Russia's invasion of Georgia last month seriously undermined peace and security in Europe for the first time in years, CDDRL Director Michael McFaul told the House Committee on Foreign Affairs on September 9. Russia's military actions and subsequent decision to recognize South Ossetia and Abkhazia as independent states, McFaul said, represent a fundamental challenge to the norms and rules that help to promote order in the international system.

"Instead of business as usual or isolation, the United States must navigate a third, more nuanced, more complicated, and more comprehensive strategy that seeks to bolster our allies and partners, check Russian aggression, and at the same time deal directly with the Russian government on issues of mutual interest. The long term goal of fostering democratic change and keeping the door of Western integration open for countries in the region, including Russia, must not be abandoned. American foreign policy leaders have to move beyond tough talk and catchy phrases and instead articulate a smart, sustained strategy for dealing with this new Russia, a strategy that advances both our interests and values."

For the past ten years, Japan has undergone aggressive, government-driven reforms aimed at changing its financial systems, labor markets, and corporate governance institutions. Faced with the challenges of globalization and an ageing population, Japan undertook these reforms to regain its former competitiveness. What remains uncertain, however, is whether these reforms will also be effective in creating an environment
that is more favorable to entrepreneurship and innovation. If the reforms are effective, at what pace, and in what shape will new firms emerge? Will Japan’s system mirror the institutions that have evolved in regions such as Silicon Valley, or will it develop into a new framework of innovation?

The persistent decline in Japanese asset values during the 1990s engendered many policy and legal responses. Among these was a series of business policy and associated legal reforms intended to foster the creation of new companies, new industries, and new financial institutions. Starting in 1997, these reforms included changes in how firms are formed. For example, the capital required to start a stock-issuing firm was reduced from ten million yen to a mere one yen. The yugen kaisha—a secondary form of Japanese company—was also abolished and the limited liability partnership created instead. Holding companies were allowed, mergers were deregulated, treasury shares were authorized, and the liability of company directors was limited.

Additional reforms were promulgated to encourage new forms of financial intermediation. Tax benefits created for “angel” investors, foreign venture capitalists, foreign private equity, and foreign lawyers became common. Purchase of shares with shares, triangular mergers, and repurchase of shares were all allowed. Moreover, several new stock exchanges were created expressly for relatively new companies.

Corporate governance laws were also revised. For one, Japanese firms may now use U.S.-style board of director committees, with an upper limit placed on directors’ liabilities. Japanese auditors are now required to be outsiders, and consolidated accounting is likewise compulsory, as well as “mark-to-market” rules for financial reporting. These are just a few of the changes, all of which combine to increase transparency in Japan’s markets.

The results were noticeable. By 2006, new companies were garnering price-to-earnings ratios of greater than 100 to 1 in the new markets; the number of IPOs per year was comparable to the rate during the U.S. Internet bubble; and the mergers and acquisition market was transformed from one of the most moribund in the world to one of the most dynamic. Venture capital firms proliferated, as did new law firms, private equity firms, and foreign banks. Existing Japanese banks merged, new banks formed, and money-lending began again. Some new companies even gained sufficient liquidity and stature to turn their founders into celebrities and some of the wealthiest people in Japan. Rakuten, Mixi, ValueCommerce, and Cybird are just a few of these success stories. Japan is currently in its seventy-first month of economic expansion—the longest of the postwar period.

The future, however, is unclear. As Professor Yoko Ishikura, of Hitotsubashi University, recently observed at a SPRIE seminar at Stanford, “Japan is at a turning point and it is uncertain which direction it will choose.” For 2008, IPO valuations have returned to levels more comparable to those in the United States, and the climate for startups has moderated somewhat. New company startup rates are flat and IPO rates have recently dipped significantly. Some prominent studies of the entrepreneurial climate in various countries rank Japan among the least favorable. Many observers are impatient for more evidence of results from the reforms. It remains an open question whether Japan is being affected by the U.S. slowdown and commodity price increases, or if the country is simply retreating from it entrepreneurial gains.

In light of these developments, scholars remain curious: Are the reforms permanently changing the Japanese economy? Are the reforms sufficient to meet the challenges that Japan faces? Will the reforms be effective? Alternatively, are these reforms even desirable? SPRIE and the U.S.-Asia Technology Management Center, in cooperation with selected experts and research organizations in Japan, are undertaking
a major project to study the seemingly contradictory corporate and social climate in Japan, which is at present stretched between entrepreneurial and more conservative forces.

Japan’s economic relationship with the countries of the Pacific Rim—and indeed with the rest of the world—is vital to all of the economies involved. If Japan is transforming into a new economic culture, an understanding of that transformation is relevant both to global economic development and to the study of entrepreneurial growth.