Richter, Frank-Jurgen. Redesigning Asian Business : In the Aftermath of Crisis. Westport, CT, USA: Greenwood Publishing Group, Incorporated, 2002

Part One. IntroductionChapter 1. Why Asian Management?

Now that the storms of the Asian economic crisis are slowly letting up, Western business analysts are telling us that Asian firms have to adapt their management practices according to what they perceive to be “conventional wisdom.” The United States and the Western world in general have set benchmarks for management practices and capitalism by putting together new combinations of technological input, open markets, and deregulation to create organizations that are expanding rapidly along a sustainable path of growth and wealth. However, the reality is that Asian firms have been different—and will be different in the future. Asian firms act within a very special frame of interlinked economic agents, a high degree of trust among these agents, and collective enhancement of society in general. It goes without saying that Asian firms are adapting to postcrisis economic realities, otherwise they would have no chance to survive in increasingly turbulent environments. But how many of these adaptations are “appearance” versus “reality”?

Confucianism as the common link of East Asia’s main economic powers, Japan, South Korea, and the overseas Chinese communities in Southeast Asia, is part of the region’s social texture of business.

The founder of Confucianism, Confucius (Kong Qiu, Kong Fu Zhe, 551– 479 B. C. E.), saw time-honored and traditional rituals as the basis of human civilization, and he felt that only a civilized society could have a enduring social order. He further believed that the self is the center of relationships and that the nature of society is a community of trust. The Chinese character ren (humanity, also translated as forbearance or benevolence) literally represents the relationship between “two persons,” or co-humanity—the potential to live together humanely rather than be hostile toward each other. Rituals—and in the broader sense transactions in business—performed with ren have not only form, but ethical content. This thinking is in contrast to the Western tendency toward arm’s-length decision making, short-term profit taking, and frequent change of employment. Although Asian firms have to comply with the new economic circumstances in the aftermath of the Asian crisis, the ongoing globalization of business, and the revolutionary spread of the Internet, they may recollect their cultural roots and try to adapt the strength of their “Asian style” of management.

Until the mid-1990s there was widespread confidence that the East Asian miracle of rapid growth would persist and that the region would continue in its role as the main powerhouse for growth in the world economy. Real per capital incomes in East Asian economies have grown at an average rate of four to six percent per annum since the 1960s. East Asia performed well above the world average for some three decades. In less than fifty years, Japan rose from the ashes of World War II as an Asian phoenix, and by the 1980s had become the world’s second largest economic power after the United States.

The four NIEs (newly industrialized economies)— South Korea, Hong Kong, Singapore and Taiwan—then followed and became the first tier of “Asian tigers” or “Asian dragons” as they are sometimes called. Later, growth in Malaysia, Thailand, Indonesia, and the Philippines picked up, and after the beginning of the 1990s even the “slumbering giant” China awoke to market reforms and entrepreneurial spirit, and started a spectacular run of economic growth. Asian firms that have expanded to an increasingly global reach not only challenged Western firms in terms of market share,

but also questioned the fundamental assumptions about economic action that guide Western firms’ behavior. Business networks like the Japanese keiretsu, the Korean chaebol, and the overseas Chinese groups, have been widely acknowledged as alternative modes of governing industrial organizations. Mutual trust between business partners, whether perceived as guanxi (connections) in China or as close customer supplier relationships in Japan, found enthusiastic disciples in the West. The underlying purpose of economic behavior in Asia—collective enhancement, that is, the goal to make a group of economic actors self-sufficient so they do not have to rely on outsiders for survival—was frenetically introduced in order to improve operations’ performance and to lend a human and social touch to organizations. In the last two decades, the influence of Asian management systems in general and Japanese management systems in particular on Western management practice has become evident. Management thinking from Japan has been regarded as superior, and many management gurus and consultants have been eager to tell Western CEOs to adopt Japanese management techniques. Before the Asian crisis lowered confidence in Asian economies and Asian management practices, many Western commentators praised Asian management practices or even warned of an economic threat from Asia. Some scholars have envisioned a “Confucian challenge” to the West by emphasizing the increasing importance of East Asian culture and economic power. Only a few commentators like the Japanese scholar Kunio Yoshihara and MIT professor Paul Krugman5 warned about the coming crisis of the Asian economic system and the regression of Asian management practices.

Asian firms are currently developing at such speed that most of our knowledge about them is outdated. In mid-1997 the expectation that Asian management is somewhat different or even superior to Western forms of organizing was shattered, as currencies plunged, financial institutions closed their doors, and rapid growth turned to recession, resulting in the failure of many Asian firms. Indeed, the golden era of Asian management practices has been rather short, as Asia has always known periods of intense change in its economic structures. East Asia’s spectacular success after World War II, and its rise to an economic powerhouse, may have led to the assumption that Asian firms were based on a stable and unchangeable model.

The Asian economic crisis destroyed businesses, banks, and reputations with enormous efficiency. Between 1997 and mid-1999, instant noodles were among the few products to report growth, a substantial thirty percent growth in some places! 6 Instant noodles— in Thailand, for instance—cost about 5 baht, while rice with curry (considered as local fast food) costs 20 baht. In short, instant noodles became one of the key indicators of the economic downturn and is perhaps a general indicator across Asia. Variations in potato sales may be a similar indicator in Europe.

When Asian economies were growing fast, governments and firms paid little attention to returns on capital investment. Similarly, as long as labor was cheap and export markets were widely receptive, labor efficiency was not an issue. Asian firms focused on creating growth— and less on shareholder value as perceived within the framework of Western capitalism. Conglomerates proliferated across a wide range of industrial activities, hindering a clear focus on core competencies. Today, improved labor efficiency and a clear focus is a priority in every part of business, from R& D to production to sales. The immediate steps Asian firms need to take to improve efficiency are standard practices. However, the extent of the improvements they must make represents a massive challenge. Improving their way of doing business is being driven by a simple factor: necessity.

What has changed along with the Asian economic crisis is not just that Asian firms are struggling against a prolonged recession, pressing though it is. Nowadays, the

prevailing view is that Western companies had learned everything they needed to know about Asian management, and that it is the Asian companies that now have to learn again from the West. As globalization gained momentum in the 1970s and the 1980s, Japanese companies, in particular, seemed to be the winners in the emerging global industries such as consumer electronics, computers, semiconductors, machine tools, and automobiles, where they challenged their Western counterparts. During this time, Japanese management was considered a valuable answer to the fading glory of Taylorism and Fordism. Yet, by the early 1990s, with U. S. and European firms regaining market shares, the challenge seemed to be over and Japanese firms were apparently the losers in some industries. The Asian economic crisis of 1997 caused many Japanese and East Asian firms to crash.

The quest for a new role model is obvious: As Lee Hong-koo, an outspoken member of the South Korean National Assembly, said, “The model is now clear. It’s not Japan. It’s the West. The current crisis has convinced almost all people that the old style doesn’t work. We will adjust ourselves rapidly to the new requirements, which means we will fashion ourselves more like the West, like the U. S. and European model.” 7 Asian management practices are under attack! Fashion, however, is always fleeting.

The label “Asian management” has been taken to refer to the paradigm that has aspired to encompass the approach to management and business practiced by Asian managers. The increasing articulation of a distinctive approach to management is closely linked to the phenomenal growth of Asian economies and the surprising decline due to the Asian economic crisis.

Moreover, Asian management has been perceived as a counterbody of thought in delimitation of Western management practices. Seduced by the strength of their economies, Asian managers became convinced that the long-term growth of their economies would continue, and they were sure of the uniqueness of their style of management. Their thoughts were congruent with assumptions widespread in Asia, where business networks count more than individual firms, trust relationships usually matter more than market mediation, and wealth creation for society as a whole takes priority over individual short-term profit taking. In redesigning Asian firms, one should bear in mind the cultural profile of the region. Solutions that worked in other parts of the world may be difficult to implement in Asia because they clash with the underlying culture of Asian firms. Western-style corporate restructuring, for instance, usually entails massive job losses and management purges. Yet in Asian cultures, their collectivist nature often results in the requirement to save face. Hence mergers and acquisitions and corporate restructuring rarely lead to as many job losses as would be the result of an approach focused on fully leveraging economies of size.

Creative adaptations of Western management practices may be useful, and occasionally one may be able to find solutions that harness Asian cultural traits. Awareness of these traits can reduce the pitfalls experienced by those charged with the task of creating economic recovery. Few Western analysts may acknowledge the essential nakedness of the new Asian management practices if they recommend that Asian firms now go by the “conventional wisdom” that has been designed by Anglo-Saxon capitalism—investment bankers, business analysts, and management gurus. I believe that we should be brave enough to resist that. Asian firms have to invest time and effort to develop their own style of business. It is not about Anglo-Saxon hegemony, about disneyfication of all corners of the earth, as Thomas Friedman convincingly explains in his bestseller, The Lexus and the Olive Tree. 8 Finding the right balance between the global and the local is the great challenge of globalization. There are many instances of East Asian firms emerging from the crisis rather strengthened. These firms often reflect Confucianism as the cultural roots of their business practices

and adopt certain “best practices” as experienced elsewhere, and may well retain their esteem very soon.

ASIAN FIRMS ARE DIFFERENTManagement practices are not developed in a vacuum but within corporate organizations and social environments that cannot be easily replicated. They cannot be introduced overnight like managerial directives but have to be integrated in corporate visions and immersed in the appropriate social values and attitudes. Despite the common blame of oversimplification, there is a rather strong empirical support for value orientations in conducting business across differing cultures. Substantial progress has been made in cross-cultural and comparative management studies depicting those differing values and practices.

The Dutch anthropologist Geerd Hofstede, 9 for example, has divided culture into four dimensions: power distance, uncertainty avoidance, individualism, and masculinity. By applying the concept of these four dimensions, he examines major Western management theories to see if they are universally applicable. One of his findings suggests that Asian nations and organizations fall toward the lower end of the “individualism vs. collectivism” scale while the United States show high values in individualism. He concludes that the difference of Asian organizations is due to the common heritage of Confucianism. Confucianism can clearly be identified with the foundations of most East Asian management practices, in particular those of South Korea, Japan, and the Chinese communities in Southeast Asia. In many areas of East Asia, Confucian values provide the basis for societal norms of interpersonal relationships and behavior. Confucianism as the common cultural heritage of the region is reaching back through a long time span. Variations in its modern interpretations are emerging in the same way that Western countries manifest a wide variety of their common occidental heritage.

The success of Asian management practices in the international arena has caused a strong debate between two different schools: the “culture-bound” and the “culture-free” theories. 10 The first states that Asian management cannot be transferred successfully abroad because it is highly dependent upon the unique ethics and culture of Asian societies. The latter prescribes full globalization of culture, human behavior, and management practices. A widely accepted wisdom determines what is best practice and what is not. Organizational ecologists like Hannan and Freeman and management scholars like Therese Flaherty, for instance, base the supposed invariance of culture on the observation that the contingencies of competitiveness impose a logic of rational administration, which it becomes functionally imperative to follow. The prevailing logic is to achieve levels of performance sufficient to ensure the survival of the organization. 11 Culture-free theories propose that this logic applies to all societies, irrespective of culture, steadily pervading the texture of organizations. Cultural differences are therefore of diminishing importance, because few differences exist among managers from different cultural backgrounds. Management theories can be easily transferred from one culture to another.

Many scholars, especially from the United States and the United Kingdom, hold on to the culture-free, universalist view. This may reflect the Anglo-Saxon dominance in the field of management studies. Conducting single-culture studies, they assume that the results of their domestic studies are universal. Michael Porter, for example, argued that Japanese companies rarely have strategies and particular management approaches that distinguish them from the West. Continuous incremental improvement as laid down in the Japanese kaizen approach is not strategy. Competition based on operational effectiveness alone is mutually destructive and does not lead to relative

improvement for anyone. 12 In this sense, Porter may be right. The Japanese approach to competition leads to a dangerous absence of strategy. This can further be illustrated by the fact that Japan has so far produced only a few well-known management scholars. Examples include Kenichi Ohmae, who is known through such books as The Mind of the Strategist: The Art of Japanese Business and Beyond National Borders: Reflections on Japan and the World13 and Masaaki Imai, who proclaimed kaizen—or continuous improvement—as the ultimate strategy to improve competitiveness. 14 However, many of the realJapanese management scholars are businesspeople, rather than professors or analysts. Nevertheless, they have put forward their ideas just as boldly as others and their names are closely associated with theories on how to run businesses. Take for example Sony’s charismatic founder Akio Morita, Matsushita’s Konosuke Matsushita, and Kiichiro Toyoda, the former head of Toyota, who introduced the Toyota Production System leading to the discussions around lean production, reengineering, and lean management. Some authors like Michael Hamlin15 even believe that there is only one universal best practice and no particular Asian management style at all. Hamlin holds that Asian networking practices work pretty much like Old Boys’ Clubs elsewhere. He evaluates Chinese guanxi relationships as mystical and not much more than a overstretched cliche´. The mystique of Asian business practices may serve to protect Asian businesses from market forces within and outside Asia. Hamlin only admits transitory business practices that reflect (ambiguous) local cultures and (inadequate) states of economic development. 16 This book follows the first line of theories, attempting to analyze management practices in relation to their cultural meanings and human organization. Management practices are culturally dependent, and what works in one country does not necessarily work in another.

Differences in cultural values, rather than in material and structural conditions, are ultimate determinants of human organization and behavior, and thus of economic growth. We need to understand—I believe—how a company can best manage its employees from different origins and how it should deal with companies from different cultural backgrounds. Even managers of companies solely focused on domestic markets are under increasing pressure to think globally and to manage different cultural settings effectively. Today, no industry or company is totally immune from foreign competition. In today’s borderless economy, multinational corporations must be able to develop a sophisticated management system to cope with the challenge of globalization.

Management of the firm in Asia is different. In order to understand the differences between Asian and Western management, one must recognize that there is not merely a cultural divide between two societies, but a civilizational chasm. The Asian cases do not support a simple convergence toward a universal market culture. However, the book is concerned with “culturalist” and “ethnocentric” commentaries on Asian politics, economy, and businesses by such prominent figures as Malaysian Prime Minister Mahathir Mohamad17 and the Mayor of Tokyo, Shintaro Ishihara, who pledge for an Asia that “can say no” and furthermore for a new pan-Asian self-awareness that is aimed against Western determination. 18 Many of these commentaries are based on simplistic portrayals of Asian culture, which consider the characteristics of Asia excessively positive in comparison with other cultures. They argue that the spectacular economic successes of East Asia has been due to their being greatly influenced by “Asian values” rejecting human rights and individual freedom. The book is neither trying to mystify Asian management nor trying to prophesize an inevitable “clash of civilizations” 19 based on cultural differences. A look at Asian management practices should be free of those and similar contortions. Confucianism has many aspects—as will be shown—and cannot be reduced to an empty shell to justify a certain kind of rule.

Although there is no common definition of “Asian management,” there are some common features among the country-specific moldingof the way to perceive and to do business:

Networks: Asian firms are organized around business networks that include firms�from different industries and value levels. They organize themselves horizontallyas interlinked firms of different industries and vertically as subcontracting pyramids,often in manufacturing or construction. Thus, by carefully combining resourceswithin and outside organizations, Asian firms have steadily advanced innovationacross industrial spectrums and have entered and created networks, such as thekeiretsu in Japan, the chaebol in Korea, and the overseas Chinese conglomerates inSoutheast Asia.

Trust: The development of mutual trust (between organizations and/ or individuals)�is the normal expectation of Asian managers. Using and developing personal connectionsstands in contrast to the Western inclination toward planning and shorttermresult orientation. The decision-making process of Asian firms, as nemawashiin Japan, noonchi in Korea, musjawara in Malaysia, or tonguo houmen in China, israther nontransparent and may lead—in Western eyes—to biased and incomprehensibledecisions.

Collectivism: The decisive economic actor in East Asian societies is typically not�the individual but rather the collective in which the individual is embedded. It isbelieved that social relations between economic actors do not impede market functioning but promote it. Just as Western economies have institutionalized ways of maintaining autonomy between actors, Asian economies are rooted institutions that encourage and maintain ties. Economic action is based on social arrangements typical of the employment system, which ensures the cooperative and diligent participation of all employees in corporate activities.

This listing and categorizing of Asian management should reveal that Asian firms, although different, do not behave in mysterious and irrational ways, but in accordance with an economic logic shaped by conditions specific to the region’s culture and capitalism.

THE MICROCOSM OF MANAGEMENT IN ASIA

Although Confucianism as the common ground of corporate management led to similarities, Asian firms are not all alike, but have different policies, practices, and strategies. First of all, besides Confucianism, there have been many other influences on cultural behaviour and conduct in general. Western managers working in Asia can experience the contrasts and similarities prevalent in the religions and ideologies that have shaped their present character: Islam, Christianity, Shintoism, Taoism, and Buddhism. Christianity gained large inroads in Korea, which may have led, as some authors suggest, to some kind of Protestant work ethics. 20 In Japan, Confucianism is accompanied by a whole set of religions, which shape the lives of the Japanese. The major ceremonies in the lives of the Japanese are undertaken by different religions: Shintoism for birth, Christianity for marriage, and Buddhism for death. In China, there are three major forces (san jiao she yi) that shape the cultural backbone of the country: Confucianism, Buddhism, and Taoism. It would be to miss the point if we generalized about the cultural grounds of Asia and Asian management. There is a vast region of differences in religious, political, and cultural perspectives.

However, the management practices of the three dominating economic pretenders of East Asia—the Japanese, the South Koreans, and the overseas Chinese—do share a host of similarities, which characterize them as a cluster of economic excellence fairly different from the business practices prevailing in the West. These three management systems have been influenced to varying degrees by Confucianism, thus sharing a common cultural heritage, although the Japanese, South Korean, and Chinese overseas business communities developed under different social and historical environments. Although the Japanese economy is the world’s second largest, the combined economies of non-Japanese Asia are substantial as well.

The influence of the most challenging non-Japanese Asian firms, the South Korean and overseas Chinese businesses, has not been felt on management practices until today. They are much less prominent than Japanese management practices, which are widely analyzed, reported, and imitated. In spite of the common cultural heritage and the progress made toward “open regions,” East Asia is not a homogeneous region. It is divided into many areas of economic activity with quite different economic structures, languages, and history. Although East Asia exists as a geographical entity, it is no more homogeneous in national or organizational culture than Europe. There are, for example, differences in industrial organization:

Although the chaebol of South Korea and the Japanese keiretsu share the concept of being organized in business networks, they differ in management style and contrast with the networking of the relatively small overseas Chinese firms. The physical distance between Singapore and Tokyo is similar to that between Europe and the United States of America. The main management systems— embedded in their prevailing organizational structures—are the following: Japanese keiretsu: 21 Japan’s industrial landscape is dominated by six very large keiretsu.

Mitsubishi, Mitsui, Sumitomo, Fuyo, Daiichi-Kangyo and Sanwa. The firstthree are successors of the prewar zaibatsu (family-dominated groups with a longhistory); the other three were formed after World War II. The member firms ofthe keiretsu operate in an array of different industrial sectors, and are groupedaround a main bank and a general trading firm (sogo shosha). They are interlinkedthrough cross-shareholdings. The keiretsu form the archetype for other Asian firmsand are copied, altered, and adjusted to the prevailing conditions. The strategic management of keiretsu is characterized by such features as job security, promotionsystems reliant upon seniority, and inhouse unions enlisting all employees. Keiretsu practice management techniques like total quality control (TQC), kanban (just-intime production), and ringi (consensus decision making).

Korean chaebol: 22 The economic size and concentration of the chaebol as the Korean �variant of the Asian firm have been both the driving force and a consequence of Korea’s rapid economic growth. A chaebol can be defined as a business group consisting of large firms that are owned and managed by family members in many diversified business areas. The five largest chaebol, in terms of sales, are Hyundai, Samsung, Daewoo, LG, and SK. In contrast to the keiretsu, the chaebol are more tightly managed, apparent in a paternalistic leadership style and the very personal loyalty of the employees. The management style and the organizational structure of chaebol are still not widely copied by other Asian firms. [Recently, there has been a trend in the People’s Republic of China to transfer the chaebol model to stateowned enterprises by diversifying around different industrial segments.]

Overseas Chinese business groups: 23 Businesses of overseas Chinese entrepreneurs �proliferate across South Asia. Many of these entrepreneurs, who originally arrived as

immigrants from southern China, today form the pillars of corporate life in their adopted lands. For example, overseas Chinese control a major portion of wealth in Indonesia, Malaysia, and the Philippines. As a further archetype of the Asian organization, Chinese business groups have been heavily admired and copied by Southeast Asian indigenous, non-Chinese entrepreneurs. The management style of overseas Chinese businesses can be characterized by family ties, guanxi networking, and a deal-making mentality.

Chinese state-owned enterprises: In China’s socialist past, industrial growth was �promoted by allocating most assets to the state industry. As a result, many big enterprises, some of them with several hundred thousand employees, and many medium-scale enterprises still belong to the state sector. State-owned enterprises constitute roughly half of China’s accumulated capital, in spite of high growth of private and cooperative enterprises within the last decade. In the context of this book, Chinese state-owned enterprises will not be treated as an archetype. However, they will be briefly illustrated in their transitional gestalt from originally being a copy of Stalinist economic texture to adopting of capitalist governance structures due to the liberalization and opening of the Chinese socialist market economy.

Southeast Asian business groups: Like Chinese state-owned enterprises, nonChinese �businesses in Southeast Asia are not considered to be an archetype of Asian management practices. In the past, Western influences on management in such former Western colonies as Malaysia and the Philippines were significant. In the s and 1990s, they mainly drew from Japanese and overseas Chinese experiences. Many Southeast Asian business groups looked like a blueprint of overseas Chinese businesses, focusing on diversification into rather unrelated industries and rapid growth through hard-currency financing. In postcrisis Asia, they are increasingly proclaiming a return to Western management practices, even trying to focus on the long-hated principle of shareholder value. This is not at all astonishing, as Southeast Asian business groups have been the first category of enterprises compelled to adapt to IMF (International Monetary Fund) prescribed measures.

The case of Southeast Asian business groups may lead to the assumption that there is no particular Asian management style as these firms seem to be rather opportunistic and volatile regarding best practices. One must bear in mind, however, that Southeast Asian business groups are latecomers in the process of industrialization, and that there has lately been a need for new role models. In this context, the fact that Malaysia’s Prime Minister Mahathir has stressed the need for obeying Confucian principles and “Asian values” in managing his country’s indigenous, so-called bumiputra businesses—although bumiputras belong to the Islamic and certainly non-Confucian world—is not strange at all. The Confucian societies and communities of Japan, South Korea, and overseas China—left open whether unconsciously or intended—spread their principles of conducting business across the whole of East Asia.

2. The Legacy of Confucianism

Harmony is invaluable.

Confucius

The legitimizing force behind the management of Asian firms is Confucianism. Its practice is necessary for the maintenance of a firm’s identity and social welfare. Although Confucianism has undergone specific evolution in China, Japan, South Korea—and in general in Southeast Asia—the main tenets of Confucianism can be found in

each of these countries. Confucianism prescribes a stringent social code wherein the individual has almost no existence of his or her own outside the local community. Confucius taught that everyone had their correct place in society, denoted by their title, and must act according to the rules associated with that position. This was particularly true in the family, where relationships were clearly defined and filial piety was believed to be a basic virtue. To a great extent, the Confucian code lives on in current management practices.

Confucianism is concerned with socially correct procedure and is rooted in loyalty and piety. A paternalistic order ranges from parents to the sovereign in a continuous chain of hierarchies of master and servant. Employees are expected to be obedient and loyal to employers, and employers are expected to look after their workers. Confucian thinking has made Asian countries rather conformist. The word “individualism” does not have the positive meaning in Chinese, Korean and Japanese associated with it as in other languages and cultures. People can generate anger simply by standing outside the crowd. To live and function as an individual is to invite criticism for being selfish and opportunistic. In China, the combined legacy of communist rule and Confucianism has homogenized its culture and—as some authors argue—slowed development of new inventions and new ways of thinking. 2 Unquestioning acceptance of the status quo has often been the norm rather than the exception.

Confucianism honors humility and courtesy. As a result, East Asians are seldom self-satisfied, even if their achievements are outstanding. When they are being polite, they can be excessively self deprecating. East Asians are among the most courteous people toward their peers. For Western individualists, this form of courtesy can be overwhelming. However, East Asians often appear to be uncaring when they deal with strangers, but such behavior may be psychologically necessary in a country as overpopulated as China where crowds organize themselves in order to avoid accidents. If accidents happen, apologies are merely given.

The cultural origins of Japan and Korea owe much to Chinese civilization. Along with Chinese culture, art, and religion, Confucianism was spread to the neighboring countries of East Asia. Social codes drawn up by Confucius drive much of East Asian cultures today, particularly as it relates to business. Afterall, Japanese and Korean cultures are partly derived from Chinese culture although the Japanese and Koreans preserved their own cultural roots—often harmonized with the direct Chinese influences. Much of South Asia’s business sector today is dominated by Chinese immigrants, leading to the socalled “overseas China.” Although adapted to their host countries, these immigrants still stick to the legacy of Confucianism as the main pillar of Chinese culture.

HISTORICAL ROOTS

Asian thinking, feeling, and acting is—regardless of the paper-thin socialist paint job of almost fifty years in China, of European colonial rule in Southeast Asia, and of symptoms of “Westernalization” in Japan—characterized by the values of a many-thousand-year-old Confucian society. The Confucian philosophy is still valid, in spite of presently undergoing radical social changes. In September 1999, Confucius’s 2550th birthday was celebrated not only in Japan and South Korea, but also in Beijing with exhibitions and performances in the famous Confucius temple. And this although—in his quest to create a new China—Mao Zedong tried to destroy Confucianism and the family as a model of the state not long ago: He undertook a farreaching anti-Confucius campaign 1974– 1976. Children informed on parents, ancestral graves were desecrated, and meals were eaten in work groups, not at home. Ordinary Chinese have been attached to their danwei (work unit), which have not only been responsible for

work-related activities but also control after-work activities and life, ranging from housing, daycare, and schooling of children to birth control. But the family survived. As China has put itself together after the times of Maoism, the family is one of the few institutions that people still believe in. Chinese teachers are no longer schooled in party ideology, but rather in Confucian ethics.

Confucius largely shaped the modern mentality and culture of the Asian peoples and societies. The origins of Confucianism lie in the collection of sayings known as the Analects, attributed to Confucius, and in ancient commentaries such as that of his disciple Mencius.

Before the third century B. C. E., Confucianism was a system of ethical precepts for the management of society, based on the practice of jen (sympathy) and human-heartedness—as shown in one’s relations with others and demonstrated through adherence to li, a combination of etiquette and ritual. A person who wishes to be properly treated when in a subordinate role must, according to the Confucian Golden Rule, treat his own inferiors with propriety. Confucianism taught obedience to and respect for superiors and parents, duty to family, loyalty to friends, humility, sincerity, and courtesy. Hence, Confucianism is not so much a religion as it is a code for social conduct. It has no gods, priests, or stringent dogmas. Its appeal lies not in conjuring up visions of an afterlife or depending on abstract notions such as the Trinity or Reincarnation. Rather, Confucianism prescribes codes of behavior. Through actions, it seeks to construct a social system and a core of principles. With its practical social precepts, Confucianism was often challenged by the supernatural religious systems of Taoism and Buddhism and was eclipsed by them from the third to the seventh century C. E., but it revived under the Chinese Tang dynasty (618– 906). The Sung dynasty (960– 1279) saw the development of “neo-Confucianism,” a metaphysical system mainly developed by the philosopher Chu Hsi, that drew on the beliefs of Taoism and especially of Zen Buddhism; during the Ming dynasty (1368– 1644) it stressed meditation and in tuitive knowledge. Thereafter Confucianism as state philosophy gradually weakened, and with the overthrow of the monarchy (1911– 1912) Confucianism declined, a process accelerated by the Communist revolution (1949). Chinese culture and people’s conduct still stem from Confucianism, however.

Between the fifth and ninth centuries Japan and Korea were active importers of culture from China, especially of Confucianism. Confucianism was supposed to be the foundation of all secular algorithm, until Western ideas were introduced in the latter part of the nineteenth century. It was the official state philosophy of the Japanese Tokugawa shogunate (1603– 1868) and the Korean Choson dynasty (1392– 1910). 4 Children were taught to recite the Confucian books in order to learn how to read and write and how to live as a good human being, a good member of society, a good worker, and a good family member. Business and political thinkers published their interpretations of the Confucian books, which were read by administrators, merchants, and educated farmers.

As Asian countries have grown and developed from the villages, social codes have emphasized the collective interest of the village over the personal interest of the individual. The cooperation by different families at the village level has proven to be an effective means of promoting the village’s own prosperity. Where one family or individual tries to act too independently or fails to cooperate, the interests of the village would suffer as a whole. To a great extent, many of the dictums attributed to Confucius largely amounted to a crystallization or philosophical interpretation of this existing social order.

For most of Asian history, the availability and access to land and water and the unreliability of the climate have led to a mere subsistence production with frequent famine and starvation. Together with the power and dominance of the educated elite forming the omnipresent feudal bureaucracy, these natural conditions may be considered one of the main influences of Confucianism. In China, the allocation of land still exists today, and is essential for the life of the Chinese. Eighty percent of them live in rural areas or come from peasant families. External conditions have been rationalized and advocated by Confucius in his philosophy. He lived in a time of political turbulence, so he was greatly concerned with building a well governed state with harmony between the individual and society. The fundamental assumption of Confucianism is that human beingsmerely exist in relationship to another.

THE FAMILY AND THE OUTSIDER

Throughout East Asian history, the most prominent and pre-eminent institution has been the family. The first duty has been to take care of one’s family. In many ways, East Asians view themselves more as parts of the family unit than as independent individuals. Grown children often live with their parents, even if they are married, and have a duty to support them in old age. This may explain the absence of social welfare systems in most East Asian countries. Still today, age and rank are respected in Asia, and young people are expected to obey their elders. In the workplace, respect and status generally increase with age.

Within the family, hierarchical relations have dominated all major human relationships as a natural consequence of filial piety. Within this social setting, there was equality among persons. The family as a basic institution thus influenced the substantive content of permissible conduct. Permissible conduct within such a setting would take the form of obligations and duties rather than rights. It was Confucius’s belief that if everyone lived up to his duties according to his station, political order would prevail. An authoritarian and hierarchical social structure developed, which has been categorized as the Five Basic Relationships. Besides virtue, the Five Basic Relationships offer the follower of Confucianism the means for progressing. These five relationships are to the ruler, the father, the husband, the elder brother, and friends. 5 These relationships constitute highly status bound and status-regarding norms. The emperor, the father, and the husband occupied these norm-generating positions. Other social relationships and configurations like those between sempai (Japanese: older person in a human relationship) and kohai (Japanese: younger person in this relationship) spin around these positions. The emperor, the father, and the husband demanded first a subservient observance and respect from the official, the son, and the wife, respectively. Reciprocal respect from the former to the latter only emerges after the latter showed and proved his respect and subordination.

Although authority and status have generally not been challenged, the dominating figures within this system have been dependent on virtue. The inappropriate use of power would lead to the “mandate of heaven” being withdrawn and passed onto a new ruler, but without actually changing the system. Confucius recognized that the epochal “great commonwealth,” the union of mankind under ethical rule, would take a long time to achieve, but believed that it might be constantly advanced by practicing the “rectification of names.” This is the critical examination of the degree to which the behavior of a functionary or an institution corresponds to its name; thus, the title of emperor should not be applied to one who does not behave properly, and the criticism of the undeserving claimant should force him to reform. Nominally, the Confucian world perception is rather dynamic, although the willingness to pursue change may be triggered after more pressure compared to similar traits in the Western world. Once the need for change is recognized, however, the extent of changes may be overwhelming.

This may be seen in the history of Chinese peasant uprisings and the success story of Asian entrepreneurs.

There is one relationship that is missing—that between the individual and the outsider. Outsiders do not fit into the traditional Confucian hierarchy. According to Michael Backman, 6 relationships outside the Confucian circle of dependencies are not regulated and rather are perceived as a zero-sum game than as a win-win game. The Chinese applied war strategems to monitor their environments that have been perceived as rather hostile. The best known strategist was Sun Tzi, a Chinese general who lived in the times of Confucius. His work, The Art of War, 7 is a sort of guidebook of how to fight outsiders. Applied to business, Asian managers are often treating competition as warfare. If relationships fall outside the five basic ones, then war strategies regulate the interaction between the business parties.

The Japanese translated the Confucian principle of regulating the harmony within the group by neglecting the “outside” into the dichotomy of uchi and soto: Different rules apply in the group (uchi) than on the outside (soto). With this, the attitude toward a subject has to be differentiated from the position represented by the outside. The basic model of this behavioral pattern is ie, the family (Japanese; Chinese: jia, Korean: taek). Conflicts are resolved on the inside. Ie is laid out for the long term, the present members see themselves as part of a line of ancestors and following generations. In the traditional Japanese society, the smallest uchi unit was the family, the next higher was the extended family, followed by a village, a prefecture, and the nation. Similarly in China, the basic social group is jia (family), beyond which is dajia (big family, i. e., larger social group that includes nonfamily members); the largest group is called guojia (country family, i. e., the state). By applying the concept of family to all these different larger groups, the self can put himself in a favorable position to build its relationships. Thus, the self can regulate his relations with others to his actual position and liking. The boundaries that constitute uchi (and what is beyond ie and jia) can be shifted to the inside or the outside. As if changing perspectives, concentric rings form around the observed uchi unit. The flexibility of the boundaries between uchi and soto often plays an important role in the preservation of social integrity and the avoidance of conflicts. Whereas European cultures have tended to give the subject a stable, central, or even transcendental position, Asian cultures tend to lend a relative position to the subject.

ASIAN VALUES

As mentioned, Confucianism can clearly be identified with the foundations of most East Asian management practices. In many countries and areas of East Asia, Confucian values provide the basis for societal norms of interpersonal relationships and behavior. And until the outbreak of the Asian economic crisis, neo-Confucian or—as they were called then—“Asian values” were widely proclaimed to be separate from universal rules. For more than a decade, aspirations to independence on the part of the newly rising Asian economies, official frustration at interference from the West on issues of human rights and citizenship, and above all pride among Asian officials and professionals, had built up the theme of Asian values. Asian values encompass what might loosely be termed the (neo)Confucian ideals of hard work, thrift, respect for authority, filial piety, and a belief that the community is more important than the individual.

The Asian values school has been favored by benevolent but authoritarian governments throughout the region, in particular in Malaysia and Singapore. 8 It is supplemented by an emphasis on some ill-defined but strongly emphasized Confucian

respect for elders and elite leaders. According to this school, the respect for Confucian tenets portrays Asian cultures as being able to retain their distinctive identity and to exercise some control over their destiny in the face of industrial progress and modernization. Asian values have been portrayed as the reason why Asians have been able to protect and nurture their traditions in the face of Western modernity, morals, and globalization.

Therefore, Asian values are to a great extent community-, family-, and relationship-oriented. The Malaysian Prime Minister Mahathir Mohamad—one of the most prominent contenders of Asian values—advocates that whereas Western values clearly emphasize individual rights, Asians tend to stress the community’s rights. 9 If an individual threatens the rights of the community, that person is damaging the rights of the majority by selfishly pursuing his own rights.

Critics of this view have argued that Asian values have hindered independent thinking and creativity and fostered authoritarian regimes. 10 They point to the essentially authoritarian governments in places such as Myanmar, Vietnam, and China. They also refer to the democracies of Singapore and Malaysia, where de facto one-party rule has been in force since independence. Asian values may not be so valuable when they lead to conforming media and a pliant populace tolerating cronyism because it is regarded as “un-Asian” to criticize a superior.

With Asian values, limits on freedom have apparently been justified, because Asians are considered to respect authority unanimously. Without authority and stability there can be no civility, Mahathir states, justifying the limits of press freedom. 11 He remains convinced that the West has conspired to prevent Asia from achieving economicsuccess. Indeed, with the Asian economic crisis, many Western observers now argue that Asian values, which have been so highly praised as a countermodel to Western thinking, may—at least partly—have caused the crisis. Asian values merely admit control mechanisms and encourage prudent standards that are widely used and accepted in the West. Defending Asian values, however, Mahathir argues that Asian values had little to do with the origins of the Asian economic crisis, and thus it is wrong to argue that the current economic hardships prove Asian value systems are wrong. If any value system has been proven wrong, he states, it is the profit-oriented, materialistic values embedded in the global financial system in the West.

According to this view, economic woes or troubles as shown by the Asian crisis are the very symptoms of the ills of the Western economic system. They have happened in the United States and Europe. Mahathir believes that the Asian crisis is symptomatic of the crisis of world capitalism. Yes, the crisis happened in Asia, and Asian governments and businesses must be responsible for their own mistakes. But complete copying of Anglo-Saxon capitalism does not solve the Asian problem simply because the Anglo-Saxon model does not solve its own problems in the West, which have been there for a long time.

Rather, the crisis happened at a historical juncture when the rapid globalization and the fast development of information technology were changing the framework of all the places involved. In fact, the faster economic growth is achieved, the greater the exposure to risks. What is more, the irresponsible pursuit of profits by Western capitalists is also thought to be part of the cause of trouble as it piled risks on the already fragile financial structure in the afflicted nations.

So—Mahathir concludes—the diagnosis has to be careful and accurate. Commenting on the accusation that Asia’s economic crisis was triggered by the West, the renowned MIT economist Paul Krugman puts forward that the so-called “conspiracy theory” advocated

by Mahathir does not work. 13 Rather, East Asian countries have been consolidated due to market forces—and due to the dangerous exaggerations posited by Asian politicians and businessmen. Anyhow, Asian cultures are products of a long history and cannot be expected to change quickly and drastically. If and when they change, they will change in the direction determined by the development of world economy and human history. Western values are changing, too, and the direction of change will be determined by social and economic progress that is common to all agents worldwide. The positive ingredients from both Western and Asian cultures may be adopted by a converging world culture to take shape soon.

3. The Three Intrinsic Characteristics of Asian Management

The success of the East Asian economies has given Confucianism a good name.

John Naisbitt

Despite the exaggerations of the Asian values school, one may regard Confucianism as the common and widely accepted basis for management practices within East Asia. Confucianism is not a mere fad to be adopted one day and rejected the next. It is something more—it is the base for social interaction in East Asia. Confucianism has a good name in East Asia and beyond, not only due to the recent success of the East Asian societies.

Confucianism has found its way—although in an exaggerated form—into the Asian values school. Most Asian managers believe that Confucian thinking is necessary to improve the team spirit, and—as a consequence—the profitability of their organizations. They do not support, however, a blind nationalism and authoritarian rule. Therefore, Confucianism is part of an ethics regarding people as the fundamentals of business rather than cultural chauvinism. A fair focus on Confucianism provides employees with the opportunity for competition, hence making it possible for them to display their talents which, in the final analysis, will benefit the organization.

A crucial factor for citizens and economic actors in Confucian societies is to maintain their proper place and behavior. In the Confucian world, wisdom and virtue are one—a belief that has helped create skilled and well-educated workforces. A strong emphasis on thrift and the promotion of the whole is clearly related to the growth of Asian corporations. Asian management is gradual, mundane, and harmonious. Deeply rooted in Confucianism, Asian management inspires no risky and revolutionary mindsets. Instead, Asian firms have developed contextualized perspectives of management that can be summarized as three features: business networks as governance structure, mutual trust as interaction mode, and collective enhancement as underlying purpose. Far from claiming completeness, this chapter will proceed by discussing what can be called intrinsic characteristics of Asian management.

GOVERNANCE STRUCTURE: BUSINESS NETWORKSBusiness networks have guided the Asian economies’ transformations from agricultural to industrial bases. Corporations linked in business networks have been involved in multiple economic sectors, which made their stocks proxies for national economic growth, and they have been perceived as leaders of their countries’ industrial development.

In addition, they have had access to the politically powerful, who often sat on their firms’ boards. The top six Japanese keiretsu, the top five Korean chaebol, and the top

ten overseas Chinese businesses in Southeast Asia still control large proportions of key economic sectors. Although firms in Western societies may have monopolistic holds on some product lines, the Asian economies’ network structures, and these networks’ relative economic power, differentiate the competitive patterns in Asian economies from those in Western economies. Because of their unique characteristics, the networks also face unique challenges in postcrisis Asia.

Many scholars have described theoretical links between Asian industrial patterns and Asian firms’ competitiveness. These scholars hold that the Asian economies exhibit continuous innovation and growth by linkages across, rather than within, specific industrial borders. 2 Thus, by carefully combining resources within and outside organizations, Asian firms have steadily advanced innovation and qualitative growth across industrial sectors. In other words, they have formed business networks, such as the keiretsu in Japan, the chaebol in Korea, and the overseas Chinese businesses in Southeast Asia.

The large number of different forms of business networks and the distinguished characteristics of their management philosophies have made East Asia a dynamic region with intensive rivalry. Although the networks’ strategic int ents appear similar in all these forms of businesses, the bases for competitive advantages differ to some extent. Asian business networks cut across a huge range of management philosophies, from the keiretsu to the chaebol, and the overseas Chinese businesses, as well as—most recently—the Chinese state-owned enterprises.

In terms of structure, ownership, and management, one major difference is that ownership and management in keiretsu are separated while owning families of chaebol and overseas Chinese businesses still actively participate in day-to-day operations. The chaebol and—to an even higher degree—the overseas Chinese businesses have a centralized power structure controlled by the founding families, which are free to intervene in affiliated firms.

Asian business networks include firms from different industries and value levels that organize themselves horizontally as interlinked firms of different industries and vertically as subcontracting pyramids. The degree of interfirm organization is enormous—individual firms without any network connection are still very rare. The affiliation to a business network combines competitive pressure with a sense of belonging to an alma mater, which reflects the Confucian legacy of a shared common history and an envisioned common future. The contrast between uchi and soto, as discussed above, can be seen as the social principle behind the phenomenon of business networks. The firms within the network see themselves as uchi, while companies outside the network are considered to be soto, and thus a latent threat to the internal cohesion of the network.

INTERACTION MODE: MUTUAL TRUSTThe interaction mode within business networks is mutual trust, which is perceived to be long-term and generated through commitment. 3 Trust as experienced in East Asia often substitutes for legal work, since most emerging problems are resolved between the economic agents through negotiation rather than resorting to lawand litigation. Generally speaking, relationships in East Asia—business, political, and professional—are based on personal considerations, not on the kind of objective reasoning preferred by Westerners. And this is the main reason why lawyers are not nearly as common in East Asia as they are in the United States or Europe. Traditionally, business arrangements in East Asia were based on verbal commitments backed by trust, which,

unlike detailed contracts, allow for considerable flexibility in interpretation and management as circumstances change.

In the West, contracts and associated prices determine the transactions that are undertaken. In so-called arm’s-length transactions the level of mutual dependency of the business partners is much lower than in the Asian relationship-based system. As a result, institutional links matter less and the market becomes a more important medium for directing and governing the terms of transactions.

Systems based on mutual trust, on the other hand, ensure a return to the partner by granting some form of power and influence over the individual or the organization being linked up. It is important to note that mutual trust does not come out of pure altruism or charity.

The self-interest in Asia lies in hateke zukuri (Japanese: ploughing the field) for future eventuality. You never knowwhen you may become indebted to others (osewa ni naru). Such long-term relationships can survive in environments where laws are poorly drafted and contracts are not enforced. Central to mutual trust is the phenomenon of what Oliver Williamson4—the father of transaction cost theory—characterized as market failure: the predictable inability of market mechanisms to achieve maximum efficiency and to encourage growth when confronting economies of scale. Williamson believes that market failure occurs such that the normal economic pressure on economic actors to perform effectively breaks down and has to be replaced by other control mechanisms.

The essence of trust revolves around the Confucian principle ren. Ren refers to the way people relate to each other. One cannot exist alone and one must be able to interact with others. Ren can, therefore, be understood as referring to howto handle an interpersonal or interorganizational relationship. Trust as corporate interaction mode is always based on a long-term commitment. According to Confucianism, one must put oneself in the place of another and seek the cause in oneself, and not impose on others what one does not desire oneself.

Mutual trust and interorganizational relationships manifest themselves in a variety of forms. On the interpersonal level, Japanese nomunication and Chinese guanxi relationships are the best known. Nomunication (Japanese: nomu: to drink and English: communication) are inofficial meetings that take place at the end of the workday with the aim to build up a mutual group identity and thereby a spirit of uchi. Japanese “salarymen” mutually drink sake in one of the many bars (izakaya), specialized for these groups of people. Thus, they grow closer to each other by sharing experiences and worries. Nomunication may include business partners from suppliers, customers, and members of the keiretsu the companies belong to. When an overseas Chinese entrepreneur seizes a business opportunity, he prefers to make a deal based on formerly established guanxi rather than seeking the anonymity of the market. Such a deal is based on opportunities arising through guanxi: privileged contacts or nonpublicly available information.

The value of the Chinese handshake is regarded to be high and invulnerable—indeed, trust is critical to all business dealings. With the outbreak of the Asian economic crisis, conducting business based on trust has been heavily criticized as the use of relationships has often led to nepotism and corruption. However, the positive impact of mutual trust is widely acknowledged: customer-supplier relationships, for example, are being stabilized leading to sustainable investments in technology and quality through the supplier. These, on the other hand, can count on the commitment of their customers not to be given up when the market environments suddenly change.

Once business networks are established, the firms need to foster mutual trust. After a verbal agreement has been settled, it is expected to be kept. Trust established through long-term relationships forges cohesion and smooth interaction between the business partners.

UNDERLYING PURPOSE: COLLECTIVE ENHANCEMENT

In the Anglo-Saxon mode of management, the main reason to have an economy—and to have economic actors—is to raise the individual consumer’s standard of living and to fulfill his demands. In the Asian context, it is to increase the collective strength—of the group, of the firm, or of the country as a whole. 5 The spirit of Asian collectivism comes across in the widely used epithets Japan Inc., Korea Inc., and so on. As such—often negatively connotated—labels suggest, the concept reflects a perception that Asia has some how managed to develop a collective, national cohesion through which the countries have succeeded in creating remarkable economic growth.

East Asian cultures rely upon methodical fine-tuning towards reaching a consensus. This tendency reflects a belief that the imposition of cohesion provides better results than the complexity associated with the open discourse of competition. Although the immediate interests of the individual and the group (department within a firm, firm, business network) may seem to diverge, it has traditionally been thought that they converge in the larger imperative of survival. Goals merge in long-term interests, a common destiny.

Confucianism holds that there is ultimately no contradiction between the whole and its parts, between the individual and the family, kinship groups, communities, and the nation. The sense of dependence of the individual on social groups enables people to maintain harmonious relationships within the group and not to act contrary to the collective will. Where the Anglo-Saxon model sees unavoidable conflict, Asian thought is in line with a final harmony.

Asian firms strive to nurture informal bonds within firms as well as between firms. This figures strongly in the motivation and commitment for which particularly Japanese firms are renowned. Compared to Western firms, a higher density and depth of ties between peers emerge. Due to the emphasis on collectivism, the momentum for decision making often comes from the middle or bottom, rather than the top of the organization. And the Asian spirit of collective enhancement normally carries an ailing firm—a subsidiary, a supplier, a member of the business network—without contradicting any economic rationale. Most East Asian firms traditionally believed that the profit of a subsidiary can be calculated based on the bottom line.

Issues of transfer pricing and group consolidation have often been tackled in a rather lax manner. In contrast, in the West, the rules and transparency of accounting might well report a failure, and the firm be forced to liquidate, notwithstanding any mitigating circumstances.The best way to assess such a situation in Asia is to ask trusted friends to form a judgment based on their model of collective enhancement. In this the centrality of mutual trust and reciprocity implied by business networks is very important.

A common misunderstanding is to believe that collectivism per se oppresses the domain of the individual. Certainly, individualism has a lower voice compared to Anglo-Saxon countries. But Asian artists, scientists, and entrepreneurs have always generated important and challenging output. The rise of the aspiring overseas Chinese

and South Korean entrepreneurs, for example, is legend. Japanese entrepreneurs—although less recognized—have generated great achievements, too. 6 Many fortunes have been built on sheer slog—and clear visions for how to reach very personal success. Asian entrepreneurs act in accordance with the goals of the collective. However, they put forward individual and “destructive” elements as well. 7 They disturb the economic balance by influencing—like a source of energy—the needs of the consumers and the prospective of society. Collective enhancement is only feasible if the individuals forming the collective enhance themselves as well.

4. Confucian Management

I insist on treating people with kindness and equality.Chao Kuangpiu

Recently, there have been attempts to link the legacy of Confucianism to the practice of managing and guiding Asian firms, postulating a “Confucian management.” 2 The notion of Confucian management is particularly common in China where a historically caused vacuum of reasoning about the management of the firm has led to new explanations and the search for theories. The supporters of Confucian management argue that traditional and Western approaches to management present choices and dilemmas for China’s rapidly modernizing business landscape. Confucian management reflects various aspects of cultural interflowin technology, economic development, management and decision making, and their implications for Chinese business. In contrast to the Asian values school, Confucian management represents a sincere search for and reconstruction of unique management practices without overstating the cultural supremacy of the approach.

The need for Confucian management is rooted in the disappearance of ethical values, which are often neglected in favor of shaky business and “easy money.” A change of values among young Chinese may be detected as going hand in hand with rising consumer standards. Besides the everyday nepotism, and despite hard penalties and public humiliation, crime and corruption—ancient Chinese evils—are on a steady rise. Corruption is destroying the rules and regulations of the social, economic, and political life and hits those people most who have no political and economic influence. Nowadays, China is by no means a stronghold of virtue. The high moral and ethic aspirations of Confucius deteriorated over time and became a simple, often ridiculous assemblage of trivial recipes.

Authors like Fu Meirong and Pan Yunhe try to emphasize those values of Confucianism that can be applied to the management of modern Chinese enterprises. 3 They argue that the economic development of East Asian societies contravenes the argument put forward by Max Weber that Confucianism inhibited the emergence of capitalism.

The German sociologist Max Weber (1864– 1920) believed that there is a connection between the rise of capitalism and the Protestant work ethics. 4 Protestants believe in their individual efforts and try to master and transform their environments in the way they deem right. Weber suggested interrelations between humans’ ethical beliefs and their economic behavior. He argued that the Confucian ethic tends to exhort people to accept or adjust to their environment.

Therefore, East Asian countries could not develop capitalism and competitive entrepreneurship. However, the rapid growth of East Asian economies has definitively

contradicted the Weberian conception of Confucianism. Michael Bond, for example, refutes Max Weber by introducing an interesting dimension to the framework of varying corporate cultures: Confucian Dynamism. 5 This is the extent to which organizations followthe principles commonly ascribed to Confucianism. This dynamic, probusiness perspective of Confucianism is recovered within the approach of Confucian management.

The social scientist P. K. Ip6 further argues that there is a need for a spiritual component together with the organizational infrastructure in Asian firms. Asian firms that are able to capture and assimilate the riches of their cultural heritage will be those that not only can deploy efficiency for enhanced competitiveness, but also have the vision and capacity to take social responsibilities and ethics seriously. He particularly stresses the importance of virtues. Virtues are the basis of economic behavior. The development of virtues is a solid means toward enhancing the morality and spirituality of corporate life.

Confucian management distinguishes itself clearly from Western approaches to management by claiming that Western management lacks “macroscopic visions.” 7 In general, Western management emphasizes the application of professional know-how in the different parts of the value chain and is rather oriented towards short-term profit taking. Although these outcomes of Western management are seen as necessary, it is judged to be fairly short-sighted and narrow in scope, because human beings are merely treated as resources to be put to good use. It is criticized for overlooking the values intrinsic to human beings, and for being oblivious to the importance of human relationships. This may result in grievances and conflicts between the superior and the subordinate, upsetting the harmony that latently exists within organizations. Confucian management, on the other hand, seeks a conciliatory approach to management as it is already lived by many Asian firms. Matsushita, for example, advocates the “spirit of Matsushita,” which illustrates harmony and cooperation on all levels of the organization. 8 This is an almost religious spirit, as if work were considered something sacred. The commitment to this spirit shall lead to personal mastery and may evolve from the traditional Japanese lifetime employment. People working for Matsushita agree to live in a community in which they will not exploit each other, but rather help each other so that they may each live their lives fully. Such “coevolution” is not grounded on a formal contract between employer and employee, but rather on a shared commitment to visions and values.

In a nutshell: Organizations led by the principles of Confucian management try to understand their employees, empathize with them and be considerate. In this way, they can maximize their potential and achieve a high level of team spirit. The advocates of Confucian management seek the fullest development of people on an equal plane with financial success. The virtues of life and business success are not only compatible but enrich each other.

Part 2 The Asian Economic Crisis

5. The History of the Asian Economic Crisis

We expanded too fast. This is the lesson.

Dhanin Chearavanont1

The Asian economic crisis started, almost suddenly, when Thailandexperienced trouble in maintaining its currency exchange rate on July2, 1997. Since then it has spread to other nations and regions in EastAsia, with South Korea and Japan being impacted as well. This crisispromised to become one of the most significant events toward theend of the twentieth century. 2 Given its timing and scale, the tremendousinfluence it is exerting has been borne into the twenty-firstcentury, although the region’s emerging economies and markets arein the process of recovery, and the restoration of financial health ismaking progress.The vacant offices have begun to fill up, as life in East Asia is slowlyreturning to normal. While much remains to be done, a lot has beenlearned from the crisis, and prudent standards as well as businesspractices are being altered. Perhaps most significant, the crisis hastriggered important changes that will have lasting effects on economichealth. In the words of James Saphiro, head of Asian operations forthe New York Stock Exchange: “Changes in attitudes among Asianfirms after the outbreak of the crisis have been revolutionary.” 3 Boththe media and capital market analysts tend to measure success on thebasis of such short-term indicators as stock indices, quarterly GDPgrowth, current account surpluses, and reserves. On this measure,East Asia has bounced back well. Moreover, and probably more important,consequent redesign of business textures across the region ismaking progress. This will be further reported.THE AFTERMATHThe evidence of the Asian crisis is there for all to see: vast expansesof abandoned, unfinished towers in Bangkok or warehouses of slowsellingsemiconductors in South Korea. Unfinished skyscrapers in citiesacross Asia document an era gone wrong, and the reputations ofmany of the designers of Asia’s boom lie in the dust. In addition tothese obvious consequences of the economic crisis, Asia is grapplingwith social ills like drugs and illicit sex, environmental degradation,and regional security tensions and threats.

After a decade of ten percent annual growth rates, East Asian economiescontracted and stock market values were in free fall. And evenafter signs of strong recovery in 1999 and rising stock markets onalmost precrisis levels, there is still much to fear. Probably, manyfirms have rightfully been worrying about the modes of economicdevelopment as external factors of the economic crisis. However, thefoundations of economic policy are almost beyond their control. Internalfactors, on the other hand, like their general tenets of doingbusiness are well within their power to change—a fact that maybehas been realized too late by many of the former corporate behemoths.Recent pitfalls of unsuccessful adjustments to the rough economicpostcrisis environment—especially concerning the requiredchanges in business-government relationships—include the failed restructuring

of Daewoo in South Korea, the so-called “Baligate” scandalin Indonesia, and the bankruptcy of Gitic (GuangdongInternational Trust & Investment Corp.) in China:

Daewoo’s president and owner, Kim Woo-Chong, has resisted for long the necessary�restructuring of its bankrupt chaebol, whose death throes pummeled localfinancial markets in the third quarter of 1999. Right after the outbreak of the Asianeconomic crisis, Kim claimed he would sell its shipbuilding and electronics businessesand further unprofitable businesses, but these have so far remained unsoldat the high prices asked. The automotive division, at last, was put up for sale in aJuly 2000 deal pursued by General Motors. The Korean government has had difficultyin cleaning up its relationships with the chaebol. Only in late 1999 and aftersevere international pressure, did Kim agree to put twelve core affiliates of thegroup under a debt workout program in an effort to keep them afloat long enoughto sell them to a third party, spin them off, or close or merge them. Lack of factsand conscious deceit about the magnitude of troubles and potential recovery forDaewoo companies have been the biggest obstacles in charting the group’s rescueplans. As a due diligence study showed in late 1999, the group’s debts are over $50billion and about a tenth of that is owed to foreign bankers. 4 The loss ratio onloans owed by Daewoo’s affiliates is expected to reach forty to fifty percent onaverage. The ratio is the proportion of loans in excess of the group’s assets.

Indonesia’s Bank Bali’s payment of a US $80 million fee to government officials�to collect a supposed government-guaranteed debt worth US $116 million is testimonythat the culture of patronage is still alive in East Asia. “Baligate” is sosensitive because the payment was directed to a firm linked to former president BJHabibie’s Golkar Party. Although Standard Chartered agreed to buy the ailingbank in early 1999, the British bank pulled out of the agreement in December 1999due to potentially being involved in the scandal. 5 Although the next President,Abdurrahman Wahid, has repeatedly said that he will not tolerate corruption inhis government, he allowed a handful of corruption-tainted politicians to climbaboard his cabinet. Nepotism and using governmental power to enrich oneself isalmost seen as an acceptable right in Indonesia. It has to be seen if the new governmentheaded by President Megawati Sukarnoputri will be successful in tacklingthe excesses of the earlier regimes. 6

The Gitic (Guangdong International Trust & Investment Corp.) bankruptcy shows�that China has not been immune from the crisis. For much of the 1990s, China’ssouthern province of Guangdong was a centerpoint of foreign investment and rapidgrowth. Factories were founded everywhere, many funded by Gitic, which increasinglyventured into speculative activities, all funded by debts—billions of dollarsborrowed from foreigners. With little monitoring of management, Gitic went outspending money obtained from loans. Fast investments were made, often in pricevolatileand illiquid assets such as real estate, without due regard to the possibilityof an economic downturn or whether the firm could adequately manage the assets.In late 1998, Gitic was closed—marking a turning point in China’s industrial policy.The failure of Gitic shocked foreign creditors, who had lent money on the assumptionthat Beijing would not let them fall and would guarantee the repaymentof foreign debt. Gitic is only one example of China’s financial institutions beingburdened with bad debts—and it seems to be a question of time before the bubblewill burst further. Another “Itic”— Hainan International Trust and InvestmentCorp. (Hitic)— defaulted in July 2000, raising further questions about the healthof China’s financial sector.

In Shanghai, China’s powerhouse, the danger of economic overheatingmay be highest. Shanghai’s new industrial and financial center,Pudong, has changed Shanghai’s look dramatically. Once a pieceof farmland, Pudong was developed into a special economic zone inthe early 1990s, pushing Shanghai to the forefront of China’s economicreform and policy of opening up to the outside world. Onecannot ignore, however, that there is a huge oversupply of office spacethat has largely been financed through hard currrency loans. TheAsian crisis has been triggered by similar situations in Bangkok andother East Asian cities.These three cases show that the Asian economic crisis and its aftermathhas much to do with government policies and practices and theirinteraction with Asian businesses. Many Asian executives expect thatexternal forces will jump-start economic recovery soon. Indeed, thereare strong signs of economic recovery. However, the further developmenthas to be carefully watched—too early optimism is dangerous.THE EVENTSIn the years before 1997, after over four decades of impressivegrowth driven by guided economic development, the Asian economieswere already close to major economic consolidation. The maincauses were the gradual shift from productive direct investment toexpansion-driven portfolio investment, which occurred between 1990and 1997, and the fixed exchange rates of many Southeast Asiannations, which contributed to growing current account deficits. 7 Theeconomies most at risk of an economic crisis were Thailand, Malaysia,and Indonesia—and South Korea, which had, in line with the Japanesemodel of economic growth, created a bloated bureaucratic overheadto “direct” economic activity.As the world’s most successful developing region, East Asia wasable to attract several hundred billion dollars of international bankloans in the first half of the 1990s. A huge portion of these loans wasshort term, that is, with a maturity of under one year. However, mostAsian financial institutions and capitalists were only partly capable ofefficiently channeling the increased inflows into profitable investments.Even the traditional hard-working business community wasseduced by the lure of easy money. For example, in Malaysia, theycould easily borrow U. S. dollars at rates lower than ringit deposits.So, the economies ended up arbitraging—with disastrous impactswhen the local currencies collapsed.Governments selected and favored certain companies that havebeen backed by guarantees. These have not necessarily been subjectto prudent standards. This system was an invitation to excessive risktaking,and became especially dangerous after 1990, as foreign capitalbegan to be freely available. As a consequence, heavy lending to speculativereal estate ventures and often unrelated corporate expansionsupported by high leverage rations became the norm. Already by themid-1990s, Asian financial markets were inflated by a bubble thatfinally burst in Bangkok, when the baht was floated. Over the nextsix months, the currencies and stock markets of the most vulnerableeconomies fell as well. When currencies plunged and formerly successfulfirms closed their doors, the economies went into recession.Unemployment, hunger, and increased ethnic conflict have beenprominent, leading in Indonesia’s case to President Suharto havingto step down in 1998 and to President Habibie’s, his successor and

political heir, voting out in 1999.The crisis resulted also from a financial sector malfunction withinthe affected economies and maybe also from faults in the internationalfinancial architecture. Bad investments left governments and businessesincapable of fulfilling their financial obligations. Short-termcapital left the country, putting fixed exchange rates under pressureand ultimately leading to a devaluation of Asian currencies. In conjunctionwith his debate about Asian values, Mahathir Mohamad pronouncedthat the Asian crisis is all a sinister conspiracy by suchrepresentatives of Western capitalism as the former U. S. TreasurySecretary Bob Rubin, Wall Street magnate George Soros, or evenMIT professor Paul Krugman. 8The International Monetary Fund (IMF) intervened, bailing outoutstanding loans. Certain conditions such as the restriction of governmentexpenditure, a reform of the banking sector, and cancellationof subsidies have been imposed to the East Asian economies. Also,the persistence and formation of Asian business networks has beensharply criticized. When events turn out as badly as they have in Asia,one wonders whether the supposed rescue team actually did its jobright. There has been criticism of the IMF, particularly within theranks of the affected Asian governments. Specifically,— as Westernobservers pointed out as well—the IMF failed to understand the panicelement in the Asian crisis, and concentrated on disciplining countrieswhen it should have concentrated on reassuring markets. 9 Along withthe IMF, global financial institutions may have failed to prevent anescalation of the crisis, and at worst may have fueled it.

THE INTERNATIONAL PERCEPTIONThe Asian economic crisis has caused a sea change in internationalperceptions of the region’s major players. After World War II Japanemerged as a formidable economic power, but its influence may nowbe on the wane. Thus, Japan, which had previously been seen as theengine of the region’s economic growth, is increasingly viewed as partof the problem rather than part of the solution. China, on the otherhand, is emerging as the new economic power of Asia. The Chinesegovernment is being praised for its handling of the crisis, principallyits declaration that it will not devalue the renminbi. However, theimpact on China from other Asian economies gone wrong may besubstantial. Despite Beijing’s conviction that China is immune fromthe impact of the Asian crisis, it may not be. It is realistic to expectthat the economic atrocities that have been experienced through Japan,South Korea, and Southeast Asia will somewhat hit China aswell.The challenge at the international level is enormous. Yet, therehave also been many critics elsewhere of the nature and volatility ofthe international financial system, with renewed attention to particularaspects with each new crisis—first Mexico, then East Asia, andfinally Russia. The Asian economic crisis, in particular, has initiateda discussion that has continued into the new millennium: a discussionabout the so-called “East Asian development model” versus the Westernor more precisely—Anglo-Saxon model. 10 The economic crisisdefinitively changed perceptions of economic policy. Until the early1990s, it was fashionable to decry the short-sightedness of the AngloSaxonmodel, the tendency to ignore longer-term corporate prospectswhile focusing on quarterly earning reports. 11 The Anglo-Saxon conviction

that well-functioning markets are able to allocate resourcesefficiently was increasingly challenged throughout the 1980s and theearly years of the 1990s. Now, again, economists are praising the freemarket, the importance of competition and transparency, and thehorrors of nepotism and “golf course capitalism.”I do not want to join chauvinist sentiments and Western triumphalism—neitheron the macroeconomic level: Asian economic developmentpolicies nor on the firm level: Asian management practices.In the fast-changing world of management styles, there is a latentdanger of changing role models known as conventional wisdom.What is important is not a battle between states and/ or companies,but a comparison of systems of economic organization which per seare neither good nor bad. Universal theories proposed to explain generaleconomic processes across time and cultures may mislead. Differingcultural traditions will always make economic development andcorporate management unique.

6. Economic Development and State InterventionThe biggest lesson from Asia’s troubles isn’t about economics, it’s about governments.Paul Krugman

The combined forces of governments, industrial organizations, financialinstitutions, and unions usually develop industrial strategy in Japanand other East Asian countries. Such integrated planning at thesocietal level may have accounted largely for East Asia’s past success.It is obvious that industrial policy has tremendous impact on managementsystems and organizations. 2 The economic developmentstrategies of East Asian countries need to be further researched anddescribed to allow conclusions about the specific molding of firmlevelorganizational behavior.

In the past, Asian countries often saw themselves as the victims of exploitation—and their colonial history gave them some reason for that view. Many of Asia’s emerging nations moved toward a considerable degree of government control of their economy and planning to catch up with the former colonizers. However, there has been no totally homogeneous or unique approach to economic development in East Asia as each nation developed its own policies. Therefore, there is no established and agreed-upon definition of an East Asian development model. 3 There are enough commonalities, however, for a generalized East Asian model of economic development to be described, primarily in contrast to the Anglo-Saxon model. A key distinguishing feature of such a model is that governments have played a major and proactive part in the industrialization process and in corporate governance. Asian state leaders often like to see themselves as the prime movers, creating and controlling their respective countries’ economic prosperity. Economic growth was a foremost priority of state action. East Asian governments have exercised a high degree of bureaucratic autonomy and capacity in implementing development policies. As a consequence, the development policies produced noteworthy accomplishments such as effective mechanisms for technology transfer, outward orientation, and high savings, investment and human capital accumulation. Other features of the East Asian development model include high insiders’ shares and weak roles for outsiders in corporate governance, close bankfirm relations, weak reliance on stock markets in investment financing, rigid labor markets, and monopolistic domestic markets with little foreign presence.

In the United States and the United Kingdom, on the other hand, individuals, rather than the government, make the majority of decisions regarding economic activities and transactions. In 1776, Adam Smith’s Wealth of Nations4 opposed old-style mercantilism, just as the American Declaration of Independence made the case against oldstyle feudal domination. Since then, in the Anglo-Saxon world, laissez faire as the economic doctrine of avoiding state regulation of the economy was established as the undisputed mode of corporate governance.

It is argued, for instance, that import restrictions undermine the ability of companies to compete and that price controls trigger shortages and invite corruption. After World War II, an arm’s-length relationship between government, business, and labor was established, despite attempts by several U. S. administrations to promote the corporate world with trade missions and the like. The Anglo-Saxon success in leading-edge information and communications technology may be partly explained by the absence of state control and the creativeness of its individualistic society.

After decades of economic depression and varying periods of stagnation, many East Asian governments and their citizens have been convinced that guided creation of wealth and economic growth is the best remedy—a practice opposed to laissez-faire economics. Proactive development policies—often combined with economic nationalism like Malaysia’s New Economic Policy (NEP)— have been applied in line with rapid gains in national income. During the 1950s and 1960s, East Asian governments adopted what is referred to as an inward oriented strategy of investment-driven economic development, which promotes industrialization by prompting industries to replace imports and stimulate production for the home market. 5 Tariffs and import restrictions were used to shelter domestic manufacturers from foreign competition, and some were picked by giving them tax and credit preferences. After a while, industrial growth ensued as many new industries were created, largely to produce simple consumer products and—after a further period of growth—technologically sophisticated products. The Asian economies have shown a willingness and ability to invest aggressively, to acquire complex product and technology through license agreements. In a later stage, Asian governments adopted an outward-oriented strategy and pushed the domestic industries to stimulate growth. 6 Asian firms started to appear on the world markets heavily exporting as well as investing and producing abroad. East Asia has successfully implemented a two-stage economic growth policy of import substitution followed by export promotion. At the import substitution stage, a country overvalued its currency in order to lower the cost of imports needed to develop its infrastructure, telecommunications, and technology base. When these have been developed, the second stage begins, at which time the currency is normally devalued in order to make the country’s exports competitive on the world markets.

This growth process, however, was hampered in the 1990s when Asian governments pursued economic growth at any cost and Asian firms targeted increasing turnover instead of increasing profits. Ironically, the primary cause that pushed Asia to the brink has been this policy of high growth. The model for this policy was provided by Japan’s Ministry of Trade and Industry (MITI). Throughout the 1980s, MITI was a major factor in Japan’s growth, coordinating both industrial and trade policies. While Japan had adopted an entirely market economy, MITI provided the input to guide market growth, trying to cut back on inefficiency and waste and identifying paths of growth for Japan’s industrial sector. 7 It has played a major role in promoting wide discussion of, and creating a national consensus about, the strategic directions in which the economy should be led.

By doing so, MITI picked certain industries and firms to receive direct and indirect subsidies as well as market protection. MITI’s policy of economic growth and insulation

from market forces has been widely adopted by the East Asian newly industrialized economies (NIEs). Some supporters of a specifically Asian development model even emphasized a shift in economic superiority from West to East and promoted the East Asian development model as being distinctively non-Western. Malaysia, for instance, adopted a “Look East Policy” drawing on the Japanese approach of economic development in order to systematically learn from the successful elements of Japanese development policies and business practices, instead of looking to the West to show the way. 8 In China, the State Economy and Trade Commission (SETC) was to be modeled along the lines of Japan’s MITI, providing guidance on economic policy as well as industrial policy. China has moved further away from state planning and closer toward a system of guided market economics. The rise of the State Economy and Trade Commission as China’s MITI of the twenty-first century meant that a coordinated industrial and trade policy has decisively focused on industrial development.

The economic leadership of Japan as developing an economic role model for East Asia has been expressed by the flying geese pattern, akin to birds flying in a neat order. 9 Japan as the leader of the Asian geese is followed by different tiers of birds, where each bird is a country. The essential characteristics of the flying geese pattern is the change of industrial structure as countries develop from primary production to labor-intensive manufacturing, to more advanced manufacturing, and finally to services. In the process, sectoral activities are shifted from the more advanced countries to those following in development.

When certain Japanese industries matured and no longer fell within Japan’s comparative advantage, Japanese firms invested in neighboring Asian countries to transfer industries to the next tier— and to promote the Asian model of economic growth. The phenomenal growth rates of the late 1980s and early 1990s will be much harder to achieve than in the past, when East Asia could expand easily according to the flying geese pattern. Asia’s economies are more developed now than they were a decade ago—and more exposed to the hyper-competition and globalization of world markets. But growth will depend less on deploying more people and capital, and more on raising productivity. The paths that the singular countries have been pursuing are rather different.

JAPAN

Japan has provided the model of the broad approach of industrialization adopted by East Asian economies during recent decades. The Japanese-style capitalism was perhaps the most formidable rival to classic free market capitalism as a model for other countries. Economic organization and economic behavior in Japan—notably the employment practices, trading relations between firms and the financing of firms—are substantially different from prevailing patterns in Europe and the United States. Ever since American Commodore Matthew Perry’s ships showed up in 1853 to force open feudal Japan, gaiatsu—foreign pressure—has played a major role in shaping Japanese economic policy. Hence, Japan felt that it always has to defend— and to protect—its economic policy practices against what was conventionally perceived to be conventional wisdom. The defeat of the Japanese at the end of World War II, and the ensuing democratic reform instituted by General MacArthur, for example, did not fundamentally change the relationship between the government and big business. Although the family-dominated and vertically linked zaibatsu were dismantled, they were quickly replaced by large horizontally linked keiretsu.

Japan’s rapid industrialization after World War II was made possible by a form of economy in which the state guided and directed the economy. Behind the state has been what is often referred to as the “iron triangle” of elite—ministry officials,

politicians, and managers of the keiretsu. 10 There has been a high level of unity between them, directed toward the vision of fast and substantial economic growth. The government indicated which industries should be promoted and guided the target industries in that direction. The corporate sector followed this guidance and, in return, the government listened to their views and coordinated them to avoid damaging competition.

In short, the whole country was seen to behave like a single entity, a “Japan Inc.,” pursuing the common goals of gaining national economic growth and succeeding in international markets, with the government and its affiliated institutions acting as the supreme guiding unit.

In this capitalist development state, the government bureaucracy worked in close coordination with politicians and the top representatives of leading businesses to guide and nurture industries. The strong ties among these groups, as shown by the exchange of personnel through the amakudari11 system and the mutual holding of stocks among keiretsu companies, allowed them to collaborate and jointly work toward the goal of transforming Japan into a modern economy from the postwar devastation.

In recent years, first after the burst of the Japanese bubble economy in 1991 and then during the recent Asian crisis, the Japanese model has not been able to demonstrate that it is highly beneficial to build up a competitive economy. In particular, there has been decreasing interaction among the territorially minded elites. Since the end of Japan’s economic miracle, which finally was an era of rampant speculation and sky-high asset prices fueled by cheap credit, the Japanese economy has been in crisis. Yet until recently the government has neglected the severity of the problems, just as failed companies as Yamaichi Securities, Hokkaido Takushoku Bank, and Long-Term Credit Bank did to its own. Instead of focusing on politically difficult reform to ensure long-term economic health, they opted for shortterm stability. Sick banks and other companies were maintained by costly life support. With the Asian economic crisis, the problems came to the surface. Yet in mid-2000, when Sogo, Japan’s retail flagship, failed, the government decided to use public funds to bail it out.

The “too-big-to-fail” argument is still dominating the public scene. Without the common will generated through the interplay among the establishments, it has been difficult to develop real advancements in propeling Japan’s economy. Also, administration and industry have vested interests in preserving their status quo and hardly cooperate to initiate significant change and innovations that might affect their delicate power balance. The Japanese “big bang” package of measures, as announced by former Prime Minister Ryutaro Hashimoto, that by the turn of the millennium would tear up much of the red tape constraining Japan’s financial sector did not materialize due to a hesitating establishment, although the plan sounded good. As a matter of fact, it has led to lower brokerage commissions, allowed banks and securities companies into each others’ businesses, and broken down barriers to foreign competition.

However, individual industrial players and new independent businesses have taken the initiative to provide the energy for spurring the Japanese economy, as this will give them more freedom to exercise creativity and expertise, which is not supported by the rigidity of the government-led development model. Change is now inspired and channeled by managers, entrepreneurs, foreigners, and ordinary Japanese rather than orchestrated by the ministries. In postcrisis Japan, new demand has to be created by the corporate world, as they have the closest access to consumers and customers, and not by the preplanned policies of the government.

There are clear signs of a changing attitude toward government regulation. The authorities no longer block foreign ownership of Japanese firms. Recently, Japanese regulators even approached the American Ripplewood Holdings to purchase Long-Term Credit Bank, which was placed under state control after it went bankrupt in 1998. Mazda’s American bosses have shrunk the work force by twenty-five percent since 1994. Renault, Nissan’s new French parent, announced similar plans to rescue the Japanese car maker. Acquisitions of Japanese blue-chip companies by foreigners would have been unthinkable a decade ago. Yet now, a decade after the bursting of the bubble economy, the Japanese are reacting calmly. There is not much sense of economic nationalism remaining, which means a sea change in Japanese society. With restructuring underway at companies and at government bodies, a new mood seems to be in the air.

SOUTH KOREA

Japan and South Korea relied on a similar system of industrial planning, in particular, huge interlinked conglomerates, lifetime jobs in big companies, export assistance, and protected domestic industries.

In the past, South Korea largely used the Japanese experience, with the chaebol leading industrial progress. Subjective judgments as to who and what would receive preferences were exercised by the government and the chaebol. The cooperation with the chaebol later allowed the government a rather strong position to push the chaebol into the selected priority industries. The Korean counterpart of Japan’s MITI is the Ministry of Trade and Industry12 (MTI), which helped the government channel its industrial policies.

With its national resources concentrated in a few hands, the speed at which chaebol such as Samsung, Hyundai, Daewoo, LG, and SK expanded was startling. Through mass production and aggressive global marketing, South Korea quickly grabbed a piece of the global market in steel, automobiles, home electronics, and photo-electric products. By the mid-1990s, South Korea had pushed its way ahead of the other “little dragons” and had entered the OECD (Organization for Economic Cooperation and Development), sometimes known as the “Rich Nations Club.” South Korea had not only become Japan’s main rival, but also the object of Taiwan’s, the other high-tech player, admiration. Once dismissed as a war-torn economy, South Korea has become one of the most successful late industrializers.

In the mid-1950s, South Korea was still recovering from the partition and the destruction due to the Korean War. In 1953, the economy was primarily agriculture-based: forty-nine percent of the GDP was realized by the agricultural sector while industry contributed only segyehwa (Korean: globalization), which had as much to do with effecting change internally as it did with increasing shares in world markets. 14 Although segyehwa was at first sight oriented toward creating a new economic policy of a more Western pattern, South Korea’s economic policy as it has been so far—a state intervention to achieve national economic growth—merely changed. Finally, Kim was not successful at restructuring the industrial landscape dominated by the mighty chaebol—although his call for smaller, more focused businesses was originally welcomed by most analysts. 15 During Kim’s ruling term, the chaebol borrowed even more than before abroad for fast expansion of many domestic industries. They were borrowing short term—for one year or less—leading to the economic collapse of corporate South Korea in 1997.

The after crisis President Kim Dae-jung seems to have recognized the signs of the time. He pledged to complete his ambitious corporate reform drive by the turn of the

millennium to help ensure the country’s future as a global economic power. The reform program has managed to restructure the debt-ridden and unproductive chaebol under its IMF-prescribed bailout agreement. This turned out to be a mammoth task, however. The reform program has had difficulties to get off the ground. After all, Kim Dae-jung gave up the traditional nationalistic undertone in South Korean economy policy. He pointed out, for example, that firms being acquired by foreign firms often become richer and more competitive. Vowing to expand foreign investment, he is banishing the decades-old resistance to overseas control to help the economy maintain its recovery. He is pushing ahead with key reforms despite widespread doubt over the ability to do so, paving the way for foreign investors to enter South Korea’s onceclosed markets. There is hope that the obstacles in restructuring Daewremains an exception on Kim Dae-jung’s reform path.

SOUTHEAST ASIA

There is broad evidence that Malaysia, Singapore, Taiwan, Thailand, Indonesia, and the Philippines borrowed from the Japanese development model, in particular the part about administrative guidance of the economy. In Indonesia, for instance, the sources of industrial planning have been former President Suharto and his extended family, in conjunction with the succeeding president Habibie’s technological community at the Ministry of Research and Technology. The Indonesian political establishment have had effective control over industrial assets equivalent to about twenty-five percent of GDP. 16 In Malaysia, Prime Minister Mahathir played a similar role in promoting the domestic industry and helping firms to realize dynamic economies of scale. Malaysia’s Multimedia Super Corridor, for instance, has been designed to elevate the country to developed-nation status by the year 2020. The intention of the project is to move Malaysia from being a mere user of multimedia products to being a supplier and developer of information technology. Another example of administrative guidance is the formation of the state-owned Heavy Industries Corporatin of Malaysia to focus public investment on heavy industrialization.

In the Philippines, state control and political oppression are legendary, especially in the Marcos era where economic growth was generated through authoritarian rule. The former President Joseph Estrada, who stumbled over a corruption affair in early 2001, initially received optimistic reviews and general support. During the last months of his presidency, however, he lapsed back into the old mistakes of the Philippine establishment. There is now hope that the new President, Gloria Macapagal Arroyo, will engineer a democratic government.

In Thailand, less government control of the private industry is obvious, although many moves, like the Seaboard Development Project to build a channel throughout the country, would not have been possible without government initiative. Like in the neighboring countries applying the East Asian development model, there were substantial controls on foreign capital coming into Thailand, especially the “51 percent rule,” which in most cases required foreign firms to form a joint venture with a Thai company or companies owning at least fiftyone percent of the joint venture. Tariffs as high as fifty percent were placed on foreign imports competing with Thai products. Soon after the outbreak of the crisis, however, Thailand revised its restrictive laws to remove limits on foreign ownership. 17 This move represents a further step in the integration of the country with the emerging global economy.

In many Southeast Asian countries, excess capacity has been built up in export industries. Failure to take adequate account of demand saturation contributed to currency depreciation, falling prices, and negative changes in East Asian countries’ terms of trade. In a later state, imbalances due to an overemphasis on export

industries an neglect of the domestic economy emerged. Domestic production has been shortchanged, and consumption standards held down in favour of aggressive pursuit of export markets. When the businesses fronted market tests that they could not meet, they and their foreign lenders expected to be bailed out with additional resources, often publicly funded or guaranteed. As in the case of questionable new ventures like Indonesia’s Timor car and PTN, the aircraft producer, it was expected that government preference would make up the difference. Within the region, only the two majority Chinese-inhabited countries, Taiwan and Singapore, escaped major losses during the crisis. In contrast to the countries mentioned above, both of them have had account surpluses in recent years. Taiwan was more or less immune from structural nepotism whereas financial institutions, the political elite, and corporate institutions had intermingled interests. Taiwan’s industrial structure is built around small and medium-sized enterprises. Such firms are limited in terms of capital and production capacity and therefore cannot take the market in one fell swoop. Instead, Taiwan’s industries found their own niche—low volume and high quality, diverse product lines, and responsiveness to customers.

Whether in traditional industries such as shoes or clothing, or in high-tech fields such as semiconductors, Taiwan’s firms exhibit these characteristics. To promote economic growth, the Taiwanese government has largely avoided interfering with the people’s right to take risks, create wealth, and keep more of what they earn. Money-losing ventures are allowed to go bankrupt rather than being kept going by government assistance. Relatively low tax rates, a transparent regulatory framework, prudential supervision of banks, sound legal infrastructure, and conservative fiscal policy have helped Taiwan’s government create the institutions necessary to preserve the health of its economic system and maintain an environment conducive to enterprise. With the election of Lee Teng-Hui in the early nineties, who partly abandoned the doctrine of economic control of the thenruling KMT (Kuomingtang), Taiwan has been undergoing an incremental transformation to economic openness and democracy. 19 This opening will be further enhanced by the new President Chen Shuibian, who broke the fifty-year rule of the KMT in the 2000 elections. He plans to convert Taiwan—once a production base for low-cost electronics products and now emerging as a bastion of the information-technology revolution—into a market-driven “green silicon island” by 2010.

Singapore has long adopted export-oriented free market economic policies that encourage two-way flows of trade and investment. These policies have allowed the country to develop one of the world’s most successful trading and investment practices. Singapore’s policies have created a probusiness regulatory framework, political stability, high savings, prudent fiscal management, a trained labor force, and tax policies that have enhanced export and investment growth. In contrast to Taiwan, Singapore’s economic policy measures have been tailored to attract foreign investments and ensure an environment conducive enough for efficient business operations and profitability. As a consequence, Singapore’s industrial landscape is not characterized by a domestic layer of entrepreneurial startups as much as Taiwan. Rising labor costs continue to be a threat to Singapore’s competitiveness, and there are indications that productivity is not keeping up. In addition, tight control policies even in private life may lead to the loss of talent. It is often argued that people do not have enough space to develop their full potential. As a result, one may not find the same number of entrepreneurs as in Taiwan, though Singapore’s GDP per capita ranks among the top ten in the world. Hence, Singapore, too, has adopted active reform and corporate restructuring. For example, the country is forcing through higher standards on both its corporate sector and its financial institutions. The objective is to enhance national competitive strength and to help local players survive and prosper when the market is fully open to global competition.

In the future, Singapore has to consolidate its position as a financial and banking center rather than an operation site. And, Singapore will focus its investment on Southeast Asia rather than other regions of the world, as Senior Prime Minister Lee Kuan Yew recently stated. 20

It is interesting to investigate how Indonesia, Malaysia, Thailand, and the Philippines—the four Southeast Asian countries with a minority Chinese population—have been molding their policies, economically and socially, toward their leading economic forces: the overseas Chinese. Generally speaking, the social and economic environment of the overseas Chinese has not been favorable. They have become major targets of rising nationalism and have endured a range of discriminating policies carried out at different stages by Southeast Asian governments. To alter the disproportionate concentration of wealth in the hands of the overseas Chinese, the Malaysian government, for example, enacted the so-called New Economic Policy (NEP) in 1971 to redistribute the wealth into the hands of the bumiputras, the Malay majority. 21 A similar policy was applied in Indonesia, whereas Thailand and the Philippines have been less discriminating toward the overseas Chinese. 22 With the Asian ec nomic crisis, the tensions against overseas Chinese and direct actions against their businesses have been on the rise.

The Chinese population in Indonesia was hit in particular—forcing many Chinese entrepreneurs to leave the country, or at least to register their operations in places like Singapore or Hong Kong. For example, the Chinese-Indonesian companies APT, one of the world’s leaders in pulp and paper, and Gemala Group, Indonesia’s biggest player in automotive components and pharmaceuticals, moved their headquarters to Singapore, initiating an exodus of the overseas Chinese. 23 Liem Sioe Liong, the founder and chairman of Indonesia’s biggest Chinese business, Salim Group, has found himself under attack from politicians anxious to appease popular pressure to break the hold of Chinese businesses on the economy and distribute their assets to indigenous groups. In the savage 1998 riots that preceded Suharto’s fall, a mob broke into Liem’s Jakarta mansion. He left Indonesia, and the group is now being run by his son, Anthony Salim. Moreover, he has sold sixty percent of its flagship Indofood unit, the world’s largest instant noodle producer, to Hong Kong-based First Pacific, itself a Salim Group subsidiary. The deal allowed Indofood to change its status to a foreign firm in Indonesia, which may help insulate it from attacks under a proposed new monopoly law. 24 Southeast Asia is still suffering from the aftermath of the Asianeconomic crisis, revealing the past mistakes in the countries’ economic development strategies which had a corrosive effect on cronyism and patronage, as well as on chauvinism toward international (Western MNCs) and domestic (overseas Chinese businesses) competition. The general result of the economic crisis, however, may be a major weakening in the perceived relevance of the former modes of authoritarian development in general and of economic chauvinism in particular.

7. The Dark Side of Asian Management

The marketplace is a battlefield.Sun Tzi1

Confucianism has been described as East Asia’s cultural backbone and engine, pushing the region’s miraculous growth and forging worldclass companies like Japan’s Toyota, South Korea’s Samsung, and Hong Kong’s Hutchison Whampoa. Now, the Asian economic crisis has shattered confidence in East Asia’s development policies and management practices. Have Asian bureaucrats and managers neglectedthe grounds of Confucianism? Or is there reason to believe that Confucianism has downsides when applied in a globalized and highly integrated world economy? Does it have flaws? Or was the crisis of 1997 just a trivial occurrence?

Both models may hold true although a combination of the two may come closest to reality. It is important to mention that Confucianism has been antithetical to commerce for a long time until it was redefined in the nineteenth century—for example, in Japan from the Meiji Restoration—to support economic growth. When Asian economies approached their height at the end of the last century, these “clean” and probusiness perspectives may have been overshadowed. The

Confucian virtues as expressed in Asian management practices, namely, business networks, mutual trust, and collective enhancement, have been misinterpreted and twisted by both Asian governments and Asian managers. The Confucian emphasis on harmony turned into the vulgar war rhetoric of Sun Tzi. The business networks led to overstretching and dissipation; mutual trust to costly dependence on fixed supply sources and rigid decision making; and collective enhancement to nepotism, patronage and hubris. Many economies and companies in Asia cultivated guanxi through gift giving of a style difficult to distinguish from corruption. The cohesive social arrangements in East Asian societies have permitted excesses in the degree of goodwill gestures. Opportunities for substantial economic growth and increase of individual income have given tremendous authority to gatekeepers. These are elites with the ability to either ease or obstruct access to markets, business partners, and governments.

A common characteristic that distinguishes Asian economies from most Western societies is the weakly developed legal system, its subordination to state elites, and the relatively unimportant role of formal contracts and agreements. In particular, the Western separation of legal institutions from the formal apparatus of the state and the considerable autonomy enjoyed by the legal profession are not so evident in East Asia, with the possible exception of Hong Kong. This has meant that the “rule of law” has not constrained the political executive much in these societies and litigation is rarely used as a means of gaining redress. It has also resulted in little reliance on legal institutions for developing and policing agreements and trust relations. Judicial authorities lack the ability to arbitrate disputes between parties or to rule on complaints against government officials. Hence, corruption is barely avoidable: Bribes ease business-government transactions. A climate of corruption and insider dealing is pervasive. The overstretching of elements of the traditional Asian management system that led to the phenomenon of ‘crony capitalism’ is closely linked with a pattern MIT scientist and bestselling author

Peter Senge has called “limits to growth.” 2 If growth of a system is no longer linked to an environment with similar growth, it can stagnate or even turn into the opposite. Limitations arise if a shortage of resources occurs or if the environment, due to

closeness to the optimum, no longer permits expansive growth. The former virtues may turn into sins, whereas the whole process is being accelerated and escalated by naive or stubborn actors. To give an example: Like many successful men, Asian tycoons seemed to succumb to hubris in their last years. Hyundai’s chairman Chung Ju-Yung, for instance, signed a blank check to form a new political party and made a bid for the Korean presidency in 1992. But the prospects of South Korea’s most powerful businessman also taking political control unnerved plenty of voters, and he finally failed. 3 Success may be infectious. Such growth limits resulted in a governance form that may be summarized as “crony capitalism.” 4 Corruption has flourished in much of East Asia. Nontransparent decision making has a corrosive effect on the societies. This distorted model of Asian management has remained mostly uninfluenced by Western economic liberalism. It generates capitalism without capitalists because the interests of those involved must be balanced to maintain stability in the long run. The region’s entrepreneurs and managers were often focusing on amassing wealth based on personal contacts and networking, rather than stressing shareholders’ interests. Confucianism as a hyper-culture of Asian management practices has been increasingly distorted and reduced to a kind of vulgar Confucianism, stressing Sun Tzi’s military tactics and merely focusing on easy money. The concentric circle around what is perceived to be uchi has been delimited to the ego, neglecting the potential sphere of goodwill beyond self-interest and opportunism.

Crony capitalism’s negative effects have surfaced in wasted resources when nonmarket choices resulted in faulty decisions, such as the Japanese Ministry of Trade and Industry’s (MITI) investments in an analog-based high-definition television system or Indonesia’s investments in a national car industry. Further effects have appeared in the structural imbalances arising from overemphasis on export industries.

Understanding the chasm between Western and Eastern, vulgar Confucian versions of capitalism assume equal importance now as policymakers and investors debate modes of globalization. Crony capitalism increasingly loses its appeal.

The Asian approach to management as influenced by Confucianism may also endorse values that contradict them. Under certain circumstances, Confucianism forms a web of normative constraints that dictate the way business ought to be conducted, as well as how people ought to behave and be treated. In view of the effect of Confucianism on the individual, it is not difficult to see that such values are not conducive to an environment that encourages personal initiatives and creativity. Without individual rights properly instituted, collectivism may be hostile to individual rights that presuppose some form of equality. This is because employee empowerment, open and free communication, and equal respect for employees are based on values that include respect of the rights and equality of the individual person.

In traditional East Asia, central to the set of behavioral norms was the family-based principle of filial piety. 5 It dictated the desirable and proper human relationships within the family and beyond. The emperor of the Confucian state ruled his subjects very much like a father taking care of his children. Heads of states, under the mandate of heaven, ran the country like a family. Thus, there is a natural extension of filial piety from the family to the state. The extension of this principle to the political sphere generated the principle of loyalty. As a result of the paramount importance given to filial piety in both family and state, it dominated and defined all other human relationships, as society was a relatively simple entity in traditional East Asia.Filial piety presupposes a hierarchical type of human relationships, which are natural within the family context. However, when filial piety is practiced as an all-encompassing principle, the hierarchical human relationships that go with it become

pervasive in all social relations. There is nothing wrong in a hierarchical relationship existing in the family structure, at least to some extent. It is, however, dangerous to have this relationship be the principal human relationship within society. The practice of filial piety sanctioned a hierarchical structure in society, which may not be desirable for developing respect of persons.

East Asia has practiced filial piety, which often led to crony capitalism controlled by hierarchies and intertwined interests groups. In postcrisis Asia, politicians are proposing that individuals and individual firms take the initiative in reconstruction and regeneration. Western skeptics abound6 but Asian observers argue that many are now no longer willing to accept monolithic and authoritarian lines. 7 While Asians still greatly value traditions of internal cohesion, strident demands for transparency are increasingly emerging. Most of the reforms aim at unraveling the tight networks of collaboration and reciprocity among government agencies, financial institutions, and industrial companies and instituting more market mediation practices.

The future of Asian management may be characterized by a fusion of Confucian thinking—as the necessary ground to stabilize Asian firms—and of some “best practices” consisting in a new openness of the business system in which firms operate. The challenge is to redefine Confucian-oriented business culturers for the new millennium.

Part ThreeAsian Management Styles

8. Japanese KeiretsuYou will always win if you rely on common sense.Konosuke Matsushita1

Japan has taken Konosuke Matsushita at his words. In big companies, management is based on common sense; that is, the employees participate in the decision-making processes—an approach that has attracted worldwide attention. Japanese management practices have been en vogue until recently: domestically, within neighboring Asia, and as far away as North America or Europe.

The most widespread management model within East Asia has been the one practiced by Japanese firms. A Japanese firm is generally referred to as kaisha (in Japanese: corporation), which is a very general form for describing Japanese business. Due to the proliferation of the big keiretsu and their ramifications, which incorporate all levels of the Japanese industrial landscape, kaisha should be distinguished from keiretsu as the archetype of Japanese organization on the firm level. Each time the main types of industrial and corporate organizations prevailing in Japan, South Korea, and in overseas Chinese communities are described, one should be clear that there are also other types of firms whereas the main type like the Japanese keiretsu, the Korean chaebol, and the overseas Chinese business groups are so dominating that such a reduction may be justified.

Most Japanese would describe themselves in terms of their place in a network of relationships rather than as individuals. In a similar way, Japanese firms traditionally define their roles through their relationships with other firms rather than as stand-alone organizations.

Most of the larger firms connect to affiliated firms with which they form keiretsu, whereby firms maintain long-standing business ties with each other that are sometimes, but not always, cemented by mutual ownership of shares. Japan’s six big keiretsu, Mitsubishi, Mitsui, Sumitomo, Fuyo, Daiichi-Kangyo and Sanwa, are powerful corporate groups held together by common values, business relationships, and a web of cross-shareholdings. In so-called Presidents’ Councils the strategy and interaction of the member companies are coordinated. They have no formal authority to force or impose decisions on the member companies or to perform centralized control functions over them such as strategic planning or formalized performance evaluations.

Rather, they focus on coordinating the interests of member companies, discussing common concerns related to their businesses, providing advice, and exchanging ideas and information among the participants. Traditionally, however, the member companies did not oppose the informal advice emerging from consultation within thecouncils. 3

The zaibatsu form the keiretsu’s ancestors. They consisted of huge groups of family businesses combining interests in the major industries. Following World War II, when they became the target of Allied Forces Supreme Command, they were dissolved. The dissolution focused on depriving them of their ownership interests in banks, subsidiaries, and affiliated companies, and freezing their assets. However, the ties and linkages have remained intact, although in a weaker form, the keiretsu. The typical keiretsu is organized around a financial institution, a general trading company (sogo shosha), and manufacturing firms from a wide cross-section of industries.

Contrary to Western conventional wisdom, cospecialization within vertical and horizontal keiretsu has allowed Japanese firms to achieve asset specialization and lower market penetration at the same time; that is, minimize transaction costs and maximize transaction value.

For instance, one of the advantages of Japanese subcontracting within supply networks has been its long-term nature that allows network members to commit sufficient resources to R& D and to collaborate in the integration of externally acquired technology for the fast development of new products. 4 Another advantage is that long-term corporate relations allow subcontractors to fully explore the experience acquired throughout the partnership. Such experience usually lead to lower costs for the products supplied by the subcontractor to the buyer. By applying the partnership approach, Japanese car manufacturers have consolidated their business with a few strategic suppliers and created conditions that permit the suppliers to make the investments necessary to accelerate down the experience curve and to share the full advantage of this volume with the car makers.

Many see the keiretsu as an organizational form for advancing Japanese interests at the cost of outsiders, especially non-Japanese competitors. 5 Foreign companies have had difficulties establishing themselves in the Japanese market. The connections between the Japanese companies often appear too complex and nontransparent and seem to leave foreigners out. Yet, although the keiretsu function as key gatekeepers, Japan Inc.’ s impenetrability does not necessarily imply a conscious blockade of foreigners. However, terms such as “Japan Inc.” and “Japan bashing” acknowledge tight links between the Japanese administration and the Japanese economy as well as the supposedly conspiratorial system in which they function. Some Western commentators claim that these tight links have harmed the West and that only political pressure may halt them. 6 To Westerners, the interaction between government and business appears to undermine the political system, as the indirect market hindrances are difficult to understand. As Ivan Hall noted, the rest of the world may have a major interest in Japanese decisions to include selectively or to exclude systematically foreigners: 7 This becomes all too clear in the negatively connotated term “Japan Inc.” Although some Japanese firms still enjoy record profits, an increasingly large number appear to be underperforming in today’s crisis environment. The financial sector, in particular, is near collapse. The continued Japanese recession has led many observers to conclude that Japan now faces an extended era of near-zero economic growth. As a consequence, researchers and policymakers are debating whether the keiretsu still offers the ideal form of industrial organization within the Japanese economic framework. 8 The globalization of industries such as finance, automotive, and chemistry has left many keiretsuaffiliated companies too small and too insular. Cross-keiretsu mergers in these industries may challenge the traditional practice of grouping around a main bank and a trading company. Indeed, the keiretsu paradigm seems to be at critical crossroad.Three models of Japanese management as traditionally practiced by the keiretsu will be presented. Each of these models dominated the discussion at a certain point of time. In the 1980s when Japanese management practices were first noticed as something different from conventional Western forms of management, and the success of Japanese firms became increasingly obvious, the focus was on the institutional factors dominant in the practice of Japanese keiretsu; namely, lifetime employment, consensus building, and promotion by seniority. 9 In the early 1990s there was a shift in the operational part of Japanese management. Kaizen, kanban, and “lean production” have been highly discussed, and held responsible for the increasing domination of world markets by Japanese firms, and—simultaneously— the decline of American dominance. 10 The success of Japan’s firms was partly based on operational effectiveness, the

development of logistics that improved product quality while cutting costs at the same time. Indeed, by now a number of well-known Japanese management practices have become standard practices used both by Japanese and non-Japanese firms. From the mid-1990s onward there was another shift—this time to “knowledge creation,” another Japanese business practice that not only accounts for but also encourages the “organizational redundancy” of Japanese firms. With the creation of knowledge, they may have institutionalized a duplication of effort that paradoxically have led to further operational efficiencies. All three facets of Japanese management have been applied simultaneously for a long time. Only the attention that Japanese management attracted by management scientists—mostly of Western origin—led to the impression that the different schools of Japanese management have superseded each other. In the following, the three main aspects of Japanese management will be described and discussed.

TRADITIONAL EXPLANATIONS OF JAPANESE MANAGEMENT

Japanese management practices are traditionally based on participatory management, job security, joint consultation between labor and management, horizontal communication, team incentives, and a relatively small gap between the highest and the lowest salaries. After being hired, employees receive inhouse training and thus get the experience of various kinds of tasks through on-the-job training, rotations, and transfers, in the course of which they also get promotions. As a general rule they complete their career in the same company and their employment is, in principle, guaranteed until a certain age. Especially in the large keiretsu-affiliated companies, employees stay with the employer who hired them straight out of college until they retire. Firms, in turn, do not downsize during recession or financial turmoil. The employment system is based on a mutual trust between employer and employee. This commitment and the endowed trust allow Japanese companies to accumulate a significant know-how specific to each firm. As a consequence, employees generally closely identify with their company and develop a strong sense of belonging. Coresponsibility for the whole derives from Confucianism. The habit of rotating people among different departments means that employees are deemed to think like entrepreneurs. And the rule that everybody must start on the shop floor means that managers may well assess all processes and events within their organizations.The Japanese decision-making process is that of consensus building. Under this system, any changes in procedures and routines, tactics, and even strategies, are originated by those who are directly concerned. The final decision is made at the top after an elaborate examination of the proposal through successively higher levels in the management hierarchy. The acceptance or rejection of a decision is the result of consensus. Decision-making processes are both formal (ringi) and informal (nemawashi). Ringi (requesting a decision) is a written recommendation urging a specific course of action. The ringi is submitted to superiors and to the relevant departments until they reach the top decision makers, who then pass down the decision on whether the proposal is to be accepted. This system enables the employees to participate in corporate policy decision making. Nemawashi (discussing behind the scenes) is the informal counterpart to ringi: If anybody wants to formally present an idea, he or she usually discusses it with colleagues first. At the same time, the idea is gradually presented personally to a majority or all of the participants before a meeting. Therefore, when the meeting is actually held, the proposition is understood and few, if any, are opposed to it. Both ringi and nemawashi reflect the Confucian search for harmony. This emphasis on collective decision making leads to a unique approach to leadership. Japanese superiors are seldom brash or charismatic.

They prefer to be modest toward their employees. Decisions appear to organize themselves. Japanese leaders strive to represent the will of the group and usually do

not want to impose their own will. Business plans are not very formalized, as the Japanese prefer to develop long-term visions and missions. The main advantage of such decision making is a wider acceptance among the organization. 11 The obvious disadvantage can be wasted time.

Confucianism places emphasis on harmony rather than rivalry in interpersonal relationships, loyalty, and paternalism, which operate in essentially vertical relations. These may have led the Japanese to create efficient teamwork, a commitment to corporate and social goals, and a close collaboration between labor, business, and government.

Only recently, with the burst of the Japanese bubble economy, the flaws of the Japanese system became obvious. Lifetime employment may prevent flexible adjustments necessary to changes in demand and competition. And there is potentially less creativity compared with the “honey-bee approach” of Silicon Valley where talent easily changes employers leading to cross-fertilization. This particularly holds true for such rapidly growing industries as the Internet and software-related businesses. Another disadvantage of the Japanese system is that decisions take a long time. This may explain why many Japanese high-tech companies of the likes of Toshiba, Hitachi, and Mitsubishi Electronics missed the opportunities to actively participate in the creation of Internet businesses.

OPERATIONS MANAGEMENT

Japanese advances in operations management, the second big contribution of the country to management theory and practice, have been largely propagated by Western management scholars who jumped on the kaizen, kanban, and lean-production bandwagon. In the best known of these studies, The Machine That Changed the World, MIT scholars James Womack, Daniel Jones, and Daniel Roos considered the achievement of the Toyota production system—or in more general words: lean production—a revolutionary innovation as far as the labor and production organization is concerned. 12 Lean production has been considered to overturn the traditional rules of Taylorism and Fordism, which treated each employee as an element in a rather mechanized world. Lean production, on the other hand, is supposed to provide more challenging and fulfilling work for employees at every level. Moreover, it provides better products in wider variety at lower cost. Lean production as a Japanese way of operations management became the standard, first for automotive manufacturers, then for manufacturing firms in general. From the early 1990s, Volkswagen, DaimlerBenz, Ford, GM, and others quickly adopted and further developed the Japanese lean-production philosophies. Lean production combines the advantages of craft and mass production, while avoiding the high cost of the former and the rigidity of the latter. In a nutshell, lean production focuses on the importance of getting things right the first time rather than spending a lot of time checking afterward. This approach went against the grounds of the standard corporate model of the time, which assumed that quality was something to be checked after a product had been assembled.

The approach was first practiced by Toyota, which established an entirely new system of production. 13 Its genius was to shift the focus of manufacturing from economies of scale to economies of time. To save time, a kanban, or card, for example, is attached to every box of supplies describing its contents. Returning the card to the supplier automatically reorders a shipment. Just-in-time delivery coordinates the flow of parts within the supply system on a day-to-day basis. Kaizen (Japanese: continuous improvement) leads to incremental changes and improvements on the shop floor, directly done by the workers without much supervision from the management.

Lean production draws heavily from Confucianism, which acknowledges the basic, economically practical aspects of human nature and attempts to do away with them. The “chaotic” environment has to be put in order according to certain universal rules. Human beings must adapt to the existing conditions whereas revolutionary challenges do not fit this worldview. Lean production in itself requires a meticulous and thorough adaptation to individual conditions. While Western managers have been trained to think that improvements stem mainly from sophisticated approaches, their Japanese counterparts believed that solutions to business problems lie waiting to be discovered in gemba. The word literally means “real place,” or shop floor, but Masaaki Imai, who made the kaizen approach popular, 14 has broadened it to encompass any on-the-spot location (also in administration) where key transactions take place. By contrast, American and European firms have been mostly concerned with a “one big solution” approach to manufacturing, R& D, administration, and sales.

By transforming traditional mass production techniques, Japanese manufacturers were able to generate their output at lower costs, in a shorter time, using less space and fewer workers. Under what has come to be known as reengineering, many Western firms have introduced teamwork, job rotation, kaizen, etc., as ways to alter and shorten the flow of information and products. 15 A number of Japanese management practices that can be classified as operations management have already become standard practice around the world.

While the Japanese lean-production philosophy was still being transferred to Western companies, critics increasingly abounded by the mid-1990s. Although Japanese firms perfected manufacturing, industry-changing products, and breakthroughs like the Internet and other high-tech products have tended to be made elsewhere, particularly in the United States. In their highly acclaimed book, Competing for the Future, 16 Gary Hamel and C. K. Prahalad show that a lean company does not automatically ascend to being a pioneer company in a certain industrial segment. It is not necessarily capable of forming new segments through a combination of existing ones. And operations management, although necessary for superior performance, is not sufficient, because its techniques are easy to imitate. In contrast, the essence of strategy is choosing a unique and valuable position rooted in activities that are much more difficult to match. In order to set a precedent, a company has to take the process of industrial change into its own hands, thereby defining the rules of competition. Firms need a long-term strategy to reinvent themselves. Entire businesses must change, not just one unit, a functional group, or a product. While costs must remain an important factor, firms have to focus on key strategic goals that will strengthen the entire organization’s competitive position, promote profitable growth, and create shareholder value.

It is becoming clear that Japanese keiretsu can no longer survive and compete on product quality and efficiency alone. They must switch from an industrial development model that stresses how to efficiently supply products and services to one that focuses on what kind of value to create and offer.

KNOWLEDGE CREATION

To overcome the shortcomings of merely streamlining shop-floor operations, the principles of lean production have been transferred to organizations as a whole; namely, postulating some kind of lean management as a logical transmission of lean production. Inefficiencies can be discovered and fought at every gemba. On looking more carefully, however, it came to light that many of the keiretsu are not lean at all. The system of lifetime employment and seniority has kept Japanese companies rather fat. The country’s white-collar sector is considered to be less efficient than its equivalents in Europe and America. 17

The obvious disadvantage of lean production and the inexistence of lean management, however, led the two Japanese management professorsIkujiro Nonaka and Hirotaka Takeuchi to the insight that the “fatness” of Japanese organizations may be an advantage, not a advantage. Japanese competitiveness is not just based on operations management but on soft factors built on specific tangible and intangible assets that cannot be easily transferred to other companies, especially to Western competitors. They summarize their ideas as “knowledge creation.” 18 Nonaka and Takeuchi contend that Japanese firms are successful because they are innovative—not merely masters of imitation as some think—and because they create new knowledge and use it to produce successful products and technologies. The success of Japanese companies is not merely due to the traditional patterns of Japanese management, although all of these patterns are important. Instead, they claim that Japanese companies have been successful because of their skills and expertise at creating “organizational knowledge.” This term is defined as the capability of the company to create new knowledge, disseminate it throughout the organization, and embody it in products, services, and systems. Cases from such firms as Honda, Canon, Matsushita, and NEC demonstrate that the approach of knowledge creation enables Japanese companies to innovate continuously, incrementally, and spirally.

The knowledge conversion process is particularly important. Through socialization, externalization, internalization, and combination, knowledge is transferred, distributed, and embedded within the organization. Although Western companies may be ahead of the Japanese in managing the sort of formal, explicit knowledge that can be faxed or e-mailed, the Japanese are better at managing “tacit knowledge,” which is generated by employees through their day-today work. This more personal form of knowledge is embedded in individual experience and involves intangible factors such as personal beliefs and perspectives. It allows companies to tap into the knowledge base of their employees, and ensures that employees’ proposals can emerge as the firm’s competitive advantage. The most important strategy is to encourage employees to spend as much time as possible together, informally as well as formally. In the West, tacit knowledge has been overlooked as a critical component of collective human behavior. In contrast, tacit knowledge—and diffusion of learning from individual to team to organization—is considered a critical source of Japanese companies’ competitiveness.

Rugby provides a metaphor for the speed and flexibility with which Japanese companies develop new products. In rugby, the ball gets passed within the team as it moves up the field as a unit. The ball being passed around in the team contains a shared understanding of what the company stands for, where it is going, what kind of world it wants to live in, and how to make that world a reality. The ball contains tacit knowledge—ideals, values, and emotions. Ball movement in rugby is borne out of the team members’ interplay on the field. It requires an intensive and laborious interaction among members of the team. This interactive process is analogous to how total knowledge is created organizationally. The concept of knowledge creation translates directly from Confucianism. Business networks, in particular, may constitute a platform for knowledge as they loosen up the traditional boundaries of formal organizations and allow firms to better integrate knowledge. 19 Confucius advocated that “the superior man looks for knowledge, not livelihood.” 20 Confucianism ranks knowledge creation as the most important. Nonaka and Takeuchi’s approach has not been free of critics. 21

Many people seem to be employed to perform neat, yet to a Westerners’ eyes, trivial tasks—like bowing to a customer on entering or leaving a department store. Even so, in the many layers of Japanese keiretsu, there was an unchallenged approach to profit making since their main thrust seemed to be toward discussion and partnering so that

harmony and knowledge creation were guaranteed. Following the burst bubble of the Japanese economy, and the Asian economic crisis, many Japanese keiretsu had to hollow out parts of their workforce.

Naturally, this severely reduces organizational slack (i. e., organizations with spare human capital engaged in knowledge creation), maybe down to zero, or even negative levels—where each of those left does much more than he or she used to do to cope with the work needed by the company. Hence, the model of knowledge creation may be less attractive because of the loss of slack.

9. Korean Chaebol

Every street is paved with gold.Kim Woo-Choong1

The advance of Kim Woo-Choong’s Daewoo group, which comprises firms from car production, heavy industry and shipbuilding, construction, electronics, telecommunications, to finance and servicebusinesses, is synonymous with the story of the rise—and the crisis— of modern South Korea. The Daewoo group’s role in transforming the country from the ashes of war into the mighty industrial juggernaut of today is legend. As in Japan, firms in South Korea organize into network groups, the chaebol. The term chaebol means “financial clique.” These large business groups, originally created by Korean entrepreneurs and still largely family controlled, spread over many different industries. Chaebol first arose in South Korea in the 1920s and 1930s when the country was under Japanese colonial rule. Japan planned Korea’s economic development to feed its own markets and set up a series of companies that were privately owned and run but rather strictly controlled by the government.

The Koreans further developed this system once they had won independence. The chaebol formed an offspring of the forced industrialization of the years after the World War II and particularly after the Korean War. In the 1960s the Korean government identified talented entrepreneurs and systematically sponsored them by credit, trading licenses, tax advantages, and other measures. Thereafter, the chaebol could sustain average growth rates of about thirty percent until the 1980s.

Superficially, the chaebol seem very similar to the keiretsu. However, substantial differences exist. Unlike the keiretsu, their founding families still dominate Korean chaebol. Furthermore, the Korean government has played an even more active role in the chaebol’s development than in the Japanese case. Another difference is that whereas Japanese keiretsu cluster around one financial institution or bank, this has not been the case with the chaebol—largely because banks were owned by the government until recently, so that the policy and direction of the chaebol were more directly controlled by the government.

The reason for the family-based structure of the chaebol may be partly that they are newer institutions than the keiretsu, and have yet to pass out of the founder’s hands in many cases. Or there may be cultural differences between Korea and Japan that make Koreans more family-oriented (like the Chinese) and the Japanese more oriented to wider social groups. The result is that even though they have grown to big proportions, most chaebol continue to be mainly family controlled. While there is an emerging class of independent senior managers, a huge number of top executives are still closely related to the founders.

In 1997, the top five chaebol—Hyundai, Samsung, Daewoo, LG (Lucky-Goldstar), and SK (Sunkyong)— accounted for thirty-two percent of all corporate sales in South Korea, twenty-nine percent of assets and thirty percent of debts. 2 The Samsung group alone accounted for twenty-eight percent of all South Korean exports in 1997. The chaebol produce a wide range of diverse products and services.

They have shown a willingness to invest heavily in R& D, with a view to challenging world leaders in industries such as semiconductors, automobiles, and large appliances.

As the Asian crisis descended, however, the chaebol’s operations appeared too vast and ill-focused, their debt too huge, and their profits too slender, threatening their survival. In precrisis Korea, the Samsung group, for example, controlled about sixty subsidiaries extended across ten industries ranging from electronics to newspapers. All the subsidiaries share a web of cross-shareholdings and overlapping commercial relationships that are difficult to localize. Some of the core firms, such as Samsung Electronics and Samsung Heavy Industries, even form mini-chaebol within the larger corporate structure. In precrisis Korea, Samsung Electronics had about 100 affiliates of its own. Observers have contended that Samsung and the other chaebol may be overstretched. 3 The ongoing credit crunch, in particular, has highlighted the urgency of reducing debt and focusing on core businesses.

TRADITIONAL EXPLANATIONS OF KOREAN MANAGEMENT

A unique “Korean” management style has been much less discussed than Japanese management practices. However, Korean management has its own characteristics, and its relative obscurity may be due to the late industrialization of South Korea and the late attention of Western observers and academics.

Since Confucianism is central to Korean thought—and probably more directly obvious than in Japan—its philosophy is evidenced in all aspects of work and everyday life. Confucianism was the state philosophy of Korea for more than five hundred years, beginning with the Choson dynasty in 1392, and only ending in 1910 when Korea was annexed by Japan. Korean adherents of Confucianism strongly believe in collectivism, or the concentration of that which benefits the group as a whole. The key Confucian values of diligence and harmony have contributed to a relatively high work ethic. Koreans are not preoccupied with personal achievement as much as with group achievement. Such collectivism allows for a high degree of group harmony within the Korean society. The social contract is predicated on a firm belief in preserving group harmony, stressing smooth, constructive, and conflict-free interpersonal relations. Even after the labor struggles of the late 1980s, Koreans have continued their tradition to work very hard. 4

Many Koreans value blood relationships so highly that they have an extended clan, or chiban, that provides security for family members. The Hyundai group, for example, is at least fifty percent owned by the group founder and his family. The chaebol are run as extensions of the feudal family network, providing lifetime employment and a range of benefits, which in turn exact a high level of loyalty and sacrifice from the employees. This means that they often make decisions based on rather personal factors instead of strictly rational considerations. The employees are given relatively little room to exercise their own judgment or contribute to decision making. The control of subordinates is seen to be justified by Confucianism, because it is derived from familial traditions. To appeal to the traditional Korean family, and to the father-son relationship, in particular, is to appeal tacitly to Confucianism, for it is understood that Confucian norms, and especially filial piety, were supposed to govern family relationships.

As in Japan and overseas China, business is a very personal affair.

It is an imperative that one is well-connected, both inside and outside the company. The formal organization takes a backseat to personal relations. Personal relationships combined with a high sense of honor and trust form the foundation of Korean business ethics. As a consequence, written contracts among South Korean businesses are rare.

Most arrangements are based purely on verbal agreements. As a result, South Korean managers spend a significant amount of time expanding and nurturing their personal relations because their business depends on maintaining these relationships. This includes approaching business partners in the “correct manner,” meaning through an acceptable introduction, and on the appropriate level. 5 To understand a Korean company, it is essential to determine the personal relationships between managers on all levels, especially the relationships between individual managers and directors or the president. Personal ties such as kinship, the same school, the same birthplace, or marriage often take precedence over other factors and may have a significant influence on how a company is run. It is necessary to treat relationships as personal ones, requiring regular stroking and other forms of maintenance. Since the mutual benefit of the interacting parties is the goal, it is seen as inappropriate to hold one party to an agreement if business conditions change to his or her significant detriment. Much criticism has stated that Korean management practices are outdated and not applicable to companies striving for world markets. 6

From the late 1980s, the chaebol have been moving to meet the globalization challenge, because they have not been able to rely on large profit margins at home any more. Moreover, South Korean wages have been increasing significantly. The resulting pressure to merge traditional Korean management with Western best practices may have reduced the strong impact of Confucianism. In spite of such constant pressure for change, however, the traditional Korean management system has maintained the major traits of its uniqueness.

VISION AND COMMUNITY OF FATE

Kim Woo-Choong, the founder of Daewoo, wrote an autobiography called Every Street Is Paved with Gold. 7 For him, they certainly have been, at least until the mid-1990s. The entrepreneur who started from humble origins has been estimated to be one of the richest men in Asia, if not in the world. The company he founded, Daewoo, is only thirty years old. He set it up in 1967 as a small textile company with just five employees. At the outbreak of the crisis, the Daewoo group had more than 100,000 employees worldwide and a turnover of more than $60 billion. According to his own record, Kim is sleeping four hours a night, working one hundred hours a week. The kind of hard work he is doing has been almost contagious. He has put the work ethos of Daewoo as creativity, challenge, and, most importantly, sacrifice. In a similar vein, Chung Ju-Yung, the founder of the Hyundai chaebol, wrote his autobiography entitled There Are Difficulties, ButNo Failures. 8 Chung founded Hyundai (it means “modern” in Korean) in 1946 as a car repair company, then quickly moved into the construction business. He became one of the U. S. Army’s favorite contractors during the Korean War, and afterwards expanded Hyundai’s businesses to include electronics, shipbuilding, chemistry, financial institutions, and automobiles. Some of his management practices may be considered extreme today but his ability to seize business opportunities made him very inspirational. As a rule of thumb, Korean chaebol put forward bold visions, which

empower their workforce— and themselves. The self-confidence of the chaebol founders is legendary.

The chaebol put forward visions that create mutual trust among stakeholders and a good reputation with customers and suppliers. This measure translates into sound corporate performance. By doing so, the chaebol even use a somewhat nationalistic undertone. Samsung reflects this in its former corporate slogan: We do business for the sake of nation building. Using a corporate slogan—or sahoon—is a way to channel the social contract between the chaebol and its employees. Managers often frame their sahoon and hang it in their office. Many sahoons are derived from the beliefs of the company founder and represent what he believes is important for the sake of the company.

Diligence and self-sacrifice in loyalty to the chairman’s beliefs and his vision helped to drive the growth of the chaebol. The employees show much euiyok (ambition), often resulting in the sheer glorification of the chairman. Chung Ju-Yung, for instance, has been called King Chairman by his Hyundai employees. 9 Work is achievement driven, according to a common goal and the establishing of a “community of fate,” deeply anchored in the piety to the chaebol chairman.

The term “community of fate” refers to the feeling among employees that they all belong to the same organization, and that they will share both the successes and the failures of its operation. The orientation toward the fate of working for a chaebol is related to feeling part of something larger than the individual. The chaebol founders argue that the community is sacred because without it, the employees are nothing. Community is the sine qua non. The decisiveness of communities of fate is maintained by corporate visions. One may conclude that Korean firms have deployed similar visions as their Japanese counterparts: to become world leaders in specified industrial sectors, reflected in the Japanese slogan Nihon ichiban. For historical reasons, this may come true: Catching up with the Japanese is an issue of national pride. The chaebol have a very clear vision of where they aim to be within a few years and a strategy to achieve it. They have been investing very large sums in new plants and R& D in order to achieve world-class status. Globalization was one of the main aims, as supported by President Kim Young Sam’s segyehwa policy.

In their quest to globalize, however, the chaebol engaged in rather unrelated diversification. New ventures, domestically and on a global scale, have been added to the existing portfolio of businesses. Moreover, the chaebol tried to tap manpower and technological expertise around the world, for example, by setting up plants and research labs in countries where salaries are low and there are well-educated managers and scientists, such as the CIS (Commonwealth of Independent States) countries and India. However, the drive to catch up, to add more business lines, and to globalize became an obsession. The chaebol built up strong communities of fate, galloping through the different steps of industrialization and globalization without allowing themselves the time to reflect and consolidate. They applied a leapfrogging approach setting new visions before the previous vision was wholly fulfilled. This led finally to a bitter finance trap. After a long period of expansion, the chaebol have lost their competitiveness, illustratedby the virtual bankruptcy of Daewoo. The employment laws, which placed significant constraints on shedding staff in the past, have been changed with the Asian economic crisis, marking a new chapter in the former consensus-driven Korean society. As a consequence, the vigor of visions and the chaebol’s community of fate may partly erode in the future.

VIRTUAL HEADQUARTERS

In the Anglo-Saxon economic model, ownership and management are usually separated and management is left to professional managers when organizations grow. Once companies reach the critical size where structures and processes have to be formalized, such a step is obvious. Business expansion requires additional capital and human resources, and it becomes increasingly difficult for owners to meet the financial and executive manpower requirements with their own resources. The separation between ownership and management has not yet occurred in most South Korean chaebol. The founder and chairman of the group normally still has direct influence on the ways business is done, using an organizational device that has been called “virtual headquarters.” 10 Virtual headquarters are staff departments with planning and control functions under the direct instruction of the chairman.

Formal organizational units for the coordination of group companies and formal hierarchical layers do not exisit. Instead, the owner chairman is at the top of the chaebol hierarchy with almost unlimited power within the group. Moreover, a group headquarters—although an informal, virtual one—is responsible for major strategic decisions. These two chaebol devices do not exist as separate legal entities in a formal sense. However, they provide the chaebol with an organizational infrastructure that allows a rather centralized corporate governance. Were it not for these devices, the chaebol would operate in a keiretsu-like way where the President Councils coordinate the interplay of the member companies.

The chaebol are owned and controlled by a family headed by the founder or his designated successor. The head of a chaebol family holds the title of chairman. The chairman title is inherited by one of the owner’s sons designated by him. The Samsung group is owned by the Lee family, the Hyundai group by the Chung family, the Daewoo group by the Kim family, the LG group by the Koo family, and the SK group by the Choi family. Koreans strongly believe that business ownership should be preserved within the owner family. This reflects the Confucian family system, which is based on blood lineage and inheritance within the family. Indeed, the strong “power distance” and “uncertainty avoidance” of East Asian culture in general and Korean culture in particular observed by Geerd Hofstede11 may have led to the centralization of Korean firms, when possible along kinship lineages.

The chairman of a chaebol has almost unlimited power inside the group. He can found new companies, enter new business areas, disband existing ones, and appoint or dismiss CEOs of member companies. Recent examples are the problematic entries into the automotive industry by Samsung and Ssangyong, which can be attributed to the two chairmen’s personal interests in cars, which have become a serious liability for these chaebol. In the meantime, Ssangyong’s automotive business has been sold to Daewoo Motors and Samsung transferred its car plant to the French automaker Renault. Daewoo Motors, on the other hand, was taken over by General Motors—a major defeat for Daewoo’s ambitious chairman. Despite their power, the chairmen are not legally bound in a formal organizational position. And they are not controlled by corporate governance mechanisms. There is a strong asymmetry between the authorities and the responsibilities of the chairmen. That is, althoughthey have an unlimited power over the member companies within their groups, they are not liable for their misfortunes. Most chaebol chairmen are not legally liable for mismanagement and bankruptcy, since they do not hold formal positions. 12 To control the member companies without holding a formal position, chaebol owners established an organizational device called kihoek-jojung-sil (office of planning and coordination, or in a free translation: virtual headuquarters).

Employees of the entire group, mainly the best talent, are assigned to the office through internal promotion from member companies. The funds needed for their operation also come from member firms, although the staff is directly under the supervision of the chaebol owners.

This is reminiscent of the practice of Confucius, who gathered scholars around him in order to spread his teachings and implement his ideas. And the chairman may even be compared with Chinese emperors who had the mandate of heaven to rule their subordinates. 13 The virtual headquarters are the organizational device for chaebol chairmen to exercise corporate control over member companies. Their tasks include long-term planning and the pooling of resources across member companies.

Recently, the chaebol device of virtual headquarters has received rather critical evaluations. 14 They may have contributed significantly to the growth of the chaebol by effectively pooling resources across member companies and investing into new business areas. However, they may also have contributed to the increasing concentration of corporate control by owner-chairmen with the known impacts on the profitablity and long-term competitiveness of the chaebol. As a consequence, there have been pressures to disintegrate or at least downsize the offices. Based on the widespread perception that they were heavily responsible for the overstated expansion of the chaebol and the consequent crisis of the domestic economy, Korean President Kim Dae-jung demanded their disintegration as a part of the government’s reform program. Although the chaebol were strongly opposed to the demand initially, most of them subsequently chose to move headquarter functions to those member companies that are directly managed by the respective CEOs.