Document Type

Article

Disciplines

International Law

Abstract

Part one of this article attempts to demonstrate through a microeconomic framework how the legal, economic, and cultural forces underlying the Japanese financial system impact the funding of venture businesses in Japan. In a venture finance market, the microeconomic decisions of entrepreneurs and venture investors determine how much capital is ultimately supplied to finance venture businesses. Investors, the suppliers of capital to a venture market, seek to ensure the highest possible payback on investment by maximizing expected returns. Rational entrepreneurs, on the demand side of the market for venture capital, seek the use of investor capital to pursue income-generating opportunities sufficiently remunerative to justify the cost of accessing this capital. Such rational decision-making, however, takes place in the context of the complex array of economic, cultural, and legal factors that underlie and permeate the financial system.'l By looking through the lens of the rational entrepreneur and the rational investor and seeing how these legal, economic, and cultural factors enhance and distort microeconomic decision-making, the dynamics of funding venture businesses become clearer, the impact of trends more salient, and the proper tailoring of reforms more efficient.

Part two of the article explores the rational economic behavior of entrepreneurs within the decision-making environment for potential entrepreneurs in Japan. In Part Three, this economic framework is applied to the decisions of potential investors in new businesses in Japan. Finally, Part Four summarizes the broad conclusions discerned from the application of this microeconomic framework to the decisions of investors and entrepreneurs in Japan. In particular, it concludes that certain legal and regulatory restrictions, rooted in excessive concern for stability, artificially constrain the formation of venture businesses by reducing the expected returns for both entrepreneurs and investors.

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