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Japanese multinational enterprises (MNEs) have evolved since the1980s when they
first came to prominence. The rise and degree of their success are not uniform stories
and Japanese MNEs vary greatly by size, sector and administrative heritage. Their
degree of integration with world capital markets is low and management styles and
innovation systems are idiosyncratic. Pressures on Japanese MNEs to increase
flexibility and openness have resulted in unusual hybrid structures.
Keywords: global factory; globalization; hybrid international firms; Japanese
management; Japanese multinational enterprises
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Introduction
This examination of Japanese multinational enterprises (MNEs) compares ‘then’ and
‘now’. ‘Now’ is easily defined – 2008. ‘Then’ is a concept that triesto pin down the heyday of
Japanese firms and therefore of the Japanese economy – or rather the point at which critics
and commentators felt that the Japanese economy was at its height. An arbitrary date of
1985 might be used. During the craze for ‘Japanese management’, Japanese MNEs were
felt to hold the answers to many of the key problems of Western economies – harmony
(between capital and labour); efficiency in the use of resources; a widely networked
economy (Gerlach and Lincoln 2004) based on long-term relationships (Liker et al. 1995,
Dyer 2000); adaptability of the firm to changing economic locations and of products to
local needs and, of course, constant innovation (Aoki 1984, 1990, Imai 1986). ‘Now’
(2008) looks different. The Japanese economy has an ageing population, rigidities in its
domestic structure (very few mergers and acquisitions for instance) and inefficient
services, including the vital area of financial services (Hoshi and Kashyap 2004). Japanese
management no longer seems the panacea many once thought it to be and Japanese MNEs
no longer seem so dominant, even so prevalent and certainly they are less salient.
This study sets out to show that the record of Japanese firms and Japanese management
was never so good as it was claimed to be in its heyday, and that Japanese MNEs and their
associated management styles are not so irrelevant as they are currently thought to be.
Literature review
Japanese style management and the Japanese economy
In 1985, the author co-wrote a paper on ‘The Wit and Wisdom of Japanese Management’
that set out to show that too much was being claimed for Japanese management and that
no one unified style of management existed in Japanese firms (Buckley and Mirza 1985).
*Email: pjb@lubs.leeds.ac.uk
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profits but this does not necessarily involve internalizing their activities Indeed they have
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profits but this does not necessarily involve internalizing their activities. Indeed, they have
set a trend by outsourcing or offshoring their activities. Outsourcing involves utilizing
‘buy’ rather than ‘make’ in the Coasean ‘externalize or internalize’ decision (Coase 1937).
Offshoring involves both the externalization option together with the ‘make abroad’
location decision (Buckley and Casson 1976). MNEs have developed the ability to ‘fine
slice’ their activities on an even more precise calculus, and are increasingly able to alter
location and internalization decisions for activities that were previously locationally
bound by being tied to other activities and which could only be controlled by internal
management fiat (Buckley 2004, 2007, Buckley and Ghauri 2004).
The opening up of the global factory has provided new opportunities for new
locations to enter international business. Emerging countries such as India and China are
subcontracting production and service activities from the brand-owning MNEs (Sturgeon
and Lester 2003). The use of the market by MNEs enables new firms to compete
for business against the internalized activities of the MNE. This not only subjects
every internalized activity to ‘the market test’, it also results in a differentiated network
(Figure 1), which we term ‘the global factory’.
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adaptation through a mix of ownership and location policies. As Figure 2 shows,
ownership strategies are used to involve local firms with marketing skills and local market
intelligence in international joint ventures (IJVs), whilst location strategies are used to
differentiate the wholly owned ‘hub’ (centrally located) from the jointly owned ‘spokes’.
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between the producer and the retailer, coordinates the entire distribution channel linking the
worker to the final customer’ (Casson 1997, p. 159). This intermediation by the brand
owner/market maker is intermediation of information, not production. The information
structure ofthe global factory is shown schematically in Figure 3. This shows that the brand
owner is the information hub of the global factory. The brand owner organizes the market
process itself. The organisation of production is conventionally within firms but the
organisation of the whole production and trade sequence is intermediated by the market
making global factory. In many industries, particularly service industries, suchas banking and
insurance, the essence of competitiveness is the processing of information (Casson 1997,
Buckley and Carter 2002).
Quasi-internalisation
The global factory structure means that the operational boundaries and the accounting
boundaries of the MNE do not coincide. The move to being a global supply chain
coordinator means that influence, not ownership, is the global factory’s ruling principle.
R h ti hi l ti d th di ti f ti iti
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Research questions: ownership, location and the coordination of activities
Although complex in detail, the key analytical decisions in the global factory are very
simple – control and location. The manager of the global factory has to ask two very
straightforward questions of each activity in the global network. Where should this activity
be located? How should this activity be controlled?
The first question of the optimum location for each activity is of course complicated by
managing the interrelationships between activities. The relocation of one piece of the
global network will have profound effects on many others (as the links in Figure 1
illustrate) but the principles of least cost location are paramount.
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It is of course essential to realize that these decisions are taken in a volatile, risky and
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dynamic situation, that the decision making process is information intensive and the
environment and competitive pressures are constantly changing. These decisions have to
be revisited on a continuing basis. However, the principles should never be overwhelmed
by detail. The need for flexibility, for judicious collection and use of information and for
a knowledge management strategy are complements to the key decisions of location and
control (Capel 1992, Kogut and Kulatilaka 1994, Allen and Pantzalis 1996).
The role of MNEs has always been to combine internationally mobile resources
(such as knowledge), with locationally fixed ones (labour, natural resources, markets).
The notion of the MNE as a network, moving around intangibles whilst locationally
anchored at given fixed points by key inputs has been around for a long time (Buckley and
Casson 1976). What has changed within the global factory is the degree to which
management has the ability to ‘fine slice’ activities, to locate these in their optimal
positions globally and to combine these dispersed activities through coordinating
mechanisms that rely decreasingly on ownership. The global factory has perfected control,
even at a huge distance, without ownership.
The key problems of the global factory are external. They arise from the existence of
unpriced external effects and from the remoteness of much value adding activity from
shareholders (and from customers) (Khanna and Palepu 1999). The first set of effects
include environmental effects (including pollution), social effects and negative impacts
on local firms. The second means that it is difficult for the owners to control the
dispersed and disparate activities of the global factory. These two effects can interact
making it difficult for shareholders to oversee, and to correct, negative externalities
(Nolan et al. 2002).
The management effects of this can be serious. Expatriate managers can be absent
from their own peer groups for extended periods of time and can be very exposed unless
properly supported. Local managers may not manage facilities in the way that (foreign)
shareholders might wish. The operation of manufacturing and service facilities in
outsourced, offshore locations often do not conform to the standards of the headquarters
(HQ) of the global factory. Accusations of running ‘sweat shops’ and poor conditions
within call centres may be diffused by distance (‘out of sight, out of mind’). However, it is
no longer acceptable for HQ of global factories to pronounce that ‘they are not our
factories because we do not own them’. Global factories have to recognize that they are
responsible for the whole of their supply chains and take social responsibility for their
operations. Compliance to standards can be enforced internally (conference calls,
video-conferencing, inspections, reports) or can itself be outsourced to specialist
companies and non-governmental organisations (NGOs) that monitor social and
environmental conditions in low-cost labour conditions.
There remain, however, clashes between local cultures and the world culture of the
global factory. At the limit, were global factories to pay advanced country wages in cheap
labour countries, this would negate their locational cost advantage and would deter global
factories from placing facilities there It is generally the case that work in global factories
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factories from placing facilities there. It is generally the case that work in global factories
is better paid than outside them, particularly when the alternative is low productivity
agriculture. Criticism of exploitation of cheap labour is a major cause for concern for
global factories. The rise of the ‘ethical consumer’ and ‘Fair trade’ products are a sign that
at least a segment of consumers are willing to pay higher prices for products made under
more humane conditions with better ethical and environmental outcomes.
The extent to which factories and service facilities in cheap labour countries can be
upgraded over time is a key issue in examining the impact of the global factory
on development. It is also critical that spillovers should be positive in terms of upgrading the
workforce through trainingand education, encouraging local entrepreneurship and fostering
indigenous suppliers. Negative spillovers, such as pollution and harmful serial effects, need
to be monitored and eliminated if the global factory is to achieve global legitimacy.
non-traded goods sector of Japan. The highly inefficient, debt ridden zombie firms are
supported by finance from the banks exacerbating a declining productivity performance.
It is against this unpromising domestic background that we must evaluate Japanese
multinational firms.
Today, a growing number of Japanese firms are alleged to be ‘hybrids’ between
Western and stereotypically ‘Japanese’ firms (see The Economist 2007). The Economist
sees Japan developing ‘a new hybrid model of capitalism that brings together aspects of
the old Japanese model, which ran into trouble in the early 1990s, with carefully chosen
Table 1. Japanese multinationals in world’s top 100 non-financial transnational corporations 2004.
Rank by
Foreign
assets TNI II
1 Toyota Motor Corporation Motor vehicles (8) 62 91
2 Honda Motor Co. Ltd Motor vehicles 21 (29) 87
3 Nissan Motor Co. Ltd Motor vehicles 28 41 90
4 Mitsubishi Corporation Wholesale trade 32 87 68
5 Sony Corporation Electrical and electronic equipment 41 47 (17)
6 Mitsui & Co. Ltd Wholesale trade 42 71 69
7 Matsushita Electric Electrical and electronic equipment 68 64 27
Industrial Co. Ltd
8 Hitachi Ltd Electrical and electronic equipment 81 96 77
9 Marubeni Corporation Wholesale trade 83 91 76
Notes: TNI: Transnationality index – average of foreign assets to total assets, foreign sales to total sales, foreign
employment to total employment. II: Internationalisation index – number of foreign majority-owned affiliates to
total majority-owned affiliates. The top Japanese firm in each category is bracketed.
Source: UNCTAD (2006), pp. 280 – 282.
Table 5. The global factory and the hybrid Japanese ideal type.
Global factory and Japanese hybrid
Similar Different
p
Information system p
Supply chain p
Team working
Labour market ?
Innovation system ?
Hierarchy ?
Openness to foreigners [at top level] X
Capital market relationships X
uses internalization rather than contracting, outsourcing or licensing and this reinforces
control, centralization and hierarchy. The key focus of the international structure is to
support exports from the source country.
The second archetype is the ‘multinational’ firm in which functions are delegated to
foreign affiliates and the extreme case is the ‘clone’ model where ‘miniature replicas’ of
the parent firm are located in key markets. Production and marketing are separated and
located in the locations most suitable for these operations. Finance, branding and other
core functions such as R&D are retained in the source country HQ and core functions are
internalized.
Th thi d f i th ‘ l b l f t ’ d ib d b h HQ t i l
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The third form is the ‘global factory’, as described above, where HQ retains only
branding and its associated functions (including financing). All the firm’s activities are
‘fine-sliced’ and are located in the places that give optimum cost conditions for the supply
chain as a whole. There is a major and profound shift to the externalization of functions
through outsourcing and offshoring.
Japanese firms may be said to be hybrids of types 1 and 3. There has been a
long-standing externalization of functions within large (and medium-sized) Japanese
companies with a definite strategy of the relocation of activities (particularly production)
to low-cost locations, largely in Asia (Makino et al. 2004). Indeed, Japanese firms were
leaders in the offshoring movement and led the opening up of China as a low-cost
production source. However, this is combined with a dominant HQ and the philosophy that
the foreign units of the ‘hybrid Japanese global factory’ are more akin to subcontractors
than to network partners.
This can be summarized in Table 5, which compares ‘the global factory’ with
‘the hybrid Japanese ideal type’. Both use global information systems, sophisticated,
integrated supply chain management and team working. However, the innovation systems
in Japanese firms are less open than in true global factories, the internal labour markets of
Japanese firms are less permeable to outside market forces and there remains more
hierarchy in Japanese firms (Chen 2004). A good example that links the last two points is
that far fewer non-Japanese rise to senior management and board-level positions in
Japanese companies, than non-nationals do in European or American companies.
The capital market relationships of Japanese companies are also less open than in the
normal case of the global factory (Aulakh and Mudambi 2005). There remain close links
between individual companies and banks, and Japanese companies are less open to
receiving foreign finance (equity and debt) than other MNEs (Kishi 2003).
Some of this has an evolutionary explanation. For instance, Ozawa (2002) posited four
stages of Japanese FDI:
(1) Labour – intensive industrialization and ‘elementary stage’of overseas investment.
(2) H d h i l i d t i li ti d th ‘ ki ’ t f
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(2) Heavy and chemical industrialization and the ‘resource seeking’ stage of
multinationalism.
(3) Subcontracting – dependent, assembly based industrialization and the ‘assembly
transplant’ stage of multinationalism.
(4) Flexible manufacturing and the ‘strategic localisation’ stage of global operations.
It is possible to argue that these stages also describe the past development of US and
European investment and that a time-dependent model is far more appropriate than a
nationality of ownership explanation. What Ozawa (2002) has described is the changing
patterns of relative location costs as the source country develops and its interaction with
types of external markets that are most easily internalized (markets in cheap labour and
low technology intermediate goods, in relatively unprocessed inputs in a vertically
integrated operation, in market-seeking operations and finally, in high technology inputs,
sophisticated labour and information). None of this requires specifically ‘Japanese’
explanatory variables. The retreat of internalization and the shift to outsourcing and
offshoring has been the most recent stage in the development of MNEs as we have seen.
Again, this has been the policy of both ‘Western’ and Japanese multinationals and it is
even being utilized by the ‘new’ emerging country multinationals. In many ways, Japanese
MNEs were ahead of the trend in offshoring as the literature on hollowing-out shows
(see Tejima 2000).
Discussion
The rise and continued success of Japanese MNEs is not a conventional or uniform story.
It is important to contrast Japan’s most internationalized companies versus the rest, and
Japanese small and medium enterprises (SMEs) have suffered more than proportionately
from the impact of hollowing-out, the credit crunch and the aforementioned lack of
entrepreneurial start-ups (Kikkawa 2006). Japanese MNEs, like all MNEs, vary by sector,
by firm and by their administrative heritage (history). The principles governing their
operations are the same as for ‘Western MNEs’ and their evolution and strategy has much
in common with their Western counterparts.
There are special issues, however, in examining Japanese MNEs. Their financial
integration with world capital markets still remains less than ‘normal’ MNEs and their
insularity in financing reflects this, although financing remains available at attractive rates
(Suzuki 1987). Knowledge management policies seem to differ between Japanese and
Western MNEs. Japanese firms are less open and their innovation systems are less
internationally networked. Japanese MNEs are facing demands to increase their flexibility
and openness – hence the ‘hybrid’ state frequently alluded to in the financial press.
As always, internationalization issues are closely linked to the structure and
institutions of the domestic economy. Japanese MNEs reflect the capital market, the
innovation system and the business culture of the home economy (Buckley and Casson
1976 Collinson and Rugman 2008) These institutional and cultural factors have led to
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1976, Collinson and Rugman 2008). These institutional and cultural factors have led to
‘capitalism with Japanese characteristics’ and therefore to MNEs that reflect this. Japan
has always retained local competition rather than encouraging the creation of a single
‘national champion’. This has had the benefit of several Japanese MNEs being able to run
foreign experiments and to use different global strategies. However, Japanese MNEs have
persisted with licensing rather than foreign investment (Okimoto 1989, Anchordoguy
1990) and the consequent loss of control of the global platform has not served them well.
In addition, ‘catching-up’ has proved easier than taking global leadership (Murtha et al.
2001, Hoetker 2006). Globalisation requires new strategies. It also requires new domestic
policies and structures to support Japanese global firms and the global factory system.
Although the Japanese government has taken steps to promote corporate change, the full
impact of these policies on firm performance is as yet unclear. Japan has not yet fully
adapted to the new system of global competition in which the head office orchestrates a
global factory based on a flexible and resilient international network (Buckley 2009).
Conclusions
From ‘then’ to ‘now’, the world has changed. The rise of India and China make global
competition much more aggressive. There are far more suitable locations for cost-based
competition. The integration of markets and the wider pool of economies drawn in to a
modern globalization process means that the world economy is far more volatile
(Buckley and Casson 1998). A key response of MNEs to volatility is to be increasingly
flexible. Japanese firms have responded to this by developing ‘global factory’ like
strategies in outsourcing, offshoring, relocating and fine-slicing their global activities,
especially to locations in East and Southeast Asia and Eastern Europe. However, they have
not yet fully responded in opening up their internal capital markets to external influences
and their top-level labour markets to foreign executives. Headquarters control and high
levels of internal integration of activities that leading Western MNEs have outsourced has
led to the idea that Japanese MNEs remain ‘hybrids’ between ‘international’ firms and
fully global firms in their strategies. An implication to be drawn from this conclusion is
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that deeper understanding is needed of whether this ‘hybridity’ represents a new status quo
or merely reflects a stage of transition to new organizational forms.
Notes on contributor
Dr Peter J. Buckley is Professor of International Business and Director of the Centre for International
Business, University of Leeds (CIBUL), UK. He was President of the Academy of International
Business from 2002 to 2004.
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