4th Industrial Revolution: Governmental Support for Open Innovation
Impact is the new global currency
As incentives and support from governments like Japan and others around the world are launching a wave of next generation startups with the greatest odds of success to date. This is a huge opportunity to get in on the action as an investor and the time for startups to start thinking outside the box to reinvent solutions for the future.
The key to innovation is data and collaboration globally to create globally competitive and sustainable companies of the future. Say goodbye to the winner takes all, exploitation of resources and limiting access of resources to the 2% elite. Impact is the new currency and it’s created from collaborative innovation and mutually beneficial standards. The numbers are also showing this to already be true. Even with the uncertainty of the global financial markets post COVID there have been *record high levels of startup investments and a **44% increase globally in impact investing in the last 12 months. Imagine combining the two greatest growth sectors into your investment strategy early in the 4th Industrial Revolution. It’s an exciting time for impact and returns as the world re-groups and builds a brighter more sustainable future together.
This will increase not only the solutions but the opportunities for growth and government legislations that will begin to require higher impact standards of all businesses. This also broadens the opportunities for joint ventures and potential startup acquisitions by the established industry leaders in order to compete and quickly adapt. The impact driven startups will be critical to the vitality of the larger corporations to maintain their market positions for the next 50 years.
As many crypto currencies are erratically bouncing from the Tweets of Elon Musk and the YC startup flippers most talked about on Clubhouse have been leading the silicon valley investors on an elite "follow the leader" gold rush; it's the impact investing space that is truly going to reshape returns for investors for generations to come.
Let us now take a look at the kinds of action that the Japanese government has been taking to address these challenges. In light of these changes to the country’s industrial and social structures, the Japanese government has set out policies such as “Society 5.0,” a vision for a human-oriented society that strikes a balance between economic growth and the solution of social issues through the sophisticated integration of cyber and physical spaces, as well as “DX (digital transformation),” the development of novel business models using new digital technologies (*3).
These initiatives also have a high affinity with the so-called 4th Industrial Revolution. The 4th Industrial Revolution refers to technological innovation relating to the utilization of data such as IoT, big data, and AI. Specifically, these are a part of the initiatives taking place under this revolution, which include the utilization of AI and robots, the revitalization of the sharing economy, and the development of fintech (*4).
Expectations are running high that this 4th Industrial Revolution will enable Japan to set a global precedent by achieving Society 5.0 and thus solving a range of social issues by incorporating technological innovation into all kinds of industries and social settings.
The essence of the 4th Industrial Revolution is said to reside in the rapid development and fusion of the “real from digital” and the “digital from real,” with models for data utilization being the source of added value. Because of this, new business models the likes of which have never been seen before are being created as a matter of urgency. Therefore, companies are now prioritizing “ambidextrous management” in which they carry out both of the following simultaneously: 1. The putting in place of reforms for data utilization models in the company’s own core businesses; and 2. Ventures into total new business fields (real stemming from digital, and digital stemming from real). In addition to making ongoing improvements to their core technologies through research and development and investments in facilities and equipment, innovative startups with the capacity to set things in motion rapidly along with open innovation are the keys to future competitiveness (*5).
The Japanese government has come up with a range of measures to help put in place robust foundations for the next phase of economic growth, such as the improvement of corporate governance. However, in order to put in place direct incentives for open innovation aimed at the creation and acquisition of new added value while further stepping up pressure for companies to make investments for growth, from fiscal year 2020 the Tax System for the Promotion of Open Innovation is set to be established as a means of encouraging Japanese companies with high internal reserves (*6) to make investments in startups.
In order for this tax system to encourage the supply of new capital to startups, the torchbearers of innovation, and for this to translate into growth, it provides companies and corporate venture capital (hereafter, “CVC”) in Japan with a tax deduction of 25% on investments of 100 million yen or more (10 million yen or more in the case of SMEs) made to unlisted venture companies that have been established for less than 10 years (*5). Overseas venture companies also qualify for this tax system if investments amount to 500 million yen or more.
Importance of Cooperation with Startups
The above kinds of changes to the industrial and social structures along with the 4th Industrial Revolution have come together to provide the momentum for the creation of new business models. Recent years in Japan, there is a great deal of enthusiasm for initiatives related to open innovation.
Kazuhiko Chuman is the General Manager of KDDI Corporation’s Business Incubation Development, Corporate Strategy Planning Division, and spearheads KDDI ∞ Labo（KDDI MUGEN Labo）, a support program for ventures, along with KDDI Open Innovation Fund, An investment fund for ventures. Mr. Chuman made the following remarks in respect to the above:
“With the widespread uptake of 5G and progression of IoT, real assets around the world will come to take on different significance. Digital gives new meaning to things, but there can be no meaning without real assets such as stores, cars and products.
In Japan, 80 – 90% of stores, distribution networks and other things are owned by large companies. However, these large companies will probably have difficulty generating new business models and entering into the field of GAFA.
That is why the existence of startups with technologies and ideas is vital. Large companies with real assets and startups with the capability to generate new business models. Both can work together to bring about true innovation (*7)”
As these remarks suggest, there are real expectations among large companies in Japan that they can accelerate the pace of innovation through partnerships which utilize the strengths of their own real assets coupled with the ideas and technologies possessed by startups.
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