The Secret to Japanese and South Korean Innovation

Japan and South Korea are innovation and tech powerhouses. They are home to leading firms in many of the high-tech sectors powering global economic growth and usually rank near the top of innovation indexes. To get to where they are today, both countries harnessed the combined power of their public and private sectors for decades. The innovation strategies they used challenge the model mythologized by Silicon Valley: the individual genius who comes up with a brilliant idea and receives funding from venture capitalists acting in a private capacity. In the United States, the perception is that startups should work by themselves, often with the aim of disrupting existing companies and industries.

Despite rhetorical claims about their goals to build their own Silicon Valleys, the governments and firms of Japan and South Korea believe that cooperation among new startups and existing conglomerates is crucial to boosting economic competitiveness, especially in frontier technologies, such as semiconductors, robotics, energy-efficient shipping, and electric batteries. Japan and South Korea have created an open innovation ecosystem in which government agencies, large firms, and smaller startups all support one another.

As competition between the United States and China heats up, the model pursued by Seoul and Tokyo suggests that startups are central to a competitive economy, but their potential is limited if they are working on their own. A national economy benefits more when startups work with government and existing big companies. Today, the United States is not the paradise for maverick entrepreneurs depicted in television shows and Hollywood movies. Instead, it already has traces of the approach found in Japan and South Korea. American policymakers should acknowledge this reality and lean into it to increase the United States’ economic and technological competitiveness.

CHANGE FROM WITHIN

Japan and South Korea publicly embrace the sentiment that startups are open innovation resources for large conglomerates. Their national policies foster smaller, more agile firms and encourage them to work with their bigger peers to support the innovativeness of the country as a whole. Startups inject new ideas, talent, and ways of working into large Japanese and South Korean firms so that they can compete with American, Chinese, and European rivals. The director of a startup support center funded by the South Korean government put it to us this way: the government wants to inject “innovative DNA” into the country’s chaebol, or large industrial conglomerates, so that the countries’ legacy firms do not go the way of Motorola or Nokia, two tech companies that were known for their earlier pathbreaking products but lost their innovation mojo along the way and got left behind.

Take the case of South Korea’s K-Startup Grand Challenge, a government program providing support for startups to become internationally competitive. Launched by the conservative government of Park Geun-hye in 2016, the program was continued by the liberal Moon Jae-in and continues to thrive today under the administration of independent turned conservative Yoon Suk-yeol. Funded and managed by the government and based at Pangyo Techno Valley—South Korea’s version of Silicon Valley, in the Seoul metropolis—the program brings together startups from across the world competing for the chance to join an accelerator in South Korea. This program serves as a springboard for these firms to expand in South Korea and across Asia thanks to a combination of funding, mentorship, peer learning, office space, and connections with the chaebol. A crucial metric of the success of the program is to identify licensing and partnership agreements with the country’s chaebol, which are also involved in mentoring. That is, government largess is contingent on startups partnering with Samsung, Hyundai, LG, or any other of the big South Korean firms.

Japan and South Korea don’t see the point of undercutting their existing large companies.

Japan launched a nearly identical program in 2018. Under the J-Startup Initiative, Japan’s postwar conglomerates, known as keiretsu, partner with the country’s main banks to fund and support potential “unicorns”—privately held startups that achieve a valuation of $1 billion. The program was not construed as a vehicle for startups to displace incumbents but to encourage them to work hand in hand. Six years later and after two changes in government, the initiative continues with the same ethos of large conglomerates providing support to new startups. Its initial goal was to help build 100 unicorns by 2023. The J-Startup Initiative has yet to achieve this, although Japan has produced 20 unicorns during that time (as well as what are called “hidden unicorns,” companies that achieve valuations of more than $1 billion by way of acquisition). In 2022, the government of Fumio Kishida announced its goal to foster 100 new unicorns by 2027 and spark the creation of 10,000 startups during that time.

These are just two examples of the many ways in which Seoul and Tokyo bring together government, large legacy firms, and startups to promote innovation and economic growth. Similar startup initiatives in the United States, such as Small Business Innovation Research, invest in startups directly but without involving large firms as collaborators, judges, or mentors. Silicon Valley promotes stories of David-sized startups defeating Goliath-like conglomerates, but Japan and South Korea don’t see the point of excluding, or even undercutting, their existing large companies. In this way, David works with (or even for) Goliath, fueling national capabilities at the world’s technological frontier.

CALIFORNIA DREAMIN’

Most people think of Silicon Valley as a land where the invisible hand of the market ensures the survival of the fittest: startups steered by young minds with brilliant ideas working out of garages while getting their funding from venture capitalists to develop the next big thing. These entrepreneurs will one day become the next Bill Gates, Elon Musk, Steve Jobs, or Mark Zuckerberg. Central to the myth of Silicon Valley is the idea that upstart entrepreneurs will create new companies that will replace today’s big firms, thus disrupting industries when not creating entirely new ones. As PayPal co-founder Peter Thiel’s Zero to One book title suggests, many aspiring tech founders understand their mission as “building the future.” On their minds are Microsoft and Apple and the personal computer in the 1980s or Tesla and electric vehicles today. Those without the imagination to come up with the next world-changing product fear they won’t receive funding or, worse, will lose millions, if not billions, of dollars and will have to leave Silicon Valley to pursue other lines of work.

Although this concept of Silicon Valley is based on truth, it does not exactly reflect reality. Today, the U.S. technology sector is dominated by only a handful of companies that make some of the world’s most valuable products. These big firms, such as Alphabet, Amazon, and Microsoft, also act as technology platforms for today’s startups, hosting research campuses and running accelerators—programs for coaching and mentoring fledgling startups. They are also the key acquirers of new inventions. In the past, these young companies forced Altavista or Packard Bell into bankruptcy. Now, they are seeking to guard against others who could put them out of business. The big tech firms thwart any threat posed by co-opting startups as users of their technologies, as recipients of their investment, and as mentees.

This integration of startups into industrial dynamics is part of what we call “startup capitalism,” an economic model in which startups contribute to employment, innovation, and growth. Startup capitalism is increasingly ubiquitous globally, with policymakers around the world striving to create their own high-tech cluster, often signaled by the use of a local Silicon Valley (such as the Chilecon Valley in Santiago or Silicon Roundabout in London). Though startups are often hailed as crucial innovation agents, as the reality of today’s Silicon Valley shows, they are more often open innovation tools for incumbent firms to boost their own competitiveness. Big firms invest in new potential unicorns that, in turn, leverage the distribution channels and talent pools of the big firms.

Despite these changes to how Silicon Valley functions, U.S. policy remains in an antagonistic relationship with today’s tech giants. On the one hand, small startups continue to be celebrated, while large firms, especially technology firms, are summoned to congressional hearings for aggressive questioning, and they are increasingly the targets of antitrust lawsuits. On the other hand, the U.S. government is a huge technology customer and is actively limiting rival countries’ access to the country’s cutting-edge technologies, especially semiconductors. The U.S. government tries to keep Big Tech in check but also understands its importance to U.S. national security. Government support is not given, for fear of being seen as wasting taxpayers’ money on companies that are already among the world’s most valuable.

American policy therefore misses out on the power that an open innovation model could bring. U.S. policymakers do not actively engage their country’s large firms as partners in startup policy. This helps explain why the Biden administration’s Inflation Reduction Act and CHIPS Act are spending billions of dollars in grants and rebates to attract foreign semiconductor, electric battery, and electric car firms to the United States. Simply put, American firms cannot compete with their foreign peers in some areas of hardware and manufacturing that demand long-term thinking and huge upfront investment. The governments of Japan and South Korea have not made this same mistake.

INNOVATE OR DIE

Japanese and South Korean policymakers realized much earlier the role startups can play in their countries’ national security strategies. Startups fuel Japan’s and South Korea’s prowess in technologies that are critical to national security—such as semiconductors, AI, and advanced materials. Defense contractors are no longer the main drivers behind a country’s competitive edge. Instead, getting ahead also hinges on national supplies of cutting-edge technologies and the inventive people behind them. The United States’ consideration of banning or forcing the sale of TikTok—and China’s opposition to the move—underscores the centrality of technology competition today. Although full-blown war between the superpowers remains unlikely, the United States and China know they can inflict pain on each other when it comes to achieving technological superiority.

Startup capitalism’s ability to boost technological supremacy therefore gives a country a competitive edge over friends and foes alike. Government support allows startups and especially big conglomerates with large financial and human resources to take a long-term approach toward economic planning, aware that funding will continue even if there are short-term economic disruptions such as a financial crisis or a pandemic. This approach also means that the government will underpin research and firms moving into new sectors where success isn’t guaranteed, a risk that often stifles private-sector innovation in other countries.

As a case in point, South Korea and Japan are world leaders in energy-efficient shipping because their governments bet on the long-term importance of this sector, while the United States and Europe gave up on a competitive shipping industry decades ago. In late February, U.S. Navy Secretary Carlos Del Toro toured Japanese and South Korean shipyards, promoting the collaboration taking place with their American counterparts to revive the U.S. shipbuilding and maintenance industry. South Korea and Japan produce a large share of the world’s most technologically advanced vessels, such as the ships that carry liquefied natural gas and ammonia. Their strength in this sector is at least partly driven by government-conglomerate-startup cooperation. In the case of South Korea, startups developing new technologies are paired with large conglomerates via a network of government-funded Creative Economy Innovation Centers, where they can gain access to mentoring, space, and funding while sharing their ideas and products. The center in Ulsan focuses on shipbuilding specifically, with Hyundai Heavy Industries as the anchor partner. Meanwhile, graduates from the national university in Busan, a traditional feeder of engineers for the shipping industry, have close links with shipbuilding conglomerates throughout their studies, even if they want to develop their own projects and launch their own firms. As for Japan, the government recently announced plans to promote collaboration between startups and large incumbents to create a national champion for next-generation shipbuilding. The United States does not have similar programs that encourage specialized training cohorts at specific universities.

EMBRACE REALITY

U.S. policymakers need to help facilitate this marriage between big firms and new startups. Because, although appealing, the Silicon Valley myth is, well, a myth. Startups are already providing solutions to problems that keep incumbent firms up at night rather than posing an existential threat to them. The origin story of Silicon Valley was also never fully true. The government has long been a key protagonist in Silicon Valley’s success. Billions of dollars in federal and state funding—including Small Business Innovation Research—were crucial in developing Silicon Valley’s entrepreneurial ecosystem as early as the 1950s. Government largess in support of American entrepreneurs has continued over the decades. As a case in point, Tesla has dramatically benefited from federal tax credits offered consumers for the purchase of electric cars. It is estimated that the firm has received almost $3 billion in state and local subsidies and incentives since its launch. And last year, when Silicon Valley Bank—favored by startups—was about to go bust, the U.S. Treasury Department, the U.S. Federal Reserve, and the Federal Deposit Insurance Corporation, came to its customers’ rescue.

Similar to Japan and South Korea, the United States has a fairly high industrial concentration. This means that different industries are dominated by a small number of large firms. This truth is widely accepted in Japan and South Korea, even if politicians and the public sometimes decry this state of affairs. The United States should also accept reality and embrace the value of large firms, particularly in high-tech sectors. As Robert Atkinson and Michael Lind argued in their 2018 book, Big Is Beautiful, the U.S. government should accept that big companies are driving American prosperity. Although antitrust oversight is necessary, market-power concerns should not preclude cooperation with big firms when beneficial for the U.S. economy, innovation, and national security. The relationship between the U.S. government and its leading tech firms is now largely one of apprehension and mistrust. And there are good reasons for this, such as threats to the health of the country’s democracy or the harm that tech can do to children and teenagers. Government regulators and lawmakers should rightly hold monopolistic and competition-busting firms and businesspeople to account.

Silicon Valley promotes stories of David-sized startups defeating Goliath-like conglomerates.

At the same time, there should be a more open approach toward the role of large firms in the modern startup-fueled economy. To begin with, U.S. policymakers should be unafraid of pairing innovative startups with large incumbents. After all, startups can have more innovative thinking, and many entrepreneurs welcome rather than reject stronger ties with big firms from which they feel they can learn and partner to achieve scale. This could take the form of government-sponsored competitions in which successful startup applicants, whether American or foreign, are paired with selected big firms willing to support their growth. The government would act as the matchmaker and also provide the funding for startups to be able to work together with their larger peers. The U.S. government should also consider launching a program to provide long-term support for startups in sectors that may be crucial to the country’s future growth and prosperity—but which could prove to be a bust. Take the case of robotics. A U.S. government body could set up a ten-to-20-year strategy to support startups that may or may not produce the next generation of, say, humanoid robots. The bet may fail, but if successful, it could make the United States one of the leaders in this industry for decades to come. This strategy should not avoid working with big firms already focusing on this sector but rather welcome them as partners with government and startups themselves. And the Biden government seems to be moving in this direction. The recently launched CHIPS Women in Construction Framework counts Intel and Micron as anchor partners in U.S. efforts to boost the number of women in the construction sector, with special focus on the semiconductor industry.

The Silicon Valley myth fuels the idea that large firms should not be viewed as sources for innovation and therefore should not work with government and startups. The United States, as a result, is inhibiting its own productive potential. It supports startups directly while challenging its own lead firms and investing billions in foreign companies to operate in the United States. In Japan and South Korea, the cooperation between startups and large firms is openly pursued because the national benefits are apparent to all.