RIETI Report February 2007

East Asian and Global Management in Japanese SMEs

The RIETI Policy Symposium, "Global Management and Innovation in Japanese Enterprises - The Strengths of Global Management and Further Challenges," held in January 2006, introduced one of the most effective management models - "metanational management." In this model, corporations seek to build competitive advantages on a global scale by acquiring and leveraging new sources of innovation around the world. Since then, RIETI has conducted further analysis to clarify how firms adopt metanational management and what effects they have achieved. The recent findings indicate that in East Asia's TFT-LCD industry both metanational management strategies and non-metanational management strategies are applied dynamically. The RIETI Policy Symposium, "Metanational Management and Global Innovation: The Case of the TFT-LCD Industry," on March 14, 2007 will present the prospects for the role of metanational management and trends in the TFT-LCD industry as well as both metanational and non-metanational strategies of leading TFT-LCD manufacturers in Japan, South Korea, and Taiwan. Cases in Japanese startups and small- and medium-sized enterprises (SMEs) will also be introduced by Consulting Fellow SANBONMATSU Susumu. A panel discussion will explore the new possibilities of management strategies and policy implications by examining the issues and challenges of metanational management from a global perspective. RIETI Report interviewed Mr. Sanbonmatsu about his recent study on innovation and East Asian and global management in Japanese startups and SMEs.

This month's featured article

East Asian and Global Management in Japanese SMEs

SANBONMATSU SusumuConsulting Fellow, RIETI

Since joining the Organization for Small & Medium Enterprises and Regional Innovation, JAPAN (SMRJ) in 2005, Mr. Sanbonmatsu has been a Consulting Fellow with RIETI. Previously, he served as a Senior Fellow from August 2004-September 2005. Mr. Sanbonmatsu's expertise is in the areas of innovation strategy and organizational strategy, design, and management. From 2001-2004, he served as a Professor in the Faculty of Policy Studies at Shimane Prefectural University. Currently, he is also a Visiting Professor at Hitotsubashi University. Mr. Sanbonmatsu earned B.A. degrees in Economics and Business Administration from the University of Tokyo. He has held numerous key positions in governmental institutions: First Secretary, Embassy of Japan in the Islamic Republic of Iran; Director, Information Management Division, Minister's Secretariat, METI; Director, Economic Cooperation Division, Coordination Bureau, the Economic Planning Agency; and Deputy Director, General Affairs Department, the Institute of Developing Economies, Japan External Trade Organization (JETRO). His major publications include Kawase hendo to ajia keizai no taio [Exchange rate fluctuations and Asian responses], (co-edited with Toru Yanagihara), IDE Spot Survey, Institute of Developing Economies, August 1996; and Higashi ajia no kaihatsu keiken [East Asian development experience], (co-edited with Toru Yanagihara), Institute of Developing Economies, March 1997.

Interview

RIETI: You recently released a discussion paper titled "Innovation and East Asian and Global Management of Startups and SMEs." Could you tell us some of the background of this research?

Sanbonmatsu: One point is that the manufacturing and services industries were positioned as the twin engines of growth in the "New Economic Growth Strategy" unveiled by the Ministry of Economy, Trade and Industry (METI) in June 2006, and the importance of innovation in services has come to be stressed in addition to that in products.

At the same time, Japan's small- and medium-sized enterprises (SMEs) are facing various structural changes in their management environment, such as intensified competition in East Asian markets. In order to cope with these changes, within Japan, they are seeking to build and strengthen their competitive advantages, develop new high-value added products and engage in efficient production based on independent innovation, and take steps to expand sales accordingly. Externally, many SMEs are moving overseas, to areas such as other East Asian nations, in order to 1) reduce production costs, 2) respond to the needs of the global expansion of their parent firms, 3) follow a management decision to develop business ties with Japanese firms that have expanded overseas, and 4) penetrate local markets in such countries as China.

Moreover, when we look by sector at the recent dominance of the East Asia region, while Japan is in a competitive position in automotive and related industries, there are some industries where other East Asian economies have industrial superiority. For example, I would cite semiconductors, flat panel displays, shipbuilding, and steel in South Korea and flat panel displays and semiconductors in Taiwan. Various manufactured goods are seeing cost competitiveness in China, and not only major Japanese companies but also SMEs and startups have business ties with companies in East Asia. Particularly in flat panel-related industries such as semiconductors and liquid crystals, innovation is proceeding at a fast pace, development and production are performed through the global innovation chain, and Japanese SMEs and startups are expanding business in East Asia and globally. Recently, viewing the entire East Asian region as a collective market, some firms are entering each country and practicing East Asian management. In addition, it is no stretch to say that some companies are striving to conduct global management, targeting the global market.

Based on the above, it is important for Japanese SMEs to expand their fields of innovation in products and services not just to the domestic market but also to East Asia and even global markets if they seek to achieve sustainable growth. This would enable them to secure dynamic competitiveness and improve results in East Asian and global markets, as well as the Japanese market. Thus it becomes necessary to examine what kind of organizational management is needed to analyze the integrated relation between innovation and East Asian and global management in order to identify new directions for corporate growth.

RIETI: As few studies in this area that focus on Japanese startups and SMEs have been conducted, this research holds great significance. How did you go about constructing the theoretical framework to explain the points you have stated, and how did you test it?

Sanbonmatsu: The framework I devised for my fiscal 2005 study titled "Global Management and Innovation of Japanese Companies" was insufficient as it was mainly for large-scale manufacturing companies. In this study I developed new conceptualization and structurization in order to build a framework for Japanese SMEs. I first clarified the analytical viewpoint of the research and the current state and challenges of the management environments of SMEs and startups, which are undergoing structural change. I then identified the requirements for organizational management including organizational structure according to different stages of development and organizational capabilities.

Intangible organizational capabilities for corporate growth are extremely important, but few systematic analyses exist on this subject. This is for a number of reasons. First, it is difficult to quantitatively measure the effects. Second, one single component cannot be extracted and explained since components are mutually dependent. In order to conduct this analysis rigorously, we must separately deal with the product companies and the service companies. Therefore, in this study I divided goods and services and constructed two comprehensive frameworks. I also developed an approach to classify the level of and directions toward East Asian management and global management.

Furthermore, I collected cases of advanced SMEs that are carrying out (or aiming toward) innovation-led East Asian and global management, and through these case studies I confirmed the validity of the approach and comprehensive frameworks.

RIETI: In this study you have made a number of recommendations. Please expand a little on one of them: "Innovation Management."

Sanbonmatsu: The path to realizing innovation is a long one, and "starting a business" and "mass production" both require intellectual activity on different vectors. At the same time, amid the current trend of advancing and fusing of technology, firms must obtain component technologies beyond their own traditional technological assets in order to achieve innovation. They need to acquire, develop, and design component technologies and services throughout Japan in order to create, supply, and sell more advanced new products and services in line with the business category and technology components. In fact, there is an increasing number of cases where the production and sales of goods and services are expanding from various regions in Japan to the rest of East Asia and global markets. For this reason, even SMEs should not rely on traditional in-house commercialization and mass production methods, but keep in mind the possibility of obtaining the components of each functional chain through business alliances. They should secure partners for such tie-ups on an East Asian and global level and carry out the overall optimal management of the necessary chains to create a sort of "dream team" situation. I believe it is desirable for the government to expand the new collaboration support measures targeting SMEs launched fiscal year 2005 to the regions so as to make it a nationwide business support activity.

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