industry as a whole means they can easily recruit good talents in the labor market, Japan
which relatively has less favorability (only Nintendo and Google in top 20) over software
companies has a serious disadvantage in that regard.
In Japan, the industry is said to be ‘3K’ which represents ‘kitsui’ (tough), ‘kaerenai’
(can’t go back home [early]), ‘kyuryo-yasui’ (low-paid). In the U.S., especially in Silicon
38
Valley, things appear to be almost opposite: people work casually/informally (no kitsui), going
home early (no kaerenai – but some exceptions in startup companies) and high-paid (no
kyuryo-yasui - Figure 3-3-1 illustrates the pay for workers in software and related services
sector in the U.S. is nearly twice the national average)
[Figure 3-3-1] Pay for workers in software and related services sector in the U.S.
By examining 3K of Japan closely, we find out kyuryo-yasui is a misconception.44
According to the interviews with engineers who had been engaged in software industry and to
my own experiences, the other two might be true on project by project. Those two are rooted
in the industry’s structure that 1. over 90 percent of the business in this industry is custom
software development based on the customer’s rigid requests and 2. culturally customers are
‘superior’ to vendors and vendors have to some extent to ‘obey’ to them and 3. as we can see
in Historical Analysis chapter many user companies lack IT literacy and capability and 4.
consequently vendors have to accept (to some extent) customer’s unsophisticated requests
thus 5. IT job is kitsui and kaerenai. And what makes the job condition worse is the industry’s
notorious pyramid-like layers of software vendors. Although details are discussed in later
44 Hiroshi Masai. “Examine 3K Theory of IT Engineers.” ASCII. 2011. http://ascii.jp/elem/000/000/587/587632/.
39
section, as argued by Hiroshi Masai in his article44, about from 400,000 to 650,000 workers in
low layers might have been deprived motivation in working and even in living by being stuck
in tough, repetitive (i.e. testing) and low-paid jobs.
The reasons I believe why in the U.S. technology jobs are popular are: high-pay
backed up by the high-profitability, influential and respectable image which can be
represented by the engineer/founder of companies such as Bill Gates, Mark Zuckerberg, Jack
Dorsey, Drew Houston etc. who frequently show up in the list like ‘The World's 100 Most
Influential People’ in Time Magagine. Those companies do not produce custom software – all
of them provide packaged or cloud-based software worldwide.
3.4 Entrepreneurship in Japan and the U.S.
Why entrepreneurship and entrepreneurs are important especially in advanced
countries like Japan and the U.S.? A professor in Stanford University, Richard B. Dasher,
claims in two ways: 1. advanced economies depend more on innovation in order to maintain
higher wage levels 2. advanced economies need some radical new ideas in order to have
sufficiently broad innovation pipelines.45
In Japan, the low number of entrepreneurs has been discussed over decades and it
sure is a problem. As shown in Figure 3-4-1 it has the lowest TEA (Total Entrepreneurial
Activity) score among major countries sampled by Global Entrepreneurship Monitor (GEM)
which has the largest sample to date for entrepreneurial survey.
45 Richard B. Dasher, Asia Entrepreneurship… Why ASES?, ASES, 2012.
40
Figure 3-4-1 TEA in Japan and the U.S.46
The U.S. is well-known its entrepreneurial society and culture and most of all great
companies established by entrepreneurial founders such as Nike by Phil Knight. As opposed
to its general image, TEA of the U.S. is not necessarily very high in the world as illustrated in
Figure 3-4-1. Therefore, stepping away from qualitative issues, I would like to examine
differences of entrepreneurship in these two countries quantitatively and conjecture the
reasons behind them.
Figure 3-4-2 is the TEA score of two countries over the past five years. The definition
of TEA by GEM is ‘percentage of 18-64 population who are either a nascent entrepreneur or
46 GEM, “Key Indicator,” GEM, http://www.gemconsortium.org/key-indicators
41
owner-manager of a new business’. Regardless of financial crisis started from 2008, there has
been constantly approximately two to three times difference between two.
Country 2008 2009 2010 2011 2012
Japan 5.4 3.3 3.3 5.2 4
US 10.8 8 7.6 12.3 12.8
Ratio U/J 2.0 2.4 2.3 2.4 3.2
Figure 3-4-2 TEA score of two countries over the past five years
Figure 3-4-3 is the New Business Ownership Rate of two countries over the past five
years. The definition of it by GEM is ‘Percentage of 18-64 population who are currently a
owner-manager of a new business, i.e., owning and managing a running business that has
paid salaries, wages, or any other payments to the owners for more than three months, but not
more than 42 months’. The data is consistent with TEA which showed two to three times
difference in two countries but the ratio is slightly smaller than those of TEA. The difference
of the definition of TEA and New Business Ownership Rate is inclusion/exclusion of nascent
entrepreneur and length of running business. Suppose there are higher rate of failure in the
U.S., we could say there are higher economic ‘metabolism’ there.
Country 2008 2009 2010 2011 2012
Japan 2.3 1.3 1.8 2 1.7
US 5.0 3.2 2.8 4.3 4.1
Ratio U/J 2.2 2.5 1.6 2.2 2.4
Figure 3-4-3 New Business Ownership Rate of two countries over the past five years
When it comes down to Established Business Ownership Rate, the rate difference
gets much closer as shown in Figure 3-4-4. The definition of it by GEM is ‘Percentage of 18-
42
64 population who are currently owner-manager of an established business, i.e., owning and
managing a running business that has paid salaries, wages, or any other payments to the
owners for more than 42 months’. This is an interesting data which has not been observed
much in Japan. High metabolism theory could be applied to this, but further studies are
needed for this matter47. Nevertheless, what matters practically can be impact of companies
created by entrepreneurs in (global) society as shown in the preceding chapter 2-1.
Country 2008 2009 2010 2011 2012
Japan 7.9 7.8 7.4 8.3 6.1
US 8.3 5.9 7.7 9.1 8.6
Ratio U/J 1.1 0.8 1.0 1.1 1.4
Figure 3-4-4 Established Business Ownership Rate of two countries over the past five years
What makes the difference of TEA which basically represents number of (young)
entrepreneurs in these two countries? What seems sure is that willingness of people to start a
business matters. Figure 3-4-5 is Entrepreneurial Intention of two countries over the past five
years. The definition of it by GEM is ‘percentage of 18-64 population (individuals involved in
any stage of entrepreneurial activity excluded) who intend to start a business within three
years’. On a whole, except for the outlier in 2012, there has been two to three times
discrepancy again. This result is aligned with around 2.4 times difference in Entrepreneurship
as Desirable Career Choice. [Figure 3-4-6]
Country 2008 2009 2010 2011 2012
Japan 3.8 3.0 2.9 3.8 2.5
US 6.9 6.9 7.3 10.9 12.5
47 This kind of further research should be conducted in studies like ‘Report on Entrepreneur Support Project (Entrepreneurship Research) Fiscal 2009’ (published in 2010) by VEC, relegated by METI.
43
Ratio U/J 1.8 2.3 2.5 2.9 5.0
Figure 3-4-5 Entrepreneurial Intention of two countries over the past five years
Country 2008 2009 2010 2011 2012
Japan 26 28 28 26 30
US 63 66 65 - -
Ratio U/J 2.4 2.4 2.3 - -
Figure 3-4-6 Entrepreneurship as Desirable Career Choice
Naturally people’s willingness to start up a company with taking risk would be
lowered if their fear of failure is high, and on the other hand would be heightened if
opportunities are foreseeable. Figure 3-4-7 is Fear of Failure Rate of two countries over the
past five years. Here it is defined by GEM as ‘percentage of 18-64 population with positive
perceived opportunities who indicate that fear of failure would prevent them from setting up a
business.’ It is widely recognized in Japan that Japanese are intolerant for failures as opposed
to the U.S. which is specially characterized by the culture of Silicon Valley with norm of ‘Err,
fail, and persist’48 which could have made entrepreneurs outweigh the human instincts to fear.
Country 2007 2008 2009 2010 2011
Japan 43 51 50 33 42
US 27 25 27 28 31
Ratio J/U 1.6 2.0 1.9 1.2 1.4
Figure 3-4-7 Fear of Failure Rate
Figure 3-4-8 is Perceived Opportunities of two countries over the past five years.
GEM defined it as ‘percentage of 18-64 who see good opportunities to start a firm in the area
48 Victor W. Hwang, The Reinforest: How “Chicago Thinking” Explains Silicon Valley, The University of Chicago Law School, 2012.
44
where they live.’ The discrepancy between two countries are very clear. High expectation in
the U.S. could be partially explained by admiration and sense of possibility brought by big
successes by Facebook and Instagram etc. which are technologically relatively not hard to
build.
Country 2008 2009 2010 2011 2012
Japan 8 8 6 6 6
US 37 28 35 36 43
Ratio U/J 4.6 3.5 5.8 6.0 7.2
Figure 3-4-8 Perceived Opportunities
Moreover, in Japan social recognition of (successful) entrepreneurs are comparatively
low. Figure 3-4-9, 3-4-10, 3-4-11, although they are not as striking as previous statistics,
respectively shows supporting data.
Country 2008 2009 2010 2011 2012
Japan 56 50 52 55 55
US 74 75 76 - -
Ratio U/J 1.3 1.5 1.5 - -Figure 3-4-9 High Status Successful Entrepreneurship49
Country 2008 2009 2010 2011 2012
Japan 23 21 17 15 14
US 37 32 29 27 29
Ratio U/J 1.6 1.5 1.7 1.8 2.1
Figure 3-4-10 Know Startup Entrepreneur Rate50
49 Percentage of 18-64 population who agree with the statement that in their country, successful entrepreneurs receive high status. Defined and surveyed by GEM in 2012.
50 Percentage of 18-64 population who personally know someone who started a business in the past two years. Defined and surveyed by GEM in 2012.
45
Country 2008 2009 2010 2011 2012
Japan 59 61 59 57 53
US 73 67 68 - -
Ratio U/J 1.2 1.1 1.2 - -Figure 3-4-11 Media Attention for Entrepreneurship51
Along with what other people think about entrepreneurs in the society, what
entrepreneurs think about themselves is distinctly different in those two countries and for
Japan, somewhat seems dismal. Figure 3-4-12 is Perceived Capabilities of two countries over
the past five years. GEM defined it as ‘percentage of 18-64 population who believe to have
the required skills and knowledge to start a business.’
Country 2008 2009 2010 2011 2012
Japan 13 14 14 14 9
US 56 56 60 56 56
Ratio U/J 4.3 4.0 4.3 4.0 6.2
Figure 3-4-12 Perceived Capabilities
There should be difference of each culture – the value of humility versus self-
confidence – but the degree of entrepreneurial education may be one of the causes. I will
discuss it in the next section.
In addition to those perspectives GEM analyzed, I would like to add one more category:
excitement, enthusiasm and dream. In modern world, jobs and tasks are segmentalized and
specialized. In Japan, working in big corporations like Sony, NEC has been a virtue in its
51 Percentage of 18-64 population who agree with the statement that in their country, you will often see stories in the public media about successful new businesses. Defined and surveyed by GEM in 2012.
46
society since it had been believed to be stable and bring ‘happiness’ to hearth and home. But if
there had been successes like Bill Gate’s and Sergey Brin’s in Japan, people would have
excited by their personal and financial successes and some would have dreamed of being like
those entrepreneurs, and in consequence there might have been some risk-taking
entrepreneurs who ‘thought big’. But in reality there have not been huge examples there. And
quite the contrary, although somewhat controversial, there was a disappointing example – a
fraud of Livedoor and arrests of management thereafter.
3.4.1 Entrepreneurial Education
In the situation where TEA is significantly low based on the (young) people’s lack of
perceived capabilities to start a business, less recognized opportunities and great degree of
fear of failure, proper education should be a key in Japan. Although METI discuss the
importance of entrepreneurial education in elementary and junior high schools first in the
related chapter in its paper ‘Final Report on Venture Companies’ Growth and Cultivation’
(2008), given the urgent current situation around IT especially software business, there
requires immediate measures. Therefore I believe priority should be placed on higher
education. According to The Organization for Small & Medium Enterprises and Regional
Innovation52, only 1.6% of adults from 18 to 65 have taken entrepreneur fostering courses in
undergraduate and graduate schools, on contrary to 13% in full-time university/college
students in the U.S. The METI paper says there might be a correlation between ratio of startup
establishment [Figure 3-4-1-1] and ratio of experience of having taken entrepreneur fostering
courses in undergraduate and graduate schools. [Figure 3-4-1-2]
52 http://www.smrj.go.jp/english/index.html
47
Figure 3-4-1-1 Ratio of startup establishment
(From left to right: Japan, the U.S., England, France)
Figure 3-4-1-2 Ratio of experience of having taken entrepreneur fostering courses in
undergraduate and graduate schools
(From left to right: Japan, the U.S., England, France)
As shown in Figure 3-4-1-3, which illustrates number of schools (blue: national
schools, red: public schools, beige: private schools) providing entrepreneurial classes, in
Japan small number of universities and colleges have them. And many of them are provided
48
in graduate schools, not undergraduate ones. In terms of opportunities and availability for
young students there, the education should be broadened extensively in Japan.53
Figure 3-4-1-3 Number of schools providing entrepreneurial classes in Japan
(From left to right: Fiscal 2000, 2001, 2002, 2003)
Not only quantitatively but also qualitatively improving entrepreneurial education is
as a matter of fact important. What will they produce in the end? For example, at Stanford
University in the U.S., it has been encouraging entrepreneurship over its history and from
there world’s most recognized companies have come out such as Google, Cisco, Hewlett-
Packard, Yahoo!, VMware, Netflix. Those companies have created an estimated 5.4 million
jobs and generated annual world revenues of $2.7 trillion.54 That kind of education will
eventually pay off in the long run, even examined at one nation’s economy level.
3.4.2 Entrepreneurial MovementBy its definition, I believe that nurturing entrepreneurship should be done in
entrepreneurial ways. If so, only education is not enough but also grassroots campaigns are
needed. For instance, at Stanford University there are over 30 entrepreneurial groups which
53 METI, Final Report on Venture Companies’ Growth and Cultivation, METI, 2008. http://www.meti.go.jp/report/downloadfiles/g80509a02j.pdf
54 Charles E. Eesley, William F. Miller, Stanford University, Stanford University’s Economic Impact via Innovation and Entrepreneurship, Stanford University, 2012. http://engineering.stanford.edu/sites/default/files/Stanford_Innovation_Survey_Executive_Summary_Oct2012_3.pdf
49
foster, mentor, teach, coach, lend facilities, give resources and even financially support
entrepreneurs. One of the most vital aspects of those groups is providing chances of
networking. There gathers would-be entrepreneurs, established business owners, sometimes
venture capitalists who are looking for investment opportunities. Figure 3-4-2 and 3-4-3 in
Appendix show a list of entrepreneurial groups in Stanford University as an example.
This point was not discussed much in the aforementioned METI report on
entrepreneurship, but I consider this as an important factor in light of forming entrepreneurial
teams or groups at first casually and quickly.
3.4.3 Intrepreneurship
In Japan, conventionally talented people choose to work for large enterprises, since it
had or has been considered as stable jobs and in fact brings workers better pays and perks.
Despite of rapid changes in global economy, this trend has not been changed a lot there. If we
take a position that great venture companies would be created by great people, in case of
Japan they would have to resort on big guys to some extent because they are the ones who
hold excellent people now. And considering that innovation can be created relatively easier in
venture environment, we can reasonably have a hypothesis that in Japan intrepreneurs (person
within large corporations who take direct responsibility for turning ideas into profitable
finished products through assertive risk-taking and innovation55) and intrepreneurship in and
of large corporations could work well due to excellent human and other resources they have if
they have entrepreneurial intentions.
Having discussed importance of entrepreneurship for Japan in preceding section, in
Japan it is not unusual phenomenon for startups to face slowing down of their growth when
they hit approximately one billion yen (roughly $10 million) in annual sales revenue.69 Given
55 The American Heritage Dictionary, 1992
50
its size of economy, over $4 trillion in GDP, $10 million sales revenue for each company
cannot be called significant to its society and economy (partially because sales revenue is not
even net added value used for calculation of GDP – we have to subtract value of intermediate
consumption from it). For impactful growth of venture businesses in a society, venture
companies generated by intrepreneurs inside large enterprises with supports of them can be a
practical solution in this disadvantageous condition of Japan.
Unfortunately the number of startups created by intrepreneurs in then-existing
companies had decreased substantially over a decade in Japan as shown in Figure 3-4-3.
Figure 3-4-3 Number of intrepreneurial startups created by existing companies 69
(Y axis represents number of companies set up in each year)
According to Techno Research Laboratory in its Report on Investigation Research for
Corporate Venturing 2008 (2009), this decline in number after 2001 might have been caused
by the collapse of IT bubble in the latter half of 2000. I claim Japanese governmental research
body should look into the reasons for the change of business mind back then, considering the
importance of intrepreneurs and intrepreneurship I mentioned above.
51
To overcome this downward situation in Japan, as the aforementioned paper points
out 1.best practice for investment from large enterprises 2.next-level growth 3.side job (which
is usually prohibited for employees in large enterprises) should be expanded and shared in its
economy. Also Japanese government, METI or Ministry of Justice whichever it may be,
should take a role in streamlining accounting laws around issues such as equity curve-out,
spin-off, demerger, listing of subsidiaries, intellectual properties and so on.
In the U.S. side, I was not able to find appropriate data, statistics and dissertation
regarding intrepreneurs and intrepreneurship.
3.5 Venture Capitalists in Japan and the U.S.
As shown in the preceding chapter, since the inception of venture capital industry
was 1972 and 1946 in Japan and the U.S. respectively, Japan lags a quarter-century behind
and venture capital history of Japan is less than two-thirds of that of the U.S.
As mentioned in the preceding chapters, in fiscal 2011 Japanese venture capital firms
made investments of $1.4 billion as opposed to $28.7 in the U.S. ones (Japan to the U.S. = 1 :
19). The balance of money invested by VCs in Japan is $18.7 billion compared with $197 by
U.S. VCs (Japan to the U.S. = 1 : 10.5). In fiscal 2011, 31 funds were created in Japan
whereas 173 in the U.S. (Japan to the U.S. = 1 : 5.6). At present there are approximately 200
VCs in Japan and similarly to the U.S. where top 10 firms among total active 526 VCs raising
69% of funds, in Japan top 20 VCs’ investment accounts for over 80% of all.56
As might be expected, venture investment per GDP is considerably low as shown in
Figure 3-5-1 below. (Red line: Japan, blue line: the U.S.)
56 METI, Survey on the Infrastructure for Construction of Database of Investment Trend, METI, 2008. http://www.meti.go.jp/policy/newbusiness/vcdb.pdf
52
Figure 3-5-1 Venture investment per GDP57
From micro economical point of view, the small size of VCs and investment should
be a one of the cause VCs are not playing major roles to nourish startups in Japan. Figure 3-5-
2 shows investment amount made by top 10 VCs in Japan in 2009.
Ranking CompanyInvestment Amount
($ Millions)
1 SBI Holdings 302 2 JAFCO 138 3 Mizuho Capital 41 4 Yasuda Enterprise Development 33 5 Daiwa SMBC Capital 32 6 Japan Asia Investment 24 7 Nippon Venture Capital 24 8 Nissei Capital 22 9 Mitsubishi UFJ Capital 21 10 Ant Capital Partners 20
Figure 3-5-2 Investment amount of top 10 VCs in Japan in 200958
57 DIS Artwork, Enhance IT Platform by Nurturing Venture Business, DIS Artwork, 2010. http://www.pc-webzine.com/modules/bulletin1/index.php?page=article&storyid=25&storypage=2&is=201012
58 Nikkei Newspaper, 2010
53
Based on the fact average deal amount of VCs in 2009 was $6.3 million in the U.S. 59,
aside from top two, SBI Holdings and JAFCO, if Japanese VCs had to invest same level of
amount as U.S. VCs (in order to catch up with ICT industry’s competitiveness in the U.S.)
invest in a deal, they could only invest in several (or even a couple of) companies in a year.
This can be an example of ecosystem of startups are not only functioning well but also quite
small.
There are not only quantitative issues such as investment amount per deal VCs invest
in startups but also qualitative problems in Japan’s VC industry. According to Kenichi Ohta’s
aforementioned dissertation ‘Industrial Structure Adjustment and Fostering Venture Business’
which won the grand prize in Japanese Economy Research Council (Nikkeicho), there are
several structural challenges in the industry such as the lack of entrepreneurial and seasoned
venture capitalists, hiring patterns and employment status of venture capitalists, the less
flexible form as a VC firm, the less diversified ways to recoup their investment, the risk-
aversive attitude of venture capitalists based on their status as salaried workers, not general
partners and so forth.34
Among them one of the most problematic issues which differs from the U.S. is the
lack of financial endowments from educational institutions and money inflow from public
pension funds, corporate pension funds, insurance companies, high net-worth individuals and
so on. For example, from average pension funds in Japan only five percent goes into venture
capital investment which is strikingly lower than over twenty percent in the ones in western
countries.60
59 NVCA, NVCA Yearbook 2010, NVCA, 2010. http://www.nvca.org/index.php?option=com_content&view=article&id=257&Itemid=103
60 The Daiwa Institute of Research Group, Sponsored Report for Surveying Potential of
54
Difference of risk-aversive attitude and tolerance of risk in VCs in these two
countries can be seen in redemption condition in their investment contract and term sheet.
Figure 3-5-3 is a table which illustrates the number of exits of VC funds in Japan. From April
2010 to March 2011 (fiscal 2010), there were 612 exits out of total 1,043 in forms of
‘redeemed by business owners etc.’ which accounted for as many as sixty percent of exits (in
broad sense) in Japan.
Figure 3-5-3 Current status of exit of VC funds35
This data proves VCs in Japan enforce entrepreneurs to take risk for the money they
invest. According to a study of Hironori Bunya, investment contracts concluded by VCs in
Japan had redemption rights for VCs: 100% for initial investment contracts, 83% for all
investment contracts.61 In the U.S. the ratio was 17% in the third quarter of 2012 and it has
been almost unchanged over the past several quarters. [Figure 3-5-4]
Expansion of Investment to Venture Business by Corporate Funds Fiscal 2008, The Daiwa Institute of Research Group, 2009. http://www.meti.go.jp/policy/newbusiness/kigyounenkinvchoukokusho.pdf
61 Hironori Bunya, Empirical Research on Venture Capital Investment Based on Agency Theory, Kobe University, 2005. http://www.b.kobe-u.ac.jp/~kutsuna/class/file/MBA1_bunya.pdf
55
Figure 3-5-4 Ratio of redemption provisions in venture financing in Silicon Valley62
As a part of qualitative problem of Japanese VCs, in Japan it is generally said
Japanese VCs do not take risks by not frequently investing money into startups in seed/early
stage. That notion does not seem true by taking a look at recent data. Figure 3-5-5 and 3-5-6
shows breakdown of initial and follow-on investment by investee stage in Japan and the U.S.
respectively.
Figure 3-5-5 Breakdown of initial and follow-on investment by VCs in Japan by investee stage10
62 Barry Kramer and Michael Patrick, Silicon Valley Venture Capital Survey Third Quarter 2012, Fenwick & West LLP, 2012. http://www.fenwick.com/publications/pages/silicon-valley-venture-survey-third-quarter-2012.aspx
56
Figure 3-5-6 Breakdown of initial and follow-on investment by VCs in the U.S. by investee stage63
The sum of percentage in seed and early stage is 44% and 31% in Japan and the U.S.
respectively. This inversion phenomenon can be partially explained in several factors from
two countries’ perspectives:
1. In Japan deregulation of antitrust law in 1994 to make VCs allow dispatching
personnel as directors and let them do hands-on management in startups they invest
which had been long prohibited from 1962 in that law
2. In Japan there emerged stock markets for startups from 1999
3.In the U.S., VCs are becoming more risk-aversive given the fact they generated
relatively poor return on their investment.64 And based on the ‘2 and 20’ (for some
prominent VC firms: ‘3 and 30’) structure VCs have, they have financial motivation
63 National Venture Capital Association (NVCA), Yearbook 2012, NVCA, 2012. http://www.nvca.org/index.php?option=com_content&view=article&id=257&Itemid=103
64 Ewing Marion Kauffman Foundation, WE HAVE MET THE ENEMY… AND HE IS US, Ewing Marion Kauffman Foundation, 2012. http://www.kauffman.org/uploadedfiles/vc-enemy-is-us-report.pdf
57
to have larger funds. (The larger the fund is, the more larger their management fee
is)29
3.5.1 Venture Exit to Recoup Investment
Other than management fee they collect from limited partners of funds, VCs revenue
mainly comes from ‘carry’ which is a share of the realized profits of the fund to general
partners. There are two ways for VCs to generate carry from investments they make: IPO and
M&A (merger and acquisition), collectively they are called ‘exit’ or ‘exits’.
When it comes to IPO, number had not differ significantly until 2008 in two
countries (in some years, Japan exceeded in IPO numbers) [Figure 3-5-1-1] In fiscal 2010, the
number of venture-backed IPOs was 56 in Japan, 75 in the U.S. In terms of economy and
business, financial result is more important than pure numbers. In Japan in fiscal 2010, VC-
backed IPO amount was $29.8 million65 when the U.S. had $7,607 million59 (Japan to the U.S
= 1 : 255). Therefore practically there is an incomparable difference in the light of economic
impact for the partners who invest money into VC funds, society and VCs themselves in the
two countries.
65 VEC, Survey on Trends in Venture Capital Investment 2011, VEC, 2012, http://www.vec.or.jp/2012/10/09/survey-on-trends-in-venture-capital-investment2011/
58
Figure 3-5-1-1 Number of IPOs in Japan and the U.S.66
Although there is a huge difference in the value of IPOs in Japan and the U.S., there
also is sharp difference in M&A. Figure 3-5-1-2 shows break down of exits for VCs in Japan.
In fiscal 2010, it had 175 cases of sales in M&As which accounted for 16% of all exits (in a
broad sense). Realized amount from sales of VC-backed companies was \7,726 million ($86
million) in the same year.
Figure 3-5-1-2 Current status of exit of VC funds
66 Kengo Ito, “Compared Status Quo of VC Investment in Silicon Valley and Japan,” Movida Japan, 2013, http://itokenv.com/archives/961.
59
In the U.S., there is a strong and consistent trend of M&As among exits in
comparison to IPOs. [Figure 3-5-1-3] Main type of those M&As is ‘strategic M&As’ with
contrasted with financial M&As which are financed by private equity, venture capital, and
other investment firms. (Example of online and mobile industry sector is shown in Figure 3-5-
1-4.)
Figure 3-5-1-3 Exit numbers of U.S. VC-backed companies65
Figure 3-5-1-4 Ratio of M&A by transaction types (in online and mobile industry sector)67
67 BerkeryNoyes, Online & Mobile Industry Full Year 2012: Mergers and Acquisitions Trend
60
In the U.S., in 2010 there were 442 M&As and an estimated total acquisition price
was $18,382 million. [Figure 3-5-1-5] It gives us Japan to the U.S ratio in terms of total
acquisition price of VC-backed companies as 1 : 214. Therefore practically we can say in
Japan there is almost no room for VCs to recoup their investment as opposed to the U.S in
terms of M&As. This disadvantageous situation inevitably limits Japanese VCs strategic
options of their recoup of investment such as selling equity to other parties like incumbent
industrial companies, other VCs, private equities etc.
Figure 3-5-1-5 Ratio of M&A by transaction types (in online and mobile industry)63
Report, BerkeryNoyes, 2013. http://www.berkerynoyes.com/publication/pr/trends/12FYOnline.aspx
61
This immature situation in Japan in exit market for VCs, and in return for venture
businesses, again, can be rooted in its history. In Japan, investment in early stage company in
hands-on management style has been conducted only for a little more than ten years after its
deregulation of antitrust law. According to a eminent Japanese M&A consultant, Tetsuya
Isozaki, there appears a high possibility that Japan will move towards M&As from IPOs over
next twenty or thirty years in exits of [startup] companies.68
3.5.2 Corporate Venture Capitals
As we saw in Figure 3-5-1-4 (Ratio of M&A by transaction types (in online and
mobile industry)), of M&As eighty or ninety percent accounts for strategic transactions in the
U.S. In the U.S., except for IT bubble period from 1999 to 2001, constantly from six to eight
percent of investment comes from corporate venture capitals (CVCs) over all VC
investments.69 Figure 3-5-2-1 shows chronological change of ratio of CVC investments over
all VC investments in a line chart.
68 Tetsuya Isozaki, “Increasing Importance of Capital Policy in the Era of ‘Targeting Decent Successes’ for Startups,” 2011, http://president.jp/articles/-/6503?page=2.
69 Techno Research Laboratory, Report on Investigation Research for Corporate Venturing 2008, METI, 2009. http://www.meti.go.jp/meti_lib/report/2009fy01/E000772-2.pdf
62
Figure 3-5-2-1 Chronological change of ratio of CVC investments over all VC investments69
One of the most successful CVCs in the U.S. is Intel Capital. Since its inception in
1999, they have invested over $7.5 billion in about 1,000 companies and among them 168
went public and 212 were acquired. In 2007 they globally invested $639 million in 166 deals
including 77 new ones. The investment amount differs significantly from year to year69
because their investment is aligned with Intel’s strategy which basically is ‘to sell Intel chips’.
Therefore to develop and expand market for Intel to sell their chips, they invest in (startup)
companies which can technically lead the world to use Internet more, improve computing and
network platform and so on. The area of investment varies widely: new technology, emerging
market, hardware, software, housing, healthcare, consumer Internet, semiconductor
manufacturing, cleantech and so forth. As a case of financial success for Intel brought by an
investment of Intel capital, one in RedHat was a considerable success since Intel eventually
succeeded in development of Linux compatible chip and it increased sales of Intel
semiconductors.69
63
In Japan, there does not seem to be a good amount of data regarding CVCs. Although
METI delegated research regarding ‘corporate venturing’, the part of CVC was quite small in
its 184 pages of report69, for which I could not find any particular reason. It says ‘we can
confirm the situation where companies having CVCs outside/inside their organization as
investment vehicles in order to achieve their strategies and promote in-house innovation
through finding and utilizing external resources, is very rare.’ I agree with the statement
empirically, but the data shown in the paper does not support it since 25 percent of large
companies (over one billion yen in capital) reported they already have organization to support
corporate venture capital activities (bars in blue, amount unit=100 million yen).69 [Figure 3-5-
2-2]
Figure 3-5-2-2
Status of with/without corporate venture capital organizations in corporations
by capital amount69
As ACCJ asserts in its paper for economic recommendation to Japan, Japan’s low rate
of economic ‘metabolism, or resource reallocation’, is a structural problem that has held back
productivity growth, hence brought out stagnation of economics, for decades. It also claims
Japan needs to attract more entrants to industries via vehicles like VCs.70 Because in Japan,
70 ACCJ, Charting a New Course for Growth, ACCJ, 2010. http://iis-db.stanford.edu/res/2323/ACCJ_CHARTING_A_NEW_COURSE_FOR_GROWTH.pdf
64
good human resources tend to concentrate in large and established companies through its
heavy dependency on ‘fresh-out-of-college-student-recruiting’ system, distribution of capital
money in a form of financial support to startups and knowhow to them from those companies
should play principal roles in fostering new venture companies especially in the area like IT
where excellence in competition is needed and certain amount of capital is required.
3.5.3 Angel Investment
As seen in Figure 3-5-6, in the U.S., in overall VC investments only three percent
counts for seed funding. And VCs invest $1 million or more in startups because they tend to
do hands-on management which takes time for them. Who are helping entrepreneurs that want
to launch their new businesses from scratch? Angels are. Although there are many exceptions,
typically entrepreneurs follow a path like this: bootstrap their business with their savings,
borrow money using credit cards, ask financial help to families and friends, and then here
come angels. They would invest $20 to $50 thousand apiece and collectively they form
several hundreds of thousands of dollars investment in a form of ‘seed round’.71 This function
of angels is considered to be a part of (Silicon Valley) venture business ecosystem.
When it comes down to comparison of angel investment between two countries, we
can refer to the Figure 3-5-3-1 which shows the difference of two.
Japan US US/JapanNumber of Angel investors 1,000 234,000 23.4 timesAnnual Investment Amount per Deal $10-30 thousand $500-600 thousand 16-50 timesAnuual Investment Amount: Total $200 million $30,000 million 125 times
Based on the Techno Research Laboratory's data, author converted yen to dollars, round the values.
Figure 3-5-3-1 Comparison of angel investments in Japan and the U.S.72
71 Dan Siciliano & Evan Epstein, Silicon Valley Tech Trends, Rock Center, 2013.72 Techno Research Laboratory, Report on Research for Formation Facilitation of Angel
Network Fiscal 2008, METI, 2009. http://www.meti.go.jp/policy/newbusiness/angelnetworkhoukokusyo.pdf
65
Again, Japan is far behind the U.S. in number of angels and amount of money they
invest collectively and individually. Moreover the U.S. had increased the number of angels
and investment amount by them in past years as shown in Figure 3-5-3-2. (Left half: Angel
investment, right half: VC investment. Each column from left to right: number of investment,
total investment amount (hundred million dollars), investment amount per deal (thousand
dollars) respectively.
Figure 3-5-3-2 Comparison of angel and VC investments in the U.S.
I maintain that the lack of angel investments in Japan is a miniature version of whole
problems written in this paper and happening in Japan at this present. We need angel money
(or super-angel money) since we do not have sufficient level of funding from Japanese VCs.
But government is not prompt enough to address issues related to angel investment
such as reform of tax system. Japanese angels do not have superabundant money partially
because there are not enough liquidity or exits in the market.
And although to become capable angels experiences in successful startups are
desired, in Japan they do not have many VCs and angels to support entrepreneurs in startups.
In the first place, young people have the least entrepreneurial mindset in most advanced
countries in the world but they have the highest degree of fear in starting a business, but even
66
if they do have entrepreneurship in his mind we do not have culture to foster his dream…
How to terminate this vicious circle will be discussed in the last chapter of this paper.
3.5.4 Crowdfunding
As of writing this, crowdfunding is in a fad, some say year 2012 was the year of
crowdfunding as we saw a big success of Pebble Smartwatch and ‘Inocente’ won the
Academy Award as a first crowdfunded movie in its history and both of them are Kickstarter
backed which is the largest crowdfunding platform in the U.S. In the last days of 2012, the
company is at over 81,000 projects with 34,000 successfully funded ones.73
At this point in the U.S., from crowdfunding in a narrow definition investors receive
rewards like newly designed products, tickets for music concerts, their name in the credits of
movies and such. But when the Securities and Exchange Commission (SEC) put The
Jumpstart Our Business Startups Act (JOBS Act) into effect, allegedly in 2014, crowdfunding
investors can receive equity in startup companies in exchange for the cash they put into.
The enforcement of JOBS Act will obviously make would-be entrepreneurs easy to
get funded. They will not have to register their stock with SEC until they hit certain number
of unaccredited and/or accredited shareholders, they will have more Internet based
crowdfunding portals since SEC will loosen conditions for small offerings. Investors will
have more flexibility since their upper limit of net worth and annual earnings will go down.
Some experts have concerns over fraudulent practices by disguised entrepreneurs and
even crowdfunding platform operators, unexpected losses by unaccredited investors and
acceleration of inflation of Silicon Valley tech bubble at present. However, I believe equity
crowdfunding system gives more diversification to current ecosystem in the U.S.
73 Matt Burns, “2012: The Year Crowdfunding Was Kickstarted Into The Mainstream,” TechCrunch, 2012, http://techcrunch.com/2012/12/31/2012-the-year-crowdfunding-was-kickstarted-into-the-mainstream/.
67
Furthermore, transition to equity crowdfunding seems rather smooth once SEC announce the
date of enforcement since there are already several players which handle equity investment
for accredited investors such as CircleUp and AngelList.
In Japan, although there are several tens of non-equity crowdfunding platform
providers, since there is no distinct ‘culture of contribution’ in the society, at this point they do
not appear to be popular74. Besides I have not heard committees and initiatives in government
for crowdfunding business at present. Notwithstanding its controversial business nature, in
order not to be lagged behind the U.S. like in other many technology areas, timely initiation of
study by appropriate member is desired in Japan.
3.6 System Integration Business in Japan and the U.S.
According to Wikipedia, ‘system integration’ and ‘system integrator’ are defined as
follows, respectively: ‘the process of linking together different computing systems and
software applications physically or functionally, to act as a coordinated whole.’, ‘a person or
company that specializes in bringing together component subsystems into a whole and
ensuring that those subsystems function together, a practice known as system integration.’
Interestingly, in Japanese pages in Wikipedia, it explains that rise/prosperity of system
integrators is particular phenomenon in Japan.21 This can be true or wrong based on the
historical analysis in the preceding chapter because in the U.S. in 1980s user corporations
experiencing significant problems in in-house software development, programming and
maintenance began to farm those tasks to system integrators such as CSC and EDS. However,
74 Because we can see the process and results of funding on the sites due to its nature of crowdfunding business, I checked several sites engaging in the business. A list of operators can be found at http://ja.wikipedia.org/wiki/%E3%82%AF%E3%83%A9%E3%82%A6%E3%83%89%E3%83%95%E3%82%A1%E3%83%B3%E3%83%87%E3%82%A3%E3%83%B3%E3%82%B0.
68
in terms of ratio of revenue from system integration in overall software and IT services
industry, there is a clear difference between the two countries. In Japan, the ratio of system
integration including customized software is 61% in overall Information Service Industry in
METI’s annual survey in 20115, whereas in the U.S. ‘System Design’ category which appears
closest to the definition of system integration75 accounted for 48% in Software and IT Service
Industry in 2008 in Services Annual Survey, Census42. (Note that there should be difference in
categorization in two countries and definition of system integrator is vague to some extent by
its nature.)
Different countries have different industry structures, therefore I cannot say simply high
dependency on one sector (i.e. over sixty percent in Japan in overall IT service industry) is
harmful in a country, but a problem would come up if that dependent sector is not lucrative
and will not seem to be neither.
Figure 3-1-1 shows top-class system integrators in Japan and the U.S. and their
profitability represented by net margin (ratio of net profit over sales revenue in accounting).
The U.S. players earn a little less than twice of Japanese ones in the samples I picked. I tried
to analyze financial statements of companies in two countries, especially income statement,
by mainly breaking down costs such as cost of service, outsourcing/subcontract cost, and
inspecting number of payroll, effective tax rate, however, in public documents filed to
authorities (Yukashoken-hokokusho in Japan and FORM 10-K in the U.S.), those information
is not necessarily disclosed and practically impossible to do analysis. Although these
information is trade secret and may be involved in competitiveness of system integrators, for
academic purpose I believe they are needed for study by researchers and for establishment of
best practice in the industry.
75 This figure also includes revenue generated by facilities management business. Thus the actual revenue of system integration can be smaller than described above.
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In addition to the profitability, there are striking differences in sales revenue in players
in two countries. Those differences could be well explained by the difference of globalization.
For instance, Accenture has offices and operations in more than 200 cities in 54 countries.76
(Among Japanese system integrators, NTT Data stands out from others partially because they
have globalized themselves by acquiring companies such as Keane International (in 2011)
which has 12,500 employees in 12 countries, and have operations in 30 countries (as of
2011).)
Will this high dependency on system integration and customize software development
business conducted by domestic players last in Japan? This is crucial question not only for
workers in the industry but also country as a whole because ICT industry accounts for 10 to
11 percent in real GDP in the country and as a matter of fact software plays critical role there.
Nonetheless, its future is controversial: almost 60 % of user companies say they will reduce
customized software development, on the other hand 40 % of vendors say the business around
it will increase for a while.6
In the long run, not only Japanese system integrators but also the U.S. ones are
exposed with virtual ‘war against cloud computing offerings’. There are several points
discussed extensively in this industry about it:
System integrators can build cloud computing platform and provide SaaS (Software
as a Service), PaaS (Platform as a Service) and IaaS (Infrastructure as a Service) by
leveraging their existent assets such as data centers, their own sets of applications
and knowledge.
As opposed to fees related to system integration work, customized software
development and maintenance fee, what system integrators can receive by cloud
76 Accenture plc, Form 10-K for the fiscal year ended August 31, Accenture plc, 2012.
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computing offerings should be relatively lower. Thus proposal of cloud is a conflict
of interest by system integrators.
But the system integration market is already being disrupted by new cloud players
such as Amazon (EC2), Microsoft (Windows Azure), Google (Google APPS),
Salesforce.com (AppMarket, Force.com). To protect the most valuable asset for
system integrators – locked-in customers – we have to keep up with the stream if it
becomes eventually customer’s requests.
But do system integrators invest in and build their own cloud computing platform
and facilities? Given the fact it is highly capital intensive, isn’t it better to act like an
broker of those new cloud services like EC2?
However, given the fact the cost of cloud computing is disruptively low, it is obvious
that margin of reselling their service will be considerably low. How they can deal
with such a difference of revenue and (highly possibly) profit between ex- and new
offerings?
What is the add-value of system integrators when finally customers choose cloud
computing as main information system (e.g. mission-critical system, ERP)?
Migration work form existing environment to new cloud ones. For secure and
accurate migration of data and assurance of functionality, tasks like planning,
optimizing, integrating are inevitable in transition, and those are traditionally
core competence of system integrators. But migration projects are one-time
work by its nature.
Choice of cloud service. Theirs or others. In case of others, whose. There are
a lot of variables like price, place, redundancy, SLA (service level
agreement), degree of security, performance and flexibility like
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configurability, capacity addition and ease of doing them and so on and so
forth. This is an area of consulting which most of top class system integrators
are able to do.
Security will continuously be crucial issue for customers. The level of
security arguably depends on the form of offering of cloud computing: theirs
or others. (Ones usually think theirs are safer than others.)
Although cloud computing is said ‘Just like water from the tap in your
kitchen, cloud computing services can be turned on or off quickly as needed’,
like adjusting water pressure, configuration in the cloud computing
environment might be needed for optimal use of it.
How are they going to set up systems individually or collectively. Which is to
say is it going to be a shared environment/instances or separate ones which is
so-called ‘private cloud’. How do you explain merit/demerit and benefit/cost
of those alternatives with losing possible earnings in exchange of their current
business asset?
In this disrupting transition period, to avoid excessive expectations and under
preparation what I would like to suggest to individual companies, academic researchers and
ICT industry in both countries is making a clear roadmap and revenue/profit associated with
it. Technology and operational advancement in security will be key in this matter. And
‘atmosphere’ will be important as well because some CIOs are risk-aversive in selection but
‘everyone-is-starting-using- it’ kind of atmosphere can push them in using it, although such
trend is hard to predict. And with the game theory, we have to forecast attitude and selection
of strategies of incumbent system integrators and new but already large players. Revenue and
profit are associated with migration and consulting tasks as discussed above. There should be
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selections in the course of transition and that should be counted. For healthy competition
among players and clear guidance to user companies, that sort of roadmap shall serve in many
ways.
The basic issues of cloud computing will be argued in subsequent Cloud Computing
section.
3.6.1 Business Structure in Japan
In the current situation where system integrators have to deal with the new disruptive
movement, cloud computing and face with mighty global competitors from/in the U.S. and
India, there also is a fundamental but deep structural problem in Japan. Multi- layered system
integrator/software house structure based on gaichu system. Basically it is a system in which a
large system integrators (including ones which are hardware manufactures at the same time)
accept orders (of customized software development, as discussed previously) from customers
for certain amount (e.g. $100,000) and those integrators partially or even wholly outsource the
task to other system integrators or software houses for cheaper amount (e.g. $80,000) and this
outsourcee-finding lasts until finally they find ones who actually do the tasks. The price tag of
outsourcing in the end might be $80,000 or in horrible cases might be $40,000 which we may
call ‘system for exploitation’.
Historically thinking, this industrial custom was born based on the outsourcing boom
in Japan from 1980s. [See Chapter 2-1 Chronological Analysis] User companies might or
could not care much about what system integrators (including spun-off subsidiaries) were
doing because they drained IT literacy outside as a result of spin-offs, and in turn system
integrators had strong motivation to re-outsource tasks they undertook since their inception
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was based on the purpose of cost cutting of parent companies or they could not propose high
price to keiretsu family companies.
For those customized software development that are prevailed in Japan and which
requires considerable number of engineers, the industry autonomously has formed pyramid-
like multi layers. Large-scale system integrators and IT vendors contract directly with user
companies and those top-tier vendors ‘use’ smaller ones for relatively easy and repetitive
tasks like design, coding and testing with paying less money.
Some called this system a reasonable form of division of labor in the industry which
gives flexibility in especially large system development projects and dispersion of risk among
vendors, but it eventually caused serious problems over years: unpopularity of the industry,
losing innovation capacity and losing competitiveness.
First, under the gaichu system, many large system integrators who mainly devote
themselves in custom software development failed to accumulate crucial technological
capability and expertise.26 In the non-profit organization called ‘Code.org’ in the U.S. which
was initiated by notable engineers such as Bill Gates and Mark Zuckerberg, importance of
coding work is strongly emphasized.77 If what they claim is the case, those companies who do
not code by themselves and contracted out too much core work by throwing them at smaller
and subordinate ones get technologically weaker than their counterparts in the U.S. and other
parts of the world.
Second, this system deprives motivation in working from workers in small
companies (subcontractors). How can an industry be competitive if workers are not
motivated?
Third, this situation had become well-known as information got flat with the
penetration of Internet, the industry got unpopular.
77 Code.org, 2012, http://www.code.org/.
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The last two points were discussed in preceding Popularity of IT/SW Companies as
Employer in Japan and the U.S. section.
3.6.2 Cloud Computing
As discussed previous chapter 3-2-2, cloud computing can be a business chance but
at the same time it can be a disruptive risk for Japanese vendors. Compared to custom
software which can lock-in customers relatively easily but be hard to scale, technology like
cloud computing can be scalable and business around it could be ‘winner-take-all’ situation.
In fact, in U.S., in IaaS (Infrastructure as a Service) area Amazon is dominant, in PaaS
(Platform as a Service) area Microsoft Azure is gaining market share utilizing its
compatibility of their existing software, in SaaS (Software as a Service) area SalesForce.com
is quite competitive based on their core CRM application and other numerous third party
application offered in their marketplace called AppExchange.
Japan’s software vendor and system integrator market is fragmented – those with
manufacturing section: Fujitsu, NEC, Hitachi, IBM Japan, those specialized in system
integration: NTT Data, NRI, IT Holdings, CTC, SCSK, those Internet oriented: Yahoo! Japan,
GMO, telecommunication carriers: NTT group, KDDI, Softbank group. It will be more
capital-intensive in terms of competition because they have to fight against IT titans like
aforementioned U.S. players and global newcomers such as TATA, Infosys, Wipro, Neusoft,
hiSoft who are entering to Japan.
If cloud computing gets technologically commoditized like in the way
semiconductors became in past decades, the situation is quite similar to the case of DRAM
with fragmented Japanese market composed of Hitachi, NEC and Mitsubishi Electronics
versus global giants Samsung and SK Hynix which ended up in defeat of Japanese companies.
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Japanese players including government agencies should carefully watch domestic/global
dynamism and competitive landscape of cloud computing and also recognize its capital-
intensive nature. (For example, Microsoft is spending ninety percent of their R&D budget on
cloud computing78 and even Amazon.com which provides low-cost service and have a thrifty
budget for its R&D they spend $132 million quarterly for R&D79 when it released EC2
(Elastic Compute Cloud).) Before serious and endless discussions like the bailout of Elpida
Memory occur, this time Japan and Japanese IT industry as a whole, is expected to have
timely strategies.
3.6.3 Immigration Policy
The aforementioned ACCJ paper discuss that Japan needs a new generation of skilled
ICT professionals both knowledgeable about the technology and comfortable with working
across borders in a convergent and interconnected world.70 In the current Japanese situation
where profitability is much lower than western IT companies, and even lower than Indian
companies37, and given the fact cloud computing is breaking national borders down, that
statement seems irrefutable. Although I will argue importance education of ICT usage and
computer science to foster experts in Japan in subsequent chapter, theoretically bringing
educated workforce might be quicker. I will discuss immigration and visa issue in subsequent
Immigration Policy section.
78 Matt Smith , “Meet Microsoft, the world's best kept R&D secret,” Computer World, 2013, http://news.idg.no/cw/art.cfm?id=D9F9E9ED-B31B-91D3-30EB90CEA1D64447.
79 YCHARTS, Amazon.com R&D Expense Quarterly, 2013, http://ycharts.com/companies/AMZN/r_and_d_expense.
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3.7 User Companies in Japan and the U.S.
In this section I compare two countries’ characteristics of user companies. Data and
descriptions are tabulated in Figure 3-7-1 below.
Perspectives Japan U.S.Role of CIO(Chief Information Officer)
Participation in designing corporate strategy13% 51%
Characteristic and orientation of CIOAbsence or inadequacy of CIO Hard to find a firm having over
$500 million revenue without CIO
Notion towardsIT system vs. organizational process
Are you willing to reform organizational practices in accord withIT system? (Question to executives)
42% 65%
Ways of Building Information Systems of User Companies
Package software（with little customization）17% 29%Package software (with customization)
26% 49%Custom software
54% 16%Notion towards enterprise packaged software
Preconceived notion of need for customization to adjust to existing operational practice.
Dependency on system integrators which knows detail of user companies’ business processes through long term (keiretsu) relationship.
Need of top managers to
Embeds ‘best practice’ capability based on lead users’ business processes.
Have configuration to avoid customization.
Customization is a main cause of cost overruns in software development project (Common view among U.S. software vendors).
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finish system deployment without disruptions.
Inability to evaluate IT choice by top management.
・Small incentives to produce high quality packaged software among larger vendors.
[Figure 3-7-1] Comparison of user companies’ characteristics19
When it comes down to usage of IT by user companies, The American Chamber of
Commerce in Japan (ACCJ) claims that Japan is trailing other countries in both GDP growth
and the productivity contributions that ICT investment brings. [Figure 3-7-2]
Sources: ACCJ, ‘Charting a New Course for Growth’, 2010
[Figure 3-7-2] Contribution of ICT-Using Services to Value Added (Per Person Engaged), 1995-2002
Moreover, Kyoji Fukao points out that ICT investment itself as a ratio over GDP had
been stagnant over the years. [Figure 3-7-3] He presents that to enhance productivity (TFP, to
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be exact) ICT investment should be effective in Japan given the fact the investment had been
rather low. He suggests, however, the reason of the low-motivated situation for ICT
investment have stemmed from the low anticipation on return for the investment in user
companies based on the inclination of Japanese companies to adopt expensive custom
software.80
Note: Blue line (almost at the bottom) represents Japan, yellow line represents the U.S.Sources: Kyoji Fukao, et. al., ‘Seeking for Dynamics for recovery of Japanese Economy’, 2010
[Figure 3-7-3] Comparison of ICT investment / GDP ratio in major advanced countries
Based on those presentation from Fukao et.al., observation from ACCJ and Figure 3-
7-1, I would like to suggest a pathway to improve the situation in Japan where ICT investment
and productivity are low comparatively to other advanced countries; 1. appointment of CIOs
in enterprises who are strategic not only in information technology but also in management
and who received proper level of computer science education; 2.raising IT literacy of IT
departments for not to be too dependent on IT vendors and for being able to ‘think’ by
themselves; 3.based on the strategic observations initiated by those CIOs, make optimal
choice of form of system they adopt in the short/long run. The last point, especially among
those three points, is easier said than done as illustrated in Figure 3-7-4 in terms of cost. The
trial calculation depicts adoption of custom/packaged software makes no big difference due to
the high recurring cost of packaged software – but now there is a new appealing option, cloud
80 Kyoji Fukao, et. al., Seeking for Dynamics for recovery of Japanese Economy, Hitotsubashi University et. al., 2010. http://www.accj.or.jp/ja/about/committees/committee-materials/doc_view/88-
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computing which always associate with concerns of security, but this is why the strategic
thinking is required in decision making.
[Figure 3-7-4] Cumulative cost simulation for usage of custom and packaged software
3.8 Education in Japan and the U.S.
Aforementioned ACCJ paper points out PC-to-student ratio as an educational
problem as follows: The PC-to-student ratio in Japan is still just 1 to 7 – among the lowest in
the OECD – and measures to introduce a digital curriculum are still yeas off.70 This should be
a cause of low IT literacy in Japan, but as discussed preceding/following chapters and sections
the situation around IT especially software business requires urgency. Effective, bold and
dynamic but prompt remedies are needed. Japan has to seriously consider the aging and
retirement of engineers from the workforce and pace of feeding replacements into the
industry. Therefore I believe priority should be placed on higher education which directly
feeds human resource into the business world.
80
3.8.1 Computer Science
Although there are several areas of technologies to tackle, now it is an era of
software/service of Internet/mobile as the image of the Figure 3-8-1-1 tells. Thus importance
of education of computer science cannot be overstated.
CT
[Figure 3-8-1-1 Image of technology trend transition]81
For this matter in Japan’s side there is little quantitative information. I infer the
reason would be that there is very limited university and college information resource since
‘Computer Science’ named department exists only in Tokyo University of Technology as of
201022. Qualitatively, Fushimi Shinya et.al maintained the quality of its instruction was well
below U.S standards and the relatively few computer science engineers have not been well
used and valued in an environment in which the primary activities in software engineering
revolve around customization.19
On the contrary, the U.S. has almost half-century history of computer science.82 For
instance, Stanford University established Computer Science Department in its School of
81 Roger Melen, What Has the Teacher Learned, Stanford University, 2013.82 Masaaki Mizuno, Learning Tree International, Importance of IT Architect and How to Raise
Them, NikkeiBP, 2008. http://expo.nikkeibp.co.jp/hc/seminar/pdf/w5.pdf
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Engineering in 1965.83 As of 2012, computer science is the most popular major among
students at Stanford84 which is the heart of Silicon Valley. Although nationwide in the U.S. its
education has not been necessarily successful in terms of penetration85, there is a movement to
encourage computer science education which was launched with helps by notable engineers
such as Bill Gates and Mark Zuckerberg and other investors. It is called Code.org, the new
non-profit established in 2013 aiming at having 400,000 computer students and 1.4 million
computer related jobs by 2020. [Figure 3-8-1-2]
[Figure 3-8-1-2 target of computer science students by 2020 - Code.org]
In Japan, number of computer science related students has been declining86, but I have
not heard robust movements like ones I described above recently there.
83 Stanford Computer Science, “Department Overview,” http://www-cs.stanford.edu/info.84 Robinson Meyer, “Stanford's Top Major Is Now Computer Science,” The Atlantic, 2012,
http://www.theatlantic.com/technology/archive/2012/06/stanfords-top-major-is-now-computer-science/259199/.
85 Code.org, “What’s wrong with this picture?”, Code.org, 2012, http://www.code.org/stats.86 METI Ideabox, “Re-examination of CS education and treatment of engineers,” METI, 2010.
http://201002.openlabs.go.jp/ja/idea/00567/
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3.8.2 ICT Education
Whereas computer science education contributes to ‘make’ of ICT business,
especially software one, I strongly believe overall ICT education serves to understanding of
importance of ‘use’ of ICT and software. Importance of use of ICT is explained in Kyoji
Fukao’s paper80 which asserts that to enhance productivity (TFP, to be exact), ICT investment
should be effective in Japan given the fact the investment had been rather low. And again, low
productivity has been a topic of economic and politic debate over years (or decades). And as a
matter of fact if you do not have understanding of it, you do not intend to use it and do not
invest in it.
What is the difference of ICT education, especially in terms of use of ICT, and how
are they different in two countries’ higher education? As far as I searched on the web and in a
library and database, I could not find studies and data around it. But assuming the level of
difference of use and investment of ICT partially comes from the one in higher education, I
would infer we could trace the root in their length of history of scientific management.
Scientific management was a theory of management developed by American
mechanical engineer, Fredric Taylor in the 1880s and 1890s.87 In the U.S., the concept of it
was adopted by Ford in assembly lines of Ford Model T using belt conveyor and drastically
improved productivity of automobile manufacturing. Later, its concept diversified into
multiple arenas regarding management engineering such as, but not limited to, business
administration and management, information engineering, information science and system
engineering etc.88 At present, for example, in Stanford University there is a Management
Science and Engineering Department which provides education and research opportunities
87 Wikipedia, “Scientific Management,” Wikimedia Foundation, 2013, http://en.wikipedia.org/wiki/Scientific_management#Effects_on_disruptive_innovation.
88 Wikipedia, Management engineering, Wikimedia Foundation, 2013, http://ja.wikipedia.org/wiki/%E7%B5%8C%E5%96%B6%E5%B7%A5%E5%AD%A6.
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associated with the development of knowledge, tools, and methods required to make decisions
and to shape policies, to configure organizational structures, to design engineering systems,
and to solve problems associated with the information-intensive technology based economy.89
In Japan, Yoichi Ueno is called ‘the father of effectiveness’ since he imported the
notion of Taylor’s scientific management and he established a School of industrial
effectiveness in 1941.90 Around then he delivered lectures in universities like Waseda
University and Kanagawa University which set up management engineering departments
afterwards.91 Therefore Japan has nearly half length of history of it in comparison with the
U.S.
As mentioned at the beginning of this section, although I could not find proof that
Japan is behind in the education of scientific management or its derivatives, management
engineering, I would like to emphasize that it is vital for Japanese universities and colleges to
teach not only general importance of ICT and software but also Productivity Revolution in the
U.S triggered by active adoption of information technology and the fact that Japan has lagged
behind in productivity and its root cause - relatively small investment in ICT and less
utilization of it in management.
The aforementioned ACCJ paper discuss that in order to improve ICT education in
Japan, it should consider providing more flexible visa options for ICT professionals from
foreign countries to bring their skills and experience to Japan under both short- and longer-
term arrangements.70 I will discuss it in subsequent Immigration Policy section.
89 Stanford University, “Overview (of Management Science and Engineering Department),” Stanford University, http://www.stanford.edu/dept/MSandE/cgi-bin/about/index.php.
90 Wikipedia, “Yoichi Ueno,” Wikimedia Foundation, 2012, http://ja.wikipedia.org/wiki/%E4%B8%8A%E9%87%8E%E9%99%BD%E4%B8%80.
91 Kanagawa University, “FAQ for Management Engineering Department,” Kanagawa University, http://www.eng.kanagawa-u.ac.jp/aboutus/faq/manage.html.
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3.8.3 Entrepreneurial Education
See section 3.4.1.
3.8.4 English Education in Japan
One of the clear advantage of the U.S. and disadvantage of Japan in marketing IT and
software product/service in global market is ability of English. Time to acquire reasonable
degree of listening, speaking, reading and writing English, confidence in negotiation, natural
and superb wording and expression in marketing activities such as taglines and brochures,
everything works favorably if you can handle it freely.
However, Japanese have very dishonorable record of TOEFL iBT score; 104th of
speakers of 113 languages.
I leave this topic to linguists but as a business person who did global business for
long time, I would like to suggest a few particular points to Japanese here.
In elementary schools, stop teaching Hepburn Method Roman characters at
inception. It easily gives pupils illusion that English can be pronounced in Japanese
way; combination of mere five vowels and consonants. This must be very harmful
for their pronunciation and most of all for their formation of think process of foreign
language. English should be read, pronounced and taught in English way.
Put emphasis on pronunciation. Listening is mainly based on correct understanding
of correct pronunciation. Speaking is composed of compose, vocabulary and
pronunciation, but we cannot pay attention to all of them while we speak foreign
languages. If they master one component first, in this case it is pronunciation, at the
timing when they are open to new pattern of linguistic sounds, they can easily get
closer to mastery of it.
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Make junior high school students recognize our inherent shyness will be a great
hamper of improvement and natural ‘speakability’ of foreign languages. Make them
think the purpose of mastering them – communication to make things better globally
in a broad sense. Even if we are culturally shy, we have to tweak ourselves to outer
world.
For entering examination to universities and colleges, make TOEFL compulsory. It is
designed for worldwide non native speaker and put emphasis on listening and
speaking at which Japanese are particularly bad as equally as on reading and writing.
Again, think our purpose first - going global.
In universities and colleges, it is obviously the best and fastest to learn and master
English in the U.S. or Great Britain ones. Personal experience and observation of
people who had done so tells author this is absolutely right.
If they correct flaws of current system or not is eventually an answer to conceptual
and philosophical question; are they okay to be 15th in Asian countries economically in the
future as it currently is in TOEFL score, or not?
3.9 Innovation in Japan and the U.S.
Peter Drucker said, ‘Innovation is the specific instrument of entrepreneurship. The
act that endows resources with a new capacity to create wealth.’ It sure created wealth in the
U.S. When we take a look at two Fortune 100 undoubtedly innovative software companies,
Google and Oracle, combined sales revenue and net profit in 2012 were $74 billion and $18
billion respectively (how big and profitable they are!).
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In Japan, there have been innovative software companies but none of them were as
impactful to society as Google and Oracle. Shinya Fushimi explains in his presentation
[Figure 3-9] that Japanese software vendors made several mistakes in business point of view
in the past. And I believe because those exit strategies were mislead as he explained,
innovation which might have been disruptive in their nature could not go right direction and
bear fruits in Japan and world market.
Figure 3-9 Mistakes the Japanese have made in (global) software business92
In Japan innovation is conventionally called ‘gijutu kakushin’ which literally is
‘technology innovation’. As explained in the above figure, in terms of technology, in Japan
they might have put too much emphasis on technology and become too technology-centrism.
And I guess the lack of entrepreneurial business thought process, which I discuss in the next
section, could have lead Japan to current situation.
3.10 Mindset in Japan and the U.S.
Talking about mindset, quantitative data such as entrepreneurial intention, TEA as a
shaped form of entrepreneurship are extensively discussed in preceding Chapter 4. When it
92 Shinya Fushimi. “Why Only Nintendo?.” Mitsubishi Electric Corporation. 2008.
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comes down to inward/outward mindset which is rather often argued in Japan, first I come up
with is number of Japanese students studying in foreign countries. According to Haruaki
Deguchi who is an entrepreneurial founder and CEO of Lifenet Insurance Company explains
that if focused on the number of them to the U.S., it is now 45% of fiscal 1997 when it had
peaked and presently it is one seventh of Chinese students.93
He claims, in turn, this introverted attitude at student level is derived from domestic
way of thinking of Japanese enterprises. For instance many executive officers are originally
from departments like Planning, Accounting, Human Resource which are in headquarters
located in Japan.
On contrary, the U.S., by taking look at its high-tech and software industry’s history
as shown in Figure 3-10-1, it is obvious they had global-minded and globally horizontal
marketing thought processes and strategies.
Figure 3-10-1 U.S companies in its high-tech industry history94
93 Haruaki Deguchi, “Why Students don’t want to study abroad? The reason lies in inward mentality of Japanese companies,” Diamond Online, 2012, http://diamond.jp/articles/-/15920.
94 Richard B. Dasher, New Business Creation and IP Strategy to Cope with Global Competition, Stanford University, 2012.
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Will Japan straggle in terms of entrepreneurial, extroverted mindset as well as other
things we saw here? Maybe not. By referring to Figure 3-10-2, International Orientation
early-stage Entrepreneurial Activity of two countries over the past five years, Japan have
overtaken the U.S. in the score. (The definition of it by GEM is ‘percentage of TEA who
indicate that at least 25% of the customers come from other countries’.)
Country 2008 2009 2010 2011 2012
Japan 7 6 6 11 15
US 17 13 12 13 12
Figure 3-9-1 International Orientation early-stage Entrepreneurial Activity
This could be a result of recognition of Japanese business person that the domestic
market will shrink due to dwindling birth rate and an aging population, or repeated news
article of ‘inward mentality’ in Japanese media. (I am not quite sure about the reason of
slightly diminishing trend of the score in the U.S. side.) Background of this phenomenon
should be studied further.
3.11 Role of Government in IT/SW business in Japan and the U.S.
The aforementioned American Chamber of Commerce’s policy document built on the
independent analysis by Stanford University researchers suggests plenty of policy issues to
Japanese government. I picked some of them which relate to IT and software industry and
seem to be reasonable to me as a Japanese citizen and business person.
Dissolve a political silo in policy making and set up a dependent body in the
government which governs ICT policy. (No time for Japan to spend time in
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‘destructive inter-ministry rivalries)
Deregulate related laws for full convergence of telecommunications and
broadcasting.
Name a national Chief Technology Officer (CTO).
Reexamine current Private Information Protection Law to allow appropriate
degree of data sharing.
Improve immigration and visa policy. (also see the following section)
Consider adoption of ‘National ID’ for future introduction of ‘Kasumigaseki
Cloud’.
Standardize venture capital funding process and publicize best practices for
venture financing.
Permit the Government Pension Investment Fund to increase its allocation to
private funds like venture capital funds, then increase the ratio of those
investments which at present is ‘zero’.
Enhance angel investor tax system by increasing the maximum amount of
investment that can be deducted from total income, and raise the maximum age
of qualifying venture companies.
Permit Japanese LLCs (godo-gaisha) to elect a pass-through taxation system and
their conversion into stock-based corporation (kabushiki-gaisha) on a tax-
deferred basis.
Set (higher) TOEFL standards during educational development
Emphasize interactive conversational skills more.
Keep steady flow of native English speakers to the country.
Back up internationalize higher education more.
90
My studies in this paper confirmed that historically Japanese government has been
‘slow’ in setting policies to address the changes in IT industry and business. Or they did not
seem to understand whole ecosystem of global IT business. Those are quite contrary to the
U.S. government including the U.S. military which had comprehensive insights into
technology and what it would bring to the country. Instances are as follows;
MITI (former METI) in Japan sponsored multiple alliances between Japanese
and non-IBM U.S. computer manufactures to compete against IBM but this led
Japanese market highly fragmented in terms of operating system26 and
eventually software vendors lost motivation to develop software in the end.
In the U.S., sponsored by Defense Department etc. to develop a ‘common
business language’, COBOL was specified and those higher-level languages
supported productivity gains in enterprises in the U.S.
It was not until 1998 that Japanese government put LPS law into effect and
limited liabilities of limited partnerships which resulted in facilitation of money
inflow to venture businesses by those partnerships.31
In Japan there still is need for streamlining accounting laws around issues such
as equity curve-out, spin-off, demerger, listing of subsidiaries, intellectual
properties and so on.69
In the U.S. in 1958 VC industry has jumped by the passage of Small Business
Investment Act of 1958 which officially allowed the SBA to license private
SBICs to help with financing and managing small entrepreneurial businesses for
91
addressing a major gap existed in the capital markets for long-term funding for
growth-oriented small businesses.28
Some of the important researches regarding such as corporate venturing and
angel investment are frequently conducted by ‘Techno Research Laboratory’ in
Japan delegated by METI. Problems often I encountered during this research
were 1.they did not touch vital points if they seem challenging to survey which
itself should be the purpose of the delegation of research 2.no formal legitimate
information of that company can be found in Internet and even in nationwide
credit database of companies. Accurate and open information and data is crucial
to recognize status quo to improve economy and society but in this matter
something opaque is going on.
Data and statistics about venture and small business are collected and well-
organized by Small Business Administration (SBA) in the U.S. Those can be
read at their web site at; http://www.sba.gov/category/navigation-structure/starting-managing-business/
starting-business/establishing-business/b-1
3.11.1 Immigration Policy
ACCJ argues that the government of Japan should improve its immigration
procedures and integrate immigration policy with its economic growth strategy. Policies
which needs improvement are, for example, providing more flexible visa options for ICT
professionals from Asia and elsewhere to bring their skills and experience to Japan under both
short- and longer-term arrangements. It also claims that Japan needs a new generation of
92
skilled ICT professionals both knowledgeable about the technology and comfortable with
working across borders in a convergent and interconnected world. 70
Immigration is a difficult issue to tackle with for almost every country’s government,
one good example should be President Obama’s emphasis on immigration reform in his
second term starting from 2012.
When it comes down to information technology, immigrants and their flesh and
blood played a huge role. According to Vivek Wadhwa, in his book ‘Immigrant Exodus’;
Each decade has yielded top-flight entrepreneurs not born in this land, from
Andrew Carnegie (Carnegie Steel Company) to Alexander Graham Bell (AT&T)
to Charles Pfizer (Pfizer) to Vinod Khosla (Sun Microsystems) to Sergey Brin
(Google) to Elon Musk (PayPal, SpaceX, Tesla Motors). A 2011 study by the
Partnership for a New American Economy tabulated that first-generation
immigrants or their children had founder roles in more than 40% of the Fortune
500. These companies had combined revenues of greater than $4.2 trillion and
employed more than 10 million workers worldwide95
He states that the U.S congress’s inability to enact high-skill friendly immigration
reform has affected high-tech related immigrants. But for my viewpoint, Japan is not even
standing at the entrance of effective immigration system to enhance productivity of not only
IT industry but also country as a whole.
95 Gregory Ferenstein, “For The First Time In Decades, US Is Bleeding High-Skilled Immigrants,” TechCrunch, 2012, http://techcrunch.com/2012/10/07/report-for-first-time-in-decades-us-is-bleeding-high-skilled-immigrants/.
93
4 Conclusion:
1
2
3
4
5
5.15.2
So, what should Japan do for its software industry to catch up with the one of the
U.S., and eventually exceed it? Things are not simple. As we saw in Chapter 2, history of
software is shorter and has been less dynamic in Japan. And as a list of sections shows in
Chapter 3, there are a multitude of issues to tackle there.
Figure 4-1 is an image of summary for how to create a great number of successful
IT/software companies in Japan;
94
Figure 4-1 Summary/Image of road to create excellent IT/software companies in Japan
As we can see above figure and in preceding chapters, again, there are too many
things to be done in Japan. It may sound cliché, but first of all prioritization of the items to be
done is must. I would like to suggest people from those bodies to participate in prioritization
session; from government – METI, MIC, MEXT; from business world – successful software
companies, incumbent system integrators and traditional/big IT vendors. We may invite the
U.S. participants as well, if possible, such as management of excellent software companies,
ACCJ and Stanford University.
This prioritization and actual actions followed to it are crucial because there might be
a worst scenario in Japan. That is, as cloud computing penetrates in the market, the U.S.
players dominates in area of cloud platform and application, plus software gets commoditized
95
CitizensMotivation
Higher Education
AngelsVCs
CVCs
Entrepreneurs
Exits
Holder of the ecosystem Good government policies Successful cases Entrepreneurial culture Understanding for IT/SW
Dream Incentive
Intention Culture
Overall ICT Entrepreneurship
CS Mgmt Engr English
Super angels Crowdfunding
Strategic investors
Mindset Experiences
Take risks Skills
Large Enterprises
IPOs M&As
Out of colleges From enterprises
Successful Companies Significantly profitable
Impactful to society Scalable (e.g. software) Global
and thus it diminishes the needs of custom software development, then Japanese system
integrators and small software houses which consist most of the IT service industry’s
workforce become totally disrupted and consequently some or many of one million workers
there lose their jobs. Practically custom software development will never go away and my
statement may be an extreme argument, but as the history shows, the long-term perspective is
always necessary.
Then those issues with priorities attached, person/organization in charge, progress
etc. should be visualized in public with using, of course, software and Internet. Given the
nature of people who will be involved in this, the visualization with software/Internet will not
be that difficult.
In my opinion, with above figure I depicted, to obtain successful IT/SW companies in
Japan, education is most important factor in mid- and long-term. As a matter of fact,
successful companies consist of competent people and first of all they need able and
ambitious entrepreneurs to start those companies. As I discussed in Section 3.8, education of
overall ICT, computer science, entrepreneurship and English need to be improved rapidly
there. And among them, especially the entrepreneurship education has been poor in Japan and
needs to be improved. The government and private companies such as venture capital firms,
incubators and even traditional companies like electronics manufactures and trading
companies ought to take roles here. Only with proper understanding by young generation for
ecosystem of world IT/SW industry, risk associated with startups and benefit they could enjoy
when they become successful by exits, we can promote them starting in new business and the
society to move entrepreneurially forward. Desirably it is better if we can show a number of
successes of Japanese IT/SW companies, especially ones deploying their activities globally
96
and went public, but until we can obtain certain number of them we can use case studies of
U.S. companies such as Google, Amazon, Oracle etc.
Things are not easy as well because inherently it involves in competition and there
are opponents. Chinese96 old proverb says ‘If you know the enemy and know yourself, you
need not fear the result of a hundred battles.’ and most of Japanese know this word. Chapter 2
and 3 are all about this. If one studies closely the situation of the U.S. IT and software
business in order to know the enemy, although the U.S. undoubtedly has the best in the world
ecosystem around them, we can find that it still has some imperfection. I pick two examples
here;
Ewing Marion Kauffman Foundation which have invested in or committed to
around $250 million to venture capital and growth equity funds and have twenty-
year history of venture investing experience in nearly 100 VC funds argues that64
Limited Partner investment model is broken.
VC returns haven’t significantly outperformed the public market since
the late 1990s.
Since 1997, less cash has been returned to investors than has been
invested in VC
They will move a portion of capital invested in VC into the public
markets.
Figure 4-2 shows a transition of number of seed deals, series A deals and
differences in numbers between them. As it gets close to present, the gap between
96 Now, China plays a big role in IT global business especially in computer manufacturing. On added-value basis, it had 46.5% share in the world in 2012.
97
those two numbers are getting widened which Silicon Valley Business Journal
called ‘a widening gulf’. This phenomenon is also called ‘Series A Crunch’
because it seems like investors in series A (usually VCs) are tightening money
inflow to startups who had gotten funded in seed stages. 97
YearQuarter 1Q 2Q 3Q 4Q 1Q 2Q 3Q
Seed Deals 242 289 233 301 388 504 513Series A Deals 155 203 188 157 173 206 182
Difference -87 -86 -45 -144 -215 -298 -331
2011 2012
Figure 4-2: A widening gulf between seed deals and series A deals97
This condition can evoke those unfavorable scenarios;
A certain number of angel investors will lose a lot of money (more than
usual).
Bubble inflation, given the crowdfunding will inflow more money into
the system.
Too high expectation will pull valuations of seed-stage companies too
high.
Incubators and accelerators will get harmful effect.
I do not think those two factors are totally disruptive to whole ecosystem around IT
and software business in the U.S. But here what I would like to assert is Japan have to study
the current situation more closely and deeply, desirably in Silicon Valley because the actual
conversation with people there is nothing but valuable information. Then they can come up
97 Cromwell Schubarth and Greg Baumann, DID FOOLS RUSH IN?, Silicon Valley Business Journal, 2013.
98
with hybrid system which eliminates flaws of the U.S. ecosystem and add strength of
Japanese such as precision and ‘attention to the little things’.
To become better than global opponents, we need to take a look at our essential
strength. I assume the mentality of Japanese to pay attention to the little things can be a good
strength in future world. According to Cusumano, M et. al, quality of Japan’s software was 20
times better than the U.S. one.98 In several years, I predict the platform for software will be
cloud computing basis and the differentiation of combination of hardware performance and
capacity will be hard. And on the ‘flattened’ computing world, aside from sales and
marketing, for software business pure functionality, usability and quality will be key factors.
Among those three factors, we already have one at hand and in this term we Japanese are
blessed because this ‘paying attention to the little things’ mindset is somehow ‘Citizens’ level
in above chart which is very hard to teach. And quality of software will be critical because
when using cloud computing security is highly appreciated by users. Security is accomplished
not only by infrastructure and platform but also by the software codes vendors write in their
product.
Even with the priority, education and detail-oriented mentality, still things may not
easy and simple. In this somehow stuck situation in Japan, I would like to suggest possible
roles of trading companies (SOGO SHOSHA) in Japan here.
Trading companies played significant roles from Meiji era and especially in the post-
war modernization period in Japan.99 In emergence of new industries in the period, by taking
98 Cusumano, M. et. al, Software Development Worldwide The State of the Practice, IEEE Software, 2003.
99 Japan Foreign Trade Council, Inc., Research on SOGO SHOSHA: Origins, Establishment, and Development, Japan Foreign Trade Council, Inc., 2012
99
risks and managing new businesses domestically and globally, they have helped to grow the
country rapidly and consequently responded to national requests. Even today, they earn
tremendous amount of profit by handling businesses worldwide.
Now their competitiveness is considered to like in those points:
Being able to take and control risks based on their sophisticated management
system and corporate governance
Have a number of affiliated companies in which they invested
Being able to manage those companies aligning with their management
strategies
Nowadays their mainstream business is natural resources-related. Business and/or
investment in ICT especially software business is not very aggressive. Having considering
ICT is the largest industrial sector in Japan and software is basis of ICT, I assume there is
some room for trading companies to think again software business strategy in them. Aside
from VC business they do in foreign countries particularly in Silicon Valley, U.S., nurturing
Japanese IT and software vendors can be beneficial for them and Japan. But as we saw in
Section 3.5 ‘Venture Capitalists in Japan and the U.S.’, at this point investing money in
Japanese startup business does not seem that lucrative. There ought to be bottom-up
approaches such as
Initiate crowdfunding type of investment to help lean startups
Export domestic competitive software to other countries
Help young startups to go global
Offer entrepreneurial courses for young people
Provide online English conversation education services
Giving out motivational information of startups they have invested which
became very successful (in global market)
100
Talk about global IT and software business experience and enlighten young
entrepreneurs
etc.
But even for those historically proven trading company, in this fast and competitive
IT/software global market, to find would-be successful venture companies should not be easy.
Considering their ‘investment vehicle’ nature and guerilla-like fast/wide-spreading nature of
the industry, crowdfunding could be a practical business option for them to start in Japan.
With that, they can not only fund young entrepreneurs in IT/software area but also help them
motivated and educated.
Finally, it all depends on people’s will. Maybe this is a time for Japanese who are
involved in IT and software business to ask themselves, ‘Do we want to be better or stay
mediocre?’ IT service market of Japan is actually the second largest in the world, next to the
U.S. It’s big, which fortunately is good, but unfortunately in IT and software world where
things move extremely fast, staying even mediocre is extremely hard unless we are willing to
change ourselves, constantly.
101
[Figure 1-1-1] Ideal Employer Survey Findings 2012
Japan U.S. JapanEngineering/Natural Science IT Engineering Natural Science
1 Bank of Tokyo-Mitsubishi / UFJ Bank Google Panasonic Corporation Google NASA National Institutes of Health
2 Mitsubishi Corporation Apple Sony Microsoft Boeing Mayo Clinic
3 Mizuho Bank Walt Disney Company Toyota Motor Apple Lockheed Martin Corporation Centers for Disease Control
4 SUNTORY Ernst & Young East Japan Railw ay Facebook Google American Cancer Society
5 Nomura Deloitte Honda Motor Company IBM General Electric Walt Disney Company
6 Itochu Corporation J.P. Morgan Hitachi Amazon Apple Peace Corps
7 Mitsui & Co. Nike Ajinomoto Intel U.S. Department of Energy Environmental Protection Agency (EPA)
8 Toyota Motor Pw C Central Japan Railw ay Electronic Arts Exxon Mobil Corporation Google
9 East Japan Railw ay Goldman Sachs Otsuka Pharmaceutical Walt Disney Company Walt Disney Company NASA
10 Nintendo KPMG LLP Sharp Sony BMW Apple
11 Central Japan Railw ay The Coca-Cola Co. SUNTORY FBI Microsoft FBI
12 Ajinomoto Facebook Toshiba National Security Agency (NSA) Intel Nike
13 The Oriental Land Company FBI Canon NASA Environmental Protection Agency (EPA) Maxim Healthcare
14 Sony Microsoft Takeda Pharmaceutical Company Cisco Systems IBM United Nations
15 ALL NIPPON AIRWAYS Morgan Stanley Apple Central Intelligence Agency U.S. Air Force Teach for America
16 Google Amazon Kobayashi Pharmaceutical Lockheed Martin Corporation Johnson & Johnson Central Intelligence Agency
17 Dentsu Incorporated Starbucks Kyocera HP Shell Oil Company Johnson & Johnson
18 AEON Group Bank of America Merrill Lynch House Foods Dell Northrop Grumman Pfizer
19 SoftBank Procter & Gamble DAI NIPPON PRINTING Oracle General Motors U.S. Department of Energy
20 Daiw a Securities Group BMW Nintendo D.O.D. Ford Motor Company U.S. Air Force
BusinessRank
U.S.
* Companies highlighted in blue denote IT companies mainly sell hardware. Those in red denote ones mainly sell software. Categorized by the author.
* Telecommunication carriers, consumer electronics companies, consulting firms are not categorized as IT companies in above table.
* Those surveys were conducted by Universumhttp://www.universumglobal.com/IDEAL-Employer-Rankings/The-National-Editions
* The rankings above represent how attractive an employer is among students and indicates a company’s position in relation to other ideal employers in the recruitment market. The rankings enable employers to track and set targets for measuring their level of employer attractiveness.
* Students are targeted separately according to their main field of study. The Universum Top 100 Ideal Employer Rankings are thus categorized as such.
* Number of participants, individual employer evaluations, universities targeted and field period are described in the web site above.
102
[Figure 3-1-1] Profitability of IT/SW companies in Japan and the U.S.100
Packaged Software Vendors(including SaaS applications) (Unit: M$)Country Company Name Sales Revenue Net Profit Net Margin Avr. Net Margin Term
Trend Micro Inc $1,043 $149 14.3% 1/11-12/11Zenrin $581 $22 3.7% 4/11-3/12OBIC $538 $115 21.4% 4/11-3/12
WorksApplications $247 -$12 -4.7% 7/11-6/12Infoteria $14 $2 12.0% 4/11-3/12
Oracle Corp $37,121 $9,981 26.9% 6/11-5/12Symantec Corp $6,730 $1,172 17.4% 4/11-3/12
Adobe Systems Inc $4,216 $833 19.8% 12/10-11/11Intuit Inc. $3,851 $634 16.5% 8/10-11/7
VMware Inc $3,767 $724 19.2% 1/11-12/11Varian Medical Systems Inc $2,597 $399 15.4% 10/10-9/11
salesforce.com inc $2,267 $12 0.5% 2/11-1/12Citrix Systems Inc. $2,206 $356 16.1% 1/11-12/11
System Integrators (including IT services, consulting etc.)Country Company Name Sales Revenue Net Profit Net Margin Avr. Net Margin Term
NTT Data $13,909 $339 2.4% 4/11-3/12NRI $3,951 $366 9.3% 4/11-3/12
IT Holdings $3,638 $24 0.7% 4/11-3/12CTC $3,308 $148 4.5% 4/11-3/12
Accenture PLC $27,353 $2,278 8.3% 9/10-8/11Computer Sciences Corp $16,042 $759 4.7% 4/10-3/11*1
SAIC Inc $10,997 $59 0.5% 2/11-1/12Cognizant Technology Solutions Corp $6,121 $884 14.4% 1/11-12/11Booz Allen Hamilton Holding Corp $5,855 $240 4.1% 4/11-3/12
Total IT Vendors (HW/MW/SW, IT Service, consulting etc.)Country Company Name Sales Revenue Net Profit Net Margin Avr. Net Margin Term
Fujitsu $49,640 $474 1.0% 4/11-3/12IBM Japan $9,646 $303 3.1% 11/1-11/12
US IBM $106,916 $15,855 14.8% 14.8% 11/1-11/12
Japan
US
Japan
US
Japan
11.4%
22.5%
3.5%
6.4%
1.3%
*1: To eliminate special accounting factor, the author changed the term intentionallySources:Earnings briefings, Securities Filings: Japanese companiesCompustat - Fundamentals Annual: U.S. companies
100 Converted a dollar to 90 yen based on the approximate currency exchange rate at the time of writing.
103
[Figure 3-2-1-2] Top 25 Software Companies in Silicon Valley101
Rank Name Software description Revenue Net Income Net margin1 Google Inc. Google Apps cloud productivity suite, Android, Chrome OS $47,500 $10,500 22%2 Oracle Corp. Enterprise software $37,200 $10,500 28%3 Symantec Corp. Norton Antivirus, security software $6,700 $1,100 16%4 Intuit Inc. QuickBooks, Quicken and TurboTax $5,200 $955 18%5 Adobe Systems Inc. Adobe Creative Suite $4,400 $834 19%6 VMware Inc. Virtualization software $4,300 $740 17%7 Electronic Arts Inc. Video game software $4,000 $15 0%8 Varian Medical Systems Inc. Oncology software $2,800 $427 15%9 Citrix Systems Inc. Cloud, collaboration, networking, virtualization $2,200 $347 16%
10 BMC Software Inc. Business service management software $2,100 $342 16%11 Synopsys Inc. Electronic design and testing software $2,100 $239 11%12 VeriFone Systems Inc. Electronic payment software $1,800 $65 4%13 Check Point Software Technologies Ltd Security software $1,300 $606 47%14 Cadence Design Systems Inc. Electronic design automation software $1,200 $137 11%15 Tibco Software Inc. Cloud infrastructure software $1,000 $122 12%16 Informatica Corp. Data integration software $803 $105 13%17 Electronics for Imaging Inc. Print industry software $641 $38 6%18 Ariba Inc. Ariba Commerce Cloud $517 $5 1%19 Guidewire Software Property/Casualty(general) insurance industry software $350 $19 5%20 NetSuite Inc. Cloud ERP solution $288 ($33) N/A21 Palo Alto Networks Network security $284 ($7) N/A22 Affymetrix Inc. Microarray technology $275 ($6) N/A23 Actuate Corp. ActuateOne Business Intelligence platform $139 $15 11%24 BroadVision Inc. E-commerce software $15 ($6) N/A25 Administrative Software Applications Inc. Online registration and class management software $2 $0 0%
Legend: APP (BtoB)APP (BtoB/C)APP (BtoC)
MW (BtoB)
* Ranked by revenue in most recently completed four quarters; companies headquartered in Silicon Valley* Constitution of Silicon Valley in the table above: Santa Clara County; Fremont, Newark and Union City in Alameda County; Atherton, Belmont, East Palo Alto, Forester City, Menlo Park, Portola Valley, Redwood City, San Carlos, San Mateo and Woodside in San Mateo County; and San Benito, Santa Cruz and Monterey counties.
* Total revenue over four quarters as reported by the top 25 software companies = $128 billion (\11.5 trillion)* APP (application), MW (middleware), BtoB (business to business), BtoC (business to consumer) was classified by the author.
101 Silicon Valley Business Journal, TOP SOFTWARE COMPANIES
104
[Figure 3-4-2] List of entrepreneurial groups and organizations at Stanford University
Graduate School of Business (GSB) Center for Entrepreneurial Studies Center for Social Innovation Graduate School of Business (GSB) Entrepreneur Club GSB Energy Club Stanford Institute for Innovation in Developing Economies Stanford Program on Regions of Innovation and Entrepreneurship
School of Engineering (SoE) Asia Technology Initiative Epicenter (National Center for Engineering Pathways to Innovation) Stanford Institute for Electrical and Electronics Engineers Stanford Technology Ventures Program US-Asia Technology Management Center
Multidisciplinary AIMS (Association of Industry-Minded Stanford Professionals) Cross-disciplinary Healthcare Innovation Partnership at Stanford European Entrepreneurship & Innovation Hasso Plattner Institute of Design (d.school) Stanford IP Innovation Society Stanford Media X Start X The Precourt Institute for Energy Woods Institute for the Environment
Media Graduate Program in Journalism: Digital Media at Stanford
Technology Transfer Office of Technology Licensing
School of Medicine Biodesign School of Medicine Career Center
Student Groups Asia-Pacific Student Entrepreneurship Society Business Association of Stanford Entrepreneurial Students Society for Entrepreneurship in Latin America Stanford Energy Club Stanford Law & Technology Association Stanford Venture Capital Club Stanford Women in Business
Sources: Stanford Entrepreneurship Network – Member Organizations (https://sen.stanford.edu/members)Note: The list above does not represent all entrepreneurial organizations at Stanford University
105
[Figure 3-4-3] Brief explanations of entrepreneurial groups and organizations at Stanford University
Stanford Entrepreneurship Network (SEN)https://sen.stanford.edu/ A collection of 30 + entrepreneurial organizations. Serves as a single point of contact for them. Sponsored by Deloitte. Runs ‘Entrepreneurship Week” every year in February/March.
https://sen.stanford.edu/e-week
StartXhttp://startx.stanford.edu/ A nonprofit organization. Takes no equity and charges nothing to entrepreneurs. Have a community of 220+ founders. Application for founders is limited to Stanford students,
professors or post docs. Provides benefits like stipend, office space, mentorship, free legal, free servers and network.
Stanford GSB Entrepreneur Club (E-Club)http://www.gsbeclub.org/about-us The largest entrepreneurial professional club at GSB (MBA program at Stanford).
Stanford Technology Ventures Program (STVP)http://stvp.stanford.edu/about/ An academic organization about entrepreneurship at School of Engineering. Hosts ‘Entrepreneurial Thoughts Leaders’ Lectures.
They can be seen online and are open to public.http://ecorner.stanford.edu/index.html
Mayfield Fellows Program (MFP)http://stvp.stanford.edu/teaching/mfp/ Only 12 students may be enrolled each year. 9 months work/study program starting from April and ending in December. Kevin Systrom and Mike Krieger of Instagram are alumni of MFP. There are 34 more companies founded by MFP alumni.
US-Asia Technology Management Center (US-ATMC)http://asia.stanford.edu/ An education and research center in School of Engineering. Director: Professor Dasher Aims at integrating practical perspectives into international strategic technology management along
with analysis of research trends in selected areas of leading-edge technologies.
Asia-Pacific Student Entrepreneurship Society (ASES)http://ases.stanford.edu/ The largest student-run entrepreneurship organization in the Asia-Pacific. Founded in 2000 by a group Stanford University engineering students. Alumni including Co-founder of Posterous (acquired by Twitter in March 2012), Garry Tan.
Sources: Stanford Entrepreneurship Network – Member Organizations (https://sen.stanford.edu/members) and each web site.Note: Figures are as of 2012.
106
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