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Home > Debates Last Updated: 14:30 03/09/2007
Online Debate

Preliminary Discussion: Japanese Corporate Reform: Global Convergence or Path-Dependent Evolution?


  • Ronald DORE (Professor, University of London)
  • Masahiro OKUNO (Professor, Tokyo University)
  • James Masakira KONDO (Consultant, Mckinsey Global Institute)
  • Tatsuya TERAZAWA (Director for Policy Planning, MITI)

Moderator: Takahiro MIYAO (Professor, GLOCOM)


Miyao (GLOCOM): In his August paper at our website, Prof. Aoki states that "the general perception prevailing around the turn of the century is that Japanese firms are somehow failing to sustain the past luster." May I ask each of you (the four panelists) the following question: What, if anything, has gone wrong with Japanese corporate management and organization in the past decade or so?

Okuno (Tokyo University): I think the very rigid corporate system that emphasizes employment security too much has propagated in the Japanese economy in the 80s and 90s. Workers accepted wage cuts and harder work environments in order to secure their jobs. Firms accepted very small profit margins in order to secure employment. Government provided subsidies in order to encourage firms to maintain employment. This system was created around 1975, following the first oil crisis and accompanying hyper inflation, and has been maintained because, especially for those working in big companies, the outside option is so poor. On the other hand, technological and financial innovations created by the IT revolution have changed the way business is conducted, radically increased the volume of information as well as the number of products, introduced new ways of producing (as Professor Aoki describes) and weakened the boundary of companies (as Mr Nishimuro emphasizes.) The rigid corporate system made Japanese business fail to adapt to such technological and financial changes.

Miyao: What do you think, Mr. Terazawa?

Terazawa (MITI): We can describe the Japanese corporate management model in the 60's and 70's as "volume oriented management". The goal of management was expansion in the volume of outputs and the size of its business. This goal had sound business rationale by reducing costs through economy of scale and the learning curve effect. This goal also served the interests of various stakeholders, including employees and banks. However, the environment surrounding Japanese firms started to change after the 80s, even before the burst of the bubble. With the maturing of the Japanese economy, volume based strategy lost its basis. The shift from bank loan based financing to capital market based financing had a tremendous impact on the behavior of Japanese firms. The companies have been increasingly forced to show their profitability and the soundness of their balance sheets. The IT revolution has posed another challenge to Japanese corporate management. When the IT revolution demands speed, over-sized Japanese firms slow in decision making becomes a handicap. The fast changes in the technology and new business formation requires mid-career hiring of talented people from outside. On the other hand, the wide usage of IT is making a large number of mid-level white collar workers redundant. In essence, Japanese firms should have reformed their management in the 80s from its old volume orientation, responding to the changing environment. On the contrary, the delay in the transformation led to more damages in the corporate system as the result of the bubble economy. The apparent loss of vigor among Japanese firms can be seen as their struggle to realize the long overdue reform of their management.

Miyao: I think Prof. Okuno and Mr. Terazawa just talked about the problem with the Japanese corporate model in the last decade or two. But there are some excellent companies like Honda, Sony, Toyota, etc., while other companies are failing in Japan. What would you say, Mr. Kondo?

Kondo (Mckinsey): I would say that 10% of the Japanese economy is export-driven and productive (still on average 120% of US productivity), while 90% of the economy is domestic and unproductive (on average 63% of US productivity). These domestic firms have been protected by entry and exit barriers and are not subject to competition. The most acute example of unproductive domestic industries is the sub-scale food value chain spreading from agriculture to food processing to food retailing. The dual economy was sustainable as long as export-driven sectors thrived. However, in the past decade, export-driven industries had to undergo restructuring from their overinvestment in the bubble-era. Inherent weakness of the domestic industry was thus revealed and has dragged down the whole economy. In terms of what is wrong with the Japanese corporate or management model, the domestic 90% has always been underscale, undifferentiated, lacked organizational skills and needed revamping. The 10% of the export-driven industries have their own issues, but this is a much smaller issue compared to what needs to be done in 90% of the economy. Professor Kinoshita, thank you very much for your very insightful and informative opinions on the Asian crisis and its recovery. We will pause here and wait to receive questions and comments from the audience until Wednesday morning, and then we will resume our discussion, to be joined by Professor Shiraishi, and respond to those questions and comments on our online debate from 9am to 11am.

Miyao: I understand, Prof. Dore, that you have a somewhat different view on this question, but what do you think has gone wrong with Japanese companies?

Dore (University of London): What's gone wrong? Various things have gone wrong with various companies, doubtless, but even in the best-run of economies, there are always failing companies. The only factor affecting all managers in Japan is the atmosphere of gloom in which they have to work, with the media constantly reflecting a national loss of self confidence, and opinion leaders and govenment commissions constantly shouting "Reform, reform, or we will all go down the drain" at them. I am sure the best managers are unaffected by all this, but it is certainly not an atmosphere which encourages bold investment.


Miyao: I see. Prof. Dore, I know you might wish to comment on the other panelists' opinions, and probably the other panelists would like to say something to you, but we have to wait until next Tuesday to have a full debate on this issue. Let me move on to ask the first three panelists the next question: What kind of corporate reform do you think is necessary for Japanese companies to regain competitiveness in the global IT revolution age?

Okuno: I think it is important to make the companies' boundaries flexible and for new companies with totally new members to start up easily. For this, not only newly available holding company schemes are important (as Prof. Aoki says), but also creating an outside (across companies, governmental ministries and universities) middle carrier market is important.

Miyao: The same question to you, Mr. Kondo. And do you think reform is actually happening in Japan?

Kondo: Reform is happening only in 10% of the economy. Firms like Sony are leading the pack, followed by other productive firms in consumer electronics, auto, machine tools and game industries. All these firms are contemplating what the IT revolution will bring to their firms. What is obvious is that there is much to be gained from endorsing open modular business models (eg. open purchasing sites, modular outsourcing, cross-industry marketing). However, the real challange for the productive Japanese firms is to leverage IT in their formerly integrated (or closed) business areas (eg. building in more/faster feedback in supply relations, product development). Doing so will allow them to differentiate themselves from foreign competitors while utilizing their strengths. As for the 90% of the economy that is domestic and unproductive, their application of IT is questionable. First of all, they are far from the productivity frontier of existing technologies (i.e. there is much to catch up before IT) and are not facing enough competitive pressures to have to change. Most of IT application has occured in industries that face cut-throat competition (eg. finance in London and New York, retail in the US, healthcare in the US). Without such a competitive landscape, which requires sweeping structural reform, IT alone will not be sufficient to bring about improvements in overall productivity.

Miyao: Mr. Kondo just mentioned "sweeping structural reform." Could you mention such reform from the view point of policy makers, Mr. Terazawa?

Terazawa: To enable quicker decision making, over-sized organizations need to be reorganized into smaller units. As pointed out in Professor Aoki's essay, adoption of holding companies would facilitate this process. To enhance the profitability of firms, unprofitable businesses should be spun off. Facilitation of M&A's, through the revision of the rigid commercial code, is necessary. For firms with excessive debt, debt restructuring is unavoidable. The newly introduced Japanese version chapter 11 procedure is a positive step in this regard. With the erosion of the influence of the main banks, a new corporate governance system needs to be established. Introduction of a Japanese version ERISA law, requiring the trustees of corporate pension funds to exercise shareholders' rights and the introduction of independent directors can be very effective in this regard. Labor mobility must be enhanced in view of the need to hire talented people with experience. Deregulation of rigid labor laws and the "portability" of pension funds must be achieved for this objective. Compensation should be able to fully reflect the contributions of managers and employees. Broader use of stock options can be helpful in this regard. For workers that have become under-utilized, effective retraining must be provided.

Miyao: Prof. Dore, I know that you are not going to talk about "reform," but what do you think would be needed for Japanese companies to regain competitiveness in the global market?

Dore: Regain? Given the export performance of Japanese manufacturers -- a consistent trade surplus of 2-3 percent of GNP in spite of an overvalued exchange rate -- the loss of competitiveness hardly seems general. Which industries are supposed to have lost competitiveness? Speaking of corporate reform, Mr. Nishimuro's paper is very interesting. I would like to ask him two questions. Perhaps some panelists here may have an idea what the answers might be. 1. Toshiba, like most major Japanese companies used to have a large board for formal rubber-stamping and a jomukai or some similar smaller group of senior directors for real discussion and decision-taking. The new structure has a small board and a system of executive officers. Is there any real difference in decision-taking procedures? 2. The only problem specified by Mr. Nishimuro as prompting the changes made in 1998-99 was "lack of speed in decision-making". I imagine there were other perceived problems -- the press has enumerated several. It would be interesting to know what the "problem diagnosis" was within Toshiba at the time of the changes.


Miyao: You sound very provocative, and must have stimulated the other participants enough to have a lively debate on this issue next Tuesday. Now I ask the final question to each of you: Do you think that Japanese corporations should adopt the global (or the American) standard for their management and organization (following global convergence theory) or should they find a "Japanese" way of reform (following path-dependent evolution theory) in order to revive their competitiveness in the 21st Century? Let me ask this question first to Mr. Kondo, and then Mr. Terazawa, and Prof. Okuno and finally Prof. Dore, in order to see various opinions on this issue from the global standard school to the path-dependent evolution school.

Kondo: The 10% of the economy that is export-driven and productive should follow a path-dependent model. Even the areas of IT application will be different (application for closed areas as well as to promote openness) and Japanese firms are in a position to lead the next productivity leap as well. However, the 90% of the economy that is domestic and unproductive should probably unlearn their unproductive modes of operation (that is yielding only 63% productivity compared to the US) and first emulate best-practice from abroad (thereby following covergence theory). Although many people say that "Japan is already beyond the catch-up phase" for the 90% of the economy, they need to start catching up or else the gap will widen.

Terazawa: When capital would chase after better investment opportunities, especially after the Big Bang, Japanese firms need to realize profit levels comparable to those of firms in other markets. As a result, convergence of institutional frameworks such as accounting rules is inevitable and companies would be forced to change their behavior focusing more on profitability. However, our "path" would also prevent us from importing everthing from the U.S. I agree with Professor Aoki's observation that Japan would not be like Silicon Valley, comprised of a cluster of entrepreneurial firms, but would capitalize largely on the resources of the established firms. While labor mobility should be enhanced, firing of employees would only take place in exceptional cases. Ensuring the commitment of employees through stable emloyment relationships is still an asset for most Japanese firms. However, while basically keeping employment, compensation and promotion of employees would be decided much more on the basis of merit and not on seniority alone.

Okuno: In my view, the global (American) standard is an illusion. In a short-run, those markets with small asymmetry of information (such as wholesale financial markets) may become global, but because the IT revolution has created an explosion of the volume of information and consequently the asymmetry of information increases, markets with large asymmetries (such as retail financial markets or niche markets), differences in business style and strategy and/or in labor relations remain across boarders and across industries. Even in the former areas with small asymmetry of information, in the long run a newly emerging stardard will dominate the current American standard.

Dore: American or Japanese. Theory? Some confusion here, I think, between a theory about what, given the structure of politics and the economy and the nature of people's objectives and values, might happen, will happen or could not possibly happen, and a prescription specifying someone's personal view of what ought to happen. So, Dore prescription: start managing companies with the maximization of shareholder value as the overwhelmingly dominant objective as in the United States? No. Treat the employee's share of value added (and their right to continued useful employment) as of equal importance to the shareholder's share and thereby try to maximise the employee's dedication, willingness to cooperate, conscientious concern for quality and the firm's reputation etc.? Yes.

Miyao: Thank you all for your frank opinions, laying the foundation for a good debate next Tuesday. In the meantime, we would welcome any comments or questions from our audience. See you again next week.

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