Slide 17.1 Alan M Rugman and Simon Collinson, International Business, 5 th Edition, © Pearson Education Limited 2009 Japan Chapter 17

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Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009

Japan

Chapter 17

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Japan

• Objectives• Introduction• Political, social and cultural characteristics• Economic characteristics• Business characteristics• Japanese corporations• A changing nation• Restructuring corporations.

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Objectives

• Examine the underlying factors - economic, political, social and cultural - that underlie the distinctiveness of Japan, its business practices and its corporations.

• Understand why Japan is a difficult but rewarding market for foreign firms to enter.

• Identify key strengths and weaknesses of Japanese firms.

• Explore the ongoing changes in Japan and the implications for Japanese firms, their collaborators and competitors.

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Introduction

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Political, social and cultural characteristics

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Political and legal system

• The branches of the Japanese government are very similar to those in the United States: legislative, executive and judicial.

• Legislative power is vested in the Diet, which consists of a popularly elected House of Representatives and House of Councilors.

• Executive power rests with the Cabinet that is organized and headed by the prime minister, who is elected by the Diet.

• The judicial power is vested in the Supreme Court. In addition, there are eight high courts and a host of district courts throughout the country.

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Ministry of International Trade and Industry (MITI)

• MITI served as the coordinating body of the country’s powerful commercial machinery between the 1950s and early 2000s.

• MITI encouraged Japanese companies to pursue targeted opportunities. – Computer technology, high-tech industrial and agricultural

machinery, optical electronics and world-class auto manufacturing. • When MITI identified an area where it would like to expand

business efforts, it was able to gain support for three reasons.– Financial incentives: these are made available to companies that

were prepared to commit resources.– Personal relationship: most MITI ministers attended the major

universities, and so they have school ties to the captains of industry.

– Location: MITI offices and those of most corporate and financial giants were located in the same area of Tokyo.

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• In 2001, MITI was replaced by METI (the Ministry for Economy, Trade and Industry).

• The practice of ‘amakudari,’ involved the regular movement of senior politicians and civil servants from the public sector into private sector companies, often as highly paid consultants.

• The early 1990s saw the start of a series of restructurings in Japanese politics to decrease government influence of the economy. Arguably, Government in Japan continues to plays a more important role in the economy than in other OECD countries.

Ministry of Economy, Trade and Industry (METI)

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Social and cultural characteristics

• Collectivism rather than individualism, dominates many aspects of Japanese life.

• Within companies certain characteristics have strong religious roots, including honour, respect, sincerity, loyalty (chu), duty, obligation or responsibility (giri), ritual and hierarchy.

• Parent–child relationships characterise the hierarchical nature of inter-organizational and interpersonal links, such as government–industry, large firm–small firm, manager–employee, etc.

• Respect for elders, ritualistic (highly-complex) language forms and behaviour, group activities and consensus decision making are all important elements.

• These contrast individualism and meritocratic forms of organization and tend overall to unify the Japanese in their response to gaijin (or outsiders).

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Hai ≠ Yes

• Hai can mean one of at least four levels of yes:– recognition, but not necessarily understanding; – understanding, but not necessarily acceptance and

agreement; – responsibility, understanding, but must consult with

others and secure their agreement before acceptance; and

– agreement, which means understanding, agreement and acceptance.

• The non-verbal signals from the speaker have to be understood to determine, which yes is being meant.

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Economic characteristics

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• Japan’s economy, combined with its productivity and the average wealth of its population, make it the second largest economy in the world after the USA.

Japanese economy

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• Japan’s rapid growth in the early years stemmed from factors such as: – the traditional relationship between government

and business;– its unique capital markets (national finance and

investment systems); – its traditionally strong ‘keiretsu’ groupings of firms;

Keiretsu: a business group consisting of a host of companies and banks linked through ownership and/or joint ventures.

– the role of the corporation in society, and the role of the employee in the firm.

Rapid growth in the early years

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Table 17.1 Economic and trade data for JapanSources: http://www.oecd.org/statsportal/; http://www.meti.go.jp/english/statistics/index.html; http://www.jetro.go.jp/.; IMF World Economic Outlook and EconStats; Bureau of Labor Statistics; US Census Bureau; CIA, The World Factbook, 2007; JETRO, Trade and Investment Statistics, Japan’s International Trade in Goods, March 2007

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Table 17.2 Japan’s FDI imbalance (billions of US $)Source: UNCTAD, World Investment Report, 2006

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Table 17.3 Japan’s FDI inflows and outflows by source and destination, 2005Source: JETRO, 2006 White Paper on International Trade and Foreign Direct Investment, pp. 10, 12, http://www.jetro.go.jp/en/

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Figure 17.1 Trends in Japan’s trade by country/region: exports from JapanSource: Statistical Handbook of Japan 2008 by the Statistics Bureau of Japan

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Figure 17.2 Trends in Japan’s trade by country/region: imports to JapanSource: Statistical Handbook of Japan 2008 by the Statistics Bureau of Japan

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Japan and China: the new Asian powerhouse?

• Trade and FDI flows between Japan and China are growing particularly quickly, raising the potential of a powerful axis of economic growth in Asia.– Japan’s technological leadership, its excellence in

innovation, its large, wealthy market and its footholds in Europe and the US.

– China’s low-cost manufacturing base and its evolving, large but low-income market.

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Business characteristics

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Manufacturing strengths

• A variety of attributes underlie Japanese manufacturing competitiveness.– attention to quality;

quality circles (QC) and total quality management (TQM). – strong manufacturer–component supplier linkages;

just-in-time (JIT) and keiretsu relationships.– ability to cut production costs;

‘just-in-time’ and flexible and ‘lean’ manufacturing techniques etc.

– a high level of automation and use of robotics; – higher degree of credibility and responsibility given to

engineers and technical expertise;– kaizen or continuous improvement, and a focus at all

levels on incremental productivity improvement and customer-led product development.

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Strong applied R&D

• Japan has traditionally spent more than most other countries on R&D. In 2005, 3.18% of the nation’s GDP was spent on R&D, compared to 2.68% in the US and just 1.84% in the EU27.

• Around 78% comes from industry, the highest amongst OECD countries.

• Contrary to popular myth the Japanese Government has always spent relatively smaller amounts on R&D compared to other advanced countries (this is partly related to the low level of defence spending).

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Figure 17.3 Company spending on R&D: Japan comparedSources: M. E. Porter and C. H. M. Ketels, UK Competitiveness: Moving to the Next Stage, DTI Economics Paper No. 3, Department of Trade and Industry, UK Government and the Economic and Social Research Council (ESCR), 2003, at http://www/.dti.gov.uk.

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Figure 17.4 International patenting output: Japan comparedSources: US Patent and Trademark Office, 2002; M. E. Porter and C. H. M. Ketels, UK Competitiveness: Moving to the Next Stage, DTI Economics Paper No. 3, Department of Trade and Industry, UK Government and the Economic and Social Research Council (ESCR), 2003, at http://www.dti.gov.uk

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Keiretsu

• The renowned Japanese corporate groupings or keiretsu, characterised by cross-shareholdings and regular meetings between executives, represent more or less closely tied groups of integrated businesses.

• There are broadly two types of keiretsu, the horizontal (kinyu) type and the vertical, manufacturing keiretsu.

• In the early 1980’s the top six keiretsu alone directly accounted for about 5% of the Japanese labour force and 16% of total Japanese corporate sales.

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Figure 17.5 The Fuyo keiretsu group before restructuringSource: Sir H. Cortazzi, Modern Japan: A Concise Survey (London: Macmillan, 1993), p. 132

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Distribution, retailing and customer-orientation

• Associated with the keiretsu industry groupings are multi layered distribution and retail networks in Japan.

• This “tied” system of distribution, bound by strong face-to-face ties between sellers and buyers at each level, adds substantial costs to the final product.

• Many elements of this complex distribution system remain in Japan today. The multi tiered distribution hierarchy has become more simplified, however, driven by the growth in discount stores and cost-reduction measures.

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Japanese corporations

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Table 17.4 The top 40 Japanese firmsNote: F/T = foreign/total; Surendar = classification (of firm). Data are for 2003. u = United Kingdom; l = Americas; z = United States; j = Japan;D = home-region oriented; S = host-region oriented; B = bi-regional; G = globalSources: S. Collinson and A. M. Rugman, “The Regional Nature of Japanese Multinational Business,” Journal of International Business Studies, vol. 39, no. 2 (2008), pp. 215–230

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Table 17.4 The top 40 Japanese firms (Continued)Note: F/T = foreign/total; Surendar = classification (of firm). Data are for 2003. u = United Kingdom; l = Americas; z = United States; j = Japan;D = home-region oriented; S = host-region oriented; B = bi-regional; G = globalSources: S. Collinson and A. M. Rugman, “The Regional Nature of Japanese Multinational Business,” Journal of International Business Studies, vol. 39, no. 2 (2008), pp. 215–230

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• In one of the most extensive studies of the Japanese enterprise system Fruin (1992) highlights high productivity, functional specialization and manufacturing adaptability as the distinguishing hallmarks of Japanese firms.

• He identifies these attributes at three, connected levels: the factory, the firm and the inter firm network.

Japanese enterprise system

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• We can distil some of the main characteristics of the generic Japanese management style as: – Effective communications internally and with

outside firms, and the use of cross-disciplinary, cross-business and cross-functional workshops.

– Less separation of R&D, design, manufacturing and marketing functions.

– Life-time employment, low labour mobility and substantial investments in training. There is also a strong emphasis on training on-the-job and job-rotation within the firm.

Characteristics of Japanese management

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– Managers as problem definers, not firefighters and as educators and mentors, not disciplinarians. This is underpinned by the weak links between performance and pay and the low wage differentials between workers and managers in the age-related hierarchy.

– Strong group/team ethic, loyalty and motivation combined with competitiveness between teams.

Characteristics of Japanese management (Continued)

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– Strict formal hierarchy combined with strong underlying informal networks and a tendency towards consensus-based decision making (‘horizontal promotion’ for high-fliers and a lack of outsiders entering the firm at senior levels).

– General “long-termism” with a focus on growth and employment stability and market share rather than profits and shareholder dividends.

Characteristics of Japanese management (Continued)

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• Abegglen and Stalk (1985) sum up some of the distinctive characteristics of Japan as the ‘‘3 Ms’’. – marketing: direct links with consumers via

retailers and wholesalers and strong customer-led product development;

– money: cross-shareholding and the lack of outside pressure for short-term returns and stock price improvements;

– manpower strategy: worker involvement, loyalty, effective team-working, and devolvement of responsibility combined with hierarchy.

Kaisha (“company”)

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A changing nation

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A changing nation

• Starting in the early 1990s Japan experienced its worst economic recession in the post-war period.

• Between 1990 and 2000 – unemployment grew from 2.1% to 4.7%;

– GDP growth fell from 5.1% to 1.9%;

– motor vehicle production fell by 25%;

– the sales of large department stores slumped by 13%;

– residential land prices in Tokyo dropped by 55%.

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• Alongside this economic slump, significant social and cultural developments have resulted in an unprecedented degree of tension between traditional and modern ways of living and working.– an increase in the purchase of foreign goods;

– the rise of a “value for money” mentality;

– a higher reliance on equity finance for MNEs as opposed to bank loans.

A changing nation (Continued)

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Figure 17.6 Bank group consolidation in Japan

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Figure 17.7 Declining cross-shareholding in JapanNote: Average proportion of shares in a company held by companies whose shares are held by this companySource: M. Abe and T. Hoshi, “Corporate Finance and Human Resource Management: Evidence from Changing Corporate Governance in Japan”, Dokkyo University and RIETI presentation, 2003

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Table 17.5 Shareholding at market valueNote: 1 The market value of public pension funds is not included in that of Annuity Trusts. 2 Foreigners: non-Japanese corporations and individuals. 3 The market value of own shares held by a listed company is included in a type to which such company belongs. Total market value of own shares held by listed companies in 2007 Survey is 12,494.5 billion yen, accounting for 3.12% of total market value of all companies surveyed. 4 Figures less than the unit are omitted, except that in the case of percentage figures and average figures, a fraction of 0.5 or more is counted as a whole number and a fraction less than that is omitted

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Figure 17.8 Cross-border M&A activity in JapanSource: JETRO, White Paper on International Trade and Foreign Direct Investment, 2007, http://www.jetro.go.jp/en/stats/

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Table 17.6 Out–in M&As in major developed countries and value of inward FDI (cumulative total, 1999–2003)Note: 1 The out-in M&A rate indicates the proportion of the M&A market in each country accounted for by M&As where the ultimate parent company ofthe acquirer is foreign2 Figures for inward FDI indicate the cumulative net flow on a balance of payments basisSources: Prepared from Thomson Financial data (as of March 18, 2004) and OECD data

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Restructuring of corporations

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The decline of manufacturing and distribution keiretsu

• Despite rationalization, consolidation, and a significant growth of M&As in key sectors, Japanese companies are still having to restructure their operations substantially in the face of longer term pressures, including:– more expensive capital;– growing competition from low-cost Asian

producers;– declining prices of key manufactures, particularly

electronics and autos;– a slowing domestic economy;– growing inroads into the domestic economy by

foreign competitors.

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• Japan’s firms now:– Reduce cross-shareholding.

– Avoid giving their usual suppliers a guaranteed business, encouraging them instead to compete with each other on price.

– Bring more inputs from abroad so a more price-driven domestic market and freer flows of imports has evolved.

– Decrease the use of exclusive agreements with single distributors or sales organizations.

Restructuring and reorganization

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Other changes

• The growth of outward-FDI and off-shore manufacturing.

• The decline of life-time employment and changing HRM practices.

• Diversification strategies.

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• Examining the above changes, Michael Porter and colleagues analyzed the challenges facing Japanese managers and came up with the following guidelines for transforming the Japanese company. – Create distinctive long-term strategies – rather than

imitating close rivals break out of the consensus and do something different.

– Expand the focus of operational effectiveness – i.e. improve office-level productivity as well as plant-level efficiency.

– Learn the role of industry strategy in structure – among a number of strategic changes, firms should avoid getting locked into price-based rivalry.

Transforming the Japanese company

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– Shift the goal from growth to profitability – focusing on market share was only possible with “patient capital” (linked to keiretsu and traditional capital markets), push for performance-related rewards.

– Reverse unrelated diversification – “stick to your knitting”; pare down to your core competencies and let other firms do the rest.

– Update the Japanese organizational model – change internal practices, away from hierarchy and consensus towards meritocracy and entrepreneurship.

– Move away from incremental change – become more flexible and responsive to suit the new competitive environment.

Transforming the Japanese company (Continued)

Documents

Slide 17.1 Alan M Rugman and Simon Collinson, International Business, 5 th Edition, © Pearson Education Limited 2009 Japan Chapter 17