The Promise of U.S. Japan Start up Collaboration

Commentary by Makoto Tsujiguchi

Published July 19, 2024

Introduction

The Kishida administration of Japan, which aims to revitalize the Japanese economy through addressing social issues, outlines its basic economic policy guidelines in two documents published and revised every June. The Basic Policy 2024, released on June 21, affirmed the correctness of past policies and declared ongoing support to "start-ups" as the key drivers of innovation and social implementation of new technologies, which contributes to resolving social issues.

Start-up promotion was also highlighted in the United States-Japan Joint Leaders' Statement released on April 10 and proposed by the Japanese side. Japanese policymakers and businesses are eager to accelerate cooperation between the two nations in this field. Currently, the U.S. government appears relatively passive in receiving proposals; however, it could further leverage its influence to strengthen international collaboration in the innovation field and deepen economic partnership among like-minded counties. Indeed, start-up promotion is emerging as a new pillar of U.S.-Japan partnership going forward.

Why Start-ups?

With the Japanese economy struggling with low growth rates, low productivity, and a dearth of innovation, start-ups are seen as vital to fostering dynamism and boosting economic growth, while also tackling social issues. Start-ups are generally recognized for their high productivity, significant contribution to value creation, and positive spillovers in innovation processes through research and development (R&D). Meanwhile, start-up ecosystems in Europe, China, India, and other countries are rapidly expanding with robust public policy support, while Japan lags behind other countries in terms of the number of start-ups, investment in start-ups, and entrepreneurial spirit. Keidanren, Japan's largest economic organization, urged the government to implement bold measures to catch up with these faster-moving counterparts.

In November 2022, the Kishida administration published the "Five-year Plan" to increase start-up investment tenfold by FY 2027. It introduced various unprecedented measures, including tax incentives, public funding, public procurement, and support for human resource development. Now, halfway toward achieving its goal, there are still many challenges remaining.

On the other hand, the United States continues to be the world's most successful model for start-up ecosystems, despite many countries having focused on promoting start-ups for years. The United States leads globally in start-up investment and the number of start-ups and unicorns. Silicon Valley and New York have been consistently ranked first and second in ecosystem rankings for five consecutive years, while Tokyo remains in 10th place or below. The entrepreneurial environment in the United States is characterized by abundance and diversity in the three essential elements for start-ups: people (entrepreneurs and mentors), money (funds), and things (research ideas and results). Each of these elements is complex and multifaceted, as reported by a governmental think tank to the Ministry of Education, Culture, Sports, Science and Technology of Japan.

Such an autonomous and spontaneous start-up ecosystem in the United States represents a unique form of soft power that China lacks, despite its rapid catching up in science and technology R&D. This dynamic has captured the interests of various countries, including Japan. Indeed, Japan's start-up promotion policy is evolving with the aim of building a U.S.-style start-up ecosystem. This is driving increasingly active cooperation between the United States and Japan in the start-up sector under government initiatives, particularly in the areas of human exchange and social implementation. Below are some examples of this cooperation.

Acceleration of Human Exchange through Start-up Promotion Policy

The promotion of start-up policies can play a pivotal role in significantly accelerating human exchanges involving younger generations, which is crucial for the stability of the U.S.-Japan relationship. Several acceleration programs operated by the Japanese government and private sector are facilitating this exchange. Japanese entrepreneurs participate in these programs, visiting the United States to receive mentoring from senior entrepreneurs, gaining insights into the innovation mindset, and establishing personal networks with U.S. investors and accelerators. These entrepreneurs often form companies with a strong potential to invest in the United States in the future.

The Ministry of Economy, Trade and Industry of Japan is expanding the scale of its entrepreneur dispatch programs, such as "J-StarX" or "Shido Next Innovator," aiming to send 1,000 participants over the next five years. Progress has been promising, with 400 individuals dispatched in FY 2023, surpassing initial targets. The programs are primarily held in U.S. innovation hubs such as Silicon Valley, Boston, New York, San Diego, and Austin, as well as in other countries. The University of California San Diego is actively developing alumni networks for Japanese entrepreneurs through its involvement in the programs.

Regarding programs for capitalists and accelerators, another dispatch program will soon be released under the Global Innovation through Science and Technology Initiative between the United States and Japan. This program, though relatively small in scale, offers a longer duration compared to J-StarX. It specifically targets deep tech fields to foster discerning capitalists and accelerators. For the U.S. venture capitalists hosting participants, this presents an opportunity to establish a gateway to Japanese limited partner investors, talent, or markets.

U.S.-Japan Collaboration in "Lab to Market"

U.S.-Japan collaboration in start-up-promoting policy also contributes to enhancing R&D and social implementation, particularly in critical technologies, through university-based R&D start-ups from the two countries. While Japanese universities possess technologies and patents with start-up potential, the pathway from research to start-up businesses has been underdeveloped. The licensing revenue generated by universities in Japan is one-ninetieth of that in the United States, highlighting the challenge of connecting R&D outcomes to patent acquisition, start-up formation, and successful market entry.

One promising initiative is the "Global Startup Campus," which pairs Japan's research resources and networks with U.S. universities, including the Massachusetts Institute of Technology. Japan is expecting the campus to serve as a hub integrating research and incubation functions in deep tech fields. The actual opening is scheduled for 2028; however, the Japanese government allocated an initial research funding budget of 57 billion yen. In a proposal published on May 31, the expert panel on the Global Startup Campus initiative outlined target areas such as biotechnology, climate tech, AI, and robotics. There were also suggestions for research contributing to economic security and dual-use applications not typically pursued by existing universities in the discussion. For U.S. universities and researchers, the conveniently located campus in central Tokyo is expected to facilitate joint research opportunities under the government-funded research initiatives, as well as exploration of potential collaborations with Japanese companies.

The remaining challenge in establishing this pathway from lab to market in Japan is the shortage of venture capitalists with extensive knowledge and mid- to late-stage capital in the deep tech sector. At the largest start-up event in Asia, hosted by the Tokyo Metropolitan Government on May 15, the Japan External Trade Organization (JETRO) specifically invited U.S. venture capitalists and arranged meetings with Japanese start-ups. During a BIO2024 side event in San Diego on June 4, Prime Minister Kishida remarked online, "Now is the time to invest in Japanese startups addressing global challenges." Amid rising international geopolitical risks, venture capital investment in the country is steadily gaining momentum. "We are seeing more Japanese startups attracting investment from foreign VC firms," noted KPMG's "Venture Pulse Q1 2024."

Additionally, for foreign entrepreneurs and experts who connect the path from research to implementation, the Japanese government expanded and introduced related visa programs. The "Startup Visa," which provides a period for start-up preparation, and the "J-Find" offer a maximum two-year stay to graduates of the world's top 100 universities.

The Strategic Significance of Start-up Collaboration

In the face of a complex international situation, the sustainable and strong ties between the United States and Japan are being tested, and a recent CSIS report cautioned that the dramatic decline in the number of international students in both countries risks eroding the foundation of the bilateral relationship in the long term. Expanding exchanges among diverse stakeholders in the "lab to market" process-researchers, entrepreneurs, investors, accelerators, university support personnel, local governments, intellectual property experts-will enhance the multilayered and deepened networks between the two countries. Furthermore, there is room for creation and expansion of acceleration programs through collaborations between universities and the private sectors in both countries. These efforts present crucial opportunities to navigate and potentially overcome this crisis.

Japanese start-ups expanding their businesses in the United States will build more multilayered economic cooperation in addition to traditional manufacturing investment, as JETRO New York director Satoshi Miura has pointed out. For start-ups in Japan, the importance of not being limited to the domestic market, but rather entering the global market from the start with an eye on increasing unicorns, has recently been emphasized. The number of Japanese start-ups that have established or relocated their bases to the United States has been steadily increasing.

It should be emphasized that such multilayered interactions between the United States and Japan will form the bedrock of their technological cooperation. Utilizing technologies owned by start-ups or potential start-ups, particularly in critical fields such as AI, robotics, biotechnology, materials science, and space, is effective for bilateral economic cooperation. The Japanese government has indicated its intention to actively support start-ups with related high-end technologies and services in support of Ukraine's reconstruction efforts. Through support from both governments for personnel exchanges and the formation of bases, as well as the creation of networks between the people of both countries in R&D and social implementation, the activation of autonomous exchanges can be fostered.

Conclusion

Cooperation in the start-up field between the United States and Japan is still in its early stages. However, the robust start-up ecosystem model of the United States can serve as a catalyst to deepen economic relations between the two countries, accelerate people-to-people exchanges, and enhance economic interdependence. Interest in start-ups within Japan is exceptionally high, and there is growing momentum to promote U.S.-Japan cooperation in this area. Stakeholders in both countries should seize this opportunity to foster multilayered efforts among governments, universities, companies, and individuals. Challenges remain, including the need to enhance the environment for attracting talent, streamline information dissemination and administrative procedures, and sustain funding. Continued efforts, particularly from the Japanese side, are crucial to overcoming these challenges and further advancing cooperation. Ultimately, these initiatives will significantly contribute to fostering trust and deepening bilateral relations between the United States and Japan.

Makoto Tsujiguchi is a visiting fellow with the Japan Chair at the Center for Strategic and International Studies in Washington, D.C., from the Japan Business Federation (Keidanren).

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