Why Japan & China can’t compete with America on Entrepreneurship

Japan and China are lagging far behind the US in global entrepreneurship, according to the recently released 2015 Global Entrepreneurship Index.

With a historical score of 85, the US tops the list of countries on the index, followed by Australia, UK, Sweden, Denmark, Iceland, Taiwan, Switzerland, and Singapore.

Japan is to be found in the 33th and China in the 61 position.

That may come as a disappointment to some. China and Japan are the world’s second and third largest economies, respectively.

What can explain Japan’s and China’s entrepreneurial lag?

For Japan, the problem is mostly demographic, a shrinking pool of young talented individuals—a group that is usually engaged in entrepreneurial activities. Tight immigration policies and a conservative business culture add to the talent shortage, because they make it difficult for Japan to attract and retain foreign talent.

That’s certainly a sharp contrast to competing international talent destinations like the US, Canada, and Australia, and the other countries on the top of the index.

The trouble is that after two “lost decades” and a wave of reforms in Japan, things turned worse instead of better.

“Having lived and worked here for the past 30 years, I can say that things are going from bad to worse. It is incredible to see the insularity and inward looking attitude of mind of the younger generations of Japanese,” comments a reader in a previous piece of ours here.

“By and large, Japanese feel uneasy around foreigners in the work environment because foreigners bring a different type of ambition. One does get the feeling that Japanese under 40 or 45 have had it too easy and are unwilling to adapt to an already changed world, never mind a rapidly changing world.”

For China, the problem is more fundamental — entrepreneurship does not blend well with the country’s culture of Confucian conformity to existing norms.

Throughout China’s history, the established order paid little respect to inventors, entrepreneurs, and business pioneers, as has been discussed in previous pieces here.

Another factor that discourages entrepreneurship in China is a heredity system that passes family assets to all sons rather than to the oldest son, putting less pressure on younger sons to pursue independent professions or business opportunities.

Then comes the Communist legacy. In spite of reforms in the post liberalization period, Chinese enterprises generally lack the information, the freedoms, and the incentives to develop pioneering products, because they remain “units” within a central plan rather than “firms,” within a market economy.

Within this institutional framework, entrepreneurship begins with the supply side of the market, with resources — rather on the demand side with consumers, as is usually the case in market economies.

Such an approach may be rational from the perspective of Chinese planners who are in command of enormous resources and anxious to find some quick uses that will produce short-term growth. But it is irrational from the perspective of fast-moving global markets where consumers rather than central planners, who are at the center of the economic universe.

To be fair, there are plenty of exceptions to this rule. Companies like Alibaba (NYSE:BABA), Xiaomi, and Baidu , for example which have been consumer-oriented.  But their numbers aren’t sufficient to push China up the global entrepreneurship scale.

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