Bureaucrats Can’t Mandate Innovation

by Patrick Lefler

Bureaucrats Can’t Mandate InnovationThis week’s Bloomberg BusinessWeek magazine features an interesting piece on the challenges that the Japanese government faces in transforming the island of Okinawa into a “cluster” site for innovation. In an article titled Okinawa’s Doomed Innovation Experiment, author Vivek Wadhwa makes the point that governments and the bureaucrats who run them can’t mandate entrepreneurial success.

  • Faced with declining competitiveness, Japan launched a series of top-down initiatives in the ’80s to boost innovation. It invested billions of dollars in creating industry clusters—by developing large technology parks and providing subsidies for companies that locate in them. All these efforts failed to achieve their objectives. Undeterred, the Japanese government is doubling its bet and creating a new cluster in Okinawa.

Okinawa is both the name of one of Japan’s southern prefectures – consisting of hundreds of the Ryukyu Islands in a chain over 1,000 km long; and in this case, it’s the name of the largest island within that chain. The island boosts a world-class research university–Okinawa Institute of Science Technology (OIST)–but no supporting infrastructure or history with regards to innovation, entrepreneurial activity and the cultures necessary for their success And because the island lacks these necessary ingredients for success, the author feels that the project is doomed. More from the article:

  • A research university is a common ingredient in regional cluster development projects. But why the hand-holding by government specialists? Kiyoyuki Shimizu, head of the cluster initiative in Japan’s Gifu Prefecture, explained that the government believed its previous investments didn’t lead to innovative products because the ties between academia, which was performing the research it funded, and industry, which needed to build businesses around this, were weak. So it needs to fill this void.

    The Japanese have it all wrong. The original clusters failed—just as nearly all the cluster development projects all over the world fail—because the basic premise is wrong: Governments can’t mandate or manufacture innovation, no matter how much they invest. Clusters happen where like-minded entrepreneurs congregate, start risky ventures, and learn from one another other by networking. Innovation is a by-product of this synergy and experimentation. What is needed is less government control, not more.

    A bigger hurdle for Okinawa is that entrepreneurs are nowhere to be found. Neither are the necessary engineers and scientists. There are eight local universities, which graduate about 20,000 students each year—of which fewer than 2,000 specialize in engineering or science. And the majority of the latter end up leaving the island soon after they graduate, as there aren’t any local jobs. Okinawa officials tout their IT industry, which employs 30,000 workers, as a potential source of talent. But this isn’t IT or engineering as we know it—it is low-level call-center work.

    To make matters worse, failure carries such a severe stigma in Japanese society that workers rarely leave their jobs to create startups. Plus, investors demand personal guarantees, so if a business fails, the founder is personally liable for all losses. Many commit suicide when their business fails.

The solution, according to the author is for government intervention. Some of his ideas are good…some not-so-good.

  • To expand the local economy significantly, it should turn the island into a free trade or special economic zone—which would be devoid of the stifling regulations that are holding back entrepreneurs in the entire country. China and Korea experimented with these and achieved major success. Okinawa can be Japan’s test lab. The region can also provide tax holidays for businesses to move there and incentives for these businesses to train locals in advanced technologies.

    Okinawa, like the rest of Japan, needs to work toward removing the stigma associated with failure. The public needs to be educated about the fact that in the high-tech world, experimentation and risk-taking are the paths to success and that success is often preceded by one or more failures. This must be discussed frequently by political leaders and taught in schools. The government should establish a venture fund for entrepreneurs who are starting their second or third businesses and who previously failed.

Here’s where I disagree with the author regarding the benefits of a government established venture fund for entrepreneurs. I don’t think it will work. If the capital markets (with seasoned venture capital experts) can’t see the benefit of establishing a venture fund for those starting their second or third businesses (and have previously failed), then I don’t to see how a government-run fund could successfully do the same. Adding political considerations into the venture funding decision-making process is a recipe for disaster. Governments should not be in the venture-capital business; they should, however, be in the business of eliminating the regulatory and taxation mess that acts as ‘sand in the gears’ for most start-ups.

Here’s the takeaway: Governments should not be in the business of funding start-ups–especially when similar efforts in the past have failed to achieve their objectives. What governments should be doing is eliminating the regulatory and taxation roadblocks that time and time again hamper most entrepreneurial ventures.

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Patrick LeflerPatrick Lefler is the founder of The Spruance Group – a management consultancy that helps growing companies grow faster. He is a former Marine Corps officer; a graduate of both Annapolis and The Wharton School, and has over twenty years of industry expertise.