How Japan Can Create Circumstances Favorable for Growth Enterprises

Overview

1. If Japan is to enjoy sustained economic growth, it is important that steps be taken to encourage the establishment and growth of enterprises, which aim to develop new businesses using new technologies and business models, and to stimulate the economic activities. A survey of trends in the establishment of new enterprises in Japan gives grounds to fear a decrease in economic vitality. The ratio of establishing of new enterprises has slumped and the number of enterprises is falling. For this reason, it is a matter of urgency that steps be taken to encourage the establishment of new enterprises and to foster growth enterprises. However, it has been pointed out that Japan lacks both the numbers of investors prepared to invest in growth enterprises and such market depth as found in the developed countries of Europe and the United States, and that a funding gap has opened up between fund raisers and providers.

2. Japan has implemented various measures with a view to creating circumstances favorable for venture investment. Observers have suggested that the reasons why investment has failed to grow in spite of these measures include (i) the considerable asymmetric information about recently established enterprises, (ii) the inadequacy of the investment to fulfill the functions of business angels, venture capital, or institutional investors such as incubation, and (iii) issues relating to assessments, costs, price formation, etc. in growth markets.

3. When looking at overseas, in the United States, a range of investors, including business angels, venture capital and institutional investors, invest in enterprises at each stage of their development, and both the multi-layered structure of the market and a lot of choice of exit methods help to encourage such investors. In the United Kingdom, the government has made fostering the growth of venture companies a matter of policy, and to this end is pursuing pensions reform and the introduction of tax benefits, etc. In particular, the London Stock Exchange's Alternative Investment Market (AIM) has a system of nominated advisors, known as "nomads", from which Japan could learn a great deal.

4. These facts suggest that, if provision of funds to growth enterprises in Japan is to be increased and if enterprises aiming for growth are to be able to make greater use of the capital markets as a means of raising funds, it is vital that steps be taken to develop circumstances favorable for fostering growth enterprises. These include measures to expand and strengthen the resources and functions in which Japan is deficient, and to upgrade the capital markets. Specific measures to these ends should include the following.
(1) Improving circumstances for growth enterprises: Japan must develop circumstances favorable to the establishment of venture companies that will be a suitable target for institutional investors, especially technology-based ventures. It also needs to establish management systems and disclosure systems that will make enterprises "worthy of investors' confidence" even if they are in the process of growth.
(2) Developing circumstances that stimulate venture investment: Japan needs to establish structures that incorporate growth enterprises as an investment target for institutional investors and to expand the tax benefits applicable to business angels and overseas investors. It also needs to improve the quality of the markets from the standpoint of growth enterprises by stimulating the market activities, and to establish exit methods other than IPOs.
(3) Developing circumstances that promote the efficient functioning of the markets: Japan needs "markets for professional investors" that offer a high degree of freedom. However, a precondition to the establishment of markets for professional investors is that the functions of existing markets be strengthened, or that surrounding circumstances that promote the efficient functioning of existing markets be developed.

DISCLAIMER: This English version is not an official translation of the original Japanese document. In cases where any differences occur between the English version and the original Japanese version, the Japanese version shall prevail. The Japan Research Institute, Ltd. shall accept no responsibility or liability for damage or loss caused by any error, inaccuracy, or misunderstanding with regard to this translation. This translation may be used only for reference purposes.

For more information on the content of this report, please contact Tetsuo Fujita, Atsuko Nomura, the Japan Research Institute, Limited.

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E-mail：fujita.tetsuo@jri.co.jp,nomura.atsuko@jri.co.jp