Internationalization and Business Performance of Japanese Corporations

Noritake KOBAYASHI (Emeritus Professor, Keio University)

As internationalization is becoming a world-wide trend, there is an increasing number of Japanese corporations trying to adopt internationalization strategies. What should be emphasized, however, is that internationalization is not an end by itself, but a means to achieve managerial objectives. Adoption of internationalization strategies could become a liability if business performance is not improved by such strategies.

Having this in mind, the author has examined recent corporate data ("Kaisha Shikiho") regarding relations between internationalization and business performance, in particular, focusing on the following issues:
  (1)  correlations between internationalization and business performance in the case of Japan's multi-national corporations,
  (2)  trends and cycles of the relationship between internationalization and business performance from the long-term viewpoint, and
  (3)  effects of internationalization trends on correlations between internationalization and performance, as examined in (1).

In the current study, those 66 multi-national corporations that satisfy the following three conditions are selected: (1) more than 100 billion yen of total sales, (2) more than 25 percent of overseas sales ratio, and (3) in the 11 sectors related to auto, machinery, electronics, chemical, medical and glass industries.

For those 66 corporations, the degree of internationalization is measured by overseas sales ratios. On the other hand, the evaluation of business performance is based on the following four factors: (1) total sales, (2) profitability (net return on sales and net return on assets), (3) stability (own capital ratio and debt ratio) and (4) creativity (R&D/sales ratio).

According to the result of our study using the FY2005 data, it has turned out that the 66 corporations in question can be classified into the following four groups:
  I.   Internationalization Champions (33 companies) with high degrees of both globalization and business performance: This group is led by Toyota, followed by 12 companies with more than 1 trillion yen of total sales, that is, Honda, Nissan, Sony, Canon, Bridgestone, Suzuki, Fuji Film Holdings, Komatsu, Yamaha, Kyocera, Sharp and Shinetsu Chemicals. In terms of overseas sales ratios, Funai Electric is on top, whereas Nintendo and Fanac receive the highest evaluation of business performance.
  II.   Internationalization Challengers (14 companies) with a low degree of internationalization but a high evaluation of business performance:
This group includes 7 companies with more than 1 trillion yen of total sales, that is, Matsushita, Toshiba, Fujitsu, Denso, Ricoh, Takeda and Kubota. The challenge for these companies is how to maintain their good performance while being internationalized in the future.
  III.   Performance Challengers (14 companies) with a high degree of internationalization but a low evaluation of business performance: This group includes 6 companies with more than 1 trillion yen of total sales, that is, Mazda, Isuzu, Seiko-Epson, Asahi Grass, Fuji Heavy Industries and Konica-Minolta Holdings. Some companies in this group seem to mix up their means and objectives, as pointed out before.
  IV.   Troubled Companies (5 companies) with low degrees of both internationalization and business performance: There are only five companies in this group, but they include some giant corporations such as Hitachi and NEC. Their overseas sales ratios are especially low, maybe due to that fact that they used to be excellent companies under various protective measures within Japan with very little efforts for internationalization in the past.

As for historical trends and cycles, 10 leading companies (Toyota, Honda, Canon, Fanac, Rohm, Eisai, HOYA, Takeda, Ricoh and Kao) in the internationalization champion group have selectively been studied and found to show the following characteristics in the trends and cycles of their internationalization and performance factors over the past 25 years. (1) The degrees of internationalization and performance have exhibited clear cyclical patterns over time. (2) There are relatively few cases where all the performance factors hit a peak or a bottom simultaneously. (3) There seems to be a considerable period of time for preparation needed to improve the degree of internationalization or the evaluation of business performance, especially to move to a higher level of internationalization. It has generally been observed that an increasing ratio of overseas sales from the 20% level to the 30% level has led to some deterioration of business performance, although internationalization and performance tend to move in the same direction when overseas sales ratios exceed 50%.

To predict the future, it may be important to see the most recent changes in business performance for the 11 sectors in question under rapid internationalization trends. From FY2004 to FY2005, total sales as well as overseas sales ratios increased for all the sectors (except the IC manufacturing equipment sector), but the ratio of net return to sales improved for only 5 out of the 11 sectors, and similar results are observed for other factors such as net return on assets, debt ratio, R&D/sales ratio, etc. From these observations, one might conclude that while internationalization trends and business performance factors tend to show some common patterns regardless of sector or size (sales), it seems essential for management to steer companies appropriately by taking into consideration cyclical patters of those factors and also by making enough preparations and efforts for improvement and maintenance of business performance in the process of internationalization.

References:
Noritake Kobayashi "Internationalization is Meaningless Without Better Performance" (in Japanese), Weekly Economist, 2/13/2007
Noritake Kobayashi "Japanese International Corporations: Relationship between Internationalization and Business Performance" (in Japanese), Chuo-Keizai-sha, forthcoming, May, 2007.