BusinessWeek: Okinawa\’s Doomed Innovation Experiment

The Japanese government is keen to transform Okinawa into a “cluster” site for innovation—but bureaucrats 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. With a world-class research university as its nucleus, it hopes to turn this tropical paradise—which happens to be home to America’s largest Asian military base—into a global research-and-development center.

Doubtless the university will provide Japan with significant long-term benefit. But the cluster will fail: All the other ingredients for innovation are missing.

The Okinawa Institute of Science Technology (OIST) convened a gathering of experts from the U.S., Europe, Malaysia, Singapore, and Russia on Oct. 5 to review Okinawa’s innovation strategy. I was part of the American delegation. The local government presented its road map for transforming Okinawa—which suffers from the highest unemployment rates and lowest per-capita income in Japan—into a “prosperous island full of hope and dynamism.”

It plans to do this by creating info tech, biotech, and environmental science clusters controlled by the government. It has already built a magnificent university campus and recruited world-renowned faculty and researchers to OIST. In addition, the government will create a sizable venture capital fund and assign its specialists to be intermediaries between OIST and local companies. The government specialists will decide what R&D to fund and help small and midsize companies decide on what markets to enter; negotiate financing; form partnerships with other companies; do business development; and modernize their facilities.

Misconstruing the Problem

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.

Solution: Special Economic Zone

What can Okinawa do to boost innovation and improve its economy?

To start with, it can put more concerted effort into improving its education system. Okinawa schools perform well below the national average. Many Okinawans can’t afford to send their children to college, and available scholarships go to elite, not lower-class, children.

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.

To teach its locals about entrepreneurship and import the talent it desperately needs, Okinawa needs to borrow a page from Chile’s book with its Startup Chile Program. Chile is offering grants of $40,000 and visas to entrepreneurs who bootstrap their companies there. It provides a work visa to any skilled immigrant who gets a local job offer. Chile is betting that many will end up staying permanently and even those that leave will end up imparting valuable skills to its natives and maintain long-term contact.

There is no reason Japan can’t innovate or boost economic growth. It just needs new thinking about how to harness the power of its entrepreneurs.