Toward Revitalization of the EconomyThrough Start-up Activity

Public Relations Office        March 4, 2019

Exploring the challenges of R&D-oriented start-ups

Masatoshi Kato

Masatoshi Kato

Masatoshi Kato Professor, School of Economics
Born in Osaka Prefecture. Professor Kato has a Ph.D. in Commerce and Management from
Hitotsubashi University. After working as an Assistant Professor at Institute of Economic Research, Hitotsubashi University, he began his appointment at Kwansei Gakuin University (KGU) in 2010. He has been in his current position since 2018. In November 2018, he established the Research Center for Entrepreneurship at KGU. His fields of specialization are Industrial Organization and the Economics of Innovation. In recent years, he has been engaged in empirical research on start-up firms.

There is a great deal of expectation being placed on start-up firms, especially ones conducting research and development (R&D),that they will revitalize the economy. This is because they boost efficiency by promoting competition in the market and driving inefficient companies out of the market. Because they come in with new products and services, it is hoped that they will stimulate the market, create jobs, and generate innovation. Professor Masatoshi Kato of the School of Economics researches the phenomena related to start-up activities, such as how start-up firms
emerge and grow, and what factors contribute to their success or failure. He is a member of the Study Group on Productivity Improvements through Innovation at the Ministry of Finance’s Policy Research Institute, as well as a member of the Small and
Medium Enterprises Policy Taskforce of the T20 (a G20 advisory group), for which the Japanese government serves as chair. He explores the challenges of start-up firms and provides policy advice.


 Research into start-up firms begins with the construction of analytical framework based on entrepreneurial theory and collecting huge amounts of data. In Professor Kato’s case, he purchases objective data on tens and hundreds of thousands of start-up firms from credit investigation companies, such as Teikoku Databank. Another way is to conduct original questionnaire surveys for start-up firms. He links all of this information to intellectual property data, such as patents and trademarks, to understand the innovation activity of start-up firms. Using this data, he obtains even more detailed information, such as the educational background and management experience of their founders, and conducts statistical analysis. Data is a tool to test hypotheses, which he uses to investigate and observe what kind of characteristics determine the performance of start-up firms.

 In Japan, there are not as many start-ups as one would expect. Professor Kato points to the extent of the risk of starting up a business as a reason for this. “Compared to being employed by a company, the income one can expect to make as an entrepreneur is quite low, and the risks of quitting one’s company and starting up one’s own business are quite high compared to other countries.” According to a recent study by the Global Entrepreneurship Monitor (GEM), more than half of the surveyed 18-64 population in industrial nations such as the United States, United Kingdom, France, and the Netherlands agreed with the statement, “Many people in my country of residence believe that starting one’s own business is a desirable career choice,” but in Japan, that percentage was only around 30%, the lowest of the OECD countries.

 However, Professor Kato says, ‘This does not mean there is no entrepreneurial spirit in Japan. The systems and environment in Japan, including its unique employment practices such as lifetime employment, have a major impact.” He explains that the difficulty of terminating employment, as well as bankruptcy legislation and other systems and environments, are important factors. It is difficult for engineers to suddenly up and quit their jobs to start their own businesses, and mechanisms are needed that will support them in areas such as financing and management. There is an expectation that venture capitalists, who are the ones providing the funds, will serve a coaching function, but as Professor Kato explains, “Japan lacks the kind of organizations and people who can fill that role.”

 The focus of his research is on what happens to start-ups after they have first set up the business. In addition to the factors that impact on the establishment of the business, he looks at what kind of firms are more likely to grow. What kind of abilities and attributes are important for an entrepreneur? What kind of financing works best when starting a business? What kinds of factors are important in determining the post-entry performance of firms?Conversely, what kinds of things will make it difficult to succeed if those things are lacking? If it is known what is lacking, then the national and local governments can be asked to provide assistance. Based on his analysis, he makes recommendations to national and local governments, providing evidence for them to consider. His recommendations are ‘evidence-based policy making’ based on scientific evidence. Amid limited resources and funding, priority can be given to backing ‘challengers with growth potential.’ He points out, ‘The question being asked is how effectively policies can be pursued based on scientific evidence, not just the intuition and experience of politicians and policymakers.’

 

 The goal of start-ups is to survive and grow. However, Professor Kato explains, “If they grow too fast, there is a high probability that they will fail.” Balancing between cashflow and costs is not easy, and financial strain starts to appear. Is rapid growth ‘the shadow of death?’ Having tested this hypothesis based on data, Professor Kato found that the probability of survival increases as growth increases, but on the contrary, rapid growth reduces the probability of survival. His findings are based on analysis that has taken into account founder-, firm-, and industry specific characteristics.

 Entrepreneurs also have an option of selling the company as an exit strategy. In Japan, when a business fails or is closed voluntarily, the red tape involved is very complicated and there are major cultural and social costs. Even under these circumstances, we are seeing the emergence of people known as ‘serial entrepreneurs.’ These people sell their companies and set up new ones, taking advantage of the profits and personal networks they have made in the first business. A
market for ‘firm sale’ could be one clue to encourage people to take up the challenge of new businesses. In addition, Japanese society needs to accept major changes, such as reforms of employment practices.

 In the future, Professor Kato would like to analyze the question of the kind of industries in which the founder’s abilities, as well as the company’s collaborations
with external organizations, play more significant roles. The abilities of the founder may have a more prominent effect on performance in industries where there is much uncertainty or change, and collaborations with external organizations may allow the company to avoid such uncertainty. He is currently working on a variety of research questions on start-up firms.

 A policy to provide corporate tax incentives to start-ups conducting R&D has been incorporated into the FY2019 tax reforms, and Professor Kato has welcomed these incentives as ‘good news.’ “Policies to date have been focused on increasing the number of start-ups. This time, the purpose of the policy is to promote growth. The recipients will need to be carefully selected, but a policy that focuses on R&D-oriented start-ups will be effective in promoting innovation, creating jobs, and boosting economic growth.” He holds out great hopes for the new tax incentives.