2002/11 Research & Review

Let's Re-examine "Japanese Companies" Academically

ITOH Hideshi
Faculty Fellow, RIETI

Study of corporations seems to be a research area which has a relatively low barrier to entry. Managers and former employees write eloquently about corporations based on their own experience, macro economists develop theories on corporations, management consultants come up with their own analysis corroborated by their experience and expertise and fiction writers author close-to-real-life corporate novels based on scrupulous interviews and factual material. Each of these groups includes observations that are both interesting and suggestive, and offer different ways to look at things.

Given that, what contribution are university scholars making with their research activities and work? Abstraction is one way to make a contribution. The word may sound difficult, but abstraction in this context means to provide an analytical framework that is applicable to many different companies, or to provide different ways of looking at things.

The book "Nihon Kigyo Henkakuki-no Sentaku (The Japanese Firm in Transition)," which I edited, was published recently. The book is the outcome of a two-year study on Japanese companies, which was launched in April 1999 when RIETI was still called the Research Institute of International Trade and Industry. Most of the co-authors are experienced or prospective scholars who are active in their respective fields of study, such as economics, business administration and law. Throughout the 1980s, Japanese companies' competitiveness was the focus of attention in various fields. From the 1990s onwards, however, the overall evaluation of Japanese companies has remained very low. Whilst the common belief that Japanese companies need to apply Anglo-American business models in order to revive spreads, a new tone in the discussion denouncing the American model has been emerging more recently, unsurprisingly in response to the series of recent corporate accounting scandals in the United States. Headlines and titles in magazine articles and books show explicitly just how drastically things change.

Judging from its title, the book I edited may look no different from numerous other books available in bookshops. But it would be better not attempt to read it whilst commuting on the train. The book, published as the first of the Economic Policy Analysis Series by RIETI, is a full-fledged academic research book. Each chapter provides in-depth analysis, for which questionnaire surveys and interviews were newly conducted, new theoretical models were built, and empirical analysis was made using a new data set. Policy research activities and policy proposals, regardless of their targeted audience, must be based on rigorous theoretical and empirical studies. Designating policy recommendations as an important objective does not mean that one should abandon strict analytical methods and robust academic achievements. On the contrary, this book's value lies in its use of such analytical methods and in achieving academic goals.

Here, let me briefly introduce the contents of the book. The main focus is on the strategies, organizations and management of Japanese companies. In other words, external factors such as macro economic conditions and government policies, although they too are important, are not addressed by the book. The book consists of four parts. Part I raises a fundamental question, asking what constitutes the "Japanese company." During the 1980s, academic research that attempted to characterize Japanese companies and identify the secret of their success - including pioneering works by RIETI President Masahiko Aoki - was actively pursued across the world, and those studies helped deepen the understanding of Japanese companies not only by those within academia circle but also by those in the political and business worlds and amongst the general public. After the drastic change in the evaluation of Japanese companies in the 1990s however, no in-depth examination has been made as to how the evaluation of Japanese companies in the 1990s is related to that in the 1980s, why the evaluation changed, and in what direction Japan should move. In order to fill this gap, it is necessary to re-examine the model that sought to explain Japanese companies' strengths in the 1980s. My book begins with such an attempt. Then, based on that re-examination of the old model, it attempts to clarify the problems Japanese companies have been facing since the 1990s. Furthermore, the book compares the traditional corporate models of both the U.S. and Japan with the Silicon Valley model, noting that there are many more similarities between the Silicon Valley model and the Japanese traditional model, than between the Silicon Valley model and the U.S. traditional model. And the book warns Japanese companies against single-mindedly moving towards the U.S. traditional model, which is premised on the existence of a matured economy, instead recommending that Japanese companies either preserve the advantages of the Japanese model in terms of motivating the contributors of human capital, or introduce some features of the Silicon Valley model into the traditional model.

Part II examines the mechanism of corporate governance. Perhaps readers of this column are familiar with the argument that Japanese companies' corporate governance is being "hollowed out". The argument asserts that contemporary Japanese companies have no one monitoring their managers. The book examines this assertion through a series of interviews and detailed empirical analysis on the patterns of management changes. Then, it points to the possibility that "self-sustaining governance" can properly function, in the sense that corporate executives step down to take responsibility for deterioration in corporate performance without any intervention from outside, and that managers are self-motivated by the need to provide employees with adequate work incentives. Of course such self-sustaining governance is not perfect. The book argues, based on theoretical analysis comparing the self-sustaining governance model with the shareholder model of corporate governance, that the self-sustaining model ceases to work properly in industries with lower prospects for long-term employment and greater labor liquidity, and in restricted or declining industries. It also asserts that while self-sustaining governance is observed more clearly in companies facing greater business risk, or those in greater needs of reorganization, companies with a stable management environment depend more and more on seniority rule - a negative effect of self-sustaining governance - which tends to maintain the status quo.

What about external control? Japanese companies' corporate governance has often been characterized as a "main-bank oriented contingent governance". Whilst corporate performance remains positive, the management and employees hold control over the company and the main-bank is silent, monitoring the management through its own dispatched officials and via its settlement accounts. Once the company experiences financial difficulty, however, the main bank takes over control and carries out bankruptcy or reorganization procedures. Furthermore, the problem of limited discipline by the cross-shareholding capital market is said to be a contributory factor. Against this backdrop, the book examines what kinds of factors determine main bank relationships, cross-shareholdings and financial patterns, and then explores how the external control mechanism for Japanese companies is expected to change.

Part III of the book provides analysis of Japanese companies' strategic decisions. Some insist, particularly recently, that Japanese companies lack effective strategies. There are many kinds of strategies though, ranging from corporate strategies and business strategies to strategies for groups of companies. In respect of corporate strategy, a questionnaire survey was conducted to measure the organizational capabilities of companies' top management responsible for making strategic decisions. Based on the results of this survey, the book states that corporate performance is significantly affected by the top management's ability to make strategic decisions when the company faces a great deal of uncertainty concerning its technology or business. It also argues that the introduction of an executive director system (shikko yakuin sei) does not enhance the top management team's strategic decision making capability, as long as other aspects of the management team remain unchanged. As for business strategy, the book analyzes the profile and career background of managers responsible for business sections at a major Japanese company, based on interviews and the results of a questionnaire survey. It argues that business managers' inability to manage and their resulting lack of strategic perspective are major problems for the Japanese corporate governance model, and explores ways to nurture and select operating managers better suited for the model.

Major Japanese companies typically form corporate groups together with their affiliates and subsidiaries. For the parent company, the governance of its corporate group is a significant matter that is the subject of strategic decision making. Based on the results of a questionnaire survey, the book analyzes authority-responsibility relationships within corporate groups and the effects of monitoring by a parent company on its subsidiaries and affiliates. The analytical results point to the possibility that the performance of subsidiaries and affiliates will be lowered when they are given little authority over their respective operations but assume major responsibility for results, or conversely when they are given major authority with little responsibility. The book also contends that monitoring by a parent company reduces the cost of assigning greater responsibility to its subsidiaries and affiliates, thereby promoting the delegation of authority from the parent to subsidiaries and affiliates.

Finally, Part IV focuses on three particular industries to examine what kinds of organizations, inter-company relations, and skills and technologies generate innovation. The three industries are the machine tool industry, which Japanese makers continued to develop during the 1990s, the semiconductor lithography systems industry in which Japanese manufacturers rapidly lost their competitiveness in the second half of the 1990s, and the TV game software industry in which Japanese companies remain strong and competitive. In respect of the machine tool industry, based on interviews and questionnaire surveys conducted in Japan, the U.S. and Germany, the book analyzes how production systems and the development of new products generate a positive cycle in Japan. It concludes that the presence of a mechanism to concurrently share information played a far more important role than the capability of the production workplace, becoming a determinant factor behind the continuous development of the Japanese machine tool industry during the 1990s. Capability at the workplace alone cannot bring about innovation, it states. On the other hand, the book insists that the weakening of Japanese lithography system manufacturers is not a temporary phenomenon but stems from structural factors. As the industrial structure shifted from an engineering to science-based one, Japanese lithography systems manufacturers failed to effectively capture the changing needs of semiconductor makers, and did not offer software that could help to improve manufactures' productivity. Another reason for decline in the industry, the book points out, was the absence of a "meeting place" to facilitate expansive collaboration going beyond conventional vertical integrated research and development at a time when the research and development of lithography systems was approaching a chemical and physical limit. In analyzing the home-use TV game industry, the book focuses on software makers to identify the mechanism for generating innovation. In particular, it underlines the leadership role played by expert game software developers. Japanese companies' decision-making processes are often characterized by information sharing and collective consensus building, but organizations holding to such philosophies tend to opt for the status quo. Through theoretical analysis, the book asserts that organizations under strong leadership are more desirable when new businesses have a good chance to develop.

Let me attempt to sum up the message of the whole book. When people say that Japanese companies lost their competitiveness or that they need to adopt features of British or U.S. companies to revive, certain stereotyped models of Japanese, British and U.S. companies lie underneath each of those assertions. This book, however, has shown that our understanding of the stereotyped Japanese company was insufficient. Each chapter of the book focuses on an aspect that has hitherto received little attention or has been left vague in existing studies. Such aspects, highlighted in the book, include internal control mechanisms, strategic decision-making capability, business managers' careers, governance of subsidiaries, linkage between producing capability and innovation and leadership roles. In other words, the book warns against the conventional and simple-minded argument that Japanese companies should just introduce Anglo-American systems.

Works by academic researchers often fail to present clear-cut proposals. In this book, I asked each author to take a step beyond simply presenting an understanding of the current state of affairs and to put forward their proposals to a broad spectrum of readers, without sacrificing logical consistency. The question as to what extent this attempt has succeeded is left to the reader, but I believe that our book, as a rare example of its kind, contributes to the analysis of Japanese companies.

Note Substantial portion of this article has been reconstructed from except from the introduction section of "Nihon Kigyo Henkakuki-no Sentaku (The Japanese Firm in Transition)" edited by Hideshi Itoh.

>> Original text in Japanese

April 25, 2003

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