Innovation Funding Incentives: Japan

Japan, a nation renowned for its technological prowess and cutting-edge research, has implemented a robust array of innovation funding incentives to bolster its research and development (R&D) landscape and foster a dynamic startup ecosystem. These initiatives are designed to encourage private sector investment, cultivate groundbreaking technologies, and solidify Japan’s position as a global leader in science, technology, and innovation. This report will detail the primary funding mechanisms available in Japan and their collective impact on the nation’s drive for innovation.

Key Funding Incentives

1 | R&D&I Tax Credit

Japan offers a comprehensive R&D tax credit system designed to reduce the corporate tax burden for companies investing in research and development activities.

• Mechanism: The R&D tax credit allows companies to deduct a certain percentage of their R&D expenses from their corporate income tax. The tax credit rate typically ranges from 6% to 17% of R&D spending, with variations based on factors such as the ratio of R&D expenditure to overall expenses and whether R&D spending has increased compared to previous years.

• Eligible Activities: The system broadly covers R&D activities aimed at manufacturing new products, improving existing technologies, or developing new techniques. This includes costs for raw materials, personnel exclusively engaged in R&D, and certain test and research expenses.

• Limitations: While advantageous, the credit is generally non-refundable, meaning it can only be offset against tax liabilities, which can limit its benefit for loss-making startups. There are also specific rules and limitations on the total amount of tax credit that can be claimed annually.

2 | Open Innovation Tax Incentive

To further stimulate collaboration between established companies and innovative startups, Japan introduced the Open Innovation Tax Incentive.

• Mechanism: This incentive provides a tax deduction equal to 25% of the amount invested by companies in eligible innovative technology startups. The investment must meet certain thresholds, such as at least ¥100 million for a Japanese venture company or ¥500 million for a foreign-based venture company. Smaller investments (e.g., ¥10 million) qualify for Japanese small and medium-sized entities (SMEs).

• Eligibility: The investing company must aim to conduct business with high productivity or develop new ventures by utilizing the resources of the startup. The target venture company must be unlisted, incorporated, and have started operations within the last 10 years.

• Impact: This incentive encourages larger corporations to funnel capital into the startup ecosystem, fostering collaboration and accelerating the commercialisation of new technologies.

3 | Government Grants and Public Funding Agencies

Japan’s government, primarily through ministries and agencies, provides direct grants and subsidies for R&D and startup support, often targeting strategic technological areas.

New Energy and Industrial Technology Development Organization (NEDO): NEDO is a key national R&D agency that provides grants for high-risk, innovative technologies aimed at solving societal issues and achieving a sustainable society. NEDO’s programs often focus on areas like green innovation (e.g., solar technology, next-generation batteries) and advanced technologies (e.g., post-quantum cryptography). They support various R&D phases, from proof-of-concept to practical application development, with funding ratios varying by project phase.

J-Startup Program: Launched by the Ministry of Economy, Trade and Industry (METI), this program provides intensive support to promising startups with high potential for global impact. Selected startups receive assistance from government agencies (like NEDO for R&D funding and JETRO for international expansion) and private sector “J-Startup Supporters,” including preferential treatment in government screening processes and assistance with exhibiting at international events.

SBIR Promotion Program: This inter-ministerial initiative promotes R&D by R&D-type startups, supporting projects that address diversified social problems and facilitate smooth social implementation of innovative technologies. It provides grants across initial R&D phases (Proof of Concept and Feasibility Study) and practical application development.

Regional Incentives: Various cities and local governments across Japan offer their own incentive programs, including subsidies, tax benefits, and co-working spaces, to attract and support entrepreneurs in specific regions.

4 | Venture Capital Landscape

Japan’s venture capital (VC) sector has been expanding, with increasing involvement from institutional investors and a growing interest in innovative startups.

Growth: The Japanese startup ecosystem is rapidly expanding, attracting more international investors. While traditionally smaller than some global counterparts, the VC landscape is maturing, with a notable increase in funding rounds.

Key Sectors: Significant VC activity is observed in sectors like AI, SaaS, life sciences, deep tech, and sustainability-focused solutions. Corporate venture capital (CVC) arms of large Japanese corporations are also increasingly active, complementing internal R&D efforts.

Government Role: Government initiatives, such as the “Startup Development Five-Year Plan,” aim to significantly increase the scale of investment in startups, diversify exit strategies, and promote open innovation, further strengthening the VC ecosystem.

Conclusion

Japan’s innovation funding incentives form a comprehensive framework that combines tax credits for R&D, direct grants from key government agencies like NEDO, and strategic support programs for startups such as J-Startup. The Open Innovation Tax Incentive further encourages collaboration between established companies and new ventures, while a growing venture capital landscape provides essential growth capital. This multi-pronged approach underscores Japan’s strong commitment to fostering technological advancement and maintaining its competitive edge in the global innovation arena.