Japanese "Investment"?

Now this is odd. Hawai'i is being used as sort of an offshore business incubator for small Japanese firms, according to this article from the WSJ's Startup Journal. Since it's the WSJ and thus normally subscription-only, I'll put the story below.

TOKYO -- Two years ago, Hiroshi Kawasaki discovered that the easiest way to do business in Japan was to get out of Japan.

Preparing to set up a company, Mr. Kawasaki learned the following: Joint-stock companies in Japan must have four different corporate officers, who need to be reappointed every two years at a cost of around $3,000 each time. In the state of Hawaii, you just have to appoint them once -- and they can all be the same person.

The U.S. also lacked other rigmarole that is standard in Japan, such as endless visits to the town hall and bank to fill out documents and pay registration fees. Worst of all, in Japan, companies had to initially put up ¥10 million ($81,000) in capital. Hawaii had no capital requirement. And Japan recognized the Hawaii-registered firms.

Intrigued, Mr. Kawasaki set up a company in Hawaii for his Tokyo Internet-consulting business, then created a Japanese subsidiary to do all the work.

"There are lots of small bothersome things in Japan," he says. "Everything is much easier in Hawaii."

His experience gave him the idea for a second line of business, and two years later, Mr. Kawasaki's company, Digital Point, is at the forefront of a minitrend: Digital Point now makes three times as much money as it does with Internet consulting by setting up companies in Hawaii for other Japanese entrepreneurs. He has set up 480 so far, about 90% of which share Digital Point's Hawaii address, and the majority of which have nothing to do with the U.S. in their daily operations. He thinks other agencies like his have set up about the same number of such companies.

The lengths these entrepreneurs go to sidestep Japan's regulatory and financial handicaps are a stark illustration of the way the Japan manages to thwart small ventures. Just when its beleaguered economy desperately needs new sources of growth, yearly venture-capital investment is equivalent to just 0.02% of gross domestic product, compared with 0.29% for the U.S., according to a recent report by the Organization for Economic Cooperation and Development.

Between 1986 and 1996, Japan's rate of creating new businesses roughly matched the closure ratio. But when the economy stalled, the number of closures leapt to 5.9% of all existing firms in 1996-99, outstripping the 4.1% for start-ups -- which remains the lowest start-up rate among the industrialized nations. The low birthrate for business isn't for want of desire.

Japan produces plenty of budding young businesspeople, but many find it very difficult to borrow during Japan's long-running banking crisis. The most recent figures show that in 1997, the "actualization ratio" of entrepreneurs who set up their own business as a percentage of all who wanted to start a company hit an all-time low of 31.5%, compared with 66% in 1968 during the fast-growth era. Of those who actually got into business, by far the highest percentage, 49.4%, identified their biggest impediment as lack of capital.

"Banks used to encourage companies to borrow," says Mr. Kawasaki. "But now they won't lend money. People who don't have ¥10 million need to be able to set up a company using just their own pocket money." So when Mr. Kawasaki -- a mustachioed 45-year-old whose resume includes stints at an advertising agency and bookstore chain -- wrote a book explaining how to get around this, e-mail messages flooded in.

The book was called "The Easy Way to Set Up an Incorporated Company for ¥300,000," or about $2,400, and has sold more than 20,000 copies. The $2,400 includes lawyer's fees, state taxes and Digital Point's fee.

One such client was Koichi Nishigami, who after 20 years working as a computer-systems engineer decided he wanted more out of life than serving out his years as a salaryman. Planning an Internet-based service to deliver roses, he realized it would never rake in vast amounts of cash -- certainly not enough to persuade a bank to lend him start-up capital.

"The barriers to setting up a company are high," he says. "With the economy like it is now, it's hard to make a lot of money quickly, so I wanted a method with lower hurdles." There were other possible solutions. Setting up a "private enterprise" is simple. But all profits count as personal income, so he would have ended up paying too much tax. A down-market type of Japanese firm, a "limited company," provides a company's tax advantages. But it still requires ¥3 million in capital, and entrepreneurs say the lower status is a handicap.

Larger Japanese companies sometimes have a policy of only doing business with joint-stock corporations. In Mr. Nishigami's case, operating a limited company would have made it harder to persuade customers to hand over their credit-card details when shopping online.

"Having a joint-stock company makes them trust you more," he says. After incurring a loss in its first year, Birthday Rose Corp. has started making a profit of about ¥210,000 a month, and Mr. Nishigami thinks the business may have a future.

The poor environment for venture business is at least partly due to Japan's ultimate problem: weak, indecisive government. Prime Minister Junichiro Koizumi has pledged widespread structural reform. But his hands have been full trying to stave off a financial crisis brought on by deflation and banks collectively holding half a trillion dollars of bad loans, and his administration has little time to think creatively.

"Koizumi is focused on the defense part of economic problems," says Haruhiko Ando, a visiting fellow at the Research Institute of Economy, Trade and Industry, a think tank affiliated to the Ministry of Economy, Trade and Industry, or METI. "But offense is very important, too, because venture businesses are the growing point for an economy."

Instead, policy making is a tug of war between bureaucrats -- in this case METI, the successor to MITI, and the more-conservative Ministry of Justice, which oversees Japan's commercial code. Until 1992, Japanese entrepreneurs needed to put up just ¥350,000 to set up a stock company. The ¥10 million capital requirement was then imposed "in order to protect creditors," says an official in the Ministry of Justice's Civil Affairs Bureau: "There wasn't a particular problem then, but there were lots of small companies who didn't have enough disclosure."

After persuading the Ministry of Justice that the law was damaging Japanese business, METI has now sponsored a bill, scheduled to be brought before the Diet later this year, to waive the capital requirement in special cases. But this will only apply until a business reaches its fifth birthday, by which time it must have accumulated this capital.

In spite of this improvement, Japanese businesses are likely to continue incorporating in the U.S. Some clients want to avoid the bothersome procedures Japanese businesses have to go through. Others simply like operating in a more venture-friendly jurisdiction.

Naoya Tamanaha just set up a company through Digital Point to operate a flight school, and will start operating next year on a U.S. air base in Okinawa. Incorporating in Japan would mean abiding by Japanese rules on maintenance: Parts imported from the U.S. would be subject to Japanese inspections, often more than tripling their price, says Mr. Tamanaha. But as an American company operating on a U.S. base, he is governed by U.S. federal aviation law and can procure parts at their U.S. price.

"Setting up an American company was a way to escape Japanese aviation law," he says. Mr. Kawasaki says client numbers have held up even after the new bill was reported. Digital Point has revenue of about $1 million a year now, including sales of the book plus seminars and speeches Mr. Kawasaki is invited to give. With that in mind, he is writing another book, due to come out next year, on how Japanese can do business in the U.S.

"It's not only a matter of cost," he says. "Young Japanese now want to set up overseas anyway."

Comments

My coworker and I spotted that piece this morning, and we're still scratching our heads. But it did prompt me to find this Star-Bulletin story on the same guy just last month, offering much more of a local perspective.

It just seemed to imply... the exact opposite of what we know, day-in and day-out, in business in Hawaii. Which is, of course, that it sucks.

But I guess if Japan is that bad, Hawaii can seem like an oasis of freedom. Frankly, though, I suspect there are more businesses from Hawaii that are incorporated or "based" elsewhere to escape Hawaii's smothering bureaucracy than there are Japanese companies hiding out here.

Nonetheless, the Star-Bulletin piece offers a small clue: our surprisingly cutting-edge online business registration system, for one. Or that despite Delaware's famous attractiveness for business startups, Hawaii's filing fee is considerably lower (a flat $25, instead of a sliding scale based on the shares sold of the company).

"...For Securities Commissioner Ushijima, the immediate goal is to have Hawaii recognized as 'the Delaware of the Pacific.'"

Fascinating.

Well, I've been around more startups than I care to think about, and none of them ever even came close to $81K in capital, so I can see the appeal.

Delaware of the Pacific?? What happened to being the Geneva of the Pacific-which Ben was pushing a while back?? In a few more years well aim even lower and want to be the New Jersey of the Pacific!

Starting a business in Japan is very difficult. I've been there. The system was designed to protect the big companies from small upstarts. That's why for example, NTT/Docomo has a stranglehold on the Telecommunications. What you don't see in Japan is the small technology companies that flourish in the U.S. Tech is driven completely by the big conglomerates. I do not find it suprising that companies are choosing to start here then sell to Japan. The cost of doing business in Hawaii is relative to the mainland, but compared to Japan it's cheap. Let's hope our government catches on to this exciting trend and encourages companies to base themselves here!

Oops! I made a typo. My last post should read "The cost of doing business in Hawaii is HIGH relative to the mainland, but compared to Japan it's cheap."

It is surprising to hear that many of the people on this site are discouraged to invest in Japan. If you would see the large amounts of cash that young Americans spend out there on nonsense you would understand where I am coming from. You can make money anywhere, you just have to be able to reach out for it.

It is surprising to hear that many of the people on this site are discouraged to invest in Japan. If you would see the large amounts of cash that young Americans spend out there on nonsense you would understand where I am coming from. You can make money anywhere, you just have to be able to reach out for it.

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