The Journal The Authority on Global Business in Japan

Entering a new market, either as a start-up or as an established company, can present daunting challenges. For a company coming to Japan, with the language barrier and its distinctive set of business rules—many unwritten—the challenges are exacerbated.

Which is why it’s good to have allies who can provide advice, assistance and, when required, the additional financial muscle that helps take a great concept to the next stage.

TEMPTING DESTINATION
“Right now, I would say that Japan is a really attractive destination for foreign companies,” said Hans-Peter Musahl, a partner in the Business Tax Services department of Ernst & Young Tax Co. (EY), which specializes in advising foreign firms doing business in Japan.

“After the disasters in 2011, things were a bit gloomy,” he told The ACCJ Journal, “but things have clearly recovered in the past five years, and are looking even better with the [concurring of an EU–Japan Economic Partnership Agreement].”

There is growing interest in Japan as a destination for companies in a wide range of sectors, he said, including renewable energy, automotive, life sciences, consumer goods, and e-commerce.

But while Japan is a tempting destination for foreign companies, analysts interviewed for this article say that the support provided by the national and local governments, as well as by domestic financial institutions and other organizations, falls short of what should be available and what is provided in other countries to attract foreign investment.

“I would say that they are making an effort, which is always the first step in making improvements,” said Musahl, adding he is confident that the Ministry of Economy, Trade and Industry, the Japan External Trade Organization (JETRO), and the Prime Minister’s Office “are all very interested in improving access.”

BIG FAVORED
Yet there is an imbalance in the way in which financial assistance is granted to companies. While major Japanese corporations are rewarded with tax breaks on their future earnings when they carry out research and development (R&D) in Japan, small and medium-sized enterprises (SMEs) are often ineligible for tax breaks from the government because they effectively report no profit each year and therefore pay minimal corporate tax.

Meanwhile, domestic start-ups and SMEs coming to Japan from overseas will have no track record of paying Japanese taxes, which also makes them ineligible for some government support.

“Japan tends to focus on the macro scale, with program and resource priorities going to larger foreign companies, which should come as no surprise given the country’s business culture,” said Andrew Meredith, managing partner with Tyton Capital Advisors in Tokyo.

“While the resources for smaller companies or start-ups entering the Japanese market are not so numerous, neither is there overwhelming demand,” he pointed out. “Barriers to entry—such as high starting costs, language issues, legal and regulatory challenges, cost of labor, employment law, a challenging business culture for foreigners, thorough entrenchment of the bigger players across most industries, and so on—all make Japan a unique and potentially stable place to conduct lasting business if you can succeed in getting things going; but these also serve as major challenges to getting started.

“This steep hill, without a doubt, deters a great many potential business opportunities.”

HELPING HAND
Yet, assistance is available, and the best information source is JETRO. The government-related organization provides a comprehensive list of advice and funding that is available at the national and prefectural levels, and can be found in the Investing in Japan section of its website (www.jetro.go.jp/en/invest/ibsc/).

The national government offers incentives to companies that conduct R&D in Japan, and can assist with raising funds, accelerating patent applications—cutting the time required from about 22 months to as little as two months—as well as reducing patent fees and shortening investment procedures.

Tax credits of up to ¥400,000 per new employee are available from the national government to encourage SMEs to hire more staff, while additional tax incentives are offered to companies that relocate their headquarters outside the 23 wards of Tokyo. Special regulatory measures, tax treatment, and financial support are also provided to companies that set up their Japanese operations in National Strategic Special Zones, while immigration incentives will be applied to “highly skilled foreign professionals” wishing to come to Japan to work.

Particular emphasis is being placed on support for businesses that establish themselves in areas recovering from the Great East Japan Earthquake and Tsunami of March 11, 2011, or the subsequent accident at the Fukushima nuclear plant, including subsidies and assistance with initial expenditure for buildings and production equipment.

A number of local governments around Japan also provide assistance to foreign-affiliated firms that set up in their prefectures. Fukushima Prefecture, for example, will subsidize a portion of a company’s rent for those in the pharmaceutical, medical equipment, renewable energy and robotics fields, and will cover consultant fees and incorporation costs.

Similarly, Niigata and Shizuoka Prefectures will subsidize a portion of office rent, Hyogo Prefecture cuts corporate enterprise tax and provides subsidies for new employees of up to ¥300,000 per person, and the Tokyo Metropolitan Government will cover some of the expenses incurred in establishing a new Asian regional headquarters in the city or an R&D center.

Support is also available through the government-backed Japan Finance Corporation, although the organization has been criticized as being “very conservative and very bureaucratic.” In addition, while incentive programs are often capped at $10 million that is then allocated to a dozen or so companies, support elsewhere is more generous. Wisconsin, for example, recently reportedly offered $3 billion in subsidies to entice a Taiwanese company to build a plant in the state.

Hans-Peter Musahl agrees that “any incentive is better than none,” but points out that countries such as Singapore, Malaysia, and Indonesia are being more generous with the assistance they provide as their governments actively solicit foreign direct investment.

“Right now, nobody is coming to Japan because of the incentives that are available here,” he said. “They are coming here because Japan is a good business opportunity, and the incentives help but are not a deciding factor.”

SMALL STEPS
Ron Harris, founder of The Harris Firm, has helped dozens of foreign enterprises take their first steps into the Japanese market and offers a one-stop shop for companies looking to negotiate the multiple hurdles. He agrees that Japan’s potential is “huge” and that the national and local governments are “trying”—although cultural differences have hampered the rate of growth of inbound businesses.

“The incentives to date have been inadequate because, I believe, no one in the decision-making positions has actually gone out and led from the front on this, or even taken responsibility for making access easier,” he said. “Japanese are reluctant to stand out or be different and, in this situation, it is holding them back.”

As a consequence, companies that were contemplating Japan have gone elsewhere, or Japanese start-ups that were struggling to find support at home have gone to the United States and are thriving.

“There are not enough entrepreneurs in Japan, and those are exactly the sort of people that the authorities here should be encouraging,” he explained. “To do that, there is a need for better support as well as the need for more people to take a risk by investing in start-ups rather than after a company has already become successful.”

The Harris Firm, which has offices in Washington DC and Tokyo, also acts as an angel investor for certain projects—although Harris points out that the concept is largely misunderstood in Japanese business circles and angels are seen more as sharks than benefactors.

Jacques Deguest set up Angels, Inc. to help new arrivals in Japan, with his investors providing funding for enterprises having trouble securing cash through more traditional routes. The organization can also link companies with professional service providers, such as accountants, lawyers, and patent experts.

“I believe we can compare start-ups to humans,” Deguest said. “If we look at a start-up, it is a lot like an infant that needs more emotional support than cash; but as both begin to grow and expand, they need more money and less emotional support to succeed.

“Entrepreneurs too often think that cash is everything when, in reality, they often need other kinds of support.”

And that is where Deguest and his fellow angels come in.

“Japanese banks may provide loans, but they require a higher collateral for secured loans—and it can be difficult for someone to mortgage their home or the company’s assets,” he said. “Also, a big problem here is that, culturally, Japanese companies and banks are extremely risk-averse in comparison with [those in] the United States or Europe.

“I became an angel investor because I love entrepreneurship and, at the same time, it is possible to make money and have fun,” he explained. “And what I love about Japanese culture is that business here is based on human relationships. People make business, and I like being an initiator, contributing to people who have ideas, a vision, enthusiasm—and, at the same time, pushing the envelope to make some money.”

An entrepreneur can never have too many allies, nor angels, it would seem.

Julian Ryall is Japan correspondent for The Daily Telegraph
What I love about Japanese culture is that business here is based on human relationships.