Transcript Leading Without Followers: Japanese Firms in the Political Economy

Inside the Castle Gates: International
Competition, Inward FDI, and the
Persistence of Japan’s Economic Model
Kenji E. Kushida
Takahashi Research Associate in Japanese
Studies, Walter H. Shorenstein Asia-Pacific
Research Center
12/7/2012
FIID Conference
Outline




Stability and Change (helping Bill update
the “institutional triad”)
Concept of Syncretism
Effects of Inward FDI
The Case of ICT
Outline




Stability and Change (helping Bill update
the “institutional triad”)
Concept of Syncretism
Effects of Inward FDI
The Case of ICT
Stability and Change

Only 14% of GDP = export dependent
• Almost ½ of this = yen denominated
• Only a few high profile firms damaged by
strong yen


“Hollowing out” began in mid-90s, most
competitive suppliers already abroad
Core strength in Components, domestic
service sectors  not financialized
Employment
Shareholders in TSE
NPLs in Banks, 1999-2011
Exports as % of GDP, 2010
60
56.8
52.4
50
46.8
40
(%) 30
20
10
0
30.4 30.029.9 29.4
27.4 27.0 26.8
25.5 24.6
21.7 21.5 21.1 20.9
15.2
12.7 11.2
Stability and Change

Japan no longer “Castle” vs foreign
MNCs (image of 80s)
• Autos  Nissan, Mazda foreign controlled
• Financial services  Top insurers = foreign
•
•
(eg. Aflac), top revenues to foreign securities
brokerages, turn-around of venerable bank by
foreign investment fund
Telecom  2001-2006, Vodafone was 1 of 3
nationwide cellular carriers
Pharma  MNCs are top employers
Stability and Change

Far more differentiated strategies

Far more Open
• Keiretsu business groups bifurcating
• No longer “convoy” or “parallel march”
• New Japanese entrants in previously closed
industries  banking, insurance, etc
How to Characterize?
Outline




Stability and Change (helping Bill update
the “institutional triad”)
Concept of Syncretism
Effects of Inward FDI
The Case of ICT
Syncretism: Japan’s Political
Economy Since the 1990s


Syncretism: new, old, and hybrid forms
of practices, norms, and modes of
organization coexist.
A specific form of diversity.
Syncretism: Japan’s Political
Economy Since the 1990s

From Kushida and Shimizu ed.,
Syncretization: Corporate Restructuring
and Political Change in Japan.
APARC/Brookings, forthcoming 2013.

Kushida and Shimizu. “Syncretism: The
Politics of Japan’s Financial Reforms.”
Forthcoming.
Syncretism: Japan’s Political
Economy Since the 1990s

Financial sectors: While the breadth of
the new has expanded, and hybridization
is occurring to a significant degree, large
portions of very traditional organizations,
norms, and practices remain within the
industry.
Syncretism: Old, New, Hybrid
Coexisting

New  foreign investment banks,
securities firms, insurers, and some new
Japanese entrants.
• New business models (eg. derivatives and
•
•
annuities)
New practices (eg. employment and inter-firm
relations)
New norms (profit max as raison d'etre, max
short-term shareholder returns).
Syncretism: Old, New, Hybrid
Coexisting

Hybrid  melds traditional and new
elements, (big 3 financial groups)
• Combination of new and old business models
•
•
(eg., traditional deposits to foreign currency
denominated accounts, annuities, insurance)
Multiple forms of employment practices
(traditional seniority-based banks versus
performance oriented securities subsidiaries),
New and old interfirm relations (acting as
relational “main banks,” but also entering into joint
ventures and tie-ups with foreign financial insts).
Syncretism: Old, New, Hybrid
Coexisting

Old  regional banks, retain…
• traditional strategies (continued heavy
•
•
•
reliance on retail banking)
traditional organizational structures (seniority
based hierarchies)
norms (regionally based with close ties to
local governments, emphasis on relationship
banking as a key source of client information).
Supported by measures such as “designated
bank” for local governments
Japan’s Deposit-Taking
Financial System (trillions yen)
Date
City Banks
Regional Banks
Postal Savings*
Deposits
1995
209.0
217.7
-
2000
230.6
235.0
-
2005
255.7
245.9
200.0
2010
270.3
272.6
175.8
1995
346.9
194.7
-
2000
373.0
200.5
-
2005
395.5
216.7
194.7
2010
419.4
240.1
264.9
Assets
Why Syncretic Outcome?

Our argument is about the politics driving
syncretism:
• major regulatory changes 
•
major regulatory
shifts provided new opportunities  ff’s took
them furthest
The interest groups most affected were not
those driving change
Effects/Implications of Syncretic
Financial System
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Avoided full impact of 2007-8 financial
crisis
Limited size of “shadow banking” system
Limited scope of “financialization”
Outline




Stability and Change (helping Bill update
the “institutional triad”)
Concept of Syncretism
Effects of Inward FDI
The Case of ICT
Inward FDI in Japan

From Kushida, Kenji E., “Foreign
Multinational Corporations and Japan’s
Evolving Syncretic Model of Capitalism” in
Kushida and Shimizu ed.

Kushida, Kenji E., “Inside the Castle Gates:
The Political Strategies of Foreign
Multinational Corporations in Japan.”
Dissertation, 2010.
Inward FDI

4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Inward FDI flows as % of GDP
Inward FDI

Sectors receiving the most inward FDI:

FDI understates presence of foreign
MNCs
• Automobiles
• Finance (Banking, Securities, Insurance)
• Pharmaceuticals
• Telecommunications
Foreign MNCs in Japan
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
Body of literature suggests that foreign
firms may drive institutional change in
“coordinated market economies” such as
Japan by introducing new practices and
norms
Do they in Japan’s case?
Foreign MNCs in Japan

In each sector
• Political dynamics  regulatory change 
•
•
•
enabled MNC entry/expansion
Finance: Financial Big Bang reforms (98)
Pharma: gradual liberalization through 90s
Telecom: liberalization of late 90s
• Exception = Autos  performance crises of
Nissan (Renault), Mazda (Ford)
Foreign MNCs in Japan

MNC expansion  new business
models/practices, particularly in financial
sectors
• Many quite profitable, became leading firms in
•
sector
But outcome = Syncretic  didn’t replace
existing Japanese firms’ business models
entirely, nor caused a wave of bankruptcies
Foreign MNCs in Japan

Finding: MNCs entered due to
institutional changes rather than drove
changes once they entered
• Sector-level regulations governing
•
•
possibilities
Foreign MNCs often took possibilities to the
extreme
Took advantage of Labor law shifts rather
than drove new rule change
Foreign MNCs in Japan

Implications for Financialization:
•
•
Foreign MNCs didn’t decisively push Japan
towards financialization
In key sectors, many of the foreign MNCs
pulled out of Japan as a result of financialized
global operations
• Eg., Financial crisis (Lehman), Autos (Ford, GM
pulled out of Japan), Telecom (Vodafone)
Outline




Stability and Change (helping Bill update
the “institutional triad”)
Concept of Syncretism
Effects of Inward FDI
The Case of ICT
The Big Question

So what happens if you get everything
right?
• Patient Capital
• Focus on R&D, not share buybacks
• Long term employment

The danger of Galapagos
The Case of ICT

Kushida, Kenji E. “Leading without
Followers: How Politics and Market
Dynamics Trapped Innovation in Japan’s
‘Galapagos’ ICT Sector.” Review of Policy
Research. 2011.

Kushida, Kenji E. “Entrepreneurship in
Japan’s ICT Sector: Opportunities and
Protection from Japan’s
Telecommunications Regime Shift” Social
Science Japan Journal. 2012.
Galapagos
Galapagos
• Kenji E. Kushida
• Stanford Asia-Pacific Research
Center
2007
Japan’s ICT Sector

What’s really happening:
Leading without followers

Japanese firms led in particular
technological trajectories

… but the world didn’t follow
Leading without Followers
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Strategies to avoid commoditization
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Value-added through R&D
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Competition accelerated along particular
trajectory
• Carriers, equipment manufacturers
• Japan vs US, Fr, UK, Ger, South Korea
• Not share buy backs (like Cisco)
• Not M&A abroad (like European carriers)
• Not commodity offerings
Leading without Followers

…but the world changed
• ATM blindsided by TCP/IP
• Standards became critical in global mobile
• Mobile Internet service platforms (3
•
commercially successful ones in Japan since
late 1990s) required global platforms and
ecosystems
Got standard right in 3G, but moved too fast…
competion moved ahead of global markets
• Global markets then disrupted by Apple & Google
Leading without Followers

Industrial policy to try to fix

But commodification may be too fast in
this case
• Align domestic market with global markets
• Ban subsidies on handsets
• Try to prevent SIM-lock
• Foster Mobile Virtual Network Operators
• Rapidly implement LTE (4G) and WiMax
• Manufacturers consolidating, massive losses
• Carriers face dilemma of Smartphone value