U.S. President Joe Biden and Japanese Prime Minister Fumio Kishida’s May 2021 summit in Tokyo reaffirmed the countries’ security alliance and moved on to focus on cooperation in several areas related to technology and innovation. The Competitiveness and Resilience Partnership includes areas such as the digital economy, 5G network infrastructure, cybersecurity and critical infrastructure resilience, science and technology cooperation (including startup collaboration), civil space cooperation, export controls, and supply chain resilience in sectors such as semiconductors, along with information sharing in areas such as batteries and rare earth elements.
The evolution of the U.S.-Japan security alliance into a multidomain technology and innovation pact is a welcome development for both sides. It is in the U.S. interest to have Japan as a close ally with dense economic ties, especially given that the advent of digital tools has created vast new areas for mutually beneficial cooperation beyond traditional trade relationships. Deeper and broader economic ties with the United States are also good for Japan, where many remain nervous about the possibility of an abrupt American about-face in both security and economic affairs if future electoral outcomes bring about a new administration.
Kenji E. Kushida is a senior fellow for Japan studies in Carnegie’s Asia Program, directing research on Japan, including a new Japan-Silicon Valley Innovation Initiative at Carnegie.
However, there are several challenges that both countries will need to overcome to realize the full potential of their cooperation. A recurring theme is a need for both sides to understand the business and industry logic of how and where the private sector creates value. Second, policy coordination among multiple government organizations in each country will be necessary, since different agencies on both sides pursuing their focused agendas can end up undermining the broader collaboration the two countries need to embrace.
FOSTERING A SHARED STARTUP ECOSYSTEM INFRASTRUCTURE FOR INNOVATION
The first challenge is ensuring effective flows of funding for facilitating innovation while maintaining private-sector incentives. Much of this science and technology cooperation will occur as publicly funded research from universities and research labs are brought to market by startups. Linking the two countries’ startup ecosystems across the Pacific will be a critical aspect of technology collaboration.
Startup ecosystems include not only the startups themselves and venture capitalists, but also large firms that invest in and buy startups; flexible labour markets; and support businesses such as law firms, accounting firms, accelerators, and incubators. Connecting the U.S. and Japanese startup ecosystems entails numerous connections: large firms from the two countries investing in each other’s startups, the cross-Pacific movement of entrepreneurs and workers, and startups from both sides working with universities and government personnel on both sides.
Large firms are an integral part of startup ecosystems because they invest in startups, purchase startups, and work with startups as early customers to enable startups to scale up their operations. Much of large corporate R&D activity now involves buying startups to bring their technology in-house, and large corporate investments in startups are often made with an eye toward mergers and acquisitions. Some regulatory hurdles for such activities should be reconsidered. For example, U.S. national security measures including the implementation of the 2018 Foreign Investment Risk Review Modernization Act by the Committee on Foreign Investment in the United States, which is controlled by the U.S. Treasury Department, frustrate Japanese venture capitalists and large corporations interested in investing in U.S. startups by slowing down the process to the point that investment opportunities are lost. Although Japan is one of America’s closest allies, it was not included in the initial 2020 white list of exempted countries, which included Australia, Canada, and the United Kingdom, nor was it listed in a 2022 update that added New Zealand. Having passed relevant domestic regulations, Germany and Japan still have the possibility of joining in the future, and a speedy examination process to approve Japan would benefit both Tokyo and Washington.
The Japanese government’s current efforts to facilitate U.S. venture capital investments in Japanese startups need to be designed to avoid being undermined by short-term political considerations. Governments often struggle to maintain long-term commitments to support startup ecosystems and to make policy consistent with private-sector incentives. For example, the Japanese government is exploring the possibility of spending public money on foreign venture capital funds investing in Japanese startups to harness their investment expertise. Such efforts must be immune to political pressure or internal government pressure to shut down such investments if the press or a wave of nationalistic populism criticizes the government for providing Japanese taxpayer funds to fuel the profits of foreign investors. Similar political considerations led to the failure of a prior government attempt to create a multibillion-dollar venture capital fund to invest in startups.
Structural differences between the U.S. and Japanese startup ecosystems also make it more challenging to link the two sides. U.S. startups grow rapidly into unicorns—startups valued at over $1 billion before an initial public offering (IPO)—and the size of venture capital investments and IPOs has grown rapidly over the past decade. Entrepreneurs and firms in Silicon Valley draw talent from all over the world, and a robust set of firms support this ecosystem, including accounting firms, law firms, accelerators, and incubators. Critically, industry ties to universities are extensive, with well-developed pipelines from university labs to startups, and the government, including the U.S. Department of Defense, acts as an important early buyer of startup offerings.
Japan’s startup ecosystem has matured rapidly over the past decade to a degree almost unimaginable fifteen to twenty years ago, but these startups are more of a complement to large firms than a disruptor. Japanese IPOs tend to be small, Japanese startups are often focused on their domestic market, and the country’s support businesses are still developing. Moreover, the talent pool is overwhelmingly from Japan, although in a stark departure from the past when Japanese entrepreneurs tended to come from outside the ranks of mainstream elites, the country’s startup ecosystem is now fueled by graduates of elite universities and workers that have had stints at large, prestigious corporations and in government posts. Ties between industry and universities have matured substantially, and the Japanese government is proactive in trying to support promising startups with favourable procurement regulations. Japan’s recent efforts to substantially increase its defence spending could also benefit the country’s startup ecosystem.
Cross-border collaboration between the two countries’ startup ecosystems, however, is limited. The primary mechanism has been large Japanese corporations that establish substantial footprints in Silicon Valley to invest in and collaborate with startups and fast-growing but already large Silicon Valley startups that enter the Japanese market. Few Japanese startups and entrepreneurs have founded rapid-growth startups in Silicon Valley, and the commercialization of university research about science and technology for both sides has been limited to their own respective countries.
There is ample room for collaboration. Technologies from U.S. university research that cannot scale as fast as Silicon Valley demands, especially ones that may mitigate significant Japanese societal problems such as an ageing citizenry and depopulation, could have a real impact on people’s lives if deployed as a startup in Japan with a smaller IPO before slowly growing into a stable business as a publicly-traded company. Likewise, Japanese entrepreneurs with promising university-linked technology may have startup potential on the scale of a Silicon Valley firm but simply lack the interpersonal networks and support businesses to give them a shot at growing their business as an American startup.
Government officials can provide useful support on both sides. For example, U.S. visa assistance for Japanese tech entrepreneurs working to commercialize university research would help bring international flows of science and technology expertise into the commercial arena. Opportunities for interpersonal connections between universities and startups through government-supported researcher and student exchange programs could help bridge the gap between university research funding and bootstrapped startups trying to reach deeply knowledgeable researchers. And support for technology startups to move their primary base of operations from one country to another in pursuit of market opportunities to best commercialize deep technology research could be useful. Japan should also credibly signal that its future pandemic response, while possibly entailing rigorous testing of people entering Japan, will not involve a sudden blanket ban of almost all non-Japanese travellers from entering Japan, as the government implemented in November 2021. That action sent a chill through the U.S. startup community interested in expanding into Japan, given the possibility that a surge of a new COVID-19 strain could effectively isolate their Japanese businesses and bring many forms of business, scientific, and academic collaboration to a halt.
CRAFTING SOUND DIGITAL INFRASTRUCTURE
An accurate framing of digital infrastructure, including cloud computing and all the related implications for technologies like artificial intelligence (AI), is also critical for many of the cooperative efforts to align the two countries’ policy aims to technological and business realities.
In its simplest form, digital infrastructure can be divided into three layers: applications, platforms, and physical infrastructure. Applications are software tools or services that sit on top of platforms, which provide the resources that enable applications to function. Platforms, in turn, sit on top of physical infrastructures, such as data centres, fibre optic networks, and wireless networks. Cooperation on next-generation networks and equipment for 5G wireless takes place at the infrastructure level. Platforms are now overwhelmingly provided on a global scale by a small group of U.S.-based multinational firms such as Amazon, Google, and Microsoft, firms that have also invested billions of dollars in data centres and fibre optic network infrastructure all over the world. Applications that use these globe-spanning platforms are what make startup ecosystems around the world function. The platforms give startups instant scaling potential, low costs, and global reach. Many corporate information technology systems, and even banks’ core systems in both the United States and Japan, are now applications built on top of global cloud providers’ platforms, using a combination of the platform’s global infrastructure and the company’s own localized data centres.
Discussions about standards, infrastructure, cybersecurity, and economic security must reflect this technological and business reality. 5G wireless networks, for example, do not inherently create value in and of themselves. It is what businesses use the networks for—such as factory automation, AI-assisted driving, and other uses not yet imagined—that matters. Equipment markets are large, but much more value is created and captured by the platform and application providers, as shown by the relative sizes of the market capitalization and cash holdings of platform providers such as Amazon, Apple, Google, and Microsoft compared to equipment firms such as Huawei, Nokia, Ericsson, and Cisco.
Telecommunications infrastructure is an easy political target for cybersecurity concerns because the analogy to wiretapping is easy to understand, but platforms and applications need to be considered too. Even if a country’s physical infrastructure consists of secure, domestic equipment, using another country’s platforms with nefarious data collection practices that allow them to siphon up apps’ payment, location, and social network data may pose far greater security risks than a secure platform regardless of who provides the network equipment. For example, the U.S. government and its counterparts in numerous other countries rushed to blacklist Huawei infrastructure, but numerous smartphone apps such as TikTok have been caught collecting and transmitting unauthorized user data to external servers or third-party advertisers. Problematic information gathering and sharing by apps is a practice by no means limited to Chinese firms, driving home the point that the underlying network equipment is not always the main issue.
U.S.-Japan cooperation on cybersecurity and critical infrastructure should be framed to take into account the technology and industry conception of applications, platforms, and infrastructure layers. Cybersecurity measures covering applications, platforms, and infrastructure differ, but they are often blurred in policy discussions. For example, in recent policy discussions within Japan’s ruling Liberal Democratic Party related to Japan’s recently passed economic security bill that identified cloud computing as a critical national infrastructure, the party called for domestic cloud providers to handle sensitive government information. This approach raises several questions, such as whether domestic cloud providers that offer mainly local infrastructure and customized applications, but not global platforms, can implement stronger technical cybersecurity measures than global cloud providers can. Although global cloud providers have not disclosed their exact investment amounts by country, their investments in physical data centres and network infrastructure in Japan in recent years have been substantial, and possibly more than those of several major Japanese IT firms that offer cloud services. After all, firms like Amazon have been spending billions of dollars on their data centres, with recent U.S. data centres costing over $2 billion each, and Amazon has multiple data centres in Japan serving the Tokyo and Osaka regions.
One concern driving the debate on domestic cloud computing is whether the U.S. Clarifying Lawful Overseas Use of Data (CLOUD) Act allows the U.S. government to demand that global cloud providers such as Amazon, Google, and Microsoft hand over data about Japanese citizens based in Japan from servers located in Japan. A Japanese legal expert has repudiated that view, but the U.S. government’s assurances on matters of data privacy are helpful and should be articulated frequently. A great deal of Japanese actors’ potential lies in their ability to be innovative users and producers of applications that use global cloud platforms and infrastructure. National security concerns must be balanced with careful consideration about how taking steps to limit private sector activities could isolate domestic businesses and hinder globalization.
There are also other promising areas earmarked for U.S.-Japanese cooperation in the Competitiveness and Resilience Partnership including in sectors like biotechnology and climate change mitigation and on issues such as supply chain resilience, standard-setting, and data trade agreements. These areas, however, also harbour challenges that will need to be addressed, a topic that will be considered in future pieces.News Source: Carnegie Endowment For International Peace