Emerging Multiplicity: Integration and Responsiveness in Asian Business Development (The Palgrave Macmillan Asian Business Series)

Emerging Multiplicity Integration and Responsiveness in Asian Business Development

Edited by

Sten Söderman

Emerging Multiplicity

Palgrave Macmillan Asian Business Series Series Editor: Harukiyo Hasegawa is Professor at Doshisha Business School, Kyoto, Japan, and Honourable Research Fellow at the University of Sheffield’s School of East Asian Studies, where he was formerly Director of the Centre for Japanese Studies. The Palgrave Macmillan Asian Business Series seeks to publish theoretical and empirical studies that contribute forward-looking social perspectives on the study of management issues not just in Asia but also, by implication, elsewhere. The series specifically aims at the development of new frontiers in the scope, themes and methods of business and management studies in Asia, a region which is seen as key to studies of modern management, organization, strategies, human resources and technologies. The series invites practitioners, policy-makers and academic researchers to join us at the cutting edge of constructive perspectives on Asian management, seeking to contribute towards the development of civil societies in Asia and further afield.

Titles include: Glenn D. Hook and Harukiyo Hasegawa (editors) JAPANESE RESPONSES TO GLOBALIZATION Politics, Security, Economics and Business Sten Söderman (editor) EMERGING MULTIPLICITY Integration and Responsiveness in Asian Business Development

Palgrave Macmillan Asian Business Series Series Standing Order ISBN 1–4039–9841–8 You can receive future titles in this series as they are published by placing a standing order. Please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address, the title of the series and the ISBN quoted above. Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England

Emerging Multiplicity Integration and Responsiveness in Asian Business Development Edited by

Sten Söderman

Selection and editorial matter © Sten Söderman 2006 Individual chapters © contributors 2006 Forewords © John H. Dunning and Finn Johnsson 2006 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2006 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN-13: 978–1–4039–9176–8 ISBN-10: 1–4039–9176–6 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Emerging multiplicity : integration and responsiveness in Asian business development / edited by Sten Söderman. p. cm. — (The Palgrave Macmillan Asian business series) “This book is an anthology comprised of contributions presented at the annual conference of the Euro-Asia Management Studies—EAMSA—in October 2003 in Stockholm”—Summary. Includes bibliographical references and index. ISBN 1–4039–9176–6 (cloth) 1. Asia—Economic integration—Congresses. 2. Asia—Economic policy— Congresses. 3. Organizational change—Asia—Congresses. 4. Business enterprises—Technological innovations—Asia—Congresses. 5. Investments, Foreign—Asia—Congresses. 6. International business enterprises—Asia— Congresses. 7. Industrialization—China—Congresses. 8. China— Economic conditions—2000– I. Soderman, Sten. II. Series. HC412.E5846 2006 330.95′043—dc22 2005044521 10 15

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Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham and Eastbourne

Contents

List of Figures and Tables

vii

Foreword by John H. Dunning

x

Foreword by Finn Johnsson

xii

Notes on the Contributors

xiii

List of Abbreviations

xvii

Introduction Sten Söderman

Part I

1

Corporations and Governments are Making Major Adjustments to Realign their Positions with New Realities

1 Asia and its Actors, their Logics and the Challenges Gordon Redding 2 Export-Led Growth in East Asia: Lessons for Europe’s Transition Economies Ari Kokko 3 Organizational Learning Capacities of Policy-Making Systems for Financial System Recovery: The Case of Sweden with Some Suggestions for Japan Kenji Suzuki 4 Levitt Emphasized Markets but Manufacturing Leads the Way Fred Robins

Part II

5

15

33

53

72

Definition of How Success or Failure Occurs is Changing in the Face of Surrounding Technical and Informational Adjustments

Japanese Foreign Direct Investment and the Transformation of the East Asian Political Economy: Corporate Strategy in the Automotive Sector Andrew J. Staples v

89

vi Contents

6

7

8

Foreign Ownership, Human Capital and Earnings in the Japanese Labour Market Hiroshi Ono

116

Gaining Societal Advantages in Emerging Markets: International Stakeholder Management in Malaysia Hans Jansson

132

The Impact of Foreign Direct Investment on the Economic Development of ASEAN Economies Hafiz Mirza and Axèle Giroud

151

Part III

9

China’s Recent Surge of Industrialization has Caused a Massive Global Redirection in the Movements of Capital, Labour and Technology

China’s Changing Role in Industrial Value Chains and Reverberations on Industrial Actors in Germany Ulrich Jürgens and Rolf Rehbehn

181

10 Local Responsiveness of German Firms in International Joint Ventures in the PRC Alexander T. Mohr and Jonas F. Puck

202

11 Foreign Direct Investment Communities and the Legitimation of Wholly-Owned Foreign Subsidiaries in China Jiatao Li and Jing Yu Yang

215

12 The Changing Environment for Entrepreneurship Development: Private Business in the People’s Republic of China Harald Dolles

234

Index

255

List of Figures and Tables

Figures 1.1 Explaining variety in capitalism 2.1 Distribution of Taiwanese manufacturing production (value added) by ownership, 1952–86 (per cent) 3.1 Ratios of loans and foreign debts of banks to GDP, annual average share price index and annual average residential property price index, 1980–92 5.1 The IMV supply network 5.2 Total overseas production, 1995–2002 5.3 Total overseas sales, 1995–2002 5.4 Toyota’s ASEAN production network under AICO agreements (CKD packs), 2003 5.5 Toyota’s Asian regional production scheme, 1993 5.6 Toyota’s Asian regional production networks, 2004 7.1 Matching strategy for societal and competitive advantage 7.2 The CSR matrix of the bearing MNC 7.3 The external institutional setting of the bearing MNC 8.1 The impact of FDI on a developing host country: an integrated model of the direct, multiplier and spillover effects 8.2 A stylized version of the integrated model highlighting the loci of the direct, multiplier and spillover effects 8.3 Stylized impact of FDI: the changing relative contributions of direct, multiplier and spillover effects over time 9.1 Market strategy and capability levels of selected infocom and automotive companies in China, 2002 10.1 Modes of responsiveness 10.2 Perceived differences in 11 functional areas (N=76) 10.3 Level of adjustment of German MNEs in 11 functional areas (N=76) 10.4 Perception of differences and adjustment (N=76) 11.1 4-cell typology of FDI communities 12.1 Self-concept of Chinese entrepreneurs and their perceptions by teachers and students, and employees 12.2 Self-concept of Chinese entrepreneurs and their perceptions by local authorities and competitors 12.3 Business objectives for Chinese entrepreneurs 12.4 Competitive advantages of Chinese SMEs 12.5 Competitive disadvantages of Chinese SMEs vii

24 45

55 98 102 102 108 110 110 139 142 143 152 153 155 186 206 209 210 211 218 243 244 247 248 249

viii List of Figures and Tables

Tables 2.1 2.2 3.1 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.11 5.12 5.13 5.14 5.15 5.16 6.1 6.2 6.3 6.4 6.5 6.6 6.7 7.1 8.1

8.2 8.3 8.4 8.5 8.6

Real growth rates of GNP, investment and exports in the five-year plan (FYP) periods, 1962–91 (per cent) Macroeconomic indicators for Taiwan, 1952–86 Swedish Parliament (Diet) seats after the 1991 election Japanese FDI to China and ASEAN-5 countries, 1995–2003 (yen 100 millions) Intra-regional trade share (percentages) Government-level meetings initiated after the Asian financial crisis Main IMV production bases Toyota’s business activities in ASEAN-5 and China Toyota’s capacity in 2002 and planned capacity by 2007, selected countries Toyota’s investments in China Toyota’s total production, 1995–2002 Toyota’s Asian and ASEAN-4 production and global share Toyota’s production in ASEAN-4, 1995–2002 Toyota’s Asian and ASEAN % sales and global share (percentages) Toyota’s sales in selected markets Toyota’s Exports of CBUs from Thailand Recent investments in China Approved AICO applications, 10 February 2003 Exports to Japan from Toyota affiliates in East Asia Main characteristics of domestic versus foreign firms Education measures by sex Computer skills by sex English ability by sex Earnings premiums in foreign firms Model comparisons of earnings regressions Variance in earnings Matching strategies and organizational routines Characteristics of interviewed companies by country of ownership, destination, period of establishment and degree of parent’s involvement Reasons for investing in ASEAN host countries Scale of activity by host country and industry Direction of outputs/exports Direction of inputs/imports Purchase of inputs from affiliated and non-affiliated companies by host country

36 42 63 93 94 95 98 99 100 100 101 103 103 104 104 105 106 107 112 122 123 124 125 125 126 128 136

156 157 159 160 161 164

List of Figures and Tables ix

8.7 8.8 8.9 8.10 8.11 8.12 8.13

9.1 11.1 11.2 12.1 12.2 12.3

Purchase of inputs from affiliated and non-affiliated companies by source country and industry Type of inputs purchased from locally-owned and foreign-owned firms Proportion of companies with supplier partnership schemes (%) Supplier improvement as a result of working with foreign firms, by host country Human-resource development indicators Current level of employees’ skills, by host country Summary of Malaysia and Thailand’s experience of FDI effects on the economy, growth and poverty reduction (based on this research study) Performance differences between a Chinese and a Western European production line for InfoCom products Means, standard deviations and correlations Negative binominal analysis: entry of wholly-owned foreign subsidiaries in China, 1979–95 Development and distribution of privately run enterprises (siying qiye) by region Sample classified by industry and company size (N=60) Motivation of Chinese entrepreneurs (N = 60; percentages exceed 100 due to multiple responses)

165 165 166 168 171 172

173 198 227 228 240 241 246

Foreword John H. Dunning

The contents of this book break a lot of new ground regarding both the determinants and the effects of business development; and the Editor is to be congratulated for assembling and coordinating such a wealth of highly interesting, well written and topical contributions. The book’s title concisely describes one of the key characteristics of the contemporary economy – via its multiplicity. Such multiplicity is itself multifaceted and multidimensional. It embraces a huge number of stakeholders and their varied patterns of choice. It includes many different modes of development and wealth creation. It embodies a diversity of visions, values, forms of governance and brands of capitalism. It incorporates a wide range of cross-border economic and business interests, and of incentives and regulations influencing these. The linkages between these attributes of multiplicity is very much the subject of this book. In various contributions, scholars from different intellectual backgrounds and experiences offer their views on the relevance of these to understanding the strategies of firms and the policies of governments in tackling the challenges of globalization, and their implications for Asian economic development. If I had to express a unifying theme, and one which I wholly applaud, it would be the role of institutions in fashioning and responding to economic change. Gordon Redding eloquently explores this role in Chapter 1, but its application and significance runs through most of the contributions. Here, I believe, this book makes its most distinctive contribution. All too frequently in the past decades, international business scholars have tended to focus their attention on ways and means by which corporations and societies might upgrade and restructure their physical assets to promote their objectives. Now, in our highly volatile, uncertain and technically complex world, it is becoming recognized that the human environment, and particularly that part concerned with the economic and business relationships individuals have with one another, deserves no less consideration as a determinant of business success and economic prosperity. In no part of the world is the multiplicity of business development better demonstrated than in Asia. Apart perhaps from in Central and Eastern Europe, nowhere has the human landscape changed so much in the last three or four decades. And nowhere has the coordination between the cross-border transfers and ownership of physical assets, and that of domestic institutions and belief structures, been more successfully achieved. x

Foreword xi

Each of the contributions in this volume is excellent. Each needs to be studied carefully, not only for its individual merit but as part of a brave – and for the most part successful – holistic attempt to draw together and integrate a series of issues of vital and growing importance to business practitioners and international business scholars. JOHN H. DUNNING Emeritus Esmée Fairbairn Professor of International Investment and Business Studies, University of Reading, United Kingdom, and Emeritus State of New Jersey Professor of International Business, Rutgers University, United States

Foreword Finn Johnsson

The speed of change is increasing and influencing progress much more quickly than we have ever seen in the global economy and the world population. The ‘old manufacturing base’ in the North and the West is moving towards the eastern and southern parts of the globe. Millions of jobs are being lost and created in this global move. New technologies move from one country to another within months. New Asian companies are emerging with global ambitions and old Western brands and multinational companies are going under or are being overtaken by Asian competitors in this process. How will the ‘old world’ respond? How will the Asian economies act? How will China continue to develop? What will define success and failure in this quickly changing environment? If you want to understand this dynamism for now and for the future, you will find here a comprehensive and structured analysis which enables possible answers. This book is a must for anyone participating in this global realignment being driven by the Asian countries. FINN JOHNSSON Chairman Volvo AB

xii

Notes on the Contributors

Harald Dolles is Senior Research Fellow at the German Institute for Japanese Studies in Tokyo, Japan. He studied business administration at the University of Erlangen-Nuremberg (FAU). After receiving his diploma he worked as a lecturer at the Institute for Management and the Institute for International Management at the FAU, where he received his doctoral degree in 1996. Soon after he transferred to Bayreuth University, where he joined the Institute for Human Resource Management as Assistant Professor. In 2000 he was nominated to join the German Institute for Japanese Studies – the German government-supported think-tank in Asia – where he continues doing research on international human resource management, international cooperative ventures and entrepreneurship in economies of transition. He has published books, book chapters and numerous articles on China and Japan. Axèle Giroud is Senior Lecturer in International Business at Bradford University School of Management. She previously worked at the University of Paris 1, Panthéon-Sorbonne. She has conducted several research projects on Asia and multinational firms’ activities in the region. She has taken part in several international seminars and has published articles and book chapters as well as having completed several research reports for major international organizations. She recently published Transnationals, Technology and Economic Development (2003), and Multinationals and Asia: Organizational and Institutional Relationships (2005). Hans Jansson is Professor of International Marketing at the Baltic Business School, University of Kalmar. He has also been employed at the universities of Uppsala, Lund and Göteborg as well as a Senior Fellow at the National University of Singapore. He has extensive research experience in international business and marketing, especially on MNCs in East and South Asia and Eastern Europe. He has published six books and many articles, supervised many PhD students and taught a large number of courses at these universities. Ulrich Jürgens is Senior Researcher at the Social Science Research Center Berlin (WZB) and Adjunct Professor of Political Science at the Free University of Berlin. Currently he is heading the Working Group ‘Knowledge, Production Systems and Work’ at the WZB. His research interests lie in the areas of systems of innovation, industrial policy, corporate governance, production system development and globalization. xiii

xiv Notes on the Contributors

Ari Kokko is Professor at the European Institute of Japanese Studies at the Stockholm School of Economics, where he works with development, trade and investment issues in East Asia. During the last few years, much of his research has focused on Vietnam, but he has also worked and published extensively on various questions related to foreign direct investment in Europe and other parts of the world. In the past, he has held positions as Professor of International Business at Abo Akademi University in Turku, Finland, and Associate Professor at the Department of Economics at the Stockholm School of Economics. Jiatao Li is an Associate Professor of Strategy and International Business at the Department of Management of Organizations, at the School of Business and Management, at Hong Kong University of Science and Technology. He has published extensively in leading international management and strategy journals on issues related to multinational business strategy, international corporate governance and joint venture success in China. Hafiz Mirza is Professor of International Business at Bradford University School of Management, UK. He is currently Senior Adviser on International Investment to the ASEAN Secretariat, President of the Euro-Asia Management Studies Association (EAMSA) and Editor of the RoutledgeCurzon International Business in Asia Series. Hafiz has published on a range of research topics, including East Asian business and development, Japanese international political economy, international technology transfer and globalization, regionalization and the strategies of transnational corporations. He has headed numerous research projects funded by major institutions such as the United Nations, the Association of Southeast Asian Nations (ASEAN), the European Union, the Japanese Bank for International Cooperation (JBIC) and the British Department for International Development (DfID). Alexander T. Mohr is Lecturer in International Business and Management at the School of Management, University of Bradford. His research focuses on international strategic alliances and international human resource management. Hiroshi Ono is Associate Professor with the European Institute of Japanese Studies at the Stockholm School of Economics. His primary research interests are social stratification and inequality in the areas of education, labour and gender. His recent work includes studies of organizational structure and labour market stratification. Jonas F. Puck is Lecturer at the University of Erlangen-Nuremberg, Department of International Management. His research focuses on cross-cultural management, international M&A, and multicultural teams.

Notes on the Contributors xv

Gordon Redding is Director of the Euro-Asia and Comparative Research Centre, at INSEAD. He was previously founder and director of the University of Hong Kong Business School, and lived for 24 years in Asia. His major research interests are Chinese capitalism and also the theory of alternative systems of capitalism seen as products of societal evolution. The Centre which he directs at INSEAD, now in its 25th year, is devoted to research on Asian business and the contrasts it presents with business in other regions of the world. Rolf Rehbehn is the founder and holder of the management consultancy REHBEHN-IPSS, which handles topics such as innovation, productivity in business processes and the conversion of the method Six Sigma. As a member of management of the business unit Mobile Devices of Siemens AG, with tasks to solve at national and international locations, one of his main focuses has been the development of industrial value chains in the East Asian economic region. This has led to several trips to the East Asian economic region and close cooperation with business partners. Fred Robins following both public and private-sector experience, now teaches and researches at Adelaide Graduate School of Business, Adelaide University, South Australia. He is Associate Head (Research) and responsible for the International Business programme. He publishes on a range of East Asian business strategy and international marketing topics and has written on the contrast between Australian and East Asian trade and industry policies. In recent years he has also written on corporate governance issues; most recently on ‘The Future of Corporate Social Responsibility’ in Asian Business and Management. His latest research is on international competitiveness. Andrew Staples is a PhD candidate and Lecturer in Japanese Studies at the School of East Asian Studies, University of Sheffield. His research interests include Japanese foreign direct investment in East Asia, East Asian regional economic integration, and Japan’s political economy. His dissertation focuses on the impact of the post-crisis transformation of the East Asian political economy on Japanese MNC strategy in the automotive and electronics sectors. Kenji Suzuki is Associate Professor at the European Institute of Japanese Studies, Stockholm School of Economics. His study has ranged over public– private partnership, the policy-making process and public management in comparative perspectives, particularly in Japan and Europe. His recent publications include a monograph entitled Competition Law Reform in Britain and Japan: Comparative Analysis of Policy Network (2002). His works have also been presented in various books and academic journals, both in English and in Japanese.

xvi Notes on the Contributors

Jing Yu Yang is a PhD candidate in the Department of Management of Organizations at Hong Kong University of Science and Technology. Her research interests include international business management, corporate strategy, and organization and management in China. Her dissertation focuses on understanding how MNCs learn from the successes, failures and complexities from others’ experience as a way to enhance the survival of their own investment in a host country.

List of Abbreviations

AFC AFTA AICO APEC BBC ASEAN CBO CSR CETRA EMS ERM EPZ EU FDI FG FIE FTA FYP GATT GLOBE IJV ILO IMV JEITA JETRO JV KOTRA METI MHLW MNE MOFTEC MOST NAFTA NGO NPC NIE OECD

Asian financial crisis Asean Free Trade Area Asean Industrial Cooperation Scheme Asia-Pacific Economic Cooperation Brand to Brand Complementarity Association of Southeast Asian Nations Completely Built-Up corporate social responsibility The Chinese External Trade Association Electronic Manufacturing Service Companies (so-called Contract Manufacturers) Exchange Rate Mechanism Export Processing Zone European (Union) Single Market foreign direct investment flying geese Foreign invested enterprises Free Trade Agreement five-year plan General Agreement on Tariffs and Trade Global Leadership and Organizational Behaviour Effectiveness international joint venture International Labour Organization Innovative International Multipurpose Vehicle Japan Electronics and Information Technology Association Japan External Trade Organization joint venture Korea Trade Promotion Corporation Ministry of Economy Trade and Industry Ministry of Health Labour and Welfare multinational enterprise Ministry of Foreign Trade and Economic Cooperation Ministry of Science and Technology North American Free Trade Agreement non-governmental organization National People’s Congress Newly-industrialized economies Organisation for Economic Co-operation and Development xvii

xviii List of Abbreviations

OEM ODM PRC RHQ RTA SARS SICCI SME SOE STIP TQM TNC VW WOFS WTO

original equipment manufacturer original design manufacturer People’s Republic of China regional headquarters Regional Trade Agreement Severe Acute Respiratory Syndrome Singapore India Chamber of Commerce and Industry small and medium-sized enterprises state-owned enterprises Science and technology industrial parks total quality management transnational corporation Volkswagen wholly-owned foreign subsidiaries World Trade Organization

Introduction Sten Söderman

With two-thirds of the world population living in Asia, and with the corresponding increase of Asian purchasing power, has come the stimulation and emergence of various approaches to business development. Historians and geographers, as well as scholars from other disciplines from the West and from Asia, have long since contributed with research and pushed the frontiers of our knowledge in many areas. However, research on ‘business development’ – within the disciplines of Management Science and International Business – is of recent origin. The economics of nations, the business models of corporations as well as the daily lives of many consumers have evolved such that we need the work of researchers to help us understand these trends. To combine parts into a whole is often a valuable contribution in research, a contribution which this book aims to make. In addition to integration, the other important key factor in this book is responsiveness; that is, our striving to see ‘root causes’ and ‘responses to influences’. This book is an anthology comprised of contributions presented at the annual conference of the Euro-Asia Management Studies – EAMSA – in October 2003 in Stockholm. Twelve of the papers presented were chosen, of which ten were later rewritten for the purpose of this publication. The book is in three parts, each comprised of four chapters focusing on one of three major themes that run through this book. Part I is based on the theme that corporations and governments make major adjustments in order to realign their positions to new realities. These changes are global, and affect both Asian and foreign firms. In Part II, the second theme is the definition of how success or failure changes in the face of surrounding technical and informational adjustments. Organizations are taking shapes never before conceived; new structures for co-ordination within sectors and industries are emerging, with new organizational types inside them. The third theme of Part III is that China’s recent surge of industrialization has caused a massive global redirection in the movements of capital, labour and technology. 1

2 Introduction

Part I One of the attempts at adjustment and realignment has been the study of institutions, a central concern in the discipline of socio-economics. Chapter 1, by Gordon Redding, introduces a comprehensive conceptual framework. Here the rational-actor model gives way to a more complex form of explanation in which institutions are independent variables, and a model for explaining variety in capitalisms is proposed. The definition of what counts as an institution tends to be widening and includes, in some accounts, issues that other scholars would treat as cultural. Chinese companies are entering the global business arena, but it is also a problem for them in defending their home markets against the new competition arriving in the wake of the WTO. At the other end of the organizational spectrum, however, are the thriving networks of small and medium-sized enterprises serving the world demand for supplies as the world converts China into being its own workshop. China as a transition economy was preceded by Korea and Taiwan, and the second chapter, by Ari Kokko, is based on these two case studies characterized by strong analytic vigour. Although some of the magic surrounding these achievements has worn off due to the financial crisis of 1997–98, it is still relevant to examine the policies implemented in East Asia to generate rapid growth, and to ask whether there are any lessons for the European transition economies. From the early 1980s, the focus shifted to high-tech industries, again in parallel with developments in Korea. However, Taiwanese economic development during the past decade has surpassed that of Korea, largely because of significant differences in the character of growth. While Korea’s high-tech drive was centred on heavy capital investment in a limited number of large firms, Taiwan achieved a high-tech breakthrough through the existence of thousands of small and medium-sized enterprises (SMEs) with significantly lower capital investment, lower indebtedness and a more diversified industry structure. In summarizing some of the experiences of exports promotion in Asia, Kokko points out that the export booms underlying the successful development of countries like South Korea and Taiwan did not generally occur spontaneously, but rather as an inevitable result of the interaction between supply and demand in free markets. Governments played a central role in the process, and, most significantly, periods of successful growth and export expansion were characterized by public policies which created a stable economic environment with strong incentives for private business, and by promoting the accumulation of human and physical capital. The policies implemented to achieve this growthoriented macroeconomic environment were quite orthodox. The GDP share of government spending and the level of taxation were relatively low. The Swedish experience of recovery from the financial crisis of 1997–98, with its quick structural reforms, has often drawn attention as one of the ‘best practices’ from policy-makers in various countries. In the third chapter,

Sten Söderman 3

Kenji Suzuki bases his analysis on a case study approach while developing an analytical framework to be used in similar situations when structural reforms are needed. Most of the previous observations about structural reforms, however, merely focused on the aspect of policy measures such as the nationalization of problem banks and divestiture of ‘bad assets’. Few have addressed the question as to why the Swedish government was able to develop such drastic and adequate measures and to apply them so quickly. Against this backdrop, this chapter investigates the Swedish case from the viewpoint of ‘organizational learning capacity’. The policy-making system of the financial system recovery is regarded as a virtual organization, and in the chapter it is discussed whether this ‘organization’ had a high capacity of organizational learning. Using the four-step process of organizational learning for the analytical framework, it is shown that the Swedish policymaking system does in fact have high learning capacity, at least in comparison with the case of Japan. The Chapter 4 illustrates a major adjustment to realign positions. It constitutes evidence of the continuing force of globalization, even during a period of global economic uncertainty and slowdown in world trade growth. Fred Robins, using only publicly available information, concludes that at the present stage of world development, the globalization of supply chains and of manufacturing is probably moving faster than the much earlier-heralded globalization of markets; and that the latter will experience intensified competition leading to enhanced local responsiveness. Robins offers examples of both global cost pressure in manufacturing and of local market pressure on product design and business behaviour. On the other hand, in 2002, Japan’s top three carmakers, the world’s most efficient, announced record overseas production as the migration of manufacturing to lower-cost countries was matched by a simultaneous increase in overseas demand for Japanese vehicles. Most of this new activity took place in Thailand and China. Indeed, PricewaterhouseCoopers predicted that Asia overall will account for more than half the worldwide industry growth during the period from 1998 to 2006. To examine what all this means for the globalization of the world’s auto manufacturers, one needs to look closer. At present, for example, Toyota consigns production of small trucks for the Japanese market to its Hino affiliate at home in Japan. But from 2004, small truck manufacturing for Japan was moved to Toyota’s own Thai factory. In fact, the President of Toyota Thailand, Masaki Nakatsugawa, says: ‘we may even consolidate all of our global small truck production in Thailand’. If this occurred, it would make Thailand the single production base for Toyota small trucks destined for the entire world market. The details of industry supply chains are very difficult to research and assess; this holds true even if financial data is not required. This is not because these ‘chains’ are increasingly global in their reach, but because transparency is absent. Today’s emerging global production networks often constitute a maze of licensing

4 Introduction

arrangements which are shrouded in commercial confidentiality and which, frequently, are put together by intermediaries whose unique business contribution lies precisely in their ability to knit such networks together and, in some cases, manage them. Robins’ exploratory methodological style cannot offer us more insight into contemporary global business; the information presented is unstructured and is, anyway, far too limited to offer more than an imperfect guide to generalization. Yet the questions we should like to answer are large ones. What, for example, does such detail tell us about the actual processes of globalization and where they are leading? What does it tell us of the levels of global product standardization or, say, global brand standardization we should expect in the future? Moreover, these forces are not only present within individual firms, where they were first identified and assessed, but within entire industry value chains. So, given what we can observe in contemporary cross-border business, what generalizations can be made with some sense of realism? If this hypothesis is accepted, we can expect globalization of production to proceed at a faster pace, and to go further than Levitt-style globalization of consumer products and markets. What is hypothesized is simply that the pace of globalization in the two spheres is unlikely to be the same, and that globalization is likely to be faster in the supply chain than in the marketing of finished goods.

Part II The Toyota case is an example of surrounding adjustments. Japan has been a central player in the regionalization of production in East Asia and now seeks to reinforce this by actively pursuing East Asian regionalism by an ongoing analysis of the car industry. Japanese auto manufacturers retain dominant positions in most East Asian markets, particularly so in ASEAN and, by extension, given the size and impact of the supporting industries, are clearly key actors in national and regional industrial development in general. In Chapter 5, Andrew Staples reports from a project with extensive data from the Asian environment. He uses the auto industry example as well as a PriceWaterhouse study to make his point, and in doing so supports Robins’ hypothesis. We can see from this data that organizations are taking shapes never before conceived. New structures for coordination within sectors and industries are emerging, with new organizational types inside them. The first section of this chapter briefly reviews FDI theory and Flying Geese variants, while the second section documents, in some detail, key aspects of the region’s post-crisis transformation; the third section concerns regional integration and a fourth section presents analysis of data collected through questionnaire and interview from a leading auto manufacturer – Toyota as a success story – in an attempt to firmly locate a micro (firm) level investigation of corporate strategy in the broader (macro) context outlined. A final section offers some brief concluding remarks,

Sten Söderman 5

demonstrating that ‘new structures for coordination within sectors and industries are emerging’. A second example of a new structure for coordination is based on ‘ownership’. This study, by Hiroshi Ono, in Chapter 6, with a strong analytic orientation, examines differences in the distribution of human capital and the structure of earnings between domestic and foreign-owned firms in Japan. With a sample size comprised of more than 9,000 men and women from the Tokyo metropolitan area, on average, it is found that workers in foreign firms have a higher stock of human capital and have higher earnings than do workers in domestic firms. Further, it was found that the differential human capital composition and industry sector distribution of the workers can explain some but not all the differences in earnings between the two groups of workers. How does success or failure occur in a changing surrounding of technical and informational adjustments? The results suggest that the differential human capital composition and industry sector distribution of the workers can explain some but not all the differences in earnings between the two groups of workers. The evidence presented here suggests that foreign firms may import their human resource practices when they enter the Japanese market. Strong evidence was found of the persistence of Japanese employment practices operating in domestic firms – mainly tenure and firm-size effects on earnings. The strong association between tenure and earnings is convincing evidence that the seniority wage system remains the norm in the Japanese firm. On the other hand, it was found that seniority does not apply in the case of foreign firms. This may be the source of their having a greater variance in earnings. In 2003, Prime Minister Koizumi called for a doubling of foreign direct investment into Japan from 6.5 billion yen to 13 billion yen by 2008. One JETRO report also claims that a majority of the foreign firms plan to increase employment in the future. Research that examines the interactions between FDI and human capital in Japan will remain an increasingly important topic in the foreseeable future. The clear focusing on institutions as ‘independent variables’ emphasized by Redding earlier in the book is recalled again in Chapter 7, by Hans Jansson. He labels this a ‘stakeholder approach to strategic management’, and proposes that the central task is to manage and integrate the relationships and interests of those groups that have a stake in the business so that the long-term success of the MNC is ensured. The major conclusion of this chapter is that the integrated theoretical framework developed seems to be valid for international stakeholder management of MNCs in emerging markets. It confirms that business cannot be usefully analysed if separated from social and natural environmental issues, demonstrating that sustainable competitive advantage has an important social aspect, being broader and involving sustainable business. A corporate social responsibility (CSR) matrix is shown to be a valuable tool for analysing strategic situations in

6 Introduction

international stakeholder management, giving an overview of the degree of importance of each CSR issue and stakeholder. Moreover, it shows a profile of issues for each stakeholder and, in addition, the possibility to analyse common and conflicting issues for the stakeholders. A case study, the ‘Bearing MNC’, is introduced that has solved the critical international business strategy dilemma of global integration versus local responsiveness in a certain way. For all CSR issues, the MNC has acquiesced in the rules of the Group at the same time as it has complied with the rules of the government authorities. Very little compromising has been necessary between global and local rules, which creates a good fit between these key stakeholders. This successful performance was based on a thorough analysis of the external institutional setting in Malaysia and the internal institutional setting of the MNC. Acquiesce is also the leading ‘matching strategy’ for stock analysts, professional and interest organizations, and the media and general public. The ‘manipulative’ and ‘compromise strategies’ dominate for the employees, while the manipulate strategy dominates for customers and distributors, suppliers, and the local community. Thus, the influence of these constituents takes place in accordance with the values and thought styles established by the Group and the government authorities, as well as according to norms found in the media and general public. It was established that major group values and thought styles had been internalized in the local subsidiary. The study thus develops a strong theoretical framework. By avoiding the requirements of formal reporting within the company on CSR-related issues, as well as lacking in supplier development, the MNC risks loss of legitimacy. The lack of reporting is also a sign that CSR as a practice is inadequately institutionalized within the subsidiary in the host country, as well as within the group. It is acknowledged in the literature that foreign direct investment (FDI) impacts on the growth and development of host countries in a variety of ways ranging from ‘direct effects’ on employment and training, through classical ‘multiplier effects’, for example workers use their wages to buy goods which stimulates other industries, to ‘spillover’ effects whereby indigenous firms acquire knowledge and technology from foreign firms through a variety of transmission mechanisms. Chapter 8, by Hafiz Mirza and Axèle Giroud, continues to focus on the sphere outside Japan and China. This is a conceptual study with a unique empirical database composed of a total of 113 companies which were interviewed. Most of the quantitative information presented relates to 88 manufacturing companies and four industries surveyed. In this context, the 10-member Association of Southeast Asian Nations (ASEAN) is a prime target for investigating FDI impact because it has been a major recipient of investment by transnational corporations (TNCs) for three decades, albeit the scale of inward FDI flows has declined in recent years. There are three principal routes of TNC impact on host economies, namely direct effects, multiplier effects and spillover effects.

Sten Söderman 7

An important example is presented in a single integrative model or framework: the stylized world depicted is divided horizontally between an international/ regional economy and the host-country economy. For a variety of reasons, the TNC in the diagram has established a subsidiary in the developing host, with the primary – and fairly typical – aim of conducting assembly and production operations for local, regional and/or global markets. The subsidiary may or may not be a joint venture, but it is perforce involved in a number of local relationships. Because of the earlier arrival of FDI to Malaysia and Thailand, these two countries stand out as exemplars for other countries wanting to utilize FDI in their development process. In addition, given the number of companies in the sample, it is possible to draw relatively robust conclusions about these two countries. The conclusions indicate ‘summarizing reasons’ for their experience of the impact of FDI – and are therefore lessons that other countries can learn from. The findings express, especially for Malaysia and Thailand, that the impact of FDI in terms of ‘direct effects’ and the ‘consumption multiplier’ are middling to high; however, with regard to the ‘value chain multiplier’ and, crucially, ‘spillovers’, the impact of FDI is thus far low to middling. Inasmuch as Malaysia and Thailand received FDI earlier than most other ASEAN countries, it can be concluded that the overall positive impact of FDI on these other countries is, as yet, correspondingly lower. The relative contributions of the different types of FDI over time lead to the overall implication that ASEAN countries, including Malaysia and Thailand, are still at an early stage of receiving the potential benefits of FDI and, of course, there is no guarantee that the benefits will definitely arrive. Of course, it may seem a little churlish to downplay the contribution of foreign investors to the ASEAN region. One should not lose sight of the considerable growth, development and poverty reduction experienced by the ASEAN countries in the 1980s and 1990s, much of which resulted from the large-scale inflow of FDI from the 1970s onwards. This boon continues today in ASEAN as a whole; and increasingly in ASEAN-4 countries, such as Vietnam and Cambodia. Certainly if one was measuring benefits in terms of job-creation, human resource development and sustained economic growth, foreign companies have contributed considerably to the development of ASEAN economies – not least Malaysia and Thailand – nuances and qualifications notwithstanding. However, it is important that ASEAN, and other developing, countries gain greater economic autonomy, integrity and choice through the development of their indigenous enterprises; and this is why, because the value-chain multipliers and spillovers (to local enterprises) are low, it is argued that the impact of FDI on ASEAN economies is low to middling (the level varies from country to country). Of course, this does not mean that foreign subsidiaries are necessarily, or entirely, responsible for this situation. For example, one of the main reasons why few spillovers occur is either because of a dearth of local companies, certainly competitive

8 Introduction

ones in the manufacturing sector, or because they lack the capabilities of absorbing foreign knowledge In this and other respects, there is much that governments can do to improve the possibility and actuality of spillovers, and many enlightened, far-sighted foreign investors can be coopted as partners in the process.

Part III One conclusion drawn from Parts I and II is that the Japanese transfer of its manufacturing base into the rest of the region has been significant in affecting the economies of other countries. The intra-regional flow influences the regional ethnic Chinese and their psychological home base of China. The economic success of this ethnic group in the countries surrounding the South China Sea, especially since the migrations from China in the late nineteenth century, pays tribute to their capacity for ‘network capitalism’, ‘business discipline’ and ‘entrepreneurship’. These skills, plus accompanying capital, have been flowing back into China in an ever-widening stream and have had a major impact there on the emergence of its now vibrant private sector. One of the most marked characteristics of globalization has been the dynamic restructuring of ‘industrial value chains’ as strongly emphasized by Robins. This is also the basic proposition in Chapter 9 by Ulrich Jürgens and Rolf Rehbehn. This restructuring is a ‘massive global redirection’ which has been both a major driver of globalization while itself being driven by globalization. The outsourcing of corporate functions has led to greater specialization and fragmentation in value chains, and the off-shoring of such activities are the main features of this transformation. It creates risks and opportunities for corporate and political actors, and its evolution is highly uncertain for all parties. A state of equilibrium, of a ‘new international division of labour’ is not yet apparent at the same time as the vibrant private sector emerges. In this restructuring process, China has been playing an increasingly dominant role since the middle of the last decade. Two factors which explain this are state policies explicitly designed to attract and regulate foreign direct investment, and the dynamic growth of demand on the domestic market. But these factors do not suffice to explain the size and speed of international engagement in China. In a further analysis of recent developments in the automotive and the infocom industries, the chapter addresses the following questions: What factors explain the central role of China in the most recent developments in restructuring industrial value chains? What characterizes the ‘embedding’ of new industrial structures and processes in China and what evidence is there for the development of capabilities? What are the commonalities and differences between industries in this regard? What are the consequences for industrial actors and locations in Germany? A strong empirical base is developed with a number of interviews by the two authors. One thing becomes apparent: the future is far from

Sten Söderman 9

clear, and there are obvious risks and many doubts about the sustainability of the Chinese rate of development. Nevertheless, the development described in this chapter poses tough challenges to manufacturing companies and high-wage countries such as Germany. They will have to aim for even higher degrees of automation to offset higher labour costs, and they will have to further improve their ‘process-chain mastery’. This would reduce the costs of quality assurance which have strongly increased in proportion in recent years. Robust control processes also have to be introduced in indirect production, and in view of their increasing relevance in terms of cost, this could be turned into a real competitive advantage. Proximities to markets or to R&D activities will not, as the example of infocom shows, guarantee a domestic manufacturing base. The movement of capital and technology is not seldom done by MNCs. Whereas research has been carried out on Multinational Enterprises’ (MNEs) attempts to balance global integration and local responsiveness, there has been hardly any research into the degree to which foreign firms respond to differences that exist between themselves and their local joint venture (JV) partners in host countries. In Chapter 10, Jonas F. Puck and Alexander T. Mohr raise the relevant research topic on MNEs’ responsiveness to inter-firm differences in IJVs as a special case of MNEs’ responsiveness to differences that exist between home and host country. They also highlight the ‘role of perceptions’ for research into firms’ decisions about the degree of responsiveness. Based on empirical data gathered by means of a questionnaire survey among 76 managers representing German partner firms of German– Chinese IJVs in the Peoples’ Republic of China (PRC), they provide some empirical evidence for the importance of individuals’ perceptions of responsiveness. A first finding of this study is that MNEs’ responsiveness in the specific context of international joint ventures warrants further scholarly attention and is of high practical relevance for firms interested in improving the management of their IJV. A second result of this chapter is that perceptions need to be taken into account when empirically studying the degree of local responsiveness of MNEs. The chapter contributes to the understanding of IJVs by analysing the so far largely neglected issue of inter-partner adjustment/responsiveness and the perception of differences between partner firms. The researchers distinguish and discuss three different modes of responsiveness available to MNEs when operating abroad through IJVs with local firms. Based on this conceptualization, the study empirically explores the degree to which German firms respond to perceived differences between themselves and their local joint venture partners; that is, which of the discussed modes German firms adopt in their IJVs in the PRC. The result is straightforward and shows that while German firms perceive a degree of difference between the partner firms, the level to which they adjust to these differences is significantly lower. There are a number of limitations that have to be borne in mind. First, the empirical basis was limited to

10 Introduction

German firms and their IJV operations in the PRC. This can be seen as limiting the generalizability of the authors’ findings. Responsiveness within IJVs may play a different role in IJVs in which both partner firms are from developed countries or in which the cultural distance is lower. Future studies should thus investigate how far the results of this study are contingent on the specific partner constellation of the analysed IJVs. Their primary research objective, however, was to compare the level of responsiveness to the perception of differences rather than identifying generalizable relationships. Future research should also analyse the link between responsiveness and perceived differences for firms from different cultures and/or operating in different host countries. A third dimension of China’s recent surge of industrialization concerns the establishment of wholly-owned foreign subsidiaries in China. Jiatao (J.T.) Li and Jing Yu Yang in Chapter 11, used numerous empirical data to study the extent to which the prior existence of wholly-owned subsidiaries in a host country has an effect on the legitimizing of this form of subsidiary. The legitimization process was explored by applying institutional and ecological perspectives at the population level, rather than as a firm-level phenomenon. All foreign entries in manufacturing industries were included for analysis, excluding entries in service sectors where the government tended to place more restrictions on foreign ownership. Focusing on manufacturing industries also facilitated a comparison of the results with those of previous studies on the same topic applying the institutional perspective. This dataset was matched with another on bilateral trade flows to allow for the influence of relative trade share of the different home countries. The final sample included 83,333 foreign entries from 117 home countries in 28 manufacturing industries among which 19,774 were in the wholly-owned entry mode and 63,559 entries were joint ventures. The results show that the establishment of wholly-owned subsidiaries was related to the prior existence of both wholly-owned subsidiaries and joint ventures in China. This legitimizing effect spilled over from foreign investors into other industries and from other home countries. In Chapter 1 of this collection, Redding mentions that the migrations from China in the late nineteenth century pay tribute not only to their capacity for network capitalism and business discipline but to China’s proven ‘entrepreneurship’. In the final Chapter 12 Harald Dolles labels this the ‘conspicuous silence’ of private enterprises, called siying qiye. This form of legal discrimination persisted until 1988 when the State Council promulgated regulations governing privately run enterprises. A siying qiye is defined as a profit-making entity that employs eight or more persons and in which assets are owned by private individuals. It may be a sole proprietorship, associated proprietorship, limited liability company or joint stock company. This type of privately run enterprise is allowed to deal with and to set up joint ventures with foreign companies. Unlike getihu, which are concentrated

Sten Söderman 11

in agriculture, the retail sector and catering services, most siying qiye engage in light industries and manufacturing. In this process of diversifying the ownership structure of China’s national economy, several creative forms of hybrid ownership such as ‘town and village enterprises’ have emerged as well. A unique body of material consisting of semi-structured personal in-depth interviews with 60 private entrepreneurs and with 40 representatives from different stakeholder groups was created. All interviews were conducted between 1998 and 2000, and Mandarin was used in most of them. All interviews were transcribed and translated into German by Chinese natives. The described method of a ‘qualitative content analysis’ was used to analyse the transcribed interviews, and in addition to the questionnaire a fully standardized semantic personality inventory to discover the selfconcept of the entrepreneur was developed. This personal inventory was also used to investigate how the entrepreneur is recognized by different groups of stakeholders. The 30 bipolar rating scales for 60 descriptive items were extracted from various studies concerning entrepreneurial values. They were tested in pilot studies to ensure the semantic equivalence of terms used in Mandarin and English and the correct use of the rating scales. The analyses indicate that private enterprises must make their way through a minefield of complex and often contradictory rules and regulations. On top of that, the vague and confused legal system offers many opportunities for local bureaucratic harassment in the form of collecting licence fees, charges, penalties and the like, from private business owners. This implies that entrepreneurs in a rapidly changing economic environment need clear guidelines on establishment, growth, enforceable commercial arrangements, and reorganizing or closing a business. The Chinese government has enacted numerous laws in order to provide a regulatory framework in line with a new economic structure that includes a private sector. Nevertheless, the entrepreneurs in the sample complain that there is still a long way to go. One-third of the Chinese entrepreneurs in the sample fear that a change of political leadership may cause drastic policy shifts; there is still not much confidence in the government’s promises to support the private sector. According to local authorities the situation is constantly improving, but it will take time to build up credibility. As has already been stated, two-thirds of the world’s population live in Asia and research on business development is of recent origin. Although India, being one of the most populous nations in the region, is an important player with emerging purchasing power, it is not covered in this book. The authors presented here are neither historians nor geographers (although skills in these disciplines facilitate successful business development), but rather economists or management scientists. We have learnt from Western as well as from Asian scholars, from Asians living in the West (like Suzuki and Ono) and from Westerners living in the East (Dolles). A great

12 Introduction

variety or multiplicity of views on business in Asia is displayed in the chapters of this book. The book is like a precise but colourful mosaic; it contains a broad sample of detailed case studies and several large surveys. The combined efforts have resulted in a number of different and often advanced databases which have been analysed in a meticulous way. In many chapters precocious literature research, resulting in progressive frameworks, has initiated challenging research questions as well as a few hypotheses to be examined later. In my view there are some striking findings. These are, first, the need to manage differences; that is, the handling of contexts such as the institutions and the complexity of Asia. Second, the industrial value-chains must be understood in order to excel in process-chain mastery. Third, governments face huge challenges in order to attract foreign corporations to move to their turf, but perhaps even more to keep and nourish them. Fourth, integration as an approach to combine parts into a whole is demonstrated by the auto industry and a number of root causes are discovered by the authors. The frontiers of our knowledge have indeed advanced. Importantly, however, new business development like the achievements by Asian multinationals must be considered in future research. Finally, I would like to extend my thanks to the authors, who have been most cooperative and surprisingly disciplined. I also owe a lot to Stacie Allard for checking the English and to Robert Demir for redrawing figures and tables. Helpful comments on parts of this book were provided by Keith Povey and the editorial staff of Palgrave Macmillan. What mistakes remain are purely my own.

Part I Corporations and Governments are Making Major Adjustments to Realign their Positions with New Realities

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1 Asia and its Actors, their Logics and the Challenges Gordon Redding

Introduction One of the significant lessons for an executive going into Asia for the first time, and expecting to do business there, is that the region is highly varied, in some ways much more so than most other regions such as Latin America, the Middle East or Europe. It is possible to argue, for example, that Sweden and Italy provide strong contrasts when first observed, but at least they are both products of a shared Christian civilizational heritage, both members of the same political grouping, both operating at a high level of GDP per capita, and both capable of constructing industries and complex firms with a global impact. Much of Europe’s variety is near the surface, and underneath there is much common ground. This is not true of Asia. There the contrasts – on the surface perhaps less obvious than those of Europe – are well below the surface and much more likely to lead to the separating out of different societal formulae. As the famous historian of Chinese science, Joseph Needham, once observed in considering the contrast between China and Japan, the latter is so much closer to Europe and so different from its neighbour that you might just as well tow it away and anchor it off the Isle of Wight. Asian variety begins with geographical contrasts, and the encompassing of all climate types from the equatorial to the Mongolian. It is manifest also in a rich variegation of religions and belief systems, often mixed together at the individual level to produce a social kaleidoscope of cosmologies. The size of nation-states is also very uneven: as well as the colossus of China and the world’s biggest Muslim country in Indonesia, there are the relatively tiny but highly significant city states of Hong Kong and Singapore. Away from the extremes, the middle-size countries such as Vietnam, the Philippines or Korea are large by European standards, with populations respectively of 78 million, 76 million and 48 million. State borders also vary in permeability (as regards the welcoming of neighbours to live), from the hermetically sealed such as Japan or Burma, to the open-frontiered ASEAN states with their highly influential sub-populations of ethnic Chinese, a surrogate 15

16 Asia: Its Actors, Logics and Challenges

nation in its own right stretching across the South China Sea and its borders. More influential as a form of variety is the difference in levels of development, it being possible to identify three clusters: rich countries – Japan, Hong Kong and Singapore; reasonably prosperous countries – Korea, Taiwan and Malaysia; and the rest in an array of positions on the lower rungs of the development ladder. The positions of these countries across this total spectrum need to be understood as legacies of their developmental history. Included in such an explanation there would need to be an acknowledgement that not just economic factors, but social and historical factors also have been contributors. The challenge for managers and analysts is how to construct this explanation, and how to derive from it lessons for current managerial practice, and for estimating future trajectories of development. Which industries will be favoured and where, but most critically why? Many of the chapters in this book deal with such questions, and at the same time perhaps illustrate the most challenging aspect of such enquiry – that the target is moving so fast. The speed of change in parts of Asia, and the fundamental nature of such change – especially now in China, is breathtaking. Paradoxically, so too is the resistance to fundamental change in other areas, most obviously and significantly in Japan. Into this arena have come, over decades, a stream of companies from elsewhere wishing to trade, to buy or sell, to manufacture, to ally with local partners, and to establish their own Asian operations. The pattern of their arrivals and departures has varied, but contains in recent years two major deviations from the historical trend of steady moderate growth. The first deviation was the surge of investment which poured in between 1990 and 1996. It came largely from the USA and was driven by the evolving investor passion – a word used advisedly because of the irrational nature of the behaviour – for ‘emerging markets’. Growth at 8 per cent for 20 years had to be well-founded – or so it was thought – and rarely has ignorance been punished, and connivance ignored, on such a scale. The bubble, much of its inflating being attributable to the investment flow itself, burst with the collapse of the Thai currency in July 1997, and the money either flowed out as fast as it had come in, or evaporated in an orgy of write-offs, mainly in property values. This economic tsunami has left two legacies: caution by outsiders, at least among those who remember; and reform by national governments to raise standards of rationality and prudence in the allocation of capital. The second deviation from a steadily rising curve of foreign arrivals has been the new passion for China, dating especially from the 1980 reforms of Deng Xiao Ping, but boosted massively by the mid-1990s reforms of Zhu Rongji. In the 25 years since the Deng reforms, the US$550 billion of FDI flowing into China has exceeded by ten times the total equivalent going into Japan since 1945. This statistic, more than most, shows up the contrast between Japan and China, and the quite different relations they establish

Gordon Redding 17

with global business. Japan did not want FDI; they could do it themselves, and did so. China wants it and needs it. The comparison stands for many other contrasts in the background of international business as it affects Pacific Asia. It needs also to be acknowledged that the study of international patterns of business must take account of patterns of connection and exchange within Asia itself. Of note here are three major features. Firstly, the Japanese transfer of its manufacturing base into the rest of the region has been significant in affecting the economies of other countries. It has also been a trend of quite long duration and steady progression. The second high level influence has been the capacity of the Korean chaebol to drive into export markets, and to pay less attention to their home market – a design principle less evident in Japan. The Korean ability to construct organizations and brands with global reach, and to challenge forcefully an earlier Japanese dominance in certain sectors, will continue to reshape the region’s patterns of business. The third intra-regional flow of influence is that between the regional ethnic Chinese and their psychological home base of China. The economic success of this ethnic group in the countries surrounding the South China Sea, especially since the migrations from China in the late nineteenth century, pays tribute to their capacity for network capitalism, business discipline and entrepreneurship. These skills, plus accompanying capital, have been flowing back into China in an ever-widening stream and have had a major impact there on the emergence of its now vibrant private sector. The trend which, above all others in present times, is capturing the attention of policy-makers in business, is the emergence of China onto the world stage as a serious player, and a force to be reckoned with. Its impact is essentially founded in three features. It has an immense supply of labour capable of being trained to high levels fast, and this supply is as near endless as any society has ever contained – even though current labour shortages are showing that the situation is not as open-ended as it once appeared, and that alleviation of the hardships of life in the country is slowing down labour migration. The second feature is the achievement, under stable political conditions, of a high degree of empowerment of local officials in the realm of economic action. This has meant de facto the encouragement of a new class of entrepreneurs, made up of local government officials competing between administrations for the progressing of their own townships or cities or villages, in alliance with business people from any source – local, Overseas Chinese, or foreign, and using access to state funds in the banking system. The third feature in China is the historically sudden emergence, and now dominance, of the private sector, as traditional Chinese instincts for trading, family or partnership business, and networking, return to the environment within which they evolved in earlier times. There is much over which China still needs to struggle, especially its system of capital allocation, its weakness in growing a large body of professional managers for large organizations, and the circumscribed nature

18 Asia: Its Actors, Logics and Challenges

of the society’s information base. Because of these handicaps, it is likely to find a route of its own for its economy to follow, borrowing selectively from the experience of others but not copying any overall design from elsewhere. This journey, taken – in Deng Xiao Ping’s memorable phrase – ‘by crossing the river feeling the stones under your feet one by one’, will determine the future of the global business world more than will any other experiment being contemplated anywhere. There is one further feature of the international business scene which marks a change of landscape, and affects all global business. During the twentieth century, but over the past 20 years especially, the world has looked on as economic power has undergone a massive shift towards increasingly large multinational corporations, with more and more monopolistic or oligopolistic control over capital, technology and scientific knowledge capable of being commercialized. To be told that the economy of China is no bigger than the balance sheet of J P Morgan is both shocking and instructive. To be told that the profit per employee of the Bank of China is US$400, whereas that of Citicorp is US$55,000, is to see a startling implication about managerial efficiency. To explain these facts requires an acknowledgment that the world of the established great global companies is even more strikingly new and high powered than most people have realized. For two decades they have been pressurized, by the accumulating influence of shareholder value concerns, to downsize, de-layer, outsource, focus, make alliances, consolidate, re-engineer, organize virtually, and above all else grow – by merger if necessary – to be in the top three or leave the industry. Pushing these new forms of coordination has been the information technology revolution, and its latest manifestation – the digital revolution within it. An attendant feature of this macro change in the world of the MNCs has been the reorganizing of supply-chain structures now possible in the new world of rich and fast communicating. Some observers of the automobile industry, for instance, see a trend whereby the key consolidators of supplies of components are reducing at a fast rate, and will have gone from around 10,000 in 1990 to less than 100 by 2010. Each of the survivors expands into a new service function in an industry which sees its basis for organizational structure responding radically to the new information world. The end-result of these processes, all of which are driven by the urge to greater efficiency and productivity, is that the set of several hundred major multinationals now control most of the world’s available capital, most of its useful technology, and most of its applicable scientific knowledge. In itself this is not a basis for assuming disaster. It is, however, a context against which the entry of new members to that very exclusive club is much more difficult than ever before. The level of this raised plateau will be too high for most newcomers. The implications for the global ambitions of firms based in China are severe (Nolan, 2001).

Gordon Redding 19

Challenges to understanding Research in international business has a job of explanation to do for practitioners by considering issues such as those above, and at the outset of this collection of studies it is worth reviewing the state of the field, so that the works presented may be seen against the background of attempts being made by others. Note will also be taken of some of the more intractable problems in international business research, some of which have posed difficulties for scholars since the discipline emerged. Recommendations will be made about the research agenda. There have been two primary approaches in international business theorizing, those based primarily in economics, and dealing mainly with material facts, and those based in sociology and dealing with culture and institutions. The former approaches have tended to use a quantitative method and to treat problems by the application of natural-science-inspired logics. Many of the presuppositions are based in industrial economics, and are traceable to the work of Adam Smith and David Ricardo. Dominant in this approach is the work of Michael Porter. His focus on comparative advantage at the state level, or on the workings of sectors and districts, is reminiscent of Ricardo whose work he aims to update by additionally accounting for technology, factor quality and methods of competing (Porter, 1990: 173). He has, however, in recent writings, shown a willingness to acknowledge the role of culture (Porter, 2000), and he has, moreover, acknowledged the possible significance of social features in determining the intriguing tendency for the leading competitors in a wide variety of industries to be based in one or two countries (Porter and Wayland, 1995). Nevertheless, he limits the implications to the need for modifying ‘economic culture’ so that it enhances national competitiveness by encouraging hard work, saving, initiative and education. The alternative to the economics approach comes from sociology, and reflects the ‘visceral distaste’ (Zukin and DiMaggio, 1990: 2) of sociologists for the neo-classical model, and the implication it carries for universal applicability. Much effort here is devoted to the study of culture, or of values (see for instance, Hofstede, 1980; Inglehart, 1997), and much is concerned with the workings of institutions and their influence on economic behaviour. Particularly crucial contributions have come from the work of Granovetter (1985), Whitley (1992, 1999) and Fligstein (2001) in illuminating the interface between the societal ground base and the world of organizing. Further progress now, however, is dependent on coming to terms with the challenges of integrating the two main approaches into a unified field of socio-economics. In a significant review of theorizing about organization cross-nationally, Child (2000) made a distinction between high and lowcontext approaches, noting that high context included cultural theory,

20 Asia: Its Actors, Logics and Challenges

cultural information theory, and institutional theory. Low-context examples are economic universalism, technology-based theory and psychological universalism/methodological individualism. Turning back to Weber for guidance, Child noted the latter’s advocacy (and practice) of an approach combining what he termed the material and the ideational components of explanation. The former include the raw facts of economic life, such as prices, supply and demand, technology – the common currency used by economists as inputs to their rationalizing. The latter brings into the account the world of ideas, of preferences, of the mental shaping of patterns of response. It is culture in action, but it also allows for the fact that individuals make choices, and so it avoids the notion that outcomes of social influences can be determined while ignoring the actors’ capacities to intervene. The fusing of these two sets of influences, as proposed by Child, finds echoes in a number of attempts at moving theory forward. One of these attempts has been the study of institutions, a central concern in the discipline of socio-economics. Here the rational-actor model gives way to a more complex form of explanation in which institutions are independent variables. The definition of what counts as an institution tends to be widening and includes in some accounts issues that other scholars would treat as cultural. An easy way out of this categorizing dilemma is to accept a difference between formal institutions such as legal systems, labour markets and so on, and informal institutions such as beliefs and norms governing power, trust and so on. As DiMaggio and Powell (1991: 9) note, ‘sociologists find institutions everywhere’. Within the cultural area a number of scholars have followed an insight of Weber (1930: 26) that the rationalism of Western culture was ‘specific and peculiar’, and that alternatives in other cultures might have origins in underlying religious formulations of how reality is constructed. He spent much effort in unpacking the core concept, and recent studies (Biggart and Delbridge, 2004; Redding, 2005; and Fligstein, 2001) have pursued this insight. Biggart and Delbridge have analysed the emergence of different systems of exchange consequent on these varying mental universes. Redding has pursued the idea of variation in espoused ends and means as the bases for economic action, and Fligstein has identified the ‘conception of control’ held by key actors as an important input to the shaping of capitalisms. Another enriching explanation is visible in the school of thought known as ‘co-evolution theory’ (Lewin and Volberda, 1999; Lewin and Koza, 2001). In this the organization is seen as shaping and being shaped by its environment in a dynamic interaction through time. This facilitates much greater sensitivity to national context, and has provided revealing studies (for example, Carney and Gedaljovic, 2001) based on Asian examples. It must be stated, however, that the discipline overall is still deeply and negatively affected by the dominant research paradigm of micro-studies,

Gordon Redding 21

quantitatively analysed so that they read like science, and weak in dealing with surrounding context. This, especially, is a failing in international business theory. The point was made forcefully by Bruce Kogut in a keynote address to the first Emerging Research Frontiers conference of the Journal of International Business Studies in 2003. The inability to handle context then became the theme for that conference. It is worth now examining briefly the challenges to understanding which this failure poses. Of these there are five, and they are: 1 2 3 4 5

Mechanics or biology? The second-order nature of social science? What is missing from accounts of context? How to handle complexity? Appropriate units of analysis.

Mechanics or biology? The essence of this debate is disagreement on how to account for cause and effect. In many studies there are implicit assumptions that human behaviour is atomistic and discrete, and that people may be treated as having similar motives, the understanding of which may lead to prescriptions of efficient responses for the organizing of their interactions. It is then convenient and enticing to study the imputed logics via abstraction, mathematical models, and reconstructions of scenarios in game theory. Complexity is thus vastly reduced. Challenging these assumptions are the difficulties posed by three features of the social world. Firstly, the connections between social phenomena are complex, multiple and reciprocal. Secondly, the phenomena themselves are not stable, and change through time. Thirdly, social systems are not closed, and new influences are likely to flow in from outside to disturb and rearrange the connections. Although many social scientists use a framework based on a systems view of the world, there is great variation in how that system’s workings are explained. The great economist Alfred Marshall pointed to this dilemma years ago when he advocated that the proper metaphor should not be economic mechanics but economic biology (Friedman, 1953). This would then allow much greater complexity to be acknowledged.

The second-order nature of social science The subject of social science is social behaviour, that is, people in societies. All people behave according to how they see the world around them. These perceptions of reality are therefore a filter between action and its explanation, and the filter has to be dealt with, not ignored, for the simple reason that

22 Asia: Its Actors, Logics and Challenges

events have different meanings to different people. It is not phenomena which influence people but the meaning of those phenomena to them. In consequence, social science needs to account for events as defined via meanings. What complicates research is that there is ‘competition over meaning’, as different values are brought into the interpretations. So, too, does language shape meaning, in that it provides the categories used for thinking about things.

Missing elements Discussions of the contexts of economic action, as well as avoiding the question of meaning, regularly also avoid the questions of interest groups, and rarely bring into the account the influences of history. Interest groups are collections of people with a common interest who act to promote and defend it, usually inside a society, but increasingly now in the global arena, as for instance with the anti-smoking lobby, or environmentalism. Such groups can often have a significant effect on an economy and its organizations. You cannot understand China without taking account of the role of the party in controlling the execution of policy. You cannot understand the USA without seeing the power of ‘management’ in alliance with government in establishing an economic system from which it benefits. You cannot understand France without coming to terms with the residual power of unions in the negotiating of the social contract, even more so in the case of Germany. The power nexus of Japan seems remarkably little disturbed by the 15 years of slow-down. The influences of history on current business systems are commonly acknowledged but rarely specified. In his magisterial review of economic history, The Wealth and Poverty of Nations, Landes (1998) concludes that culture makes all the difference, but is not in a position to explain how. Studies that have specifically done so are rare, and examples are Hamilton’s (1994) account of the role of ‘civilization’, Eisenstadt’s (1996) account Japanese civilization, and Jacobs’ (1985) account of Korean patrimonialism.

How to handle complexity To do business in another part of the world is to encounter and deal with difference, and – by definition – difference cannot be understood without comparison. Thus the challenge of comparing is built into almost all research in this field. This raises the question of how comparison may be properly done, a matter which is more complex than it first appears. The essential dilemma is that of uprooting. If you study a phenomenon, take it out of its context and compare it with a notionally similar phenomenon elsewhere (also out of its context), then you finish up with a comparison between two things, perhaps ‘job satisfaction’, or ‘trust networking’, neither

Gordon Redding 23

of which is then being studied within its own societal frame. This produces ‘facts’ but not understanding. Maurice (1989) and Ragin (1987) have argued cogently for the comparison of social wholes rather than of components extracted out of context. The core of the case is that understanding is best pursued by acknowledging the interconnections between different levels of analysis – the individual, the organizational/institutional, and the societal. The flows of influence between these layers are multiple, connected between themselves, and reciprocal. Understanding can only be closely approached by the acceptance of a complex adaptive system as the frame. As so much influence on behaviour stems from factors identifiable with societies, particularly culture and institutions, society becomes the most plausible envelope with which to begin studying phenomena. Understanding may then be improved by the comparison of wholes, inside each of which a more contextualized account may be constructed of the phenomena of interest. Ragin argues that a fusion is then possible between the qualitative and quantitative approaches, as it is possible to apply Boolean algebra to construct patterns of covariance between elements within the complex system, and at the same time to use a form of large case narrative account to build the comprehension of events. The work of Whitley (1992, 1999, 2003) in comparing and explaining business systems illustrates the power of this approach.

Appropriate units of analysis The societal effect is most easily thought of as the set of influences which stem from the institutions and the culture of a society. In the majority of cases, a society overlaps with a nation-state, and factors such as the legal system, financial system, educational system, shared history, political structures and government policy are conveniently bounded and understandable. In some cases, however, a society may not overlap with a state. The case of the regional ethnic Chinese is that of a people with a shared culture and heritage, and a commonly adopted formula for running a business, but doing so across the boundaries of several nation-states. This phenomenon may be analysed within the envelope of one society defined ethnically (see for example, Redding, 1990). In another sense, the boundary might well be inside a state, when a state has distinct business systems inside it, the analysis of each being an improvement on the averaging of their combination. An example here would be the separate analysis of the business systems of the Yangtse Delta around Shanghai, and the Pearl River Delta around Hong Kong and Guangzhou. The first of these is largely state-industry-based, and the second is largely private-sector-based, and the separation of their descriptions is justified.

24 Asia: Its Actors, Logics and Challenges

In the end, the question of unit of analysis is answered with a judgement about major determinants in the surrounding fabric of society, and with that in mind, I now turn to a framework within which to make such a judgement.

A proposed model for explaining variety in capitalisms Much of the inspiration for this model derives from the work of Whitley on business systems, and especially the application of it to Asia (Whitley, 1992). I have, however, given more emphasis to culture by separating the informal institutions from the formal, and by the addition of a specific component to deal with ‘meaning’ referred to here as rationale. There are also some changes in terms used for the categories. The model is given at Figure 1.1. Although there is an implied causal logic that suggests the

OWNERSHIP

NETWORKS

MANAGEMENT

Structures and systems for co-ordinating economic behaviour and exchange. Firms and managing

MATERIAL LOGICS

Impact of costs and technology on features and the interaction of features

The shaping of patterns of economic exchange behaviour

CAPITAL

The evolution and growth of forms of orders

HUMAN CAPITAL

SOCIAL CAPITAL

Institutions: the humanly devised constraints that shape social interaction, and provide a hospitable environment for co-operative solutions to complex exchange. Forms of order

The adjustment of values and norms by experience

The conditioning of institutions by values and norms

RATIONALE

IDENTITY

AUTHORITY

Culture: values, norms and socially constructed realities which acts as the bases for the society’s forms of order

Figure 1.1

Explaining variety in capitalism

IDEATIONAL LOGICS [EXTERNAL]

Impacts of external ideas, norms, values, on features and the interaction of features

Gordon Redding 25

culture shapes the institutions and then both shape the business system, this is not intended to be seen as direct linear determinacy. There are many reciprocal flows of influence, as in any complex adaptive system. The business system is conceptualized, following Whitley’s formulation, as a series of three ways of coordinating economic action and achieving stable combinations. The first of these is Ownership, and this captures the variation in how organizations are constructed within a framework of dominance or governance. The divisionalized firm, with a holding company at the centre, operating across a range of industries and managed by a cadre of professional managers whose performance is directed towards return to shareholders, is a different kind of animal from a family-owned firm held together with nepotistic connections. Some societies favour huge structures with many interconnections across the economy, as does Japan. Others favour huge firms with a bias towards vertical connections, as does Korea. Others favour small firms able to be controlled personally but networked with others to escape their scale limitations, as occurs in Chinese network capitalism. The category of Networks captures these second features of the architecture of coordination. Management is concerned with the mechanisms with which resources are pulled together into effective connections within firms, some of the greatest variations here being within the realm of manager–worker relations. These may be based on high levels of interdependence between the layers, as in Japan, or on high levels of top-down control, as in Korea or China. The design principle then establishes what can be delegated, how, and with what effect on the nature of outputs. The three ways of achieving coordination are all interconnected, and a change to one is likely to influence others. Thus the system of ownership in the keiretsu, whereby there are many cross-holdings of shares, and cross-directorships, is connected with the high state of networking. The stability which that brings contributes also to the ability to commit long-term to employees, and so to invest in their skills to a point where delegation becomes worthwhile. The business system is embedded in the fabric of societal institutions and culture, and the layer of institutions is seen as having three components. These are conceived as the key inputs required for the workings of the business system. They may be great facilitators, or great handicaps, depending on their condition. They have, in some cases, great influence on the shaping of the business system, as do arguably the US institutions of capital allocation, or the Japanese institutions for human capital. Each of them is in some way a resource, and so they are seen as forms of capital – financial, human and social. Capital, in the financial sense, varies in the way its allocation is institutionalized, by having different channels through which it flows. In some cases it flows mainly through the banking system, as in Japan or Germany.

26 Asia: Its Actors, Logics and Challenges

In others it flows mainly through the stockmarket, as in the USA. Its allocation also varies in the objectivity and rationalism with which allocation decisions are made, in the priority interests which its use serves, and in the freedom or otherwise from government control which is exercised in moving it from one use to another. Human capital institutions are essentially those of the labour market and the education and training system, providing as they do the quantity and type of skills needed in the business system, and shaping the relations within which its use is established. Social capital is the collection of foundations upon which trust is, or is not, established. It also shapes the nature of the trust, in simple terms determining how much is dependent on formal institutions such as law, open reliable information and so on, and how much on ties of personal obligation, these latter varying between societies in their architecture. The base layer of Culture contains three major elements. Rationale is an acknowledgement that the purposes underlying behaviour, and the means seen as legitimate for the achievement of those purposes, are not universal. In fact they vary substantially between societies. This allows access to the world of ‘meaning’, and brings new insight to the analysis of why certain responses are chosen. The other two cultural platforms are the values, norms and ideals which support the two main principles of societal order: how to relate to others horizontally and vertically. They are termed here Identity and Authority. Two external influences are the final components of the picture. Always, potentially or actually capable of significant effects on the societal system as it evolves, are the Material and Ideational Logics coming in from the outside world. The material issues here are those of economic forces such as price, and technical forces such as new inventions. The ideational forces would include concepts such as democracy, freedom, free-market competition, anti-corruption, pop culture, consumerism and so on. Any full account would also need to incorporate the influences of history and of state policies and behaviour. In most societies there have been, in their history, crucial formative influences on present-day systems. These may be events such as the Meiji Restoration, or the MacArthur reforms in Japan. They might also be people, such as Mao Tse Tung, King Chulalongkorn, or Margaret Thatcher. The role of the state is also an obviously significant feature in many societies, especially in Asia where strong states commonly design economies from the top, and direct the development process.

The workings of a business system As a complex adaptive system, overlapping (usually) with a society, the keys to a reading of its workings are complexity, evolution and emergence. The

Gordon Redding 27

idea of complexity contains the idea of multiple, complex patterns of determinacy. All the parts are in constant interaction. What happens in the world of organizations in the business system both reflects the institutions, and has an influence on the reshaping of those institutions. The same two-way process results in the culture being in constant living interaction and response, capable also of changing within itself over time. There are virtually no simple direct lines of cause and effect. Everything is connected to everything else. Evolution occurs in conditions where change and adaptation take a system in a visible direction. This has occurred dramatically in Asia in recent decades, as countries have actively sought prosperity. They follow ‘trajectories’ which are shaped by their own circumstances. But it is not simply a matter of path dependence, as specific events or chosen policies also come into the picture to explain the pattern of evolution. Both sets of forces – the historical legacy and the specific interventions – are at work. It would be possible to argue, for instance, that the Chinese experience of totalitarianism, the absence of civil society of a form which induces trust between strangers, and the Confucian emphasis on family as core unit of identity, all conspired to encourage the fast rise of the private sector in China since 1980. But the account would be incomplete without an acknowledgement of the elasticity displayed by the political elite, the impact of WTO, and the intervention of Deng Xiao Ping. The idea of emergence derives from thinking about complex systems, and it suggests that stable patterns form in any complex system, which brings into harmony certain features that find a fit with each other. Thus, responses that work to ensure growth and a stronger entity, emerge from the very complex bed of interactions. Such combinations are analysed by Hall and Soskice (2001) among others, and they foster the understanding comparatively of features in an economy such as the sourcing and allocation of capital, the stabilising of labour markets including skill and employment systems, norms of ownership, and systems of production (Redding, 2005).

Strategic implications An organization, if it is be healthy, has to contain within it three capacities: efficiency in the administration of a process of coordination of necessary elements; learning about its external environment, and especially about changes which will affect it; and the ability to change what it does and how it does it. Societies tend to produce organizations that handle these demands in different ways. In some cases, such as that of the USA, a group of professional managers is commonly charged with responsibility for all three roles, the most senior of them being hired and fired on the basis of their capacity to handle them. In Japan and Germany, the roles and responsibilities are more evenly spread throughout the organization, with many

28 Asia: Its Actors, Logics and Challenges

workers engaged in thinking for the organization. In many Chinese organizations, the role set tends to be concentrated at the top of the organization, in either a single individual or a limited group. The societal shaping of these responses is the proper concern of international business theory, but so too is the understanding of their implications for choice of strategy, an issue currently beyond the frontiers of most research, but pointed towards in a number of the chapters in this book.

Asia and its actors Three themes run through this book. The first is that corporations and governments are making major adjustments to realign their positions with new realities. These changes are global, and affect both Asian and foreign firms. The second theme is that the definition of how success or failure occurs is changing in the face of surrounding technical and informational adjustments. Organizations are taking shapes never before conceived. New structures for coordination within sectors and industries are emerging, with new organizational types inside them. The third theme is that China’s recent surge of industrialization has caused a massive global redirection in the movements of capital, labour and technology. Considering the region, and how it has been affected and is responding, it is possible to see, at each national level, a number of special challenges as variations on the above themes. China is displaying all the qualities of emergence noted above, in that its private sector is coming to dominate the economy in a seemingly unstoppable swelling of significance, arguably representing a ‘natural’ response to the challenges of the coordination and control of economic behaviour, and pointing to the outlines of a distinctly Chinese formula for the future. This is attributable to three features in the main: the traditional entrepreneurial skills of family or partnership-based business; the opportunities afforded by the release of state assets into the market as the state sector itself is forced to rationalize; and thirdly the immense entrepreneurial drive exhibited by local government officials in competing for investment against other administrations. But China faces inevitably large challenges as it adjusts to the dominance of market in economic life. Of the challenges which have a direct impact of multinationals, perhaps the most significant are (a) the highly disaggregated nature of the home market, (b) the problem of decentralizing policy control, (c) the weakness of institutionalized trust, (d) the absence of rational allocation of capital, (e) the legacy of inefficiency in large scale organization, and (d) the weight of the competitive challenge passed by multinationals both abroad and in China itself. The state of the home market reflects an old fact about China, which is that it is a country of regions, each with its own tendencies. It is also very

Gordon Redding 29

large indeed, in many senses, and its infrastructure – despite massive advances recently – is still inadequate to the task of fostering a real national market. There are, for instance, 8,000 cement companies in China when the rest of the world has 1,500. And there remain significant language differences and traditions. The problem of political control via the Party remains, and a recent request from reformers within the Bank of China for a dismantling of the politically-based committee which oversees loans, and arguably distorts their efficient allocation, is symptomatic of this issue. The core difficulty lies in the political heritage of an essentially pre-modern state, with its built-in ideal that the government has the duty to maintain order in the society, and cannot thus risk the dismantling of central power. Much has been achieved recently via the encouragement of controlled decentralization to local administrations, but the growing pressure from a prospering bourgeoisie for control over their lives may not be managed smoothly. The weakness of institutionalized trust is a result of the absence of bodies to foster it. Such bodies might include a well-functioning and open legal system, a solid and independent profession of accountants, and an open and rich base of information, including a free press. In the absence of such supports to trust, the Chinese response is to fall back on the tried and tested mechanisms of guanxi, and to the development of high skills in the coopting of any necessary political support. One of the obvious downsides to this is corruption, now a formidable challenge. The allocation of capital in China is conducted in two ways. In the public arena, that is in banking and the stockmarkets, it is done with quite disturbing inefficiency. Although strenuous efforts are now being made to correct this, the legacy of bad loans at something like 45 per cent, is a crippling burden for the country, running now at somewhere near US$500 billion, balancing the figure for the savings of the people in the same banks, the overall scene being alleviated only by an equivalent positive figure for foreign reserves. Unfortunately, the option of opening the banking sector to access by the rampant private sector is more problematic than might first appear as managerial skills in banking, and especially in lending, are very weak. As the private sector comes to the banks, it yields bad loan figures even worse than the earlier public sector did. The second form of capital allocation is that used by the private sector, and based on retained earnings, and private investments among friends or relations. The obligations, and the entrepreneurial flair itself, suggest that money will here be used more effectively overall. China’s Achilles heel is large-scale organization. There are always exceptions, and China is capable of high quality administration in some industries, but the wider picture is forbidding. Evidence for it lies in the dismantling of the state sector, now down to about 15 per cent of the economy, from 75 per cent in 1980. The essence of this challenge is weakness in management, which

30 Asia: Its Actors, Logics and Challenges

has not yet emerged as a professionalised field at anywhere near the scale needed for the organizational challenges posed. Most middle managers in China act as transmitters of top-down communication, and administrators of specific organization sections, but without a wider perspective which would allow them to contribute to the problems of efficient integration across a value chain. There is, in other words a ‘stovepipe’ mentality, and this in turn inhibits organizational learning. Dependence on the centre for strategic thought and direction is endemic, and an outcome is the handling of complexity by a large organization, at global standards of efficiency, is a challenge beyond most of the aspirants. This latter problem is exacerbated by the issue, referred to earlier, of the rise in the level of competitive intensity, based on organizational scale, in global markets. Not only does this pose a problem for Chinese companies entering the global business arena, but it is also a problem for them in defending their home markets against the new competition arriving in the wake of the WTO. At the other end of the organizational spectrum, however, are the thriving networks of small and medium-sized enterprises serving the world demand for OEM supplies as the world converts China to being its workshop. In Japan the scene is very different, and its huge economy – five times bigger than that of China – rests on the plateau it achieved in earlier years, not gaining in dynamism, but not losing in weight either. Its challenge is that of adjusting to the fact that its supremacy in manufacturing is not matched by an equivalent strength in services, and that many of its industries in the latter category could not sustain the full onslaught of external competition if it came in strongly. There is, in Japan, a long crisis of rationale, as the old belief that firms are there primarily to employ people clashes with the ideals brought in by powerful invaders, and external competitors, that firms are there to give return to shareholders. The same dilemma faces Germany, and in both cases the resistance to any change of ideology is strongly entrenched. And yet, much change is reported in Japanese companies as they try to deal with these strains. The essential problem is less within organizations but more in the nexus of power which controls policy, and which deals in consensus-reaching between big business and government. Korea stands in sharp contrast to Japan for the dedication to change which has characterized its organizations, as well as its government. This arises from the combination of new pressures from a democratic system, and the depths of failure revealed in the Asian crisis of 1997–98. The crisis revealed the risks of using short-term borrowings to finance long-term investments, and of taking too much foreign money given liberally during the run-up. Reform has injected a heavy dose of rationality into the system of capital-sourcing and allocation, and it has also caused the dismantling of many of the irrational diversifications which the chaebol indulged in. Much

Gordon Redding 31

duplication has been eliminated by the enforced merging of firm activities, many owning-family members have been induced to leave the boardrooms, and government plans to support industries such as IT and advanced engineering have been vigorously pursued. The other ‘dragons’ – Taiwan, Hong Kong and Singapore – have all seen their economies moving up the ladder of technical sophistication in recent years, examples being visible in Taiwan’s science parks, Hong Kong’s Cyberport and Singapore’s bio-tech hub. Their additional concentration in services is visible in their domination of sectors such as insurance, financing, design, sourcing logistics, sea transport and container terminals, and airlines. As many of their base manufacturing plants migrate to China, Vietnam and elsewhere, they retain a managerial and ownership hold, reinforced as it is by their knowledge of the technologies and markets of the rest of the world, these latter links being seemingly stronger as time passes. The ASEAN states present a mixed picture, but they share a common challenge in the threat posed to their industries by the rise of China. Only Vietnam among them is able to match China’s resources of human talent skilled at industrially competitive levels. It would seem increasingly likely that, except in special cases, such as Malaysia’s long established IT industry, the main parts of ASEAN will slowly turn back to their historic dependence on natural products. The contrasting scenes just outlined give evidence of the opening statement that Pacific Asia is an area of immense variety, and of deep change. The accounts in this book will show facets of that change across all aspects of the broader model proposed earlier. They need to be seen in the light of the notion implied in the model – that each country makes its own economic fate in its own way, and that understanding any event or phenomenon requires an acceptance of the complex nature of evolving societal systems.

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32 Asia: Its Actors, Logics and Challenges Granovetter, M. (1985) ‘Economic Action and Social Structure: The Problem of Embeddedness’, American Journal of Sociology, 91: 481–510. Hall, P.A. and Soskice, D. (2001) Varieties of Capitalism (Oxford: Oxford University Press). Hamilton, G.G. (1994) ‘Civilizations and the Organization of Economies’, in N.J. Smelser and R. Swedberg (eds), The Handbook of Economic Sociology (Princeton, NJ: Princeton University Press): 183–205. Hofstede, G. (1980) Culture’s Consequences (London: Sage). Inglehart, R. (1997) Modernization and Postmodernization (Princeton, NJ: Princeton University Press). Jacobs, N. (1985) The Korean Road to Modernization and Development (Urbana: University of Illinois Press). Landes, D.S. (1998) The Wealth and Poverty of Nations (New York: Norton). Lewin, A.Y. and Koza, M.P. (eds) (2001) Organization Studies, special issue: ‘Multi-level Analysis and Co-evolution’, 22(6). Lewin, A. and Volberda, H.W. (1999) ‘Prolegomena on Co-evolution: A Framework for Research on Strategy and New Organizational Forms’, Organization Science, 10(5): 519–34. Maurice, M. (1989) ‘Methode Comparative et Analyse Societale’, Sociologie du Travail, 17(2): 175–91. Nolan, P. (2001) China and the Global Economy (London: Palgrave Macmillan). Porter, M. (1990) The Competitive Advantage of Nations (London: Macmillan, now Palgrave Macmillan). Porter, M. (2000) ‘Attitudes, Values and Beliefs and the Microeconomics of Prosperity’, in L.E. Harrison and S.P. Huntington (ed.), Culture Matters (New York: Basic Books): 14–28. Porter, M. and Wayland, R.E. (1995) ‘Global Competition and the Localization of Competitive Advantage’, Advances in Strategic Management, 11(A). Ragin, C. (1987) The Comparative Method (Berkeley: University of California Press). Redding, G. (1990) The Spirit of Chinese Capitalism (New York: de Gruyter). Redding, G. (2005) ‘The Thick Description and Comparison of Societal Systems of Capitalism’, Journal of International Business Studies, 36(1): 123–55. Weber, M. (1930) The Protestant Ethic and the Spirit of Capitalism, trans (T. Parsons (London: Unwin). Whitley, R. (1992) Business Systems in East Asia (London: Sage). Whitley, R. (1999) Divergent Capitalisms (Oxford: Oxford University Press). Whitley, R. (2003) ‘The Institutional Structuring of Organizational Capabilities: The Role of Authority Sharing and Organizational Careers’, Organization Studies, 24(5): 667–95. Zukin, S. and DiMaggio, P. (1990) Structures of Capital: The Social Organization of the Economy (Cambridge: Cambridge University Press).

2 Export-Led Growth in East Asia: Lessons for Europe’s Transition Economies Ari Kokko

Introduction With reasonably low inflation and positive GDP growth rates in most of Europe’s transition economies since the late 1990s, the focus in the economic policy debate has gradually shifted from stabilization and recovery to questions concerning long-term growth and convergence. The new key challenge is to establish a policy environment that will facilitate catching up: there is a growing consensus that the transition economies will not be able to benefit fully from EU membership unless the development gap to the rest of Europe is reduced. Some general guidelines for what is required in this process are provided by the long-term growth experiences of the richer EU countries. These include a central role for the private sector, free markets and prices for the efficient allocation of resources, appropriate incentives for entrepreneurship, and participation in the international economy, but also an important role for the public sector. Sustainable development requires a strong state to maintain competition and protect property rights, and to provide infrastructure, education and social services in those cases where the market outcomes are not satisfactory. In fact, many of these lessons are included in the acquis communautaire that has been integrated into the legal framework of the transition economies. However, Western economies have evolved relatively slowly over a long period of time and their recent history does not provide many explicit insights about the requirements for rapid convergence of the kind attempted by the Central and East European transition economies. The growth experiences of some East Asian economies, on the other hand, are likely to offer important lessons about catching up. For instance, South Korea and Taiwan were able to raise their per capita incomes from a few hundred dollars in the 1950s to high OECD standards in the 1990s. Although some of the magic surrounding these achievements has worn off because of the financial crisis of 1997–98, it is still relevant to examine the policies implemented in 33

34 Export-Led Growth in East Asia

East Asia to generate rapid growth and to ask whether there are any lessons for the European transition economies. Looking at the experiences of South Korea and Taiwan, it appears clear that there is a strong relation between rapid growth and export orientation. The focus of this chapter will therefore largely be on the policies underlying export success although some references to the more general policy regimes that facilitated their rapid development will be made. For a broader discussion about the possibility to adopt Asian growth policies in the European transition economies, see Sachs and Warner (1996). Woo et al. (1997) and Stiglitz (1996) also summarizes some of the lessons from the Asian miracle. Both South Korea and Taiwan are unquestionable success stories, and their starting points after the Second World War, as resource poor, densely populated and largely agricultural economies, are in many respects similar to present conditions in many of Europe’s transition economies. This analysis will primarily cover the period to the mid-1980s, when the basis for the export success was firmly established. The next two sections summarize some elements of the country experiences, while the final section attempts to draw some lessons for growth and export promotion in Europe’s transition economies.

South Korea from the 1950s to the 1980s After the Second World War, the Korean peninsula was divided into two separate parts along the 38-degree line. When South Korea (the Republic of Korea) became formally independent in 1948, the new nation was severely handicapped by a lack of natural resources. The partition of the peninsula had left the South with most of the population but less land and much less industry than the North, which controlled most of the heavy industry, including mineral deposits and almost all of the hydropower facilities. In addition, the country’s initial development ambitions were badly hurt by the North Korean invasion in 1950 and the ensuing war. A comprehensive import-substituting development strategy, largely financed by US aid, was initiated soon after the truce in 1953. Although the average annual GDP growth rate during the rest of the 1950s reached about 5 per cent, Korea remained one of the poorest countries in the region. The dismal export performance during the import-substituting phase provides one indication of the country’s weak industrial competitiveness in the 1950s: the real value of the country’s manufactured exports actually fell by about 80 per cent between 1953 and 1959 (Suh, 1996: 578). The limited export success also highlights the role of US aid in financing the necessary imports, that is technology, machinery, intermediates and raw materials during this period. However, the Korean government instituted two policies that turned out to be of the utmost importance for subsequent development. Firstly, the population pressure, worsened by substantial immigration from the North,

Ari Kokko 35

necessitated a comprehensive land reform. The reform, initiated in 1949, limited the maximum size of household holdings to three hectares, creating an egalitarian distribution of income and wealth among the majority of the population. In fact, nearly a quarter of all arable land was redistributed in this programme. Secondly, education was identified as one of the highest development priorities immediately after independence and significant public resources were invested in the sector. The character of development changed radically from the early 1960s. One reason was the substantial reduction of US grant aid (from 1963), which forced the country to increase its export revenues in order to pay for necessary imports of fuel and capital goods. Another cause lay in the widespread political changes that followed the instability and student uprisings of 1960. A military coup in 1961 brought General Park Chung Hee to power, and the actions taken by the military regime over the next few years reshaped the political economy of the country. One of the first moves of the Park regime was to nationalize all financial institutions. This was done in order to place all decisions regarding the allocation of credit in the hands of the government, and at the same time many prominent businessmen were imprisoned, accused of having accumulated ‘illicit’ wealth. They were later released against promises to serve the nation by investing according to the state’s development objectives. The incident left a large share of the business community morally obliged to adopt the state’s development objectives (Chang, 1993: 151–2). Economic decision-making power was centralized in a super-ministry, the Economic Planning Board, which assumed responsibility for the tasks normally divided between specialized planning, industry and finance ministries. The sum of these and other actions was to create an exceptionally strong state that was in a position to command a radical change in the country’s development strategy. The major performance requirement from the 1960s and onwards was ‘export success’. Hence, although the Korean economy can be characterized as a private market economy, the state had an important role in generating the country’s impressive development from the early 1960s. The most important element of government intervention was arguably the establishment of a set of rules that imposed a strong export orientation on industry. Detailed Five-Year Plans – the first one covering the period 1962–66 – defined the current development objectives, often stated in terms of export performance, and various regulations, incentives and interventions were used to realize the plans. The sectors targeted for exports had ‘priority in acquiring rationed (and often subsidized) credits and foreign exchange, state investment funds, preferential tax treatments (for example tax holidays, accelerated depreciation allowances) and other supportive measures, including import protection and entry restriction’ (Chang, 1993: 141). In return for these benefits, industry was expected to prove its value for development by fulfilling ambitious productivity and export targets.

36 Export-Led Growth in East Asia Table 2.1 Real growth rates of GNP, investment and exports in the five-year plan (FYP) periods, 1962–1991 (per cent) Years 1st FYP 2nd FYP 3rd FYP 4th FYP 5th FYP 6th FYP

1962–66 1967–71 1972–76 1977–81 1982–86 1987–91

GNP growth rate (%)

Investment growth rate (%)

Export growth rate (%)

National savings % of GNP

7.8 9.6 9.6 5.9 5.7 8.7

23.2 18.5 12.7 8.0 9.4 16.5

26.2 30.3 27.6 12.3 11.8 11

7.9 15.4 20.4 26.3 28.9 37.4

Sources: Suh (1996) table 2.4.1; IMF, International Financial Statistics, various years; ADB, Key Indicators 2002, Bank of Korea, Economic Statistics Yearbook.

Unlike most other countries that have opted for development strategies with equally comprehensive state intervention, Korea was highly successful for a long time. Table 2.1 outlines some of the performance measures during the five Five-Year Plan (FYP) periods starting 1962. Apart from high aggregate growth rates, it should be noted that investment and savings as a share of GNP grew throughout the period in question. In 1966, savings reached 12 per cent of GNP while investment amounted to 22 per cent. By 1986, both savings and investment had grown to above 30 per cent. It is also remarkable that average export growth was maintained at above 25 per cent per year until the mid-1970s and at double-digit rates thereafter. In absolute amounts, exports increased from US$54 million in 1962 to US$60 billion in 1988. The export strategies implemented during these three decades fall into three distinct phases. During the first and second FYPs, there was an intense drive to increase exports of any sort. The third and fourth FYPs (until 1979–80) were marked by a bias in favour of heavy industry. The period after 1980 was characterized by a reduction in the bias towards heavy industry and instead an increasing emphasis on high-tech exports.

Korean export promotion In the field of trade policy, tariffs and other trade barriers provided significant protection for Korea’s domestic industry until the 1980s, and import substitution played an important role in most consumer goods and capital goods industries (Chang, 1993: 132–5). Yet, export promotion became an integral part of the development strategy already from the early 1960s, for several reasons. Industrialization required massive imports of foreign technology and raw materials, and growing export revenues were needed to cover the rapidly growing import bill, particularly after the sharp reductions of US aid in 1963. Industrialization also required more investment resources than

Ari Kokko 37

what the domestic market could generate. Unlike in Japan during the same period, domestic savings were not sufficient to finance domestic investment, and inflows of foreign capital were needed to cover the savings gap. Consequently, export revenues were needed to service the foreign loans. In addition, many of the designated priority sectors were characterized by significant economies of scale, and the state systematically instructed industry to build their plants large enough to reach an efficient production scale. Exports were necessary to avoid losses from low capacity utilization in these industries (Chang, 1993: 140). The Korean export promotion policies included various kinds of subsidies, preferential prices and tax and tariff exemptions, although preferential access to credits was probably the most important individual measure. The major policy reforms in this field were instituted in the 1964–67 period. At the beginning of the period, the Korean won was devalued by almost 100 per cent against the US dollar, with obvious benefits for exporters. A major target of macroeconomic policies during the following two decades was to keep the real exchange rate roughly stable, to keep exporting profitable and to minimize excess demand for imports. This objective was achieved through periodic nominal devaluations and strict aggregate demand management that never allowed inflation to get out of hand. Imports of capital goods, equipment and intermediate inputs were exempted from tariffs. Exporters were given credit at preferential interest rates, as well as reduced rates for electricity and transportation services. Accelerated depreciation schemes and other tax benefits were also introduced. Moreover, the full set of export incentives was also made available for producers supplying intermediate inputs to the exporters, providing an additional stimulus to the development of the country’s domestic production capability. Few of the individual export incentives differ much from those that can be found in other countries, but many observers have noted that the aggregate weight of these policies was high enough to provide roughly equal incentives to production for exports and domestic sales, in spite of significant tariff and non-tariff barriers. This has been proposed as one of the reasons why the efficiency losses have been relatively small, in spite of the fact that many import-restriction barriers remained until the 1980s (World Bank, 1993). Another important reason is that the Korean industrial and trade policy regime has provided explicit links between domestic protection and exports. Westphal (1978: 373) reports that access to protected domestic markets was dependent on satisfactory export performance, so that ‘newly established import-substituting industries have been generally encouraged to begin exporting almost at once’. Consequently, many essentially import-substituting firms learned to adjust to competition and market discipline in their export markets at the same time as they enjoyed protection at home. Whereas most of the specific microeconomic policies to promote Korean exports are commonly found in other countries, Korea also followed the less

38 Export-Led Growth in East Asia

common Japanese example by establishing several new institutions to encourage the outward orientation of the economy. The Korea Trade Promotion Corporation (KOTRA) was established in 1962 with government support to do market research and to promote exports, in particular for small and medium-sized enterprises. The Korean Institute for Science and Technology supported the importation and adoption of foreign technologies. The Korea Traders’ Association institutionalized the contacts between business and government, and their Special Fund for Export Promotion, established in 1969, was well-financed by mandatory contributions of 1 per cent on most imports. Korean embassies abroad were required to participate actively in trade missions and other forms of trade promotion, and the government established detailed export targets for individual commodities, markets and exporters. There were daily printouts of exports by company, and monthly meetings chaired by President Park, attended by business executives and top bureaucrats, to avoid administrative obstacles and other bottlenecks. The main purpose of the monitoring system was to provide information on the efficiency of export incentives and to adapt policies to the continuously changing international environment. Furthermore, in the early 1970s the first export processing zones (EPZs) were established in Masan (1970) and Iri (1973). Up until that time, the Korean government had chosen not to encourage inward foreign direct investment, and FDI had not exceeded 3 per cent of total investment during the 1960s. The new EPZs were especially designed to suit foreign firms in selected industries, such as electronics and textiles and clothing. By providing automatic access to all export incentives, the EPZs were able to attract a notable number of foreign multinational corporations, and by 1978 foreign firms had grown to account for three-quarters of the Korean electronics exports and around 10 per cent of textile and clothing exports. However, various restrictions limited the possibilities of foreign firms to establish affiliates outside the export processing zones, and the aggregate share of foreignowned enterprises remained small until the financial crisis in the late 1990s led to comprehensive liberalization and significant inflows of new FDI. A result of the strong export drive initiated in the early 1960s was that Korea emerged as a major exporter of labour-intensive products, such as textiles and garments, silk, plywood and fish, but the structure of exports was changing rapidly. Individual industries proved remarkably efficient in graduating from import substitution into exporting, and there was a steady transition towards activities with higher value added. By the 1980s, exports were dominated by new products like colour TV sets, computers and cars. In most other countries where significant import restrictions have been in place, this transition has been slow because attempts to withdraw support from protected industries have typically met with strong resistance from the interest groups that risk losing their privileges. What distinguishes the Korean experience is that the Korean state was stricter in enforcing productive and

Ari Kokko 39

allocative efficiency and upholding hard budget constraints until at least the 1980s. Hence, it was clear to most actors that import protection, subsidies and other rents were temporary supports, and that all firms were eventually expected to manage in international competition and that the government was able and willing to withdraw support from firms and industries that failed to reach their performance targets. Restrictions on entry and expansion limited excessive investment in protected industries, and the sanctions for inefficient firms – and industries – were generally harsh. Chang (1993) refers to several instances where the Korean government forced firms into mergers, sales or liquidation because of inefficiency or ‘excessive competition’, causing low capacity utilization or low profitability, while Thomas et al. (1991: 131) note that no advance assurances of emergency assistance were generally available, and that the bankruptcy rate among exporters was relatively high. The Korean success in disciplining industry may be partly explained by the tough measures undertaken by the military regime during the early 1960s to expose domestic industry to international competition, but another reason may be the fact that that the trade-related interventions were concentrated towards a limited number of very large private firms, the chaebol. These are large diversified business conglomerates that typically operate in several import-substituting as well as export-oriented areas, generally in tough competition with other chaebol. The government’s ability to link a firm’s performance in one industry to promises of support (or threats of withdrawal of support) in other industries was arguably important. However, there are several episodes demonstrating that not even Korea has been immune to the various problems related to selective intervention. One is related to the Heavy and Chemical Industries Drive of the 1970s. Although the Korean trade regime provided strong support to exports from the early 1960s, it was roughly neutral with respect to the composition of exports until the early 1970s (World Bank, 1993: 128). This meant that almost all the various export promotion incentives were automatically available to all exporters without discrimination. The neutrality contributed to efficiency, since potential exporters were automatically directed to areas where Korea possessed some inherent comparative advantages. In 1973, there was a shift away from neutral export incentives to a strong bias in favour of heavy and chemical industries. One reason was a fear that US military assistance would diminish. This necessitated the growth of strategic defence industries in preparation for a possible North Korean attack. Three sectors – steel, petrochemicals and nonferrous metals – were singled out to enhance self-sufficiency in industrial raw materials. Concurrently, the shipbuilding, electronics and machinery industries were selected to become the country’s future export base. As earlier, these priority industries were supported with preferential access to cheap credits, tax credits, accelerated depreciation allowances, tax holidays and import protection. The government also promoted heavy

40 Export-Led Growth in East Asia

investments in infrastructure and industrial parks. Since most of these industries are characterized by economies of scale, an export orientation was necessary from the very beginning: the domestic market was too small to allow reasonable capacity utilization rates. Although this endeavour to create a national heavy-industry sector was more successful than similar projects in other developing countries – largely because international competitiveness was an explicit performance measure from the very beginning – it can still be argued that it serves as a caution regarding the dangers inherent in attempts to tailor industrial development. The direct export share of the promoted industries grew, but only from 25 per cent in 1973 to 28 per cent a decade later. The opportunity costs were also significant, since the preferences automatically translated into a bias against other sectors. Soon enough, serious supply bottlenecks started emerging in light manufacturing industries, generating inflationary pressures and weakening the competitiveness of traditional exports, for example textiles. Large debts had been incurred to finance the necessary capital-intensive investments (at the expense of investment in other sectors), but low capacity utilization, partly brought about by the second oil shock in the late 1970s, forced many of the promoted firms to default on their loans. The slowdown in the growth rates of GDP, investment and exports was partly due to these problems. There were also serious repercussions on the financial system and the overhang of bad debt from this period burdened the commercial banks well into the 1990s. Moreover, the distortions caused by lobbying and corruption were probably significant, but it was not until the late 1990s that political scandals and the financial crisis in Korea revealed some of these consequences of the earlier selective interventions. One important conclusion is that there is reason to be extremely cautious regarding any government’s possibilities to conduct selective intervention without inducing costly rentseeking and corruption. Another problem was that the heavy and chemical industries drive contributed to the further concentration of economic power in the hands of the chaebol, since the government had encouraged only the largest business groups to participate in the promoted projects. The clashes between government and the increasingly powerful chaebol have been a recurrent theme in the gradually less authoritarian political systems that emerged in South Korea after the assassination of President Park in late 1979. Park’s successor as President, Chun Doo Hwan, also seized power in a military coup. Following Park’s example, Chun’s government tried to control the business sector by threatening to prosecute business leaders on charges of ‘illicit wealth accumulation’ unless they cooperated with his new economic policies. The chaebols formally pledged their loyalty to the new government, but the state–business relationship during the following decades turned out to develop very differently from Park’s cooperative developmental state model of the 1960s and 1970s (Moon, 1994: 147). One reason was that the

Ari Kokko 41

chaebol were much more influential and powerful than two decades earlier. Another reason was that Chun’s economic policies – in particular, the ambition to reduce business concentration by forcing the largest corporations to sell off assets – were clearly contradictory to the interests of big business. Other rules were established to promote small and medium-sized firms. There were two motives for these policies: aside from the neo-liberal economic philosophy of the new leadership, it was necessary to distance the new government from the problems caused by the previous government – chaebol coalition (Moon, 1994: 146–52). Paradoxically, the result was to strengthen the position of big business. The efforts to reduce the concentration of ownership had little effect, and the chaebol were instead the first to seize the investment opportunities when new sectors were liberalized. The liberalization of the financial sector was particularly important, since it allowed the large industrial conglomerates to become more independent from state-controlled credits. The next president, Roh Tae Woo, democratically elected in late 1987, initially followed Chun’s anti-chaebol policies but shifted course a few years later, after heavy pressure from industry. A conservative coalition, the Democratic Liberal Party, was established in 1990, and government policies turned to favour big business. The Korean won was depreciated to boost exports and most of the various nominal restrictions on chaebol expansion that had been introduced during the preceding decades were lifted. The result was a significant increase in investment, and a temporary boom in growth. However, new problems emerged by the mid-1990s. In addition to challenges from rising labour costs, Korea was struggling with the weakness of the banking sector, the financial problems of some chaebol that had incurred too much debt, and several corruption scandals that surfaced as a result of the increasing political transparency and democracy. These were all, to some degree, reflections and results of the interventions and industrial policies of the previous decades. Moreover, the liberalization of the financial market, both domestically and internationally, had increased the supply of investment capital, which contributed, together with state supported efforts to make inroads into some new ‘strategic’ high-tech industries, to the rapidly increasing indebtedness of the corporate sector. The risks related to offensive development policies with emphasis on selected strategic industries were, once again, demonstrated during the turbulence following the Asian crisis when the heavily indebted Korean economy was one of the hardest hit victims of the crisis.

Taiwan from the 1950s to the 1980s It can be argued that the conditions for economic development in Taiwan in the early 1950s were unusually beneficial, in particular in comparison with the concurrent developments in Korea. The new nation had inherited

42 Export-Led Growth in East Asia

a relatively advanced economic infrastructure from Japanese colonialism; immigration from mainland China had created an ample supply of skilled and entrepreneurial labour; land reforms, similar to those undertaken in Korea, had been instituted; and inflows of aid from the USA, comprising more than 30 per cent of domestic investment each year until 1960, provided badly needed financial resources for development. Yet, it would be wrong to ascribe the remarkable economic development of Taiwan since that time to these historical circumstances. Instead, there is reason to emphasize the role of successful government policies in creating an environment where the private sector has been able to generate a high and steady rate of economic growth. Beginning with an early land reform that created a remarkably equitable distribution of income and wealth, the Taiwanese government proceeded with policies that facilitated the accumulation of human and physical capital, upheld a stable macroeconomic environment, and provided considerable support to domestic investments, industrial development and exports. Some quantitative data reflecting the country’s successful development are summarized in Table 2.2. The achievements during the 1960s, when Taiwan turned from traditional import substitution to a strongly export-oriented development strategy, are particularly notable. The shift in strategy boosted exports, stimulated economic growth, contributed to a reduction of the inflation rate, all of which helped balance the country’s external accounts. Like in Korea, the 1970s were marked by an attempt to target heavy, investment-intensive industry, with only limited success. From the early 1980s the focus shifted to high-tech industry, again in parallel with developments in Korea. However, Taiwanese economic development during the past decade has surpassed that of Korea, largely because of significant differences in the character of growth. While Korea’s high-tech drive was centred on heavy capital investment in a limited number of large firms, Taiwan achieved a high-tech breakthrough Table 2.2 Macroeconomic indicators for Taiwan, 1952–86 Item

1952–61 1961–71 1971–81 1981–86

Average GNP growth rate* Average inflation rate Gross domestic investment (per cent of GNP) Gross national savings (per cent of GNP) Export share (per cent of GNP) Average export growth rate* Import share (per cent of GNP) Average import growth rate* Trade balance (per cent of GNP) Note: *Calculated from data in constant 1981 prices. Source: Kuo (1988), tables 1 and 3.

7.5 8.8

8.8 8.5 14.3 5.4 −5.5

10.2 3.3 22.4 21.9 18.5 23.5 21.1 17.7 −2.6

8.9 11.6 30.7 32.1 42.4 13.8 40.5 11.9 1.9

7.6 3.5 22.2 33.1 50.3 13.1 38.2 6.6 12.1

Ari Kokko 43

through thousands of small and medium-sized enterprises (SMEs) with significantly lower capital investment, lower indebtedness and a more diversified industry structure.

Taiwanese export promotion policy Taiwanese trade policy was largely characterized by import substitution until the late 1950s. With the objective of developing an industrial base for economic self-sufficiency, the government protected local producers of consumer goods, and invested heavily in infrastructure to support domestic industrialization. Policies included the usual import controls, tariffs and multiple exchange rates, and the domestic currency was overvalued to facilitate the necessary imports of technology and capital goods. Moreover, state-owned enterprises (SOEs) held a dominant position in the manufacturing sector, especially in heavy industry. Import substitution was successful in the sense that industrial production more than doubled during the 1950s, with particularly rapid growth in labour-intensive industries like textiles, apparel, wood and leather products, and bicycles. However, the limits to growth based on import substitution began to be noticed already in the mid-1950s. As the small domestic market gradually became saturated, the GDP growth rate declined. The financial costs of import substitution were also significant. In addition to the government budget deficits caused by the heavy public investment expenditures, the policies contributed to a growing trade deficit: the trade regime encouraged imports of technology, capital goods and intermediate goods, but discouraged exports. These imbalances appeared sustainable during most of the 1950s, but only because the deficits could be financed by large inflows of US aid. The US announcement that aid flows would be terminated by the mid-1960s, at the latest, forced the government to rethink its development model. Without access to US aid, it would be necessary to find other sources of badly needed foreign exchange, and so the development strategy shifted to emphasize outward orientation, with export promotion as a new policy instrument. Consequently, starting already in 1958, the Taiwanese government introduced a series of policies to support exports and to promote inflows of foreign direct investment. The multiple exchange rates were gradually transformed into a unitary rate, which translated into an effective devaluation of about 60 per cent benefiting exporters. Tariffs and other import controls on capital goods and intermediates used by exporters were removed. A broad package of fiscal and institutional export incentives – including cheap credits for exporters, income tax exemptions, and cheap export insurance – was put in place. The China External Trade Association, CETRA, was established to provide international marketing services, particularly for small and medium-sized firms that would not have been able to afford such activities on their own. Foreign direct investment was also promoted

44 Export-Led Growth in East Asia

with a powerful incentive scheme. Apart from a duty and tax-free trade regime, foreign investors were granted a five-year corporate income tax holiday and a subsequent maximum tax rate of 25 per cent. During the 1960s, the government established several export promotion zones (EPZs), bonded factories and bonded warehouses. The investors in these zones enjoyed all the incentives and privileges granted to exporters in general, but without the red tape that was otherwise necessary. Concurrently, a gradual reduction of the effective protection of the domestic market commenced. Unlike Korea in the 1960s, Taiwan targeted specific industries already from an early stage. The promoted industries during the period up to about 1973 included plastics, synthetic fibres, apparel, electronic components, consumer electronics, home appliances, and watches and clocks. One important point to note about the choice of industries to be promoted is that these were selected on the basis of Taiwan’s comparative advantages in cheap labour and the existing technological capabilities, in contrast to the Korean heavy industry drive of the 1970s which was not firmly based on existing comparative advantages. Partly for that reason the policies proved extremely successful, and Taiwan’s exports grew at an average annual rate of 28 per cent between 1963 and 1972, from a mere US$123 million to nearly US$3 billion (World Bank, 1993: 132). It is also notable that the export boom was led by private firms, in particular small and medium-sized enterprises (SMEs). In the mid-1980s, the private sector consisted of 57,000 enterprises. On average each of these firms employed only 40 people. Yet, the manufacturing sector had been strongly dominated by large state-owned enterprises (SOEs) at the beginning of the export-oriented period. The role of the SOEs was not to export directly, but rather to exploit economies of scale in the production of inputs – plastics and fibres – for the private export sector. There was little privatization of state enterprises and the demand from the growing export sector allowed the SOEs to expand at a reasonable pace throughout the 1960s. State manufacturing output doubled between 1964 and 1972. However, the growth of private manufacturing output was many times faster. Figure 2.1 illustrates the distribution of manufacturing value added between private and public enterprises in Taiwan since 1952, and highlights the increasing dominance of the private sector. By 1972, about 85 per cent of industrial employment and value added was accounted for by private firms. The growth of private industry was driven by a 50-fold increase in manufacturing exports 1960–72. While agricultural products had accounted for 67 per cent of exports in 1960, manufacturing had taken over with 83 per cent of exports in 1972. Another significant characteristic of Taiwan’s export-led development during this period was the great importance of FDI. Altogether, FDI inflows amounted to about 6 per cent of gross capital formation during the 1960s, with a peak of 11 per cent in 1971. The main contribution of these foreign

Per cent

Ari Kokko 45 100 90 80 70

Public Private

60 50 40 30 20 10

74 19 76 19 78 19 80 19 82 19 84 19 86

72

19

70

19

68

19

66

19

64

19

62

19

60

19

58

19

56

19

54

19

19

19

52

0

Year Figure 2.1 Distribution of Taiwanese manufacturing production (value added) by ownership, 1952–86 (per cent) Source: Republic of China (1990), table 5.4.

investments was not so much the inflow of capital as the transfer and dissemination of knowledge and of skills, both in production technology and areas like marketing and distribution. This resulted in remarkably rapid industrial diversification and quality improvements – which are often prerequisites for successful export performance – during the early stages of Taiwan’s export-led development process. The bulk of FDI was directed to export industries, in particular electronic and electrical appliances, and foreign firms accounted for 80 per cent of Taiwan’s exports of these products by the mid-1970s. This share has subsequently fallen as local firms have grown into exporting in the same areas. As a result of the successful promotion of labour-intensive exports, the pool of surplus labour had been virtually exhausted by the early 1970s. The resulting scarcity of unskilled labour put pressure on domestic wages, and the emergence of new low-wage producers abroad began to challenge the Taiwanese export success. Serious bottlenecks also appeared in the transport, electricity and communications networks. The first oil crisis added to the problems, and real GDP growth collapsed to only 1.2 per cent in 1974. Exports declined by about 7 per cent in real terms the same year. At that time, the government had already realized that a shift in the development strategy was necessary and that future growth should be directed towards

46 Export-Led Growth in East Asia

more capital and skill-intensive industries. The Taiwanese government therefore introduced new policies to consolidate industrial development. The new plans focused on the development of capital-intensive, heavy and petrochemical industries to increase economic independence. In addition, a massive public investment programme, amounting to some US$8 billion, was put in place to remove the bottlenecks and revitalize the economy. The programme included investments in highways, railways, airports and construction of nuclear power plants. The attempt to establish a heavy industrial base was not a total success. While selective support for steel and petrochemicals appeared to be successful, there were clear failures in autos and shipbuilding. The costs of selective intervention were probably not as large as in Korea during the same period, because the discrimination of other sectors was less pronounced. Although most SMEs did not qualify for cheap subsidized capital, they had better access to informal credit than what was the case for non-promoted firms and industries in Korea during the same period. Yet, the impressive growth rates of the 1960s and early 1970s fell to below 7 per cent in the late 1970s, inflation rose, and Taiwanese exporters continued to suffer from the pressure of newly emerging low-wage competitors in the region and elsewhere. Yet another development strategy was therefore formulated in the early 1980s. The Taiwanese government decided to focus on high-technology industries, such as information technology, biotechnology, machinery and precision instruments, and environmental technology industries (World Bank, 1993: 133). This shift required a broad and coordinated effort involving industrial, financial, scientific, technological and human-resource policies. Tax laws were revised to encourage commercial R&D and upgrading of production technologies. New firms were supported with access to venture capital. Universities received additional resources to strengthen programmes focusing on science, mathematics, engineering and computer science, and programmes to encourage qualified overseas Chinese to return to Taiwan were introduced. Concurrently, the speed of economic liberalization was accelerated to promote the further globalization of Taiwanese business. In contrast to the heavy-industry scheme, the focus on high-tech industry proved relatively successful. Growth rates rose above 9 per cent in the late 1980s and the current account exhibited large surpluses throughout that decade, making Taiwan a major foreign investor and creditor. The progress during the 1980s was achieved with remarkable investment efficiency. Here comparison with Korea is interesting. Although Taiwan’s population is less than half of Korea’s, and although the ratio of investment to GDP has consistently been lower than that in Korea, Taiwan’s exports and per capita incomes in 1990 were higher than Korea’s. These differences are probably due to the heavier state intervention and larger subsidies to capital in Korea during the 1960s and 1970s. The availability of subsidized credit allowed the Korean chaebol to grow rapidly, but growth had a high price in terms of

Ari Kokko 47

capital investment and indebtedness. Taiwanese firms, by contrast, invested more moderately and grew slower because capital was typically more expensive. One difference between these two strategies was demonstrated when the financial crisis hit Asia in 1997–98. Taiwan’s low level of indebtedness – both at the national and corporate levels – allowed it to manage the crisis without serious disturbances to the real side of the economy. The heavily indebted Korean industry was less resilient, and the reduced capital inflows following the crisis drove several of the leading chaebol to bankruptcy.

Lessons and conclusions for Europe’s transition economies Summarizing some of the experiences of export promotion in Asia, it is clear that the export booms underlying the successful development of countries like South Korea and Taiwan did not generally occur spontaneously, but rather as an inevitable result of the interaction between supply and demand in free markets. Instead, governments played a central role in the process. Most significantly, periods of successful growth and export expansion were characterized by public policies providing a stable economic environment with strong incentives for private business and promoting the accumulation of human and physical capital. The policies implemented to achieve this growth-oriented macroeconomic environment were quite orthodox. The GDP share of government spending and the level of taxation were relatively low. Strict fiscal and monetary discipline kept budget deficits, domestic and foreign debt stocks and inflation rates sufficiently low to be manageable. Exchange rates were managed to avoid overvaluation of the domestic currency. This stability made it possible to avoid imposing general import restrictions to correct balance-of-payments deficits, and facilitated a gradual reduction of trade restrictions. In fact, trade liberalization was often integrated with macroeconomic management, so that major phases of liberalization coincided with devaluations, exchange rate unification, fiscal reform and inflows of foreign aid or concessional loans to offset the temporary weakening of the current account (World Bank, 1993). Both trade liberalization and realistic exchange rates were necessary requirements for export success, given that most exporting firms were dependent on access to imported intermediary and capital goods, and relied on low prices as a major competitive asset. Most of these policies were not only beneficial for export performance, but rather for economic growth in general. Looking more specifically at policies and institutions in the export sector, it appears that the most successful episodes of export promotion share some common features. First, the allocation of various preferences and export incentives was largely based on markets and competition: to qualify for continued support, firms had to show good export performance. Strict discipline in the administration of supports by and large preserved hard budget constraints. Firms that could not achieve their objectives were often forced

48 Export-Led Growth in East Asia

to merge with others, or even forced out of business. Second, it was the private sector rather than the state-owned sector that was targeted and that responded to the various interventions. In Taiwan, foreign investors also played an important role for export success. Third, the governments managed to carry out their policies, including the eventual reduction of state support, in an orderly fashion, without much interference from the interest groups involved and apparently without much corruption. In South Korea, in particular, there were also episodes when these characteristics were weaker. Typically, the result was instability and weaker economic performance – arguably, the Asian crisis was largely the result of failures in some or several of these points. While these experiences may appear straightforward, it is not easy to distinguish the main lessons for Europe’s transition economies. The reason is not only that there are many differences between Central and Eastern Europe and East Asia, but also that today’s international environment differs from that of a few decades ago. As a result, it is hard to determine how the relative competitiveness of the European transition economies compares to that of East Asia in the 1960s and 1970s, and which of the Asian exportpromotion policies would be effective today. On the one hand, labour costs are higher in Europe than they were in East Asia in the 1960s and 1970s. The political regimes in Europe are also less authoritarian and probably less well-equipped to direct the development of trade and industry than governments in countries like South Korea. On the other hand, the average level of education and infrastructure in Europe today is higher than it was in East Asia some decades ago, compensating to some extent for the higher labour costs. The geographic distance to the main markets is shorter, and EU membership and WTO rules guarantee a higher minimum level of market access abroad than what the Asian miracle economies enjoyed under GATT. EU membership and other international obligations also restrict the policy choices of the European transition economies. For instance, adopting the European Union’s acquis communautaire has introduced strict competition policies, for example ruling out direct state intervention to support ‘national champions’. WTO membership excludes the use of direct export subsidies. The most serious policy-related restriction in this context may be the ambition to fulfil the Maastricht criteria in order to qualify for membership in the EMU. The Maastricht criteria mandate low government budget deficits and stable nominal exchange rates – while the former is well in accordance with the lessons from Asia, the latter is not necessarily so. The reason to be cautious about the virtues of a fixed nominal exchange rate is the Balassa– Samuelson effect (Balassa, 1964). It is likely that the increase in the relative productivity of ‘tradables’ versus ‘non-tradables’ in the transition economies will be higher than that in the old member countries of the EU (as a result of technological convergence). This will raise the wage level and the price of non-tradables, resulting in rates of inflation that are probably not compatible

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with the Maastricht criteria. Maintaining a nominal exchange rate in this situation will lead to real appreciation and probably weaker export competitiveness. Alternatively, attempts to contain inflation may require contractionary, monetary and fiscal policies that could inhibit growth. Against this background, there is obviously reason to be cautious in drawing up lessons for the European transition economies. It may therefore be appropriate to distinguish between three sets of policy experiences. First, there are some policy lessons that are clearly appropriate for the Central and Eastern European economies. Second, it is equally clear that there are also experiences that are neither appropriate nor applicable in a European context. The third category includes some policies that are highly desirable for export promotion, but not compatible with the commitments to the European Union.

The lessons Regarding the positive policy lessons, it is useful to begin by emphasizing the importance of macroeconomic stability. It is uncontroversial to note that strict fiscal and monetary policies to maintain reasonably balanced public budgets, together with relatively low levels of foreign and domestic debt, are probably necessary to maintain a stable macroeconomic environment. It may also be necessary to restrict the GDP share of the public sector to reduce the ‘distortionary’ effects of high tax rates. For most European transition economies, this makes up a significant challenge, considering the historical legacy of a completely dominant state sector. In particular, it has been pointed out that pension reform, replacing pay-as-you-go pension systems with systems based on individual pension savings accounts, will be needed to reduce the levels of current government spending (Sachs and Warner, 1996). Other broad policies needed to establish a growth oriented macroeconomic environment such as appropriate incentives for private entrepreneurship, broad land reforms and public support to education, science and technology are of course also required. Regarding trade and investment policies at the macro level, the policy lessons are also uncontroversial. The East Asian experiences stress the importance of open and outward-oriented trade and investment regimes: as members of the EU, the transition economies have already reached further than any of the Asian miracle economies had at a corresponding stage of their development. The EU’s common external trade policy provides a reasonably open environment for international trade (although some transition economies, like Estonia, applied more liberal policies before their accession to the Union). Moreover, the free mobility of goods, services and capital (and eventually also labour) in the European Single Market has created an overall policy environment that is much more favourable than that faced by South Korea or Taiwan.

50 Export-Led Growth in East Asia

The lessons regarding microeconomic export promotion measures are perhaps more interesting. Discussing the export impediments for the Central and Eastern European economies, Cooper and Gács (1997) emphasized two main problem areas. First, they noted that exporters typically lacked competitive financing. Second, exporters lacked information on foreign standards, regulations and customer requirements. One reason for these deficiencies was that governments paid little attention to developing the infrastructure for the export sector. In fact, Gács (1997: 323) concluded that ‘The East European governments seem to have given far less support for their exports than their international commitments allow.’ In particular, the institutions for export credits and export insurance and guarantee schemes were weakly developed, and not much was invested to establish permanent trade missions abroad. It is possible that the most important lessons from the East Asian experience are found in just these areas. Both South Korea and Taiwan invested heavily to establish formal institutions for international marketing, market research and technology diffusion. At the same time, there was strong emphasis on education and training, to augment the human capital base. It is likely that the improvements in education were highly important in raising the efficiency of the investments in export infrastructure. Thanks to the improvements in human capital, it was not only possible to transfer foreign technology and knowledge to selected actors in the country, but also to diffuse it throughout the economy. Two lessons regarding the implementation of various microeconomic export promotion measures stand out. It is essential to maintain strict discipline in the administration of the supports, to preserve the hard budget constraints for exporters. It also appears important to focus on broad and relatively general forms of support that are automatically available to all exporters that fulfils certain predetermined criteria. This reduces the rentseeking and corruption that tends to follow more selective schemes, where the profitability of the individual company or group of companies is closely related to whether or not they qualify for public support. The most important negative lesson from the Asian experience is related to selective large-scale export promotion. The heavy and chemical industries drive in South Korea in the 1970s demonstrates some of the costs that are likely to emerge. The risk for increased rent-seeking and corruption has already been mentioned. Another general problem is that of ‘picking winners’. While it may be possible to set up strongly selective support programmes that favour industries that have already demonstrated their competitiveness, it is more difficult to identify those industries that will become competitive in the future. Moreover, it is typically very difficult to maintain hard budget constraints in these ‘strategic industries’. The introduction of various subsidies is often interpreted as a signal that market prices do not matter; in heavily supported industries it may also be understood that short-term nominal profits do not matter. The moral hazard involved is

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likely to generate too much risky investment in the targeted sectors, resulting in excess supply and downward pressure on prices. In addition, it may be difficult to finance large targeted programmes without introducing various kinds of distortions. The sectors that are not supported will face a heavier tax burden if the funds come from the government budget. Crowding-out and weakening of the financial sector is likely if the funds are raised in the domestic credit market, with further complications if the policies are financed through foreign borrowing. The main item in the third category – policies that are desirable for export promotion but not compatible with EU regulations – is exchange rate policy. Throughout East Asia, the exchange rate was used actively from time to time to promote exports, and all major episodes of export orientation started out with significant devaluations. High rates of export growth were sustained as long as the productivity increases in industry matched the real rate of currency appreciation. Problems followed when the currencies appreciated faster: this was arguably one of the reasons for the Asian crisis. The most common approach among the European transition economies is to favour nominal exchange rate stability – in some cases, this is guaranteed through currency boards – and most currencies have appreciated significantly in real terms during the past decade. This process is likely to continue in the future due to the Balassa–Samuelson effect. It is hard to see how high and sustainable rates of (export) growth could be maintained in such a situation. Some degree of flexibility in exchange rate policies would therefore be desirable. There are many other areas where similar arguments against strict convergence to EU standards are easy to make. The reason is simply that the present legal and institutional setup of the EU has not been established to maximize the growth rate of GDP or exports. For instance, Sachs and Warner (1996) argue that the transition economies should opt out of the EU’s Social Charter in the short to medium run to avoid burdening their relatively weak economies with the high social costs that are implied by full convergence. However, it is not likely that these arguments will carry any substantial weight in the short run, as long as integration and policy convergence remain the key words in the EU policy debate. In summary, it is therefore likely that the Central and Eastern European transition economies will not be able to duplicate all of East Asia’s growth and export-promoting policies. This will mean that their short to mediumterm export performance is not likely to match that of the Asian Tiger and Dragon economies some decades ago – in particular, this assessment applies to their exports outside the European Single Market. Yet, the export sector will still play a central role for growth and convergence. The relevant lessons from the Asian miracle economies point to the importance of sound macroeconomic policies and some of the ‘softer’ forms of export promotion. These include public investment in infrastructure and investments in

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institutions to support export financing and insurance, market research, dissemination of information about foreign market opportunities, training and education in export-related skills, and technology transfer. The lessons from Asia also throw doubt on some of the ambitions to converge rapidly to EU standards. In particular, there is reason to be cautious regarding the objective to fix the nominal exchange rate during periods of relatively high growth.

References ADB (2002) Key Indicators 2002. Balassa, B. (1964) ‘The Purchasing Power Parity Doctrine: A Reappraisal’, Journal of Political Economy, 72: 584–96. Bank of Korea, Economic Statistics Year book. Chang, H.J. (1993) ‘The Political Economy of Industrial Policy in Korea’, Cambridge Journal of Economics, 17(2): 131–57. Cooper, R.N. and Gács, J. (1997) ‘Introduction and Summary’, in R.N. Cooper and J. Gács (eds), Trade Growth in Transition Economies: Export Impediments for Central and Eastern Europe (Cheltenham: Edward Elgar). The Economist, various issues. Gács, J. (1997) ‘Government Policies in Support of Exports in Small Transition Economies’, in R.N. Cooper and J. Gács (eds), Trade Growth in Transition Economies: Export Impediments for Central and Eastern Europe (Cheltenham: Edward Elgar). IMF, International Financial Statistics, various years. Kuo, S.W.Y. (1988) ‘Development of the Taiwan Economy’, in Conference on Successful Economic Development Strategies of the Pacific Rim Nations, Chung-Hua Institute for Economic Research Conference Series no. 10, Taipei. Moon, C. (1994) ‘Changing Patterns of Business–Government Relations in South Korea’, in A. MacIntyre (ed.), Business and Government in Industrialising Asia (Sydney: Allen & Unwin). Republic of China (1990) Taiwan Statistical Data Book 1990, Council for Economic Planning and Development: Taipei. Sachs, J.D. and. Warner A.M. (1996) ‘Achieving Rapid Growth in the Transition Economies of Central Europe’, Working Paper no. 116, Stockholm Institute of East European Economics. Stiglitz, J. (1996) ‘Some Lessons from the East Asian Miracle’, The World Bank Research Observer, 11: 151–76. Suh, C.S. (1996) ‘Korea in the 1990s: Little Dragon or New Giant?’, in D. Das (ed.), Emerging Growth Pole: The Asia-Pacific Economy (Singapore: Prentice-Hall). Thomas, V., Nash, J. and associates (1991) Best Practices in Trade Policy Reform (New York: Oxford University Press for the World Bank). Westphal, L.E. (1978) ‘The Republic of Korea’s Experience with Export-Led Industrial Development’, World Development, 6(3): 347–82. Woo, W.T., Parker, S. and Sachs, J.D. (1997) Economies in Transition: Comparing Asia and Eastern Europe (Cambridge, Mass.: MIT Press). World Bank (1993) The East Asian Miracle: Economic Growth and Public Policy (New York: Oxford University Press for the World Bank).

3 Organizational Learning Capacities of Policy-Making Systems for Financial System Recovery: The Case of Sweden with Some Suggestions for Japan Kenji Suzuki

Introduction The Swedish experience of the recovery from the financial system crisis with quick structural reform has often drawn attention as one of the best practices from policy-makers in various countries. For instance, the International Monetary Fund in its 1997 report counted Sweden as one of the five ‘substantial progress countries’ (Dziobek and Pazarbasioglu, 1997). In the discussion on the financial system crisis in Japan, the Swedish case had appeared rather sporadically until the mid-1990s (Yoshino, 1994; Masumura, 1997), but it attracted much attention in the 1998 Diet session where the recovery measures from financial crisis were discussed most intensively. Japanese policy-makers have shown their interest in the Swedish case more often since then, but most previous observations, however, have merely focused on the technical aspect. Hence, the ordinary pattern is to point out some advantages and disadvantages of such policy measures as the nationalization of problem banks and divestiture of bad assets, and to discuss the applicability of those measures to Japan. Nevertheless, policy measures are not the only elements to be learned from the Swedish case. This study does not discuss policy measures themselves, but rather considers why the Swedish government was able to develop such drastic and adequate measures in such a short time and to apply them so quickly. Of course, this question has already been addressed from various angles. The most popular answer among Swedish observers, including public officials and politicians directly engaged in the policy-making process at that time, is that the necessity for quick recovery of international credit was recognized quite strongly in Sweden, as the country was a small net-debtor, facing accession to the European Union. It may also be said that solutions such as nationalization were a natural outcome in Sweden, where 53

54 Organizational Learning: Sweden and Japan

the traditionally interventionistic social democratic party had taken office for most of the postwar period, and that the country was just lucky to benefit from favourable economic conditions. Those views are highly convincing, but they do not seem to be sufficient to explain the Swedish success. For example, small net-debtor countries are not always able to act quickly and adequately. Failure is more frequent than success, according to the history of financial crisis in other small net-debtor countries. It should also be remembered that non-social democratic parties took office when the government took measures for recovery from the financial crisis, and the interventionist tradition was not necessarily effective at that time. Then, what should complement the ordinary explanation of the Swedish success? To answer that question, the present study tests the hypothesis that Sweden has demonstrated a high ‘organizational learning capacity’, at least in the policy-making system concerning the financial system recovery. In general, organizational learning capacity means the capacity for an organization to collect and understand inside and outside information and to address problems properly on the basis of acquired knowledge. The discussion on organizational learning, including the analysis of its capacity, has rapidly developed in the field of management and organization studies especially since the 1990s (see Cohen and Sproull, 1996; Argyris, 1999; Easterby-Smith, Araujo and Burgoyne, 1999, for example). Strictly speaking, this study does not investigate a company-like organization but a policy-making system, which encompasses government agencies, politicians, relevant private groups and ultimately the public. Yet there has even been an idea of treating states as virtual organizations (Ahrne, 1998, for example), and it is significant to examine the learning capacity of a policy-making system as an applied study of organizational learning theory. The study is organized as follows. The next section outlines the financial system crisis in Sweden and political reactions to it. The third section reviews the use of the concept of ‘learning’ in the field of political science, and then examines whether the policy-making system regarding the Swedish financial crisis had strong organizational learning capacity, comparing it with the Japanese case. The fourth section summarizes the discussion and concludes with some suggestions to the discussion in Japan.

The Swedish financial system crisis and political reactions This section outlines the rise and fall of the Swedish bubble economy, its impact on the financial system and the reaction of the government as a base of our main discussion to follow.

The rise and fall of the Swedish bubble economy The financial sector in Sweden had long been stagnant under heavy regulation until the early 1980s. The Swedish Central Bank regulated various deposit and loan rates, as well as the amount of loans in total and by sector,

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Percent

and thus market competition was extremely underdeveloped in the banking sector. Since then, however, the sector has gradually been deregulated as the regulation on banks became less effective due to the internationalization of corporate finance and the development of non-bank financial corporations (Finansbolag). Moreover, the liberalization of the banking sector was an international trend, which Sweden could not resist in the face of growing economic internationalization, especially in Europe. Among others, the relaxation of loan rate regulation and the removal of the upper limit on loans by commercial banks in 1985 were most effective in promoting market competition between banks. Banks were now more concerned about the amount of loans rather than profitability. There were ample funds for loans, as banks fully exploited access to the international financial market, whose interest rate was lower than the domestic one. Indeed, the amount of international loans by Swedish deposit banks grew four times from 1985 to 1990. Corresponding to the development on the supply side, the demand for loans by households and corporations also became large. The Swedish economy had steadily grown since the devaluation in 1981–82, and the fall of oil prices reduced the production costs of exports, and hence contributed to the prosperity of export-led growth. Furthermore, a high expectation for inflation and special tax deductions for interest income jointly increased the preference for loans (Jonung and Stymne, 1997: 28–30). In short, there were many good conditions for the growth of loans both on the supply side and on the demand side in the late 1980s in Sweden, just as in Japan. As a matter of fact, the amount of bank loans increased rapidly after 1986 (Figure 3.1). While the ratio of bank loans to gross domestic product

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Figure 3.1 Ratios of loans and foreign debts of banks to GDP, annual average share price index and annual average residential property price index, 1980–92 Note: Data for the annual average residential property price index from 1980 to 1983 are missing. Source: Statistiska Centralbyrån Affärsvärlden.

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(GDP) was around 40 per cent from 1981 to 1985, it exceeded 50 per cent in 1988 and became as much as 58.2 per cent in 1990. The loans were largely directed to the domestic security and real-estate markets. The annual average share price became three times higher in 1989 as in 1985, and, likewise, the annual average price of residential properties doubled from 1985 to 1991. The rise of real estate prices meant the increase of their mortgage value, hence further pushing up the amount of loans based on mortgage. While the resale of properties just for profit making was strictly regulated in Sweden (unlike Japan), the restriction of overseas securities and properties promoted the purchase of domestic properties especially by corporations as investment. Nonetheless, the Swedish economy slowed down after 1989, reflecting the high growth of labour costs and a restrictive monetary policy to manage prospective inflation. This was followed by the rise of oil prices during the Gulf War and international recession, and Sweden suffered from a rapid economic downturn. Some conditions for the ‘real-estate bubble’ had significantly changed as well. First, the tax reform in 1990 removed the special tax deduction for interest income, so that the demand for loans decreased. Secondly, investment in overseas securities and properties became easier due to the deregulation of foreign exchange controls, so that the demand for domestic investment decreased. Furthermore, the international interest rate went up after German Unification, and increased the cost of funding for loans both internationally and domestically. The real-estate bubble collapsed as a result, and Sweden entered into a serious vicious circle, where the collapse of the real-estate market caused economic distress, which further dragged down the property prices in turn.

The structure of the Swedish financial sector and the financial crisis The amount of loans at the end of 1990 was 2,036 billion kronor. The loan supply was composed of banks (45 per cent), housing-loan companies (39 per cent), other financial companies (6 per cent) and others (10 per cent). The Swedish banking sector at that time was composed of 12 commercial banks (except 9 foreign banks), 104 saving banks dealing with small depositors, and 373 corporate banks whose origin was the farmers’ corporation. Commercial banks held 79 per cent of the assets in the banking sector. The shares of saving banks and corporate banks were 17 per cent and 4 per cent respectively. As for commercial banks, the largest bank in terms of assets was Skandinaviska Enskilda Banken (26 per cent of the assets held by all commercial banks). It was followed by Nordbanken (22 per cent), Svenska Handelsbanken (21 per cent) and Gota Bank (8 per cent). These top four banks held nearly 80 per cent. From 1991 to 1992, however, the 11 largest saving banks and all corporate banks were consolidated into Sparbanken Sverige (Swedbank) and Föreningsbanken respectively.

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With regard to financial companies, they initially attracted loan-takers because they had not been regulated so strictly as banks. However, their prosperity continued even after the banking sector was deregulated. On the contrary, the number of financial companies kept increasing in the late 1980s, from 213 in 1985 to 292 in 1988. Competition in the loan market became harder after the entry of banks, and less competitive financial companies increased their loans with less rigorous investigations. As a result, those companies were damaged first by the collapse of the bubble economy. Financial companies lost credit, especially after a large financial company, Nyckeln, turned out to be in a critical situation in October 1990. In fact, the number of financial companies was reduced by more than a half (133) from 1988 to 1992. The failures of financial companies damaged banks not just by creating a bad mood for investment, but also by causing a problem in financial management as many banks had bought financial securities issued by financial companies. In 1991, Nordbanken became short of capital, which led the government to guarantee the issue of new shares and purchase them. The government also bailed out the largest saving bank, Första Sparbanken (later merged with Sparbanken Sverige), which had also fallen into a debt surplus. However, the general outlook was still optimistic at the end of 1991. For instance, ‘The Swedish economy appears to have reached the bottom of its recession this autumn’ reported the Financial Times (21 October 1991). At that time, Sweden saw Norway suffer from a negative spiral, where banks’ wariness of lending caused bankruptcies, which damaged the management of banks in turn. Yet analysts believed ‘Sweden will avoid a similar fate since its market liquidity is much bigger than in Norway and Swedish banks have better capitalisation and strong ownership structures’ (ibid.). In other words, the Norwegian crisis was largely viewed as a different case; this is consistent with what was heard from the interviews with relevant officials.

The 1992 crisis and political reactions The above-mentioned outlook very soon showed that the previous economic forecasts were too optimistic. Problems surfaced with the financial position of Nordbanken and Gota Bank in spring 1992; for Nordbanken, in June the government decided to take over all minority equity, hence making the bank wholly nationalized. This was followed by the European currency crisis that summer. The high interest rate in Germany increased tremendously the demand for German marks, and other European countries faced the alternative of increasing interest rates correspondingly or disengaging their currency from the Exchange Rate Mechanism (ERM). Sweden took the first choice at the beginning, but the result was that the Central Bank had to raise the overnight rate

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up to 500 per cent in the middle of September. The currency was eventually depreciated by 12 per cent, when Sweden left the ERM in November. The delay in disengagement from the ERM seems to have alleviated its impact by giving companies the time to hedge their currency risk (Englund, 1999: 93–4). Nevertheless, the financial sector was seriously damaged by high capital costs due to the high interest rate until disengagement from the ERM. The currency depreciation substantially increased the burden of foreign debts on banks, and consequently banks other than Nordbanken and Gota Bank also found themselves in a critical situation. Now the financial sector seemed to be going into a systemic crisis. Against this background, the government changed its policy from ad hoc support of individual banks to comprehensive support of the whole financial system. The government published a comprehensive support package in September 1992, which was passed in the Swedish Parliament (corresponding to the Japanese Diet) in December. The main feature of this package was to specify no conditions for support so as to keep flexibility for problem-solving. Likewise, no limit was established for financial expenditure. The support administration was initially in charge of the Department of Finance, but the Bank Support Authority was established as a special agency for the support administration. In parallel with this support package, the government nationalized Gota Bank in December. With regard to Nordbanken, the government established a service organization, or ‘bad bank’, called Securum, which took over bad debts from Nordbanken (for Securum, see Macey, 1999, for example). The government recapitalized Gota Bank, and established the same type of service organization (Retriva) to manage the bank’s bad debts. The total amount of expenditure for the two organizations was 64.2 billion kronor in total. The other banks, except Svenska Handelsbanken, applied or considered applying for some sort of public support, but the real public expenditure was only one billion kronor caused by the interest-free loan to Sparbanken. The Swedish financial system has rapidly recovered since 1993. By 1995, all of the five largest banks – Skandinaviska Enskilda Bank, Svenska Handelsbanken, Nordbanken (which acquired Gota Bank), Sparbanken Sverige and Föreningsbanken – achieved positive current profits. The Swedish economy was substantially negative 1991–93, but it changed for the better very quickly. Average stock prices and average property prices began rising in 1993 and 1994 respectively. Given those improvements, the Department of Finance proposed abolishing the support package in November 1995, which was carried out in July of the following year. The Bank Support Authority was reorganized into the Deposit Guarantee Commission, and the ownership of Nordbanken was transferred back to the Department of Finance. The government later sold Nordbanken, earning 67 billion kronor, well-beyond the expenditure for its previous support (Nordea, 2002).

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The organizational learning capacity of the policy-making system As stated in the first section, a policy-making system is not an ‘organization’ in any strict sense. However, it is possible to apply organization theory by considering a policy-making system as a virtual organization. This section first reviews the use of the concept of ‘learning’ in the field of political science, before examining how the Swedish policy-making system was equipped with organizational conditions for a high learning capacity. The study of the policy-making system using the concept of learning dates from the 1970s (Heclo, 1974), but it has rapidly developed especially since the 1990s (Dolowitz and Marsh, 1996; Knopfel and Kissling-Näf, 1998; Stone, 1999). Traditionally, the mainstream political literature on pluralism and elitism has addressed the question of ‘who decides policies’ or ‘who is most influential in policy-making’. By contrast, the ‘policylearning’ literature focuses on the ways of policy formation; in this sense it may be classified into the same current as incrementalism (Lindblom, 1959) and classic bureaucratic choice theory (Niskanen, 1994). As Hall (1993: 276) and Stone (1999: 55) point out, however, the policy-learning literature does not necessarily focus on the state, since social factors and non-governmental actors may also affect policy learning. Therefore, ‘learning is only a partial corrective to theories of policy change based on notions of power and conflict. It is not an alternative hypothesis, because it must always take place within the community’ (Bennett and Howlett, 1992: 290). It is noteworthy that policy learning is often identified with ‘policy transfer’ in political science. That is, many studies on policy learning only focus on the transfer of policy measures from one country (or other jurisdiction) to another. Nevertheless, policy learning should be defined more broadly than policy transfer, so that it includes the creation of new policy measures based on the understanding of existing information, as seen in the Swedish reaction to the financial crisis. Furthermore, the existing literature of policy learning seldom stands on the theory of organizational learning systematically. In particular, political scientists have paid little attention to the theoretical results of organization studies about the conditions of promoting/preventing organizational learning. Hence it is necessary to seek an original framework for our analysis. One of the most extensive analyses on the conditions for organizational learning was conducted by Dixon (1999). Her framework consists of four steps of organizational learning: (1) widespread generation of information, (2) integrating new/local information into the organizational context, (3) collectively interpreting the information, and (4) authority to take responsible action based on the interpreted meaning; and she discusses the conditions necessary for organizations to perform properly in each step. With this framework, the subsequent part discusses the conditions for organizational learning, and considers how much the policy-making system concerning

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the Swedish financial crisis embraces those conditions. Dixon’s framework looks very useful for our analysis, but this does not imply that it is the only framework for identifying the conditions for organizational learning. For instance, Huber (1991) proposed a similar four-step framework, but his contents are different from those of Dixon. It should also be remembered that the following discussion does not derive all aspects from Dixon’s work.

Widespread generation of information In her framework, Dixon used the phrase ‘generation of information’ to ‘encompass both the collection of external data and the internal development of new ideas’ (1999: 93). That is, the first requirement for organizational learning is to collect a variety of information from outside, as well as to develop new ideas from inside. To collect outside information is equally important for company-based organization theory and for government-based political science. In general, to import external success is easier and more frequent for governments than companies. After all, states are not normally put in a position to compete with each other (although they are more and more likely to compete, for example in attracting good companies, due to economic globalization). Neither does policy imitation cause problems in terms of intellectual property rights. This may be why policy learning is often identified with policy transfer. Yet the purpose of the collection of external information is not just to import other cases. From the viewpoint of organizational learning, it is rather more important that the inflow of external ideas stimulate internal ones, or that the mixture of different external ideas leads to the creation of totally new ideas. Combining information from different sources ‘leads not only to new information but also to new understanding’ (Huber, 1991: 101). As a result, organizational learning ‘occurs at the interfaces between persons, between organizational units, and between the organization and its external environment’ (Friedlander, 1983: 199). With the assumption that the diversity of information gives the effect of interaction, it would be better to collect external information from various sources through various channels. During the process of financial recovery, the Swedish government made a number of characteristic efforts for the collection of external information. One of those efforts was to make active use of external consultants. Since the dependence on just one consultancy firm was considered undesirable, the government spread the task over several different firms, even though that might be more costly. Specifically, Credit Suisse First Boston helped the Department of Finance and the Bank Support Authority with financial analysis of banks, while Arthur Andersen investigated internal management. McKinsey & Co. took responsibility for the analysis of strategy and

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effectiveness. The appraisal of bank-owned real estate was under the charge of Valuation Board, organized by Dr Stellan Lundström, a land economist at Royal Institute of Technology, and other real-estate specialists. According to Stefan Ingves, the first Chairman of the Bank Support Authority, and Göran Lind, the then liaison officer at the Swedish Central Bank, the main idea behind the use of external consultants was that it would prove more effective to use those with experience of the financial crisis in the United States and Norway to obtain proper knowledge quickly. Furthermore, it is interesting that those officials admitted that they adopted external consultants because the government had no concept device to solve the problems, and no capability to analyse and clearly explain the situation. This may look irresponsible, but it may also be interpreted as the flexible attitude of Swedish public officials, who would primarily think of problem solution, accept their weaknesses and try to overcome those weaknesses in flexible ways. One of the reasons for such flexibility in the government may be the ‘youth’ of politicians/public officials in Sweden. This is not for biological reasons, but rather because young politicians/public officials are less likely to be obsessed with stereotypical ideas underlying the society and their organizations, so that they can come up with new ideas more easily and carry them out more flexibly. However, the government may not function well when it is composed of only younger people. The greater experience of older people often plays an important role as well, most importantly the construction of the government by a variety of generations, which may lead to a greater interaction of ideas. In fact, the coalition cabinet at the time of financial crisis (1991–94) was very young, not least the Prime Minister, Carl Bildt. The average age of the cabinet ministers was 48.1 years, and Bildt was the second-youngest (42 years old) among them. The youth of this cabinet is impressive when compared with the case of Japan, where the average age of the youngest cabinet member for the last 30 years was 59.4 years (Hosokawa cabinet: 1993–94) and the age of the youngest prime minister was 54 years (Kakuei Tanaka: 1972–74). With specific regard to the politicians directly in charge of financial policy, the Finance Minister, Anne Wibble, was 48 years old, and the minister specifically responsible for the financial crisis, Bo Lundgren, was 44 years old. The average age of the top nine officials (Chefstjänstemän) at the Department of Finance was 47.6 years in 1992. In particular, the leading vice-minister who established the basic framework for the financial system recovery, Urban Bäckström, was 38 years old in 1992. The first chairman of the Bank Support Authority mentioned above, Stefan Ingves, was 40 years old when he was appointed. On the other hand, the average ages of vice-ministers and division heads in Japan were 58.4 years and 54.4 years respectively, according to the survey of the National Personnel Authority in 1994–95. It should be noted that

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the life-expectancy is as long in Sweden as in Japan, and it is not convincing to say that the ageing of the Japanese government reflects its society.

Integrating new/local information into the organizational context Even though much data and ideas may be generated externally and internally, they might not contribute to the learning process unless distributed and shared by the whole organization. Thus the next important step of organizational learning is how an organization can share data and ideas effectively. The degree of communication in an organization largely depends on the relational structure between its components. When each component is isolated and there is no boundary-spanning individuals or sections (Newman, 1985; Tushman and Scanlan, 1981), information may not be distributed properly across different components. Some components in conflict with others may manipulate information or delay the distribution of information for their own interest (Huber, 1991: 101). Moreover, if the communication procedure is very formal, the distribution of information may well be delayed due to the preparation of documents and forms. Useful information may be discarded just because it is not equipped with a proper form (von Krogh and Roos, 1995: 151–2). It is not easy to discuss the extent of the communication capacity of the Swedish policy-making system. When it comes to the general corporate characteristics from the viewpoint of organizational culture, however, Nordic (including Swedish) companies are more likely to avoid intersectional conflict and be less bureaucratic in decision-making procedures than American companies (Selnes et al., 1996). In light of the above, such characteristics may contribute to the improvement of the communication capacity. In addition to the general tendency as such, let us consider the communication capacity of the policy-making system. There are three potential fractures of communication in the policy-making system: between different government agencies; between government and opposition parties; and between the state and society. With regard to the first fracture, the relationship between the Department of Finance, the Central Bank and the Financial Supervisory Agency is the focal point in the case of financial system administration. Those government agencies have close mutuality regardless of their institutional independence, which is discussed in the next sub-section. This is clearly reflected in the appointment of high-ranking officials across different agencies. For instance, the above-mentioned Urban Bäckström was appointed to be Governor of the Central Bank after working for the Department of Finance as the leading vice-minister. Anders Sahrén, who was the Director-General of the Financial Supervisory Agency from 1990 to 1993, came from the position of ViceGovernor of the Central Bank. Such transfers are highly unlikely in Japan, where each financial agency has an individual personnel system, and top executives are always appointed from inside.

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Regarding the second fracture, between government parties and oppositions, the establishment of a comprehensive alliance in summer 1992 was important for the solution of the financial crisis. The achievement of such an alliance was primarily because the economic situation, including the hyperinflation of interest rates, was so critical as to marginalize political conflict. Yet there are two other institutional factors to be noted. First, Sweden has a tendency towards consensus politics. As Katzenstein (1985) has pointed out, many European small states, including Sweden, traditionally have various institutional treatments to coordinate different interests and alleviate conflict between political parties as well as interest groups. According to his study, those states, which he labelled as ‘democratic corporatism’, are less partisan and more conciliatory particularly in the field of economic policy. The second institutional factor is that Swedish party politics has been developed consistently as a one-dominant-party system with the Social Democratic Party at the centre in the postwar period. The Social Democratic Party was not in government at the time of the financial crisis, but it was still the largest party in Swedish politics. The right-wing coalition government did not hold the majority. Even the Moderate Party, the leading party in the coalition, occupied less than 60 per cent of the number of seats held by the Social Democratic Party (Table 3.1). The government therefore needed cooperation from either of the three opposition parties (Social Democratic Party, Left Party and New Democratic Party) in order to pass its bills. It was unlikely to choose the Left Party over the Social Democratic Party, and its choice for alliance was either the Social Democratic Party or the New Democratic Party. The government chose the former partly because the policy stance of the latter was not clear, and partly because the alliance with the largest party would construct a more stable base for policy-making. As a result, the government asked the Social Democratic Party for cooperation, promising to share all relevant information with the party. This government–opposition alliance was reinforced with the establishment of the Bank Support Authority. There were six members on the board of the Bank Support Authority besides the Chairman, Stefan Ingves; three members came from the Social Democratic Party, one from the Department of Finance and two from private companies. This meant that (unlike the case of the Financial Reconstruction Commission in Japan) government

Table 3.1

Swedish Parliament (Diet) seats after the 1991 election

Moderate Party Centre Party Liberal Party Christian Democratic Party Coalition total

80 31 33 26 170

Social Democratic Party Left Party New Democratic Party

138 16 25

Total

349

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politicians left the task to their public officials, while the board was regarded as the place where opposition politicians checked the performance of public officials. Furthermore, it should be pointed out that the establishment of the Bank Support Authority helped reduce the first fracture, that is, the fracture between relevant government agencies, since the separation of activities from the Department of Finance made it easier to communicate with the Central Bank and the Financial Supervisory Agency. As for the third fracture, that is between the state and society, it is necessary to take account of ‘remiss’, a special procedure to draw opinions from the society in Sweden. In the remiss procedure, a policy draft is distributed to a wide range of relevant government agencies and private organizations before it is submitted to Parliament (the Diet). These are legislative proposals of Swedish politics, and the remiss is still seen as an important form of influence. However, this procedure is not free from problems. For example, Lindbeck et al. noted that ‘Enquiries are carried out under too tight time constraints or with too limited objectives’ (2000: 28). In fact, it was in early November 1992 that the draft of the bank support programme was distributed for remiss, and respondents were required to submit their opinions within only two weeks. An article on the remiss referred to a man’s complaint that the issue was relevant to him, even though he was not involved in the remiss, for his tax money would be used (Dagens Industri, 19 November 1992). The article did not assess the remiss procedure itself, but such a complaint brought the problem to light. Yet it is not right to say that the remiss procedure has become totally dead because the draft is distributed to only those expected to give favourable comments, or because respondents are unable to give their opinions. In the bank-support case it is true that the remiss procedure formally started in early November, but the outline was always published in the media in late September, and relevant parties had sufficient time to consider it. The above article also reported that nearly half of the feedback criticized the draft in many critical points. From this it may follow that the remiss procedure contributed to reducing the state–society fracture at least to some extent.

Collectively interpreting the information After generating and transmitting information, an organization needs interpretation, that is ‘the process through which information is given meaning and actions are chosen’ (Daft and Weick, 1984: 294). Interpretation is the central step for organizational learning. Generally speaking, ‘more learning has occurred when more and more varied interpretations have been developed, because such development changes the range of the organisation’s potential behaviors’ (Huber, 1991: 102). Nevertheless, the variety of interpretation can be easily prevented by diverse factors. Out of those factors, let us first focus on the issue of hierarchy, which was also discussed by Dixon. This is followed by a discussion on

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‘organizational defence’, which often draws attention from organization theory. All organizations have more or less hierarchical elements. The more hierarchical an organization, the more likely its leaders are to impose their interpretation on others, which may reduce the scope of organizational interpretation. In hierarchical organizations, moreover, leaders are less likely to be criticized by their subordinates, and thus more likely to overestimate their abilities. In other words, those who originally have greater learning capacity may be promoted to higher positions, but, paradoxically, the closer to the top they reach, the more they lose the opportunity to learn from the criticisms of others. Argyris labelled this as the ‘leadership dilemma’ (1999: 139–48). Then, how hierarchical is the Swedish policy-making system? There is no study on organizational hierarchy specifically focusing on the government, but Swedish organizations are in general seen as less hierarchical than others at the level of organizational culture. In a comparative study by Trompenaars and Hampden-Turner (1993), for example, Sweden was classified into the ‘Equality’ category on a Equality–Hierarchy scale (Japan was classified into ‘Hierarchy’ in the same scale). Likewise, the large-scale international comparison of leadership (Global Leadership and Organizational Behaviour Effectiveness, GLOBE) indicated that Sweden was ranked as 50 out of 61 countries in the aspect of power distance, that is the distance between leaders and subordinates in organizations (Holmberg and Åkerblom, 1998: 11). Given such a low degree of hierarchy, the appointment of relatively younger officials may be easier in Sweden. Conversely, the appointment of younger officials seems to be helpful in keeping flexibility and less hierarchy. Therefore, it may be said that the ‘leadership dilemma’ is less likely to prevent organizational learning in Sweden. While it is necessary to avoid hierarchization to secure the variety of interpretation, however, it is also essential for organizations to have leadership in order to ‘choose actions’, which is also an important element of the collective interpretation of information. In fact, the Swedish policy-making system sometimes witnessed hard measures under strong leadership. An example was that the Chairman of the Financial Supervisory Agency, Anders Sahrén, was suddenly appointed to another post abroad in autumn 1993, speculatively because he was not much in harmony with the Finance Minister, Bo Lundgren (although Lundgren himself rejected that speculation, see Lundgren 1998: 290). There was no remarkable dissension between the Department of Finance and the Central Bank in the case of bank support, but it should be pointed out here that the political independence of the Central Bank was comparatively weak in Sweden, at least until the early 1990s. For instance, Alesina and Summers (1993) marked it as 2 on a 4-grade scale, which was even lower than the Bank of Japan (2.5). It is of course quite difficult to keep leadership while avoiding hierarchy and leadership dilemma. It may be said, although

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merely with hindsight, that the Swedish policy-making system achieves a good balance in that respect. Besides hierarchy, ‘organizational defense’ is another important factor to reduce the performance of collective interpretation. According to Argyris’s double-loop learning theory (1999: 67–91), members would, unconsciously or somewhat consciously, avoid measures that are likely to induce the disturbance of the governing value of their organization, no matter how useful they are for the solution of their problems. This evasive action is organizational defence, which prevents proper interpretation for problem-solving. Government politicians are the final decision-makers in the policymaking process; what they are most afraid of is the destruction of their regime, and the loss of their supporters. The recovery from a financial crisis was no doubt essential in preserving governing values and in avoiding such results. Since there was no ultimate solution, however, politicians would choose policy measures not just for their economic effects, but also for their impact on the existing governing values. In Japan, for example, it was out of question to support banks with tax money, no matter how economically effective the measure would be. Banks were the major source of political donations, and the collusive relationship between banks and public officials at the Ministry of Finance was widely recognized. Under those circumstances, the public was unlikely to support the idea that the government would help banks that had already been criticised as the principal cause of the bubble economy. Moreover, many politicians and public officials were themselves reluctant to give public support which would result in the resignation of their friends – bank managers. In any case, the government actually discussed the plan to support most damaged banks by the purchase of real estate with public funds; nonetheless, the plan was abandoned due to strong opposition from the public. Then how was the relationship between the government and banks in Sweden? Let us examine political donations first. The total financial size of major Swedish parties was 355 million kronor (approximately 4.3 billion yen) at the time of the 1991 election year. This was only 2.5 per cent of the corresponding figure in Japan, published by the annual report of political finance (150–200 billion yen). In Sweden, moreover, more than a half of it was financed by tax money (Finansdepartmentet, 1994). Even the Moderate Party, which was the closest to the business world, owed more than half of its finance to public money. According to Bäck and Möller (2001: 135), even this party no longer receives corporate donations. Personal donations may include those from the managers or owners of banks, but the Swedish public did not seem to consider the relationship between politicians and banks as so problematic that people would suspect their collusion. Regarding the relationship between public officials and banks, it is not prohibited in Sweden for those with careers in the Department of Finance or the Financial Supervisory Agency to work for banks. Most symbolically,

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Anders Sahrén got his job at Föreningssparbanken, which was established by the merger of the banks he had supervised as Chairman of the Financial Supervisory Agency at the time of the financial crisis. Furthermore, the relationship between the government and banks had been, in a sense, more institutionalized in Sweden than in Japan until the early 1990s. Not only partly-national Nordbanken but other totally private banks also had to offer seats in the board to ‘government-appointed executives’ to secure public supervision of management. It should be noted, however, that those executives were neither specifically chosen from public officials, nor exploited for the purpose of their reemployment after retirement. As a result, it is not surprising that this bank–government connection had not been criticized in the same way as amakudari in Japan. Another important reason for minimizing the criticism about the bank– government connection in the discussion on bank support was that the government was not hesitant to accuse bank managers and owners. For example, the government, as the largest shareholder, either dismissed or pressed to resign all board members at Nordbanken in early 1991, even when no tax money had been spent for its support. In the case of Gota Bank, the government supported Gota Bank itself, while leaving its owner, Gota AB. On top of that, the government fought against S-E Banken over the share value of Gota Bank. The share of Gota bank was first acquired by S-E Banken as collateral and then assigned to the government. While S-E Banken requested the government to pay 4 billion kronor for the assignment, the government overrode the request, asserting that the share of Gota Bank had no value at all. Furthermore, the nationalized banks filed a damage suit against its former managers, although a compromise was reached. It is noteworthy in the Swedish case that the Bank Support Authority owed the cost of its own management and consultancy fees to the banks that had applied for its support. The total cost was 130 million SEK kronor, which was not very large compared with the total amount of support. Nevertheless, this policy might be significant for showing the government’s impartiality as the support framework had displeased competitors of the subsidized banks, such as financial companies, insurance companies and non-supported banks, notably Handelsbanken.

Authority to take responsible action based on the interpreted meaning The fourth element for organizational learning raised by Dixon is to give organizational members the authority to act properly based on their interpretation of the knowledge. In other words, organizational members ‘must have enough discretion in their actions to make changes when and where they are needed’ (1999: 121), and ‘The reduction of risk is as necessary to taking responsible action as is having the authority’ (ibid.: 122). While the decision-makers in the policy-making system are politicians, those who implement their decisions are public officials. Basically, Swedish public

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officials are seen as quite autonomous (see Pierre, 1995, for example); yet it should also be noted that political appointees sometimes occupy top-level posts, and that the organizational framework of public agencies is flexible enough to secure political control. Swedish public officials are autonomous, although political control seems to function effectively, in contrast with Japan. The tendency to respect the autonomy of public officials was clearly indicated in the bank support framework. As explained earlier, one of the most important characteristics of the support framework in autumn 1992 was to avoid specifying particular support measures and conditions in order to maintain flexibility. The limit of financial expenditure was not specified either. Government politicians did not engage themselves in the management of the Bank Support Authority (although Social Democratic politicians participated in the executive board). It must be stressed that public officials were able to keep their autonomy largely because the bank–government relationship was not such that it would cause unnecessary social doubt or distrust. Of course, there were numerous criticisms about the government and public officials in the context of the economic slump, but most of them were not so hysterical as to attribute all economic and social problems to the responsibility of public officials. Even in Japan it is true that some observers have called for the establishment of an environment where public officials are able to be fully functional. For example, Tomita warned that ‘too much bashing of the Ministry of Finance creates problems for the future’ (1999: 45). Ikeo emphasized the necessity to increase human resources at the Financial Supervisory Agency (2002: 18), while the general public atmosphere was just to require public officials to be as thrifty as possible. Still, the mainstream argument in Japan is such that ‘it is obvious that the greatest responsibility lies in bureaucrats, while politicians, company managers, journalists and the public are responsible in part’ (Sakaiya, 2002: 153). It is no doubt important to discipline public officials, but, nonetheless, organizational learning theory and the Swedish policy-making case imply that it may not always be the right way to restrict the authority of public officials, or to allow much intervention of politicians.

Conclusions This chapter has examined the financial system crisis and the policy reaction in Sweden, and discussed how much the organizational learning capacity of the policy-making system was relevant to that process, comparing the Swedish and Japanese cases when necessary. Dixon’s theoretical framework has been applied to assess the organizational learning capacity, but it should be recalled that the above discussion did not cover all aspects of

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the framework, and that her study includes far more than the framework presented here. Moreover, we should be cautious not to interpret hastily a good organizational learning capacity as having saved Sweden from the financial crisis. As noted at the beginning, the Swedish policy reaction should rather be attributed to the country’s position in international political economies and its historical state interventionism. Also, its success seems to have relied as much on various accidental factors such as the international economic climate. Without those environmental conditions, the result might well have been different even though the Swedish policy-making system had great learning capacity. The argument of this study is that the result would not have been so favourable even under the same conditions, unless the Swedish policymaking system had had enough learning capacity. When discussing the Swedish case, Japanese observers tend to focus on policy measures. The consequence is either that they depreciate the case with too much concern about the differences of environmental conditions, or that they appreciate it too much, having little concern about the differences and devaluing their discussion. Some observers have discussed certain elements of the policy-making system such as quick decision-making, information disclosure and the use of external specialists (for example, Sato, 1999; Yamada, 2001). Yet most of their discussions are rather sporadic, and this study is a challenge to develop a more systematic discussion on the issue. It is important to learn policy measures from successful cases in other countries, and not only for the case of financial system recovery. As this study shows, however, it may be important to develop the discussion not only on policy measures but also on the policy-making system, including assessment of the framework suitable for analysis.

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70 Organizational Learning: Sweden and Japan Dolowitz, D. and Marsh, D. (1996) ‘Who Learns What from Whom: A Review of the Policy Transfer Literature’, Political Studies, XLIV: 343–57. Dziobek, C. and Pazarbasioglu, C. (1997) ‘Lessons from Systemic Bank Restructuring: A Survey of 24 Countries’, IMF Working Paper no. 97/161. Easterby-Smith, M., Araujo, L. and Burgoyne, J. (eds) (1999) Organizational Learning and the Learning Organization: Developments in Theory and Practice (London: Sage). Englund, P. (1999) ‘The Swedish Banking Crisis: Roots and Consequences’, Oxford Review of Economic Policy, 15(3): 80–97. Finansdepartmentet (1994) Det Offentliga Stödet till Partierna – Inriktning och omfattning, Ds 1994: 31 (Stockholm: Fritz). Friedlander, F. (1983) ‘Patterns of Individual and Organizational Learning’, in S. Srivastva (ed.), The Executive Mind (San Francisco: Jossey-Bass): 192–220. Hall, P.A. (1993) ‘Policy Paradigms, Social Learning, and the State: The Case of Economic Policymaking in Britain’, Comparative Politics, April 1993: 274–93. Heclo, H. (1974) Modern Social Politics in Britain and Sweden (New Haven: Yale University Press). Holmberg, I. and Åkerblom, S. (1998) ‘Primus inter pares’ Leadership and Culture in Sweden (Stockholm: Centre for Advanced Studies in Leadership). Huber, G.P. (1991) ‘Organizational Learning: The Contributing Processes and the Literatures’, Organization Science, 2(1): 88–115. Ikeo, K. (2002) ‘Furyosaikenshori motto hitowo fuyase’ (Increase manpower to cope with bad debt), Nikkei Business, 11 February 2002, p. 18. Ingves, S. and Lind, G. (1998) ‘Om att hantera en bankkris’, Ekonomisk Debatt, 26 August 1998. Jonung, L. and Stymne, J. (1997) ‘The Great Regime Shift: Asset Markets and Economic Activity in Sweden, 1985–93’, in F. Capie and G.E. Wood (eds), Asset Prices and the Real Economy (London: Palgrave Macmillan): 19–55. Katzenstein, P.J. (1985) Small States in World Markets: Industrial Policy in Europe (Ithaca: Cornell University Press). Knopfel, P. and Kissling-Näf, I. (1998) ‘Social Learning in Policy Networks’, Policy and Politics, 26(3): 343–66. Krogh, G. von and Roos, J. (1995) Organizational Epistemology (Basingstoke: Palgrave Macmillan). Lindbeck, A., Molander, P., Persson, T., Petersson O. and Swedenborg, B. (2000) Power and Accountability in Swedish Politics (Stockholm: SNS Förlag). Lindblom, C.E. (1959) ‘The Science of Muddling Through’, Public Administration Review, 19: 79–88. Lundgren, Bo (1998) När bubblan brast (Stockholm: DN). Macey, J.R. (1999) Are Bad Banks the Solution to a Banking Crisis?, Occasional Paper no. 82, (Stockholm: SNS). Masumura, M. (1997) ‘Sweden no kinyukiki to keizaiseisakuunei (Financial crisis and economic policy operation in Sweden), Nihon keizaiseisaku gappai nenpou, 45: 105–9. Newman, M. (1985) ‘Managerial Access to Information: Strategies for Prevention and Promotion’, Journal of Management Studies, 22(2): 193–211. Niskanen, Jr., W.A. (1994) Bureaucracy and Public Economics (London: Edward Elgar). Nordea (2002) Historik Nordbanken Pierre, J. (1995) ‘Governing the Welfare State: Public Administration, the State and Society in Sweden’, in J. Pierre (ed.), Bureaucracy in the Modern State: An Introduction to Comparative Public Administration (London: Edward Elgar): 140–60.

Kenji Suzuki 71 Sakaiya, T. (2002) ‘Heisei kanryo ha munosugiru’ (Bureaucrats in Heisei era are too ineffective), Bungei Shunju, March 2002: 152–62. Sato, S. (1999) ‘Sweden no kinyu sisutem kiki – nihon heno kyokun’ (The Swedish financial crisis – lessons to Japan), ESP, February 1999: 55–9. Selnes, F., Jaworski, B.J. and Kohli, A.K. (1996) ‘Market Orientation in United States and Scandinavian Companies. A Cross-Cultural Study’, Scandinavian Journal of Management, 12(2): 139–57. Stone, D. (1999) ‘Learning Lessons and Transferring Policy across Time, Space and Disciplines’, Politics, 19(1): 51–9. Tomita, T. (1999) ‘Kadono okuratatakiha kakon nokosu’ (Too much bashing to Ministry of Finance creates problems for the future), Nikkei Business, 1 November 1999: 145. Trompenaars, F. and Hampden-Turner, C. (1993) The Seven Cultures of Capitalism (New York: Doubleday). Tushman, M.L. and Scanlan, T.J. (1981) ‘Boundary Spanning Individuals: Their Role in Information Transfer and Their Antecedents’, Academy of Management Journal, 24(2): 289–305. Yamada, Y. (2001) ‘Keizai kyoshitsu: Sweden ni miru kikitaiou’ (Economic seminar: Crisis management in Sweden), 25 June 2001. Yoshino, N. (1994) ‘Sweden deha seifuga ginkowo kyusaishita’ (The government saved banks in Sweden), Ekonomisto, 28 November 1994: 82–6.

Periodicals Affärsvärlden Dagens Industri Financial Times, 21 October 1991 Statistiska Centralbyrån Sveriges statskalender

4 Levitt Emphasized Markets but Manufacturing Leads the Way Fred Robins

Introduction In this chapter a summary comment is offered on the global integration versus local responsiveness issue from both theoretical and commercial perspectives. The issue is introduced through reference to its theoretical development in the marketing and business strategy literatures, followed by an equally brief reality check by noting a few contemporary business decisions, apparently made with the need for enhanced local responsiveness in mind. There then follows a closer look at some specific, heavily foreigninvested industries in which both global versus local tensions might reasonably be expected to be present and informative. These are the Thai auto industry and the Chinese computer and optical frame industries. Using only publicly available information, it will be seen that at the present stage of world development the globalization of supply chains and of manufacturing is probably moving faster than the much earlier-heralded globalization of markets; and that the latter will experience intensified competition leading to enhanced local responsiveness. The idea that modern business is globalizing, or quite simply going global, is older than the idea of a tension between the forces favouring global integration of business and the forces favouring local responsiveness in business. Most commentators choose to credit Theodore Levitt, who prophesized the globalization of markets in a Harvard Business Review article, with having inaugurated the modern globalization debate. As befits a marketer, his emphasis was very much on markets and the apparent convergence of consumer tastes and living styles across the more prosperous countries of the world (Levitt, 1983). The same was true of Kenichi Ohmae, a couple of years later, who was struck by the apparent ‘Californization’ of teenage society across much of the world (Ohmae, 1985). At that time, little was heard about the globalization of production. However, it quickly became apparent that ‘globalization’ meant different things to different people, and in terms of analysis globalization could be 72

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examined at more than one level. In macro terms, at the international level, it referred to growing interdependence among entire national economies or countries. At this level, it was a matter of growing international trade, investment and technology transfer. At the national or country level, globalization referred to the extent to which the economy of a particular economy was interlinked with the rest of the world. The major business consultants increasingly published annual rankings purporting to show the relative level of economic integration of individual countries with the rest of the world. Then, within a national economy there was the single industry level of analysis. This was the degree to which the competitive position of an industry within its domestic market was becoming tied up with its competitive position across national borders; regionally or globally. The world’s auto industry offered some early and revealing examples. Finally, at the micro or company level, globalization referred to the extent to which the individual firm extended its own activities into other countries. It is at this intra-firm level that the ‘global integration’ versus ‘local responsiveness’ debate belongs. Once the steady globalization of some markets, notably luxury product and fast-food markets, had gained attention, the firm-level realities of globalization were subjected to major empirical research. Close examination soon revealed a rather more complex picture than that first hypothesised. While there were indeed identifiable forces pushing firms towards increased global integration of their activities, it was also the case that a different set of forces could be identified which were pushing some of these same firms in the opposite direction; that is, towards increasing their responsiveness to local demands. This recognition was immediately popularized, first by Prahalad and Doz (1987) and then by Bartlett and Ghoshal (1989). They utilized a two-dimensional ‘IR’ grid in which global integration (I) and local responsiveness (R) pressures could both be represented and individual industries then plotted in relation to both of these conflicting sets of forces. For ‘eclectic’ theorist John Dunning, the existence of these conflicting sets of forces was seen as something of a paradox. For him, the idea of ‘thinking globally but acting locally’, implied a need to tap resources from throughout the world yet simultaneously be part of a local cluster of firms engaged in related activities. Most importantly, research revealed that not all industries and product categories were equally well-suited to the globalization of their business activities. In particular, it became clear that the globalization of business activities was much more appropriate for firms with innovative technical products like consumer electronics, than for firms with more culturally-embedded products like processed foods. As Bartlett and Ghoshal stated, globalization was easier and more appropriate for Sony than for Unilever. Research into the detail of globalization also moved the focus of analysis away from the globalization of markets and marketing alone, to the globalization of a firm’s business activities as a whole. Indeed, one major

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piece of research developed a sophisticated itemization and classification of all the various elements identifiable in global manufacturing networks (Ferdows, 1997). More generally, the global integration of firms’ manufacturing production received a lot more attention as the increasing use of cheap, modern, electronic communication developed during the 1990s. This technologically enabling-factor has greatly facilitated and strengthened cross-border activities of all kinds, embracing the entire value chain.

Some current reality Against this backdrop, it is good to bring the story right up to date by double-checking what firms with global operations are actually doing. At the time of writing, May 2003, a cursory look at the business news offers plenty of evidence of globalization continuing apace. In particular, it suggests that companies are being driven by both cost pressures and market pressures alike. This is precisely what the established research would lead us to expect, so let us note the kinds of things which are going on. First, an example of market pressure leading to greater localization of management and greater local adaptation. Lawson Inc is a Japanese retailer which first moved into Shanghai in 1996 and after seven years now operates about 100 convenience stores there. Lawson’s move into China took the form of a 70 per cent joint-venture stake in Shanghai Hualian Lawson, in partnership with the Hualian Group Corporation, China’s major retailer and a core company within Shanghai Bai Lian Holdings. However, Lawson’s have been faced with complications in negotiating property acquisition in China and are disappointed by their modest rate of expansion. According to company President Isamu Ochiai, the opening of stores lagged because Lawson operations in China ‘were too Japanese’ and failed to adapt to the local business environment. As a result, Lawson has decided to reduce their stake in the joint-venture to 49 per cent by selling 21 per cent to their partners. By handing primary management rights over to Hualian Group, they believe they can create a structure which will enable the joint-venture to successfully pursue new store openings and surpass its break-even level of 300 stores relatively quickly. Under the new structure, the board of directors will change from five Japanese and two Chinese to three Japanese and four Chinese, including a Chinese chairman (Schimoharaguchi, 2003). Another Japanese example is offered by Mitsubishi Electric in Thailand. It is reported that the company has identified a pent-up demand in Thailand for a user-friendly vacuum cleaner. Of course, the company already produce such products in Japan but they are costly high-end models featuring easy, front-end opening for clearing dust. However, the company is now preparing to launch a simplified, low-cost equivalent in Thailand, tailored to the needs and incomes of customers in Southeast Asia and Southern

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Europe. We are told this marks the first attempt by Mitsubishi Electric Thailand to adapt a product to the Southeast Asian market (Wada, 2003). In fact, the current business news is full of global companies raising their level of local responsiveness. Another example relates to Korean consumer electronics manufacturers, LG Electronics and Samsung Electronics, in India. Together, these two companies’ sales of TVs, air conditioners, washing machines, microwaves and phones account for one-third of total Indian sales in each category. This is at first sight surprising, given that firms like Philips, Electrolux and Whirlpool have been established in India for longer. According to New Delhi market research company, ORG-GfK, this is largely due to the failure of non-Korean firms to adapt their products to local needs. In contrast, when the Koreans arrived in the mid-1990s they took the time to undertake market research and learn exactly what Indians wanted. Samsung India’s Vice-President for marketing is quoted as saying: ‘we began researching the market in 1994 but didn’t start selling products here until December 1995’. For example, both Samsung and LG learnt that Indians like more volume on their TV sets because families often watch in a noisy environment. So for a premium of 7 per cent both companies offer sets with more than 800 watts of sound, compared with the normal 200 watts (Kripalani, 2003). LG’s local sales and marketing chief, Ganesh Mahalingham, puts it this way: ‘In India, you’ve got to roll up your sleeves like a local to do business, not do it like a suit-and-tie multinational.’ Rather similarly, Hyundai’s first Indian offering, the US$7,000 Santro, was an old mini-car design but fitted out with the very latest technology, especially for the Indian market. Less-obvious local adaptation has been undertaken by China’s three leading internet portals: NetEase, Sina and Sohu. In this case, local and domestic firms had to re-craft an entire business model when faced with the entry into their domestic market of global competition from America Online. As a consequence, they abandoned their ‘imported’ business model, which depended on advertising revenue pitched to China’s 52 million internet subscribers, and focused instead on selling online content to China’s 200 million cell-phone owners. The portals found a new source of revenue and profit in short text messages for which customers pay a monthly subscription charge which is shared between the portal and the mobile phone operators (Einhorn and Ihlwan, 2003). Two final examples relate to the globalization of production. Melco Display Devices is a plant in Mexicali, which made cathode-ray tubes for computer monitors. Owned by Mitsubishi Corporation, it closed in July 2003 because it was no longer able to compete with lower-priced production from China. It was easy, cheap and fast for Mitsubishi to transfer this production to one of its existing affiliates in China; this decision was made on cost. However, it is not always quite as straightforward. Microsoft’s ‘Xbox’ videogame console was also made in Mexico. When the product was

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launched in mid-2001, Microsoft chose to centralize production for the US market at Flextronics’ Guadalajara facility so that its engineers could easily fly down from the USA for last-minute design changes. A year later, Microsoft transferred production to two plants in China. According to Todd Holmdahl, Microsoft’s general manager for Xbox hardware, the reason was not simply cost. The main reason was: ‘China is closer to our supply base. Most Xbox components come from the Far East’ (Smith, 2003). Interestingly, Xbox’s move from Mexico to China may be taken to support the paradox John Dunning sees between the needs of global procurement and the need for membership of a Michael Porter-style ‘cluster’. All of the above is culled, without making any effort, from just one week’s reading of the business press. It constitutes evidence of the continuing force of globalization, even during a period of global economic uncertainty and slowdown in world trade growth. It offers examples of both global cost pressure in manufacturing and of local market pressure on product design and business behaviour.

The Thai auto industry Auto production is perhaps the largest manufacturing sector in the world, producing some 55 million vehicles annually and accounting for about 10 per cent of world trade. Not surprisingly, it is a sector dominated by well-known corporations with global reach. General Motors has plants in 50 countries, Mitsubishi in 31, Ford in 30 and Toyota in 25. Yet the WTO tells us that tariff rates in the sector remain well-above the average for industrial goods. This may largely explain why the industry has not until very recently been at the forefront of globalization. Indeed, some prosperous car-producing countries, import few cars. Whereas in Australia 60 per cent of the vehicles sold are imported, the figure for Japan is just 6 per cent and for South Korea less than 1 per cent (Pearson, 2002). On the other hand, in 2002, Japan’s top three carmakers, the world’s most efficient, announced record overseas production as the migration of manufacturing to lower-cost countries was matched by a simultaneous increase in overseas demand for Japanese vehicles (Ibison, 2003). Most of this new activity was in Thailand and China. Indeed, PricewaterhouseCoopers predict that Asia overall will account for more than half the worldwide industry growth over the period from 1998–2006. This is also the view of the Auto Sector Working Group of the US–ASEAN Business Council over the period to 2010. Thailand is the nascent epicentre of ASEAN auto production. In 2002 there were 14 vehicle assemblers with a total production capacity in excess of a million units per annum. These were supported by approximately 1,700 auto-parts suppliers, of which 700 were OEM suppliers (MOI, 2002). In the government-sponsored Eastern Seaboard Industrial Estate south-east of Bangkok, there is a collection of overseas-owned car plants which are

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sometimes known as the ‘Detroit of the East’. This modern industrial complex houses factories operated by General Motors, BMW and Auto Alliance Thailand, a joint-venture between Ford and Mazda, plus a number of associated auto-component manufacturers. Half the capacity of the GM plant assembles the Isuzu ‘Spacecab’, the best-selling vehicle in Thailand, while some of the remainder produces Daewoo and Alfa Romeo cars. GM’s own product, its ‘Zafira’ people-mover, is Thailand’s top passenger car export. Although few of these are sold in Thailand, some 50,000 are already exported to 20 countries, including Japan. Locally manufactured parts, which are more than 10 per cent cheaper than those made in Japan, the USA or Europe, account for between 75 per cent and 85 per cent of the parts used. Under the ASEAN Free Trade Area (AFTA), the original Asean member states, with the exception of Malaysia, have dropped auto tariffs to less than 5 per cent. This is allowing Thailand to develop as a production base on a regional scale with region-wide exports. Further, thanks to plans by Mitsubishi, Toyota and Honda to boost Thai production for ‘reverse’ export to Japan, research company Automotive Resources Asia believes Thailand will produce over a million vehicles per annum within three years (Tilley, 2003). To examine what all this means for the globalization of the world’s auto manufacturers we need to look closer. At present, for example, Toyota consigns production of small trucks for the Japanese market to its Hino affiliate at home in Japan. But from 2004, small-truck manufacturing for Japan will move to Toyota’s own Thai factory. In fact, the President of Toyota Thailand, Masaki Nakatsugawa, says: ‘. . . we may even consolidate all of our global small truck production in Thailand’. If this occurred, it would make Thailand the single production base for Toyota small trucks destined for the entire world market. In a comparable development, Thailand is becoming important in Honda’s global strategy. That company has already moved production of its Australian model ‘Civic’ passenger car from Japan to Thailand and plans to start importing small Thai-built models to Japan this year. Honda also uses its Thai base to supply sedans to Indonesia while using its Indonesian facilities to supply minivans to Thailand (Shimizu, 2002). It is revealing that the impact of globalization is just as apparent if we consider the one significant ASEAN car producer which has not yet had to cope with the AFTA car tariff regime; that is, Malaysia’s ‘national car’, the Proton. Malaysia negotiated an exemption for its two car producers until 2005 to give them more time to adapt. In this context it is helpful to note that Proton’s entire annual production amounts to less than a single week’s output by Toyota, Ford or GM. Until now Proton has benefited from massive home government support, including both public funds and tariff protection. But with the onset of the AFTA car tariff regime, Proton will have to survive foreign competition on more even terms. Most of Proton’s

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foreign rivals are preparing for this market opening by reorganizing their dealerships and a price war has already broken out so that Proton’s price advantage has diminished. The character of Proton’s proposed reorganization is particularly revealing. The aim is to make it easier for Proton subsidiaries to forge new alliances with foreign manufacturers independently of the 15.8 per cent stake (subsequently reduced) held at that time by two Mitsubishi subsidiaries. To this end, a new holding company called ‘Newco’ is to be established under which there will be four subsidiaries, including a delisted Proton as the main manufacturing subsidiary (Cheesman, 2003). The most interesting aspect of this development is the fact that Proton, a state-sponsored firm, in an industry which the government was long reluctant to liberalize, is now not merely having to shape up to international competition for the first time but is having to do so by means of developing new international linkages of its own. All these changes reflect the growing capability of global manufacturers to exploit the increasing freedom of location and production flexibility, plus the increasing freedom to trade without encountering insurmountable barriers, which the world’s more liberalized trade and investment regime now allows. Although the foregoing relates primarily to Thailand and only to its auto sector, there are plenty of parallels in other countries and in other sectors, both in Asia and elsewhere in the world. The big picture is undoubtedly one of increased cross-border integration of both manufacturing and marketing. But this is not all. It is also a picture of increasing cross-border corporate ownership and of increasing cross-corporate ownership and control.

China’s computer industry In the early years of computing, China’s small market was dominated by the products of pioneering foreign firms. At the beginning of the 1990s the market leaders in China, by share, were IBM, Compaq, HP and Toshiba (Powell, 2002). Today, China’s market is dominated by Legend, a domestic producer with global ambitions now known internationally as ‘Lenovo’. Indeed, according to the Japanese Electronics and Information Technology Industries Association, in the course of 2003 China is expected to become the world’s largest producer of desktops, notebooks and personal digital assistants (TNW, 2003). Given the high-tech character of computers, this is a dramatic transformation in just one decade. However, the point which is relevant in the context of globalization is that none of it could have occurred without close integration of the computer industry in China with the computer industry in other economies, notably those of the United States, Taiwan, Japan and South Korea. The intimacy of the required cross-border industrial and commercial integration is clear when it is recognized as embracing capital investment, transfer of managerial expertise,

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introduction of overseas-owned intellectual property, inclusion in intracompany trading relationships, and inclusion in wider supply-chain and marketplace relationships as well. In 2002, Legend held 27.7 per cent of China’s domestic PC market. Their closest competitor was another domestic brand, Founder, with a 9.4 per cent share, and the largest foreign PC supplier, Dell, had 5.8 per cent. Moreover, the market leader’s brand name is locally synonymous with high quality, good service and value for money and not just low price. It is relevant to note how this enviable position was achieved. In terms of production and, particularly, distribution, Legend learnt important lessons from Hewlett-Packard and Toshiba, its early partners. When the time came to build their own machines, Legend was able to achieve lower costs than their foreign competitors but their biggest competitive advantage lay in their distribution network. In the marketplace, however, Legend’s successful strategy was basically the application of local knowledge to meet the unique requirements of the emerging Chinese market (Meyer, 2003): As a distributor for Western brands, Legend discovered that the average Chinese couldn’t use a Western computer because the software required sophisticated knowledge of English. People wanted turnkey systems, so Legend started making turnkey systems for different markets in China. And while emphasising cost, their margins were pretty good. Legend’s founder and Chairman, Liu Chuan Zhi, used his ties to China’s state-owned enterprises to sell them computers and then dispatched armies of retail staff throughout the country to teach first-timers how to use them. This was financed by a listing in Hong Kong in 1994, raising nearly US$30 million. Legend also pioneered a new keyboard that made it easier to write Chinese characters (Economist, 2001), but the focus was on selling reliable, basic machines. Market leadership was achieved in 1997 by launching a price cut of 40 per cent which Legend’s foreign competitors could not match. By 2000, Legend was a US$2.2 billion company with $40 million in annual profits and, not least, 3,500 sales points. The latter comprised 570 outlets directly established by Legend in 300 cities, which target customers and provide wide-ranging computing advice, together with a further 3,000 distributors active in some 600 cities. This strength in distribution cannot be equalled by Legend’s foreign competitors. Legend’s next challenge will be to move successfully into the international market. With 7 per cent of sales already outside China a start has been made. Its QDI subsidiary also sells motherboards to white-box manufacturers in Asia and Europe but the company has yet to extend its brand into Western markets. That will prove the next big test. For the purpose of this chapter, however, the main point has already been made, namely, that local adaptation and responsiveness can yield dramatic marketplace success.

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Interestingly, one little adaptation Legend is making as it prepares to enter the global market is to its brand name, which is owned in most overseas markets by others. In April 2003, Legend widely registered the ‘Lenovo’ brand for its forthcoming global push (Hyland, 2003). What is notable is that Legend’s domestic market success indicates the degree to which cross-border linkages can be successfully coordinated in today’s globalized world. The company is dominant in its domestic market as a result of its local knowledge and astute responsiveness to market needs. At the same time it relies on a supply chain which is almost totally dependent on imported technology and is dominated by foreign-invested firms. In other words, production is part of the globalized economy, while marketplace success is owed to ‘localization’. This is very different from the well-known luxury good brands like Gucci and Prado. In these latter examples, production and marketing are both more or less global and issues of local adaptation do not generally arise. Indeed, product uniformity and global recognition are an intrinsic part of the appeal of many up-market luxury consumer items. (Legend later acquired the IBM PC business – editor’s note.) China’s computer industry supply chain is more fully integrated into the global economy outside China than is Legend. For example, Prime Technology, an electronics manufacturing service provider affiliated with a Taiwanese firm, located in Guangzhou, mass produces motherboards for Compaq, Canon and Xerox, amongst others. The company’s entire output is exported, with 70 per cent going to the USA and the rest to Japan. USI Electronics is another Taiwan-affiliated firm making motherboards, which supplies IBM. Hong Kong-affilated Fittec Electronics and Japan-affiliated Kaga Electronics, both of which also manufacture motherboards, are similar. A common view is that a high concentration of similar firms has helped make production of sophisticated electronics parts more efficient than elsewhere which, in turn, has attracted more firms. Most of these firms are located in the Pearl River Delta region close to Hong Kong, which acts as a financial and distribution centre, contributing to what many see as an ideal business environment (Kitadai, 2002). It is estimated that in 2001 some 56 per cent of China’s US$28 billion of IT products came from Taiwan-affiliated firms. Somewhat similarly, there is a collection of semiconductor manufacturing plants, both established and planned, in Shanghai. The first of these are also Taiwan-affiliated, with more than a dozen so-called ‘fabs’ likely to be established by the end of 2005, capable of making half a million 8-inch wafers a month. Foreign investors include AMD and IBM from the USA, Japan’s Toshiba, Singapore’s Chartered Semiconductor and Taiwan’s TSMC. This international group of major corporations in the same global industry are all coming together in a local manufacturing ‘cluster’ close to Shanghai (Einhorn, 2002); another example for Professor Dunning perhaps. Of course,

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China’s integration into the global economy is very far from limited to computer components and semiconductors. Meanwhile, the best-selling non-Chinese computer in China, Dell, offers another example of how global firms find it desirable to adapt to local market circumstances. Ranked fourth in China in market share in 2002, Dell had to work hard to gain share rather than lose it. To this end, Dell decided upon several adaptations. First, according to the President of Dell Asia-Pacific, William Amelio, the company had to bring down its price to make its product more attractive to the 85 per cent of the Chinese urban population that don’t have a computer yet. Accepting that most Chinese buyers were relatively unfamiliar with computers, the company designed and launched the straightforward ‘SmartPC’ with a preset configuration, costing only US$575. At the start, the machine was outsourced from a firm in Taiwan that assembled it in China. Then, when Dell was able to commission its own new, purpose-built factory in Xiamen, in November 2000, it brought production back in-house. Another local problem for Dell, in a market not comfortable with credit cards, was receiving payment. The initial answer was to accept payment on delivery. Some buyers were found to lack the money when the computer arrived so arrangements were made with local banks for buyers to pay there. Finally, given that the Chinese were inexperienced in Dell-direct purchase, the company sent sales teams to shopping malls to offer potential buyers the opportunity to ‘see and touch’ (Einhorn, 2001).

Another globally integrated supply chain in China The detail of industry supply chains is very difficult to research and assess, and this holds true even if financial data is not required. This is not because they are increasingly global in their reach, but because transparency is absent. Today’s emerging global production networks often constitute a maze of licensing arrangements which are shrouded in commercial confidentiality and which, frequently, are put together by intermediaries whose unique business contribution lies precisely in their ability to knit such networks together and, in some cases, manage them. One unusually informative little document on the subject, published by the OECD (Lillywhite, 2002), relates to the supply of optical frames produced in China. The study was undertaken by the Brotherhood of St Laurence which, in 2000, took over a small Australian company called Mod-Style which imports and wholesales optical frames to Australia’s independent optical retailers. The Brotherhood quarantined company profits for the first two years in order to fund a thorough investigation of its supply chain. Although the main focus was corporate responsibility, with an emphasis on labour standards, the study also illuminates the complexity and opacity of contemporary supply chains.

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China currently manufactures 90 per cent of the world’s optical frames, primarily for the US and EU markets. This includes many well-known brands of Italian sunglasses labelled ‘Made in Italy’, which are in reality produced in China with only the finishing details added in Italy. Thirteen of Mod-Style’s 23 suppliers are based in China, seven of them in the industrial zone of Dongguan, near to Hong Kong. Most are wholly-owned Hong Kong family businesses, with well-educated second-generation management in charge. They vary in size from 150 workers to 4,500. In fact, the largest of these suppliers is also one of the largest suppliers to the global market and has 20 production lines with a monthly output capacity of 1.1 million optical frames. Mod-Style accounts for less than 2 per cent of its annual production. However other final customers of these Dongguan factories include major global brands such as Gucci, Timberland, DKNY, Esprit, Disney and Calvin Klein. What is noteworthy is that most final customers deal with the factories at arms’ length, through complex indirect arrangements. For example, many contract through the three or four trading houses with offices in Hong Kong, which themselves exert more influence than the final purchasers over the global optical industry. Other subcontracting arrangements are also complex and difficult to map. However the available detail, even if incomplete, offers insight into the global character of modern manufacturing supply chain linkages. Raw materials and components are imported into China from many other countries. For example, metal and plastic [acetate] come from Italy, Germany and Japan; screws are from Switzerland; lenses from the USA, Thailand and Vietnam; colouring and screen prints from Italy; and wire from domestic Chinese suppliers. Over and above this, the smaller factories often outsource particular production processes, such as electroplating and injection moulding. This is a complex industry, whose product supplies a near global market on OEM or contract terms, with a supply chain of its own which, in turn, is also near global in its sourcing. In such a case it is hard to say whether it is the production of optical frames or their marketing which is the more globally integrated; both are. Where big name brands are involved, we may reasonably judge the marketing to be more globally integrated than locally responsive. Similarly on the production side, as with many capital goods and industrial intermediate products, we may judge the Dongguan optical frame industry to be more concerned with global integration and efficiency rather than with a desire to meet local or regional preferences.

Amazon in Japan Amazon Japan has been that company’s fastest overseas subsidiary to break even. It has registered more than two million users since its launch in November 2000 and in the fourth quarter of 2002 reached quarterly operating profitability (Rahman, 2003). Amazon’s strategy in Japan has

Fred Robins 83

been a blend of replicating its established US formula and making changes to suit the local Japanese market. It is the latter which are of interest. They included introduction of cash-on-delivery to cope with the fact that credit cards are not widely used in Japan. Amazon also started a rewards system, which is common practice among Japanese electronics retailers, giving buyers of electronics products a discount on the next purchase. It has also introduced what is a telling innovation into Japan simply by doing something which is routine back home in the USA. This is the introduction of Amazon’s free-delivery policy, which allows the company to sidestep the restrictions which exist in Japan on discounting books and music, effectively allowing people to buy products at a lower price and also directly discounting English-language books.

Assessment The foregoing fragments of information cannot offer more insight into contemporary global business. The information offered is unstructured and is, anyway, far too limited to offer more than an imperfect guide to generalization. Yet the questions we should like to answer are large ones. What, for example, does such detail tell us about the actual processes of globalization and where they are leading? What does it tell us of the levels of global product standardization or, say, global brand standardization we should expect in the future? Not least, what does it tell us of the balance between the pressures of global integration and the pressures of local responsiveness both within and between firms? In a nutshell, does it add to our general understanding in any way? The honest answer is probably not much! Yet, this author is reluctant to leave it at that. Faced with such complexity, one can at least avoid some of the more facile generalizations of the past. Globalization, however defined, is unlikely to prove universal. Nor is it inevitable. Awareness of detail reveals many shades and degrees of both global integration and local responsiveness. Moreover, these forces are not only present within individual firms, where they were first identified and assessed, but within entire industry value chains. So, given what we can observe in contemporary cross-border business, what generalizations can be made with some sense of realism? A first basic principle of globalization might be that one size definitely does not fit all. We know that different industries do not share the same globalization potential (Yip, 1992: 12). We also know that within the individual firm (Bartlett and Ghoshal, 1989: 97), not all product categories – business functions or tasks – require the same degree of integration or differentiation across borders. Accordingly, this author hypothesizes, as a generalization, that pressures for local responsiveness will be greater from household customers in the marketplace than from industrial buyers involved in the production chain. If this hypothesis is accepted, we can

84 Levitt, Markets and Manufacturing

expect globalization of production to proceed at a faster pace, and go further than Levitt-style globalization of consumer products and markets. This is likely to be most apparent in the context of technical products destined for the business-to-business marketplace. It is to be emphasized, however, that this is only a generalization. It acknowledges that some measure of globalization is being experienced in both the production process and the marketplace. What is hypothesized is simply that the pace of globalization in the two spheres is unlikely to be the same and that globalization is likely to be faster in the supply chain than in the marketing of finished goods. It follows that this is likely to apply both within and between firms. Where the entire value chain, or a large part of it, is vertically integrated within the same firm, this pressure will require an organizational response within the firm. Where the value chain is disaggregated among a lot of independent but contractually linked firms, the pressures will be the same. In this case, however, response will be required of the supply chain as a whole and may be less apparent. One reasonable assumption is that we are still at a very early stage in the globalization process. Granted this, we may safely assume that as time goes by there will be more and more ‘global’ firms growing into the marketplace, producing more and more global products and services, particularly in the consumer marketplace. So a second reasonable expectation is that in any particular product category, worldwide competition among global rivals will increase steadily as more companies and products go global. With this heightened competition, almost inevitably, pressures for product differentiation within each category will also intensify. One feature of this differentiation, basic marketing suggests, is likely to be increased product adaptation to satisfy local market preferences. In other words, increased local responsiveness. Again, pressures in this direction may be assumed both within firms when vertically integrated, and among them when the value chain is disaggregated. In an increasingly globalized world this is an entirely reasonable outcome. However, it would probably be wrong to assume that ‘local responsiveness’ will always remain associated with geography or culture. With the passage of time, what we today understand as local market preference may become less and less a matter of geography and much more a matter of lifestyle or belief. Time will tell.

Conclusion There is plenty of evidence that business globalization continues. Evidence such as that in this chapter can be paralleled in many other parts of the world and is to be found right across manufacturing, distribution and marketing. At the same time, what is happening at firm level makes clear that generalization is risky; business globalization is self-evidently a many-sided process. Moreover, competitive pressures to integrate globally, or adapt locally, are often felt along entire industry value chains as well as within individual firms.

Fred Robins 85

Against this backdrop the author has offered a couple of intuitively reasonable, but untested, hypotheses. The first is that globalization is proceeding further and faster in manufacturing and supply chains rather than in consumer marketing. The second is that with time, there will be an intensification of competition at the global level. In most categories there is likely to be a growing number of global rivals. This intensified competition will spur greater product and service differentiation, including enhanced responsiveness to local preferences.

References Bartlett, C. and Ghoshal, S. (1989) Managing Across Borders: The Transnational Solution (London: Hutchinson Business Books). Cheesman, B. (2003) ‘Proton Restructures to Handle Foreign Competition’, Australian Financial Review, 2 June, p. 14; Sydney. Dunning, J.H. (1991) ‘The Eclectic Paradigm of International Production: A Personal Perspective’, in C.N. Pitelis and R. Sugden (eds), The Nature of the Transnational Firm (London: Routledge): 119–38. Economist (2001) ‘Legend in the Making’, The Economist, 13 September; www.economist.com. Einhorn, B. (2001) ‘Dell Takes a Different Tack in China’, Business Week Online, 3 December; downloaded 16 August 2003. Einhorn, B. (2002) ‘China’s Chip Binge’, Business Week, 21 January, New York: 18–19. Einhorn, B. and Ihlwan, M. (2003) ‘China’s Homegrown Stars, Three Portals Thrive on Text Messaging’, Business Week, 12 May, New York. Ferdows, K. (1997) ‘Making the Most of Foreign Factories’, Harvard Business Review, March–April: 73–88. Hyland, A. (2003) ‘China Learns to Play the Name Game’, The Australian Financial Review, 22 May: 68. Ibison, D. (2003) ‘Japan’s Carmakers Benefit from Overseas Move’, FT.com, 27 January; London. Kitadai, N. (2002) ‘China IT Firms Enjoy Jump in Orders’, The Nikkei Weekly, 18 March, Tokyo: 20. Kripalani, M. (2003) ‘A Profitable Passage to India’, Business Week, 12 May, New York: 21. Levitt, T. (1983) ‘The Globalization of Markets’, Harvard Business Review, May–June: 92–102. Lillywhite, S. (2002) ‘Pursuing Corporate Responsibility in China – Experiences of a Small Enterprise in the Optical Industry’ (Paris: OECD), 19 June. Meyer, M. (2003) ‘Can a Chinese Legend Go Global?’, Knowledge@Wharton, 12 March, University of Pennsylvania. MOI (2002) ‘Automotive Industry in Thailand’, Office of Industrial Economics, Ministry of Industry, Bangkok; March. Ohmae, K. (1985) Triad Power: The Coming Shape of Global Competition (New York: The Free Press). Pearson, B. (2002) ‘Driving a Hard Bargain’, The Australian Financial Review, 6 August: 61. Powell, B. (2002) ‘The Legend of Legend’, Fortune, 5 September; www.fortune.com Prahalad, C.K. and Doz, Y. (1987) The Multinational Mission: Balancing Local Demands and Global Vision (New York: The Free Press). Rahman, B. (2003) ‘Amazon Predicts Japan will be Second Market’, Financial Times, 2 July: 29.

86 Levitt, Markets and Manufacturing Shimizu, Y. (2002) ‘Region’s Carmakers Seek New Route’, The Nikkei Weekly, 11 September, Tokyo: 20. Shimoharaguchi, T. (2003) ‘Lawson to Expand Store Chain in China’, The Nikkei Weekly, 5 May, Tokyo: 20. Smith, G. (2003) ‘Wasting Away’, Business Week, 2 June, New York: 27–8. Tilley, R. (2003) ‘Detroit of the East’, Asia Inc., May, Hong Kong: 36–7. TNW (2003), anonymous: ‘China’s Lead Widens in Electronics’, The Nikkei Weekly, 5 May, Tokyo: 20. US–ASEAN (2003) Auto Sector Working Group, www.us-asean.org/auto.asp Wada, S. (2003) ‘Pessure from S. Korean Rivals Prompts Japanese to Overhaul Ops’, The Nikkei Weekly, 5 May, Tokyo: 20. Yip, G. (1992) Total Global Strategy (Englewood Cliffs, NJ: Prentice Hall).

Part II Definition of How Success or Failure Occurs is Changing in the Face of Surrounding Technical and Informational Adjustments

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5 Japanese Foreign Direct Investment and the Transformation of the East Asian Political Economy: Corporate Strategy in the Automotive Sector Andrew J. Staples

The aim of this chapter is to examine the strategies employed by Japanese automobile manufacturers in East Asia in the context of the post-crisis transformation of the region’s political economy. Flying-geese (FG)-type models of foreign direct investment (FDI) have made valuable contributions to our conceptual understanding of Japanese MNC FDI, the international division of labour and economic development in East Asia. However, the increasingly diverse and complicated reality of the contemporary political economy may render these models overly simplistic and consequently of limited analytical value. And, whereas globalization, the pace of technological change and the regionalization of production through networks underpinned our understanding of the region throughout the late 1980s to mid-1990s (Bernard and Ravenhill, 1995; Hatch and Yamamura, 1996), stalled multilateralism, market liberalization, new regionalism, regional economic integration and the continued rise of China define the contemporary era. These contextual issues are crucial to understanding both the activities of Japanese MNCs, Japan’s role in the region and the complex nature of production in East Asia. Japan has been a central player in the regionalization of production in East Asia and now seeks to reinforce this by actively pursuing East Asian regionalism. Japanese auto manufacturers retain dominant positions in most East Asian markets, particularly so in ASEAN and, by extension given the size and impact of supporting industries, are clearly key actors in national and regional industrial development in general. The first section of this chapter briefly reviews FDI theory and FG variants, while the second section documents in some detail key aspects of the region’s post-crisis transformation. The third section concerns regional integration and a fourth section presents analysis of data collected through questionnaires and interviews from a leading Japanese auto manufacturer in 89

90 Corporate Strategy in the Automotive Sector

an attempt to firmly locate a micro (firm) level investigation of corporate strategy in the broader (macro) context outlined above and below. A final section offers some brief concluding remarks.

FDI theory, product cycles and the flying-geese model Traditional approaches to the overseas activities of firms have focused on the firm as the unit of analysis. Locational (why firms invest overseas) and organizational theories (how foreign firms can successfully compete with local competitors given the presumed costs of foreignness) have further concentrated on the maximization and application of firm-specific advantages as key to understanding the move to invest overseas. Vernon’s (1966) well-known ‘product life-cycle’ marked a departure from this narrowly defined field by synthesizing firm-based theories with those concerned with the dynamics of international trade, and it is at this point that the Western legacy brushes up closest with that emerging in Japan discussed below. Dunning’s ‘eclectic paradigm’, however, made the convincing argument that FDI was sufficiently complex to require reference to all the major theoretical approaches described above. Essentially, Dunning stressed that a combination of advantages in three specific fields, namely ‘organization’ (O), ‘location’ (L) and ‘internal’ (I), are necessary for firms to undertake FDI. Thus, if not yet a general theory, the eclectic or OLI paradigm has provided a rigid analytical framework for the study of FDI by combining elements of international trade and industrial organisation theory. Yet the apparent Western bias inherent in mainstream approaches to FDI and the particular nature of Japanese FDI in East Asia led to the development of a Japanese response to which attention now turns.

Development of Japanese FDI theory The Japanese approach to FDI has been dominated by the flying-geese paradigm first enunciated in the late 1930s (in Japanese) by Akamatsu. Since publication in English (1962) the theory has been continually modified, criticized, stretched and challenged. Three key aspects of the model have been identified by one of its most vociferous proponents, Kiyoshi Kojima (2000). First, the model describes a process of ‘catching-up’ industrialization between advanced and developing economies. Second, that FG-style FDI is inherently pro-trade (export-orientated) in contrast to the anti-trade (host-market) nature of Western (US) investments. Third, there is a regional dimension to the model based on comparative advantage and agreed specialization. A central criticism of the theory is that its supposedly benign and developmental nature cloaks a conscious effort by Japan to dominate the region through dependency-inducing relationships. Indeed, a compelling response to Kojima and the Japanese school is made by Hatch and Yamamura (1996)

Andrew J. Staples 91

who present the ‘Asia in Japan’s embrace’ argument, seeing in the expansion of Japan’s economic engagement with the region a remerging neo-greater East Asian co-prosperity sphere. For these authors, the relationship between lead and following goose is highly asymmetric, locking developing economies into vertical and exploitative relationships where they are dependant not only on Japanese technology and capital, but also on US markets for exports. Moreover, they suggest that this is an implicit policy aim of Japanese technocrats. The paradigm also suggests that firms in industries with declining comparative advantage will exit those industries and the maturing technology transferred abroad. But as others have pointed out (Bernard and Ravenhill, 1995; Hart-Landsberg, 1998), the utilization of technology allows Japanese industries to remain significant players when, the theory suggests, production could be expected to be relocated overseas. A final further criticism of the theory is found in the response from mainstream, that is to say Western FDI theorists who suggest that it is unduly static, failing to take into account falling and rising comparative advantage, and, crucially, globalization. If the flying-geese theory is, as has been suggested, the ‘triumph of analogy over analysis’, then what approach should we adopt when investigating Japanese FDI? Susan Strange is clear on this point: The explanation for the internationalisation of production is not to be found within the firm but in the context, in the changing political economy within which the firm operates and competes with others in a global market for goods and services. (Strange 1993: 104) It is becoming increasingly clear that the dramatic changes in the international and regional political economy since the latter half of the 1990s have fundamentally altered the way in which we can and should investigate Japanese FDI. Simply put, locating a micro (firm, industry)-level examination of corporate strategy within the contextual environs of the region’s post-crisis political economy affords us a clearer understanding of the contemporary ‘reality’ observed in East Asia.

The transformation of the East Asian political economy This section posits that events at the multilateral, regional and national levels in the late 1990s and early twenty-first century, when taken cumulatively, equate to a transformation of the East Asian political economy. The impact of the Asian financial crisis is clearly central, but it is only when the responses to this event are taken in the context of further trends (the rise of China, continuing and deepening regional economic interdependence,

92 Corporate Strategy in the Automotive Sector

‘new’ regionalism and the rise of free-trade agreements) that a clearer picture of the region’s political economy emerges.

Responses to the Asian financial crisis In-depth analysis of the causes and immediate impact of the crisis may be found elsewhere (Pempel, 1999; Noble and Ravenhill, 2000; Robison et al., 1999) and the debate rumbles on. But it is the deeper trends emanating from the crisis that have specific significance to the issues investigated here. The event has served as a catalyst for a more politicized and formalized regionalism, deeper economic integration and further trade liberalization and facilitation, typified by the rapid growth of bilateral and regional freetrade agreements. Before these trends are examined, two further points which stalled multilateralism and the rise of China require consideration.

Stalled multilateralism The multilateral process played out at biennial WTO ministerial meetings has stalled. The late 1990s can to some extent be seen as the high-water mark for this form of institution-led globalism. The Seattle meeting (1999) was characterized by violent protests from anti-globalization groups and NGOs and spectacularly failed to launch a new round of negotiations. This predicament persisted until the Doha talks, held shortly after 11 September 2001, that succeeded in launching the ‘development’ round of negotiations. However, these talks were not successfully concluded in Cancún (2003) and although the next round of talks is timetabled for Hong Kong in 2005, it is not clear that any deal will be achievable even by that date. Frustration with this situation has led to an increasing interest in multilateral, regional and bilateral free trade agreements (Low, 2003) and a considerable shift in Japan’s trade policy in particular (METI, 2002).

The rise of China Since the late 1980s, China has been emerging as a challenge to the Japanese economic dominance of the region; as a potential threat to ASEAN economies still attempting to compete on low labour costs; as the FDI destination of choice; as a vast and rapidly growing consumer market and as a manufacturing export platform. Certainly, difficulties and questions persist (overheating, overcapacity, legal framework, SARS) but fundamentally the rapid and sustained growth of the Chinese economy is perhaps the core issue in the East Asian political economy today. In Japan, the Chinese ‘threat’ has more recently receded as Sino-Japanese trade and investment continue to grow. Overall, investment in China was expected to reach US$60 billion in 2003 (Business Times, 13 August 2003) and US$100 billion by 2006 (China Daily, 02 January 2003). In 2002, Japanese FDI exceeded that for the rest of ASEAN (Association of Southeast Asian Nations) combined and the ranks of early investors are now swelled

Andrew J. Staples 93 Table 5.1 Japanese FDI to China and ASEAN-5 countries, 1995–2003 (yen 100 millions) 1995

1996

1997

1998

1999

2000

2001

2002

2003

China ASEAN-5

4,319 5,134

2,828 6,831

2,438 9,227

1,377 5,221

858 4,461

1,114 2,769

1,819 4,636

2,152 2,773

3,553 2,552

Singapore Malaysia Indonesia Thailand Philippines

1,143 555 1,548 1,196 692

1,256 644 2,720 1,581 630

2,238 971 3,085 2,291 642

839 668 1,428 1,798 488

1,158 588 1,070 934 711

505 256 464 1,030 514

1,435 321 785 1,106 989

917 98 644 614 500

364 523 732 711 222

Source: Ministry of Finance, Japan.

with relatively late entrants, including the likes of Toyota. Japanese FDI to China (Table 5.1) rose to US$3.5 billion in 2003, while growth in transport equipment (mainly automotive and associated industries) rose to US$800 million. Auto manufacturers are crowding into China on the back of huge real growth and sales, and this is a market that will dwarf any combined ASEAN market of the future. At present (2005) the ASEAN market stands at approximately 1.2 million units and may double in the next decade. China currently stands at approximately three million units and is set to increase two to threefold in the same period. Politically, there has been a growing acceptance within the Chinese leadership, since the crisis, of a need to engage constructively with the region. China then is ‘for’ both bilateral and regional Free trade agreements (FTAs) and actively encourages this process. China and ASEAN signed an FTA in December 2004, which will not take force until 2010 and then with notable exemptions, the first large regional agreement of its kind in East Asia.

Deepening regional economic integration Closer regional cooperation in East Asia is based on regional economic interdependence (Kawai, 2004), which deepened considerably throughout the 1990s. Rising interdependence can be seen in figures for both intra-regional trade and investment, and Table 5.2 documents the rising percentage of intra-regional trade throughout East Asia. Intra-emerging East Asia trade (excluding Japan) rose 18.4 percentage points from 22.6 per cent in 1980 to 41.0 per cent in 2001, whereas the EU experienced only a 9.3 percentage point rise in the same period indicating that East Asia is trading increasingly within the region and approaching the level of intra-regional trade observed in NAFTA (North American Free Trade Agreement).

94 Corporate Strategy in the Automotive Sector Table 5.2 Intra-regional trade share (percentages) Regions

1980

1985

1990

1995

2000

2001

East Asia-10 (including Japan) Emerging East Asia-9 NIEs-4 ASEAN-4 NAFTA EU

33.6 22.6 8.5 3.5 52.6

36.2 26.3 9.5 4.9 36.6 53.8

41.6 32.8 12.4 3.9 36.8 64.9

50.1 38.4 14.0 5.2 41.9 64.1

50.1 39.5 13.6 7.9 46.5 62.1

50.8 41.0 13.2 7.9 46.3 61.9

Note: (a) The intra-regional trade share is defined as: {(Xi j /Xi) + (Xi j /X j)}/2 where Xi j represents exports of region i to region j, Xi represents total exports of region i, and X j represents total exports of the world to region j (or total imports of region j). In the table, the share is defined only for economies within the same region, so that i = j. Source: Kawai (2004): 10.

Between 1993 and 1998 intra-ASEAN trade increased yearly by 13.2 per cent from US$44.2 billion to US$73.4 billion.1 The rate of increase immediately prior to the crisis was just below 30 per cent, which was markedly higher than the near 19 per cent increase seen in total exports for the region. However, this trend was reversed in the aftermath of the crisis and intra-ASEAN export trade contracted by 15.9 per cent, more severe than the 5.8 per cent reduction in total exports. By 2001, intra-ASEAN export trade had recovered to US$80.8 billion or approximately a 10 per cent gain on 1998 figures. Imports also showed a substantial 7.3 per cent increase from 2001–02, while imports from outside of the region declined slightly. This export and import trade structure demonstrates not only that intraEast Asian trade is increasing, but that the traditional reliance on external markets for exports and imports is declining. Although intra-regional trade percentages are lower than those found in the EU and NAFTA, these data suggest the emergence of a viable and self-sustaining regional market. This is particularly important when we consider the traditionally export (extraregional)-orientated nature of production in East Asia. Japanese FDI has traditionally accounted for a dominant proportion of FDI in East Asia, most notably in the ASEAN states. Yet FDI flows within the region are changing and a new pattern is emerging. Japanese FDI to ASEAN is declining in contrast to the high levels of investment directed at China, either directly or through investment in Hong Kong and Taiwan. FDI from the newly-industrialized economies (NIEs) to other Asian countries has steadily increased as has the share of intra-Asian FDI in total inflow figures. A number of factors account for this, not least the liberalization of FDI regimes and increased opportunities for investment as a result of high growth rates.

Andrew J. Staples 95

New regionalism, free-trade agreements and economic partnerships One clear and still emerging response to the Asian financial crisis at the governmental level has been a growing interest in a new and more proactive approach to regionalism in East Asia. This ‘new’ or ‘second-wave’ regionalism that emerged in the 1990s is closely associated with the division of the world into regional trading blocs, exemplified by the EU’s single market (1992), and the creation of the NAFTA (1994). Before the crisis, East Asian economies appeared content with modest movement towards informal trading arrangements under the auspices of APEC (Asian Pacific Economic Cooperation) (Bogor Declaration, 1994), though the ASEAN Free Trade Area (AFTA) established in 1992 may be seen as an exception to this. Since the crisis, considerable emphasis has been placed on moves towards a more formal style of regional economic integration premised not only on expanding intra-regional trade and investment, but also on ‘deeper’ issues of finance, human resources, standardization and structural reform. Table 5.3 records the range of government-level meetings initiated after the Asian financial crisis that continues to meet regularly at scheduled ASEAN summits. These meetings are much premised on a process of thorough discussion, consultation and negotiation leading to the creation of frameworks for the implementation of concrete proposals endorsed by government.

Growth of free-trade agreements and economic partnerships A further, critical dynamic transforming the region’s political economy is that of the rapid rise of bilateral and regional trading agreements. In

Table 5.3 Government-level meetings initiated after the Asian financial crisis Meeting

Initiated

ASEAN +3 Heads of Nov. 2001 Government Summits ASEAN +3 Finance Ministers 1997 Meetings

ASEAN +3 Trade Ministers Meetings

ASEAN–China FTA ASEAN–Japan

Results

CAFTA proposal JACEP proposal Implementation of Chiang Mai Initiative BSA (currency swaps) Training of ASEAN officials Development of early warning models Asian Bond Market Initiative 1999 Identification of Priority Areas and specific project proposals Six areas of cooperation endorsed by ministers (Siem Reap, 2001) Nov. 2001 Agreement signed 2004 Nov. 2001 Continuing

96 Corporate Strategy in the Automotive Sector

contrast to WTO-led (stalled) multilateralism covered above, the popularity of FTAs has expanded rapidly. Between 1952 and 1995, 41 RTAs (Regional Trade Agreements) were notified to the WTO, a rate of approximately one a year. Between 1995 and 2004, a further 66 RTAs were notified, or approximately seven a year. East Asia, while a latecomer to the global trend of regional agreements is now keenly pursuing multilateral, regional and bilateral FTAs. The only regional FTA in operation at the time of writing is the ASEAN Free Trade Agreement (AFTA) that, for the first time, creates a regional market for member nations. This is of considerable importance for manufacturing industries, the auto industry in particular, and the impact of the agreement on corporate strategy is the key research question considered in the next section. However, a considerable number of regional and bilateral agreements are in various stages of development. Japan signed its first FTA (though Japan prefers the term Economic Partnership) with Singapore in 2003, a second with Mexico in 2004 and is in active bilateral discussions with other ASEAN states including Thailand, Malaysia, the Philippines and Korea. A framework for comprehensive economic partnership between Japan and ASEAN is also under consideration. Space dictates that further investigation into the number of FTAs under consideration in East Asia be omitted,2 yet the rapid growth and popularity of agreements in the region is further evidence supporting the hypothesis of a transformation of the East Asian political economy.

Corporate strategy in East Asia: Toyota Motor Corporation The following section draws on research conducted through questionnaires and interviews with Toyota Motor Corporation (TMC) between 2003 and 2004. Interviews were conducted at both Head Office in Tokyo and regional offices in Singapore. Questionnaire and interview responses were augmented by internal documents and by secondary material sourced elsewhere, notably from FOURIN (China Auto Weekly). The research sought to construct a picture of Toyota’s operations in East Asia in the context of the transformation of the East Asian political economy as examined above, with specific reference to the following areas: general corporate strategy, investments, production and trade.

Overview of Toyota’s operations in East Asia Toyota commenced operations in East Asia in 1964 with a plant in Thailand and expanded its presence throughout the 1980s and 1990s. Most recently, significant FDI has been directed to China, albeit somewhat belatedly. Japanese automakers play a dominant role in East Asia, China excluded, and within this structure Toyota’s position is strongest. Given this dominance, an

Andrew J. Staples 97

understanding of Toyota’s strategies in the region is crucial to any investigation into the East Asian activities of Japanese MNCs.

General strategy Toyota’s general strategy has been described as expansionary, regional and based on the application of kaizen. Quantitatively this equates to a global target market share of 15 per cent and production of approximately nine million units by 2010. A central strand of the regional strategy is the Innovative International Multi-purpose Vehicles (IMV) project, which has particular relevance to East Asia and is covered in some detail below. Regional strategy is further underpinned by objectives in product development and production structure.

The IMV project Launched in 2002 and to a large degree in response to the Asian financial crisis, the IMV project indicates a significant and strategic development. Mirroring general trends among Japanese automakers over the last three decades, global demand for Toyota models was initially met through domestic production and exports. A second phase (1980s onwards) of overseas expansion and localization followed, though Toyota was a relatively cautious overseas investor at first. This latest phase attempts to move a sizeable proportion of Toyota production (500,000 units by 2006, approximately 11 per cent of Toyota’s global production at 2002 figures) onto a truly global basis. ASEAN production bases (Thailand and Indonesia) are central to this strategy. Essentially, the IMV project aims to ‘realise global optimal production and supply networks’ (Toyota, 2004). In other words, Toyota is seeking to capitalize on the trend towards liberalization, exemplified by AFTA by rationalizing production capacity to realize scale economies and linking global markets. It is suggested that the IMV project could realize cost savings of up to 30 per cent (Nihon Keizai Shimbun, 12 April 2004). It is noteworthy that the project explicitly aims to link production in developing markets (Thailand, Philippines, South Africa and Argentina) to the ‘advanced’ market found in Europe. This may be taken as an indication of the advancements made in raising quality in these production centres. Figure 5.1 and Table 5.4 show the IMV vehicle supply network. Thailand is the key player within this structure with an annual production capacity of 280,000 units of which 140,000 will be for export markets. Production in Thailand of the first3 IMV vehicle, the Hilux VIGO pickup, commenced in 2004 and the country will also produce diesel engines for export to other IMV production bases. The IMV project is to some extent premised on Toyota capitalizing on the low-cost nature of production in these two countries.

98

Europe Thailand TMT 280,000 units∗ (140,000 for export)

Middle East

Asia Central & S. America

Africa

Argentina TASA 60,000 units∗ (45,000 for export)

Indonesia TMMIN 80,000 units∗ (10,000 for export)

South Africa TSAM 60,000 units∗ (30,000 for export) KD∗∗ kits

Oceania

∗ Annual production capacity ∗∗ Knock down kits Figure 5.1 Source:

The IMV supply network

Adapted from Toyota promotional material.

Table 5.4 Main IMV production bases Country

Affiliate Production vehicle

Start of production

Annual production

Export destination

Thailand

TMT

August 2004 2005

280,000 units (Including 140,000 units for export) 80,000 units (Including 10,000 units for export) 60,000 units (Including 30,000 units for export) 60,000 units (Including 45,000 units for export)

Europe, Asia, Oceania, The Middle East

Indonesia

Pickup truck (Hilux VIGO) Sport utility vehicle TMMIN Minivan

September 2004

South Africa TSAM

Pickup truck Sport utility vehicle

2005 2005

Argentina

Pickup truck Sport utility vehicle

2005 2005

TASA

Asia, the Middle East

Europe, Africa, etc.

Latin America

Notes: *Worldwide IMV production including in countries other than the above four is expected to exceed 500,000 units in 2006. TMT: Toyota Motor Thailand Co., Ltd. TMMIN: PT. Toyota Motor Manufacturing Indonesia. TSAM: Toyota South Africa Motors (Pty) Ltd. TASA: Toyota Argentina S.A. Source: Toyota promotional material.

Andrew J. Staples 99

Strategy in East Asia Three aspects to Toyota’s strategy in East Asia may be identified. First, the rationalization of capacity in the region and concomitant development of Thailand as the regional hub for auto production: second, the expansion of market share in key ASEAN markets; and third, the development of the Chinese market in terms of production and sales. The IMV project discussed above underpins Toyota’s rationalization efforts in East Asia. IMV production in Thailand and Indonesia builds upon long-term presence in both countries. Toyota initiated production in Thailand in 1964 and has expanded capacity by introducing two further production plants over the years. These now produce the Camry, Corolla, Hilux, Soluna Vios (Asian car), Hiace, Land Cruiser, TUV models, diesel engines and other parts. Indonesian operations began in 1970 and now produce Camry, Corolla, Dyna, Soluna, TUV Technischer Uberwachingsverein models and petrol engines. Toyota Motor Thailand’s (TMT) Gateway plant is now regarded as Toyota’s main passenger car production plant in Southeast Asia and production capacity currently runs to 300,000 units in Thailand, more than in any other East Asian country including China. Thailand is also the first ASEAN country to produce a model completely relocated from Japan, in this case the Hilux. The increasing focus on Thailand as a regional hub (Table 5.5) and the commencement of the IMV project are largely premised on the implementation of AFTA and the importance of this is considered in detail below. The second element of Toyota’s East Asian strategy, expansion of market share, is being facilitated by the introduction of the so-called ‘Asian cars’. Along with other manufacturers, Toyota has invested in the production of ‘localized’ regional products, and the Vios and the Corolla Altis are Toyota’s models in this field. Both are built in Thailand and exported to other ASEAN countries, notably Singapore, and Thai exports of the Corolla Altis to Singapore directly replace previous exports of the Japan-produced Corolla. The Vios is a development of the Soluna model, a basic saloon, and is only available in ASEAN and China. Both cars are considerably cheaper than comparable models produced in Japan. Through the introduction of these more affordable and localized cars, Toyota hopes to expand market share as the buyer base Table 5.5

Indonesia

Toyota’s business activities in ASEAN-5 and China

Malaysia

Philippines

Singapore

Thailand

China

Notes: Headquarters; R&D centre; Production sites through FDI; Sales office; Parts production site; Parts export hub; Vehicle export hub; Production site with technical collaboration. Sources: Toyota Annual Reports, various years; FOURIN.

100 Corporate Strategy in the Automotive Sector Table 5.6 Toyota’s capacity in 2002 and planned capacity by 2007, selected countries

Asia Pacific China Thailand Source:

2002

2007 (planned)

853,000 256,500 93,183

1,090,000 345,500 320,000

‘Toyota and the World 2003’, FOURIN.

expands. This is particularly so in Thailand where the one-ton pickup truck remains more popular than standard saloon models. In contemplation of an expanding market, Toyota has been increasing production capacity (Table 5.6) in recent years in the key markets of Thailand and China. Although Toyota is focusing on Thailand in terms of production, the Thai market is approximately a quarter the size of that observed in China. In pursuit of this, investments into China in recent years have been considerable as recorded in Table 5.7. These investments equate to a total production capacity of 256,500 units in 2002, projected to rise to 345,500 by 2007. Sales in China have been rapid, reaching 98,000 in 2003, a 95 per cent year-on-year increase.

Management of operations Management in Asia (excluding Japan) was restructured to include China,4 hitherto a separate entity, in 2001, and is coordinated by Toyota Motor Asia-Pacific (TMAP) which is headquartered in Singapore and 100 per cent owned by TMC. TMAP emerged from Toyota Motor Management Services (TMSS) established in 1990 in recognition of a need for better coordination Table 5.7 Toyota’s investments in China Date

Voting rights

1997 1998 1998 1998 2000 2002

30 50 90 100 45 50 50 50 − 90 70 50

2003 2004 2005 (planned)

Source: Toyota Annual Report, 2004.

Product Steering parts Engines CVJs, axles, steering columns Forging parts Coaster, Land Cruiser, Prado Vios Pressed parts Plastic parts Land Cruiser Stamping dies Engines, engine parts engines

Andrew J. Staples 101

of activities, parts complementation in particular, in preparation for AFTA implementation. TMSS effectively oversaw production in the ASEAN-4 and thus became a natural entity for the coordination of business activities under AFTA. The key reported objective of TMAP is to manage component procurement to achieve the aim of a 100 per cent localization rate for ASEAN activities. A second objective is to strengthen sale and marketing capabilities and relevant divisions were established in 2001. In contrast to the more straightforward activities of regional management structures in North America and Europe, Toyota’s organization in East Asia has emerged from an attempt to deal with the complex nature of the regional division of labour. It is anticipated that AFTA will facilitate smoother regional management.

Impact of the Asian financial crisis Toyota’s strategy in the region prior to the Asian financial crisis was largely dictated by the fragmented nature of the market. Local-content requirements in each country necessitated national organization and resulted in production for and sales in, limited to national markets. Moreover, due to their difficult and limited nature, ASEAN sponsored parts complementation schemes, including BBC (Brand to Brand Complementarity) and AICO (ASEAN Industrial Cooperation Scheme), which were not particularly utilized.5 Although the general image of the crisis as a disastrous collapse in output and demand remains valid, the overall impact on Toyota’s operations was relatively limited (Table 5.8), particularly when viewed in a longer-term perspective. Production in Asia had virtually recovered to 1996 levels by 2001, rising by 35.5 per cent over 1996 levels by 2002 (Table 5.8). However, production in individual ASEAN-4 markets was hit harder and has taken longer to recover. Sales in Asia decreased from 444,800 units in 1996 to 229,550 in 1998, a decrease of 48 per cent, but had recovered to 455,000 units by 2002,

Table 5.8 Toyota’s total production, 1995–2002

1995 1996 1997 1998 1999 2000 2001 2002

Japan

North America

Europe

Asia

Oceania

Others

3,171,300 3,410,100 3,502,000 3,165,800 3,118,200 3,429,200 3,354,400 3,485,200

729,900 783,000 838,300 962,800 1,061,900 1,104,000 1,088,500 1,205,300

95,500 124,400 108,800 175,700 181,500 173,300 217,000 344,600

259,000 255,100 246,700 124,800 182,100 248,400 254,300 345,700

54,100 67,600 77,600 100,400 91,000 92,400 94,600 86,600

114,700 116,000 118,800 103,800 94,600 133,200 108,500 144,900

Asia includes Brunei, China, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand and Vietnam. Source: Toyota Annual Reports, various years.

102 Corporate Strategy in the Automotive Sector

Units

representing an increase of 2.3 per cent over 1996. Yet the situation was most severe in ASEAN. Production (Figure 5.2) slumped by 77 per cent between 1996 and 1998 from 290,703 to 66,731 units, and had not recovered by 2002, only reaching 273,459 units or still 6 per cent down on figures for 1996. The collapse in sales was more pronounced, dropping by 70 per cent during the crisis years and remaining 10 per cent below pre-crisis levels in 2002 (Figure 5.3).

1,400,000 North America Oceania

1,200,000

Europe Others

Asian production trendline Asia

1,000,000 800,000 600,000 400,000 200,000 0

Figure 5.2

Units

Source:

1995

1996

1997

1998

1999

2000

2001

2002 Year

Total overseas production, 1995–2002

See Table 5.8.

2,000,000 1,800,000

North America Latin America

Europe Africa

Middle East & SW Asia Asia Oceania

1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 1995

Figure 5.3 Source:

1996

1997

Total overseas sales, 1995–2002

Toyota Annual Reports, various years.

1998

1999

2000

2001

2002 Year

Andrew J. Staples 103

The ASEAN-4 accounted for 21.6 per cent of overseas production in 1996 but only 12.7 per cent in 2002, while ASEAN-5 sales in 1996 accounted for 12 per cent of overseas sales, but only 7.4 per cent in 2002. During the same period, total Asian production increased from 255,100 to 345,700 units, though this translates to a decrease in the share of total overseas production from 19 per cent to 16 per cent. In other words, growth in (mainly) Chinese production and sales has helped the region as a whole to recover, while ASEAN’s role has been significantly truncated. Although 2004 figures for ASEAN were unavailable at the time of writing, production and sales in Asia had reached 493,100 and 620,600 units respectively, indicating continued and sustained growth of the market (FOURIN) (see Tables 5.9, 5.10, 5.11 and 5.12).

Table 5.9 Toyota’s Asian and ASEAN-4 production and global share Total overseas production Asian production ASEAN 4 production 1996 1998 % change, 1996–98 2000 2002 % change, 1996–2002

1,346,000 1,467,600 +9% 1,751,400 2,155,200 +60%

255,100 124,800 −51% 248,400 345,700 +35.5%

290,703 (21.6) 66,731 (4) −77% 118,867 (6.8) 273,459(12.7) −6%

Notes: Figures in parenthesis represent percentage of total overseas production. Source: FOURIN.

Table 5.10 Toyota’s production in ASEAN-4, 1995–2002 1995 Thailand

1996

1997*

1998*

1999

146,263 149,416 96,115 33,889 84,936 (2) (−37) (−65) (150) Malaysia 22,333 29,395 29,728 5,558 13,966 (−81) Indonesia 97,571 75,025 98,350 16,730 26,713 (−83) Philippines 35,561 36,867 30,977 10,554 18,455 (−66) ASEAN 4 301,728 290,703 255,170 66,731 120,030

2000

2001

2002

83,145 (2) 19,612

90,661 139,983 (9) (54) 22,113 28,000

89,932

80,486

84,307

18,658

15,873

21,169

118,867 209,133 273,459

Notes: *Asian financial crisis author’s calculations; figures in parenthesis are for year-on-year percentage increase–decrease. Sources: Toyota Annual Reports, various years, FOURIN.

104 Corporate Strategy in the Automotive Sector Table 5.11

Toyota’s Asian and ASEAN % sales and global share (percentages)

1996 1998 % change 1996–1998 2000 2002 % change 1996–2002

Total overseas sales

Asian sales

ASEAN 5 sales

2,621,800 2,930,000 +11.8% 3,382,700 3,838,300 +46.4%

444,800 229,500 −48% 339,300 455,000 +2.3%

314,372 (12) 93,382(3) −70% 218,794 (6.5) 282,761(7.4) −10%

Notes: Figures in parenthesis represent percentage of total overseas sales. Sales figures are for ASEAN-5. Source: FOURIN.

Table 5.12 Toyota’s sales in selected markets 1995

1996

1997

1998

1999

2000

2001

2002

Asia 433,000 444,800 417,900 229,500 252,900 338,900 342,200 455,000 ASEAN-5 na 314,372 153,523 93,382 146,779 218,794 220,813 282,761 Thailand na 163,940 107,121 42,661 74,619 71,300 83,514 130,052 Notes: Rounded to nearest 100. Source: Toyota Annual Reports, various years.

As a result of the Asian financial crisis, Toyota was faced with three main problems: • a sudden and acute drop in demand (see Table 5.11); • overcapacity (see Table 5.10); capacity utilization dropped to 30 per cent for a period in 1998; and • affiliates under severe financial pressure. Toyota responded to these challenges by: • Suspending production for two months in Thailand. This period was used to retool the production line, in line with a decision to increase exports as a means of overcoming the problems outlined above. See table 5.13. • Reducing shifts. Toyota consciously made the decision not to close any production plant or to lay-off workers but this necessitated drastically reducing shifts. • Re-orientation of production for export. Thailand began exporting the Hilux pickup to Australia in October 1998, although it is not clear to what extent

Andrew J. Staples 105 Table 5.13 Toyota’s Exports of CBUs from Thailand

Thailand Year-on-Year % +/−*

1997

1998

1999

2000

2001

2002

1,563 na

1,819 16

12,151 568

16,031 32

12,028 −24

11,882 −1

Notes: *Author’s calculations. Source: Federation of Thai Industries.

this was a new development or the accelerated implementation of an existing programme. Exports are also made to Brunei and Singapore (see Table 5.8). • Injecting new capital into affiliates (2.8 billion baht in Thailand) and other assistance including advance purchasing arrangements and compensation for inventory build-up. • Agreeing to accept increased numbers for training in Japan and elsewhere. Although Toyota is the dominant regional producer, it has experienced ‘operational difficulties’ (interview, 30 July 2003) in the implementation of parts complementation schemes including BBC and AICO. AFTA implementation was also described as ‘patchy’ and ‘subject to negotiation’ (ibid.). However, it is clear that there has been a fundamental shift in the policies pursued by ASEAN governments and that Toyota has to some extent based its regional strategy upon this. Thailand has been the main beneficiary of Toyota’s restructuring in Southeast Asia but this has been subject to some negotiation. For instance, Toyota delayed its decision to relocate Hilux production from Japan, the foundation of the IMV project, until Thailand made key (favourable) decisions on tax (the Hilux was to be taxed at a higher 4 × 4 rate rather than the preferential one-ton pickup rate) and dismissed the likelihood of an investigation into allegations of transfer pricing by Japanese MNCs (Automotive Emerging Market, 2002: 7). Additionally, Toyota was able to secure certain incentives6 from the Thai Board of Investment reducing costs by 30 per cent.

Investment in China Much has been made of the alleged ‘China threat’. Indeed, this presumption has informed much of the policy debate in the region since before the onset of the Asian financial crisis and lies at the heart of ASEAN-led moves towards closer regional economic integration. In contrast to Japan, where in general the debate has moved from China as ‘threat’ to China as ‘opportunity’,

106 Corporate Strategy in the Automotive Sector

ASEAN is predominately concerned with the erosion of their comparative advantages in manufacturing industries. Yet the debate is somewhat different in the automotive sector given the nature and scope of the industry. As noted above, Toyota is a relative latecomer to the Chinese market and currently has approximately 3 per cent of market share, behind the smaller Honda (5 per cent). Toyota has reported its intention to aggressively increase market share to 10 per cent by 2010 and is employing a number of strategies to facilitate this. Toyota’s investments (Table 5.14) in China have been rapid and substantial, including US$461 million announced in 2004 to produce the Camry7 in a new joint venture with Guangzhou Auto. To date, Toyota’s main partner has been the FAW group and this diversification may indicate a desire by Toyota to diversify risk. Toyota also plans to produce one of Toyota’s latest designs, the Prius (hybrid) in China and this would be the first overseas production of the model. This contrasts with the production of the Vios, modelled to be more cost-attractive for the Asian market in Thailand and may be explained with reference to the late entry (and therefore new capacity) of Toyota in China and the market’s potential. However, Toyota’s general response to the question suggests that there is little or no evidence to support the hypothesis that Toyota’s investment in China is investment lost by ASEAN. The rapid expansion of the Chinese market means that there is little spare production capacity and that any further investments will also go to meet future demand. Strategy in China revolves around increasing market share of the rapidly expanding domestic market while strategy in ASEAN revolves around expanding ASEAN market share, exports and the IMV project. It is possible, therefore, to conclude that at the present time it is not the case that there is a finite pool of resources (auto assemblers are in an expansionary period) and that increased investment in one area necessarily equates to less investment in another.

Table 5.14 Recent investments in China Date

Investment

Partner

Module/part

Market

2004

US$461 million

Camry

Domestic

2004

5 billion yen

Engine parts

Export to Japan

2004

1.3 billion yen

Guangzhou Toyota Motor Co., Ltd. (GTMC) FAW Toyota Changchun Engine Co., Ltd. (FTCE) Toyota FAW (Tianjin) Dies Co., Ltd. (TFTD)

Automotive stamping dies

Domestic

Source: Toyota.

Andrew J. Staples 107

ASEAN trade facilitation initiatives Toyota was perhaps the biggest beneficiary of the BBC scheme, utilizing it to link Malaysia, Thailand and the Philippines8 yet the scheme was largely ineffective and was replaced in 1996 by the AICO programme. Toyota has also been the most prolific user of AICO and these agreements (27 by February 2003) underpin its current regional strategy. The structure of Toyota’s AICO-based intra-firm production is displayed in Table 5.15 and Figure 5.4, yet this is not to suggest that all of Toyota’s intra-firm trade is covered by AICO agreements and serves to demonstrate the complex and advanced nature of regionalized production. It is possible to conclude, therefore, that the BBC and AICO schemes have been central to Toyota’s overall strategy to the region and have played a key role in determining investment strategy in particular, as they have, more or less successfully, facilitated the regionalization of production.

AFTA implementation It is clear that the implementation of AFTA has significant implications for the auto industry in general and Japanese assemblers in particular. Toyota is taking advantage of AFTA in the following ways: • developing production bases for certain models in each main national market; • relocating production of certain models (Hilux) to the region; and • increasing investment in existing plant; Toyota in particular expects to benefit from AFTA because of the already regionalized nature of its assembly. The component network further expects that AFTA implementation will assist with improving quality (through

Table 5.15 Approved AICO applications, 10 February 2003 Number Honda Mitsubishi Nissan Toyota Total Total including other Japanese firms including Denso & Yamaha Total number of approved applications. Source: Compiled using data from ASEAN Secretariat.

26 4 5 27 62 77 101

% of all AICO automotive approvals 29 5 4 30 70 88

108 Corporate Strategy in the Automotive Sector

THAILAND TMT, Siam Motor Diesel Engines, Steering Columns, Body Parts

MALAYSIA Assembly Services Steering Links, Engine Computers, Wipers

3 2 SINGAPORE (TMAP) Management & Coordination

3

2

PHILIPPINES TMP Transmissions, CVJs, Switches

Figure 5.4 2003

2

1

4

2 1

3

2

1

INDONESIA TAM Petrol Engines, Clutches, Door Parts

Toyota’s ASEAN production network under AICO agreements (CKD packs),

Notes: CKD packs. Number in box represents number of approved AICO agreements. Source: Based on data compiled from ASEAN Secretariat, Toyota.

competition) and local content ratios; the stated aim is for 100 per cent localization for the IMV project.

Planned investments/disinvestments A number of new investments and further investments (or changes in ownership structures) in existing operations were reported. As noted above, Thailand was chosen as the base for Toyota’s first overseas R&D centre to be based outside of North America and Europe. The initial investment for this project was announced in 2003 as 2.7 billion Thai baht. Further developments in Thailand include the introduction of new shifts at both Toyota factories to ramp up IMV production, and an increase in the number of dealerships from 240 to 310. Elsewhere in the region, assets in Indonesia were reorganized by splitting manufacturing and the marketing units, with Toyota increasing to 95 per cent its stake in the manufacturing arm, PT-Toyota Astra Motor (Nihon Keizai Shimbun, 20 February 2003). Toyota further announced plans to invest US$380 million in Indonesia as part of the reorganization of vehicle manufacturing and parts production (Jakarta Post, 5 February 2005). Toyota announced sizable investments in the Philippines in 2004 to modernize production facilities for the export market and in 2005 for Minivan (IMV) production. A ¥620 million investment in a parts-testing

Andrew J. Staples 109

and procurement centre in Vietnam was announced in 2004 to source components for domestic and Thai operations. The breadth and scope of these new investments and rationalization measures are in accordance with Toyota’s overall regional policy as reviewed above. The establishment of the R&D facility in Thailand (and also a sister facility in Australia) are particularly noteworthy as this demonstrates a strong commitment to the development of localized models suitable not only for the immediate East Asian region, but also the emerging markets of India and possibly China. In other words, this development may indicate a longer-term vision from Toyota that positions Southeast Asia for export production to late-developing markets rather than existing markets in North America, Europe or indeed Japan. Although considerable excess capacity remains in Toyota’s ASEAN operations,9 it is unlikely that there will be any disinvestment (closures) given projected demand. However, a certain degree of rationalization is taking place. Toyota announced plans to merge the two Philippine plants in late 2004 due to poor domestic demand, although this action entailed no job losses. One characteristic of Toyota is that they make strenuous efforts to avoid job losses; in Toyota’s opinion, announcing redundancies would not be conducive to maintaining a good relationship with the host government, and conversely keeping workers employed demonstrates a commitment to the country which is appreciated and creates political capital to be employed at a later date.

Localization Toyota’s stated aim is to achieve 100 per cent localization in Thailand and throughout ASEAN, a level that appears achievable given that the localization rate for the Hilux has increased from 60 per cent to 96 per cent since the introduction of the IMV project (Toyota, 2004). Achieving 100 per cent localization within ASEAN under AFTA makes good business sense for Toyota on two fronts: components can be produced (and transported) more cost-effectively in low-cost ASEAN countries than in Japan, and the need for (expensive and tariff attracting) components sourced from outside the region (Japan) dissipates.

Regional production networks Toyota’s regional production network is perhaps the most extensive of Japanese automakers in East Asia. As noted above, Toyota has 16 manufacturing operations in seven regional countries excluding Japan.10 However, these production clusters are to a large degree autonomous, with limited interaction between them at present. Toyota’s ASEAN network in 1993 is described in Figure 5.5. Figure 5.6 presents a more abstract representation of Toyota’s networks in the region a decade later. The main points to note are the internal and external

110 Pressed components, electrical parts

THAILAND Diesel engines Pressed parts Electrical parts

MALAYSIA Steering gears Electrical parts

Steering gears

SINGAPORE Coordination & management (TMSS) Transmissions

Pressed parts

Transmissions

Gasoline engines

Electrical parts

Steering gears

Electrical parts

INDONESIA Gasoline engines Pressed parts

Gasoline engines, pressed parts

Steering gears Electrical parts

PHILIPPINES Transmissions

Transmissions

Figure 5.5 Toyota’s Asian regional production scheme, 1993 Source: Petri (1993): 41.

JAPAN TAIWAN PHILIPPINES

THAILAND

SINGAPORE

VIETNAM MALAYSIA

INDONESIA AUSTRALIA

Figure 5.6 Toyota's Asian regional production networks, 2004 Notes: AFTA IMV .

Andrew J. Staples 111

expansion of Toyota’s Southeast Asian production network. Internally, Vietnam is included while production in the Philippines and Indonesia has been rationalized to lend ‘greater stress on Thailand’ as the regional hub. Externally, the IMV project links ASEAN, Thailand and Indonesia in particular,11 with other South America, South Africa and Europe, while the Philippines exports transmissions to Japan and Completely Built-Up (CBUs) to Israel. CKDs from Australia to ASEAN-4 countries are also noted. In other words, Toyota’s production network has developed both qualitatively and quantitatively by exploiting the advantages offered by AFTA and by seeking to position ASEAN as a key producer, export base and market. In a sense, it is possible to see Toyota’s network as multilayered. The traditional model of regionalized production throughout the ASEAN-4 – as described in Figure 5.5 – persists and may be seen as the base layer. A second layer describes the IMV project (Figure 5.6) production network, while a third layer introduces both intra and extra-regional players including Vietnam, Australia, Taiwan and Japan and has the potential to include China.

Chinese and ASEAN production There is little interaction between Chinese and Southeast Asian operations as yet. As noted above, the rapid build-up of capacity in China is to meet present and projected domestic demand though the possibility of linking Guangzhou with ASEAN. Toyota is the second-largest ‘reverse importer’12 to the Japanese market, importing 16,281 units in FY 2003, 48.29 per cent (JAIA, 2004) of all passenger cars manufactured overseas by Japanese firms and later imported into Japan. In 2004, Toyota announced plans to export to Japan up to 20,000 units a year of the Avensis model from its UK plant. The Avalon is also exported from the USA. To date, these remain the only examples of CBU reverse imports and reflect the quality standards of these plants. Toyota does not export CBUs from any East Asian production site. However, there has been an increase in the exports of components from affiliates in East Asia, notably from ASEAN as recorded by Table 5.16, although the majority of reverse import components currently originate in Thailand, and the Philippines are also emerging as an important production hub.

Proliferation of FTAs The Japan Singapore Economic Partnership Agreement (JSEPA) had no impact on Toyota operations as Singapore is not an auto-producing country and already maintained zero import duties on CBUs, although sales are heavily regulated. However, further proposed FTAs, notably with Thailand and the Philippines,13 would have significant implications for their operations. Toyota is adopting a wait-and-see approach to the issue but do not expect substantial liberalization to occur rapidly in the event of an agreement being concluded.

112 Corporate Strategy in the Automotive Sector Table 5.16 Exports to Japan from Toyota affiliates in East Asia Exporter

Parts

Thailand

2 & 5L engines (n.a.) STM Indonesia 5K engine blocks (6,000) TAM Philippines CVJ Assy (n.a.) TAP

China

5A engine parts, blocks, etc (31,000) TTME

Parts for cams (91,000) STM

Parts for blocks (45,000) STM

Body parts, resin parts, rubber parts, lamps, etc. (n.a.) TMT

7K engine blocks (n.a.) TAM Transmission assemblies (n.a.) (commenced 2004) TAP Constant velocity universal joint assemblies (n.a.) TFAP

Semi-finished forging for constant velocity joints (n.a.) TTFC

Notes: Figures are for 2002; n.a. = figures not available. Source: Toyota.

The view is supported by the Japan–Thailand EPA Task Force, which reported in December 2003 that on discussions concerning industrial sector liberalization the ‘Thai side referred to the sensitivities of iron, steel items, automotive and automotive parts and petrochemical products’ (stress added). Rapid removal of import duties for CBUs and auto parts from Japan into the Thai market, for example, would present serious challenges for Thai-based manufacturing, and Toyota as the largest market player (28.1 per cent in 2001; FOURIN, 2003: 219) would be affected the most. Therefore, the stated wait-and-see approach will most probably be augmented by lobbying to ensure that any opening of the auto market would be gradual and incremental. Evidence for this may be seen in the central role played by Toyota Chairman, Hiroshi Okuda, during the 2004 Keidanren14 tour of the region to promote bilateral and regional (Japan–ASEAN) FTAs.

Conclusions This chapter has sought to investigate aspects of political economy and industrial organization in East Asia. The opening section reviewed traditional approaches to the issues of FDI and Japanese MNC investment in East Asia, and concluded that an approach that affords a central role to issues in the political economy is both appropriate and necessary. We than considered a number of events and trends observed in the multilateral and regional arenas throughout the late 1990s and into the twenty-first century

Andrew J. Staples 113

that, when taken as a whole, suggest a transformation of the East Asian political economy. Given the approach proposed in the opening section, we then examined how this transformation has impacted on the strategies employed by a leading Japanese auto manufacturer. The research presented here has implications for a number of issues, including among others East Asian integration, Japan’s role in emerging regionalism, our understanding of corporate strategy and industrial organization in East Asia, but fundamentally it stresses the importance of adopting a broader, holistic or eclectic approach rooted in international political economy.

Notes 1. Based on data available from the ASEAN Secretariat. 2. The reader is directed to C. Dent, ‘Networking the Region? The Emergence and Impact of Asia-Pacific Bilateral Free Trade Agreements’, The Pacific Review, 16(1): 1–28 (2003). 3. A total of five IMV vehicles are planned including three pickups, a minivan and a SUV (Sport Utility Vehicle). 4. It was reported that China may receive its own headquarters in the medium term (Interview, 30 July 2003). 5. AICO was more successfully utilized than BBC due to its more liberal nature. 6. Incentives included a corporate tax holiday and tax exemption for imported machinery (Thailand Board of Investment). 7. Toyota intends to satisfy local demand for the Camry solely through local production and will eventually terminate exports of the model from Japan. 8. ‘Thailand exported under body and electrical parts, and Malaysia exported parts for fuel tank, suspension system, steering link assembly, convenient and accessory equipment, and electrical parts to the Philippines. In turn, both the countries imported manual transmission from the Philippines’ (SICCI, 2002: 6). 9. Toyota’s production capacity in Thailand was 240,000 units in 2002, with 139,983 units produced equating to a capacity utilization rate of 58 per cent. 10. China, Indonesia, Malaysia, Philippines, Taiwan, Thailand and Vietnam. 11. IMV production (Innova model) in the Philippines is under consideration and has gained Board of Investment approval (2002). 12. Reverse imports are imports from overseas affiliates of that country’s own firms. 13. Japan and the Philippines announced an agreement in principle on an EPA between the two countries in November 2004. As part of this agreement auto and auto-parts tariffs are to be eliminated by 2010. 14. Okuda is currently (May 2005) Keidanren Chairman.

References Akamatsu, K. (1962) ‘A Historical Pattern of Economic Growth in Developing Countries’, The Developing Economies, 1: 3–25. Bernard, M. and Ravenhill, J. (1995) ‘Beyond Product Cycles and Flying Geese: Regionalisation, Hierarchy, and the Industrialisation of East Asia’, World politics, 47 (January): 171–209. Breslin, S. and Hook, G. (2002) Microregionalism and World Order (Basingstoke: Palgrave Macmillan). Business Times, ‘World Bank Backs Bilateral FTAs’, 6 June 2003.

114 Corporate Strategy in the Automotive Sector Business Times, ‘FDI in China Rises 26.6 per cent in First 7 Months’, other trade figures, 13 August 2003. CSGR Working Paper no. 80/01, September 2001. Das, D. (2001) ‘Regionalism in a Globalising World: An Asia-Pacific Perspective’, CSGR. Working Paper no. 80/01, September 2001. Dent, C. (2003) ‘Networking the Region? The Emergence and Impact of Asia-Pacific Bilateral Free Trade Agreements’, The Pacific Review, 16(1): 1–28. Dunning, J.H. (1997) ‘Trade, Location of Economic Activity and the MNE: A Search for an Eclectic Approach’, in B. Ohlin, P.-O. Hesselborn and P.M. Wijkman (eds), The International Allocation of Economic Activity: Proceedings of a Nobel Symposium held at Stockholm (London: Macmillan now Palgrave Macmillan). FOURIN (2003) Asian Automotive Business Review (Nagoya: FOURIN). Fukuyama, F. (1992) The End of History and the Last Man (London: Hamish Hamilton). Hara, S. and Nakanishi, K. (2004) The Asia Strategies of Japanese Corporations (Tokyo: Nomura Research Institute). Hart-Landsberg, M. (1998) ‘Contradictions of Capitalist Industrialisation in East Asia; A Critique of Flying Geese Theories of Development’, Economic Geography, 74 (September 1998): 87–110. Hatch, W. and Yamamura, K. (1996) Asia in Japan’s Embrace (Cambridge: Cambridge University Press). Hughes, C. (2000) ‘Japanese Policy and the East Asian Currency Crisis: Abject Defeat or Quiet Victory?’, Review of International Political Economy, 7: 219–53. JETRO (various years) White Paper on International Trade. JETRO (various years) White Paper on International Trade and Investment. JETRO (various years) White Paper on Investment. Jomo, K. (2003) ‘Reforming East Asia for Sustainable Development’, Asian Business and Management, 2(1): 7–38. Kawai, M. (2004) ‘Trade and Investment Integration for Development in East Asia: A Case for the Trade-FDI Nexus’, World Bank. Available at http://wbln0018.worldbank.org/ eurvp/web.nsf/Pages/Paper+by+Kawai/$File/KAWAI+ABCDE+EUROPE+ 05-07-2004. PDF, accessed 23 February 2005. Kelly, D. (2002) Japan and the Reconstruction of East Asia (Basingstoke: Palgrave Macmillan). Kojima, K. (2000) ‘The “Flying Geese” Model of Asian Economic Development: Origin, Theoretical Extension, and Regional Policy Implications’, Journal of Asian Economics, 11: 374–401. Low, L. (2003) ‘Multilateralism, Regionalism, Bilateral and Cross Regional Free Trade Arrangements: All Paved with Good Intentions for ASEAN?’ Asian Economic Journal 2000, 17(1): 65–86. McKinnon, R. and Schnabl, G. (2002) ‘Synchronised Business Cycles in East Asia’, Stanford University Discussion Paper no. 02-010. METI (2002) Promotion of Economic Partnership Tokyo: JETRO. Ministry of Trade and Industry Singapore; http://www.mti.gov.sg/public/FTA/frm_ FTA_Default.asp?sid=27; accessed 16 August 2003. The Nihon Keizai Shimbun, 12 April 2004. Noble, G.W. and Ravenhill, J. (eds) (2000) The Asian Financial Crisis and the Architecture of Global Finance (Cambridge: Cambridge University Press). Ohmae, K. (1994) The Borderless World (London: HarperCollins). Ohmae, K. (1996) End of the Nation State: The Rise of Regional Economies (London: HarperCollins). Pempel, T.J. (1999) The Politics of the Asian Economic Crisis (Ithaca, NY: Cornell University Press).

Andrew J. Staples 115 Petri, P. (1993) The Lessons of East Asia: Common Foundations of East Asian Success (Washington, DC: World Bank). Robison, R., Beeson, M. and Kaniska, J. (eds) (1999) Politics and Markets in the Wake of the Asian Crisis (London: Routledge). SICCI (Singapore India Chamber of Commerce and Industry) (2002) ‘Singapore: Supply and Demand Survey on Automotive Components’, Available at http://www. intracen.org/sstp/Survey/automative/Singapore_survey_final.pdf; accessed 12 February 2005. Strange, S. (1993) ‘TNCs in the Third World: Stability or Discontinuity?’, in L. Eden and E. Potter (eds), Multinationals in the Global Political Economy (Basingstoke: Palgrave Macmillan). Toyota (2004) Toyota and the World 2004, Toyota. Vernon, R. (1966) ‘International Investment and International Trade in the Product Cycle’, Quarterly Journal of Economics, 80(2): 190–207. World Bank (1993) The East Asian Miracle (Oxford: Oxford University Press). World Bank (1994) World Development Report 1993/1994 (New York: Oxford University Press). World Bank (1999) World Development Report 1999/2000 (New York: Oxford University Press). Yoshimatsu, H. (2003) ‘Japanese Policy in the Asian Economic Crises and the Developmental State Concept’, Journal of the Asia Pacific Economy, 8(1): 102–125.

6 Foreign Ownership, Human Capital and Earnings in the Japanese Labour Market Hiroshi Ono

Introduction The main purpose of this chapter is to investigate the differences in the distribution of human capital and the structure of earnings between workers in domestic firms and foreign-owned firms in Japan. The main question of interest is: Do foreign firms pay more than local firms in Japan? If so, why? Empirical studies in this area remain surprisingly few, and research opportunities remain vast. Our research focus on Japan is of considerable value in light of the so-called unique features of the Japanese labour market such as seniority, lifetime employment, and high degrees of gender segregation. We perform detailed econometric analysis using individual-level data in order to estimate the earnings premium associated with employment in foreignowned firms. We also examine similarities and differences in the determinants of earnings between workers in domestic and foreign firms. The current research will advance our understanding of the operations of foreign multinationals in Japan, and add further empirical support to an area more deserving of evidence.

Theoretical considerations Owing to improvements in data access, there is now convincing evidence that foreign firms pay higher wages than do local firms in both developing and developed countries.1 Much less clear is why foreign firms pay higher wages than domestic firms. A plausible explanation is that foreign firms, in one capacity or another, are able to attract higher quality workers, set up large-scale establishments, and operate in high-wage industries. However, many studies have confirmed that the wage premium exists even after controlling for various human capital and employer-level characteristics. The question more accurately posed, then, is why foreign firms would pay more for labour of a given quality (Lipsey, 2002). One explanation concerns 116

Hiroshi Ono 117

the latecomer disadvantage. By default, foreign firms face a latecomer disadvantage of competing against local firms that have superior knowledge of local markets, consumer preferences and business practices (Blomström and Kokko, 2003). Wage premiums must be offered to attract better workers in order to overcome the latecomer disadvantage in an efficient and timely manner. Another explanation is that foreign firms pay ‘efficiency wages’ to reduce worker turnover, in order to prevent their proprietary knowledge or technology from leaking out to domestic rivals (Lipsey, 2002). The efficiency wage explanation is particularly applicable in the case of developing countries where foreign multinationals may be concerned about their advanced technology leaking out to local markets. It is also relevant to developed countries characterized by high labour turnover such as the USA, where firms may fear the loss of their proprietary information through labour turnover (Feliciano and Lipsey, 1999).

The case of Japan Wage premiums may exist between foreign-owned versus local firms in technologically advanced countries, but they may exist for different reasons. Efficiency wage is not a plausible explanation in Japan, considering that the Japanese labour market is de facto characterized by strong levels of employee attachment and one of the lowest labour turnover rates in the world (Auer and Cazes, 2000). If wage premiums exist among foreign firms in Japan, compensating wage differentials may be a more reasonable explanation than efficiency wages. Foreign firms in Japan have a general reputation of high turnover and low employment security. Foreign firms engage in aggressive poaching (or headhunting) tactics, mainly to minimize their recruiting, training and search costs in order to overcome their latecomer disadvantage in the local market. The theory of compensating wage differentials implies that poached workers must be compensated for relinquishing their employment security with the local firms. The wage premium therefore acts like a risk premium and a retainer fee. Foreign firms must not only pay higher wages to attract a high-quality labour force, but they must also pay a premium to retain them. Similarly, it may be argued that workers simply prefer domestic firms over foreign firms, so they must be compensated to overcome this preference (Lipsey, 2002). From a human-resources (HR) perspective, the biggest latecomer disadvantage that confronts foreign firms is their lack of brand recognition and overall visibility. Brands can be a considerable asset in attracting valuable human resources insofar as it provides greater information, reputation and trust, all of which reduces uncertainty for the applicant. Workers who are employed by foreign firms must be offered a premium for the disutility of detaching them from domestic firms.

118 Foreign Ownership, Human Capital and Earnings in Japan

Features of the Japanese employment system When firms set up foreign affiliates, they bring their proprietary technology and their firm-specific advantage that allows them to compete successfully with local firms (Blomström and Kokko, 2003). Foreign firms may also import their human-resource practices along with them. Earnings reflect the outcome of the complex interactions between HR practices and human capital. Differences in earnings may therefore be generated by differences in HR practices that operate within domestic and foreign firms. In this section we outline some of the notable features of the Japanese labour market in comparison to other industrialized economies. We focus mainly on Japan–USA differences due to the lack of comparative literature from other regions, and because US firms have the largest single-country market dominance of foreign direct investment in Japan (see discussion below). Our empirical analysis (in the following section) will examine the extent to which these features can be observed in our sample of workers in foreign firms in Japan, that is: Can we observe the features of Japanese employment practices operating in foreign firms in Japan? The first feature concerns seniority wages. A seniority-based wage structure is a system whereby wages rise with tenure (duration of employment with the same employer) and not necessarily with respect to work experience. Although the seniority system is not unique to Japan, comparative studies have confirmed that the seniority effect is stronger among Japanese employers (Kawashima and Tachibanaki, 1986; Mincer and Higuchi, 1987). For example, Hashimoto and Raisian (1985) find that the tenure–earnings profile of Japanese workers is steeper than that of American workers. One interpretation of the seniority effect is that it measures the extent of on-the-job training provided by firms (Mincer, 1971). The steepness of the earnings profile as a function of tenure implies a ‘gift exchange’ relationship (Akerlof, 1982) where workers receive on-the-job training during younger stages at depressed wages, and reap the returns from their training at later stages. The fact that the seniority effect is greater for workers in Japanese firms therefore implies that these workers receive greater on-the-job training than do workers in Western firms, which is consistent with the evidence.2 Since on-the-job training is by definition firm-specific (Becker, 1993), it follows that the returns to firm-specific skills are higher among workers in Japanese firms. The second feature concerns the relatively long duration of employment relationships, as implied by the popularized expression ‘lifetime employment’. Evidence suggests that job separation rates are lower and average tenure is longer than most OECD countries (Auer and Cazes, 2000). This contrast is greater when compared to the USA which is characterized with the opposite extreme – high separation rates and short tenure. Numerous

Hiroshi Ono 119

empirical studies have found that interfirm mobility is lower in Japan than in the USA (Hashimoto and Raisian, 1985, 1989; Mincer and Higuchi, 1987; Tachibanaki, 1984). Third, comparative studies have found that labour-market demarcation in Japan is more pronounced along lines of firm size rather than along different product markets and industries (Bronfenbrenner and Yasuba, 1987; Kalleberg and Lincoln, 1988; Kawashima and Tachibanaki, 1986; Rebick, 1993; Tachibanaki and Ohta, 1994). In contrast to large firms, small firms on average pay lower wages for similar types of work and provide fewer fringe benefits.3 The firm-size effect is not unique to Japan, but its magnitude is stronger than those reported in other countries. For example, Rebick (1993) finds that the difference in logged average hourly earnings between large (more than 1,000) and small firms (less than 100) in Japan was .54 compared to .28 in the USA. Fourth, the variance in wages in Japan is one of the lowest among OECD countries. Ohta (2000) examined earning data for 16 OECD countries and showed that Japan has the third-lowest dispersion of market wages as measured by the Gini coefficient. The relatively narrow bandwidth of earnings reflects in part the seniority effect where wages rise automatically with respect to age and seniority and less so with respect to performance and productivity. And fifth, gender inequality is greater in Japan than is the case in other industrialized economies. Japanese women who still shoulder a majority of ‘non-market responsibilities’ are disadvantaged under an employment relationship that presumes long-term commitment because they must exit the labour force more frequently than do men. The exodus of women from the labour-force as they enter their years of non-market responsibilities results in a sharp decline in the labour-force participation of women in their mid-thirties. International comparisons consistently show that this pattern of decline from the labour force is most pronounced among OECD countries (ILO, 2000). The gender division of labour in Japan results in a gender-segregated structure of the labour market where men are placed into the ‘permanent’ positions in the internal labour market and women are positioned into secondary jobs. The pronounced pattern of gender stratification in the Japanese labour market results in one of the largest gender wage gaps in the industrialized countries (ILO, 2000). Women are also significantly less likely to advance to university education than men, suggesting that lower market wages may lead to an underinvestment in women’s human capital in Japan (Ono, 2004). In a qualitative study of highly-skilled women in the Japanese labour market, Ono and Piper (2004) explain that women with career aspirations are increasingly attracted to foreign firms in Japan because they can bypass the institutional barriers that confront them in the Japanese labour market.

120 Foreign Ownership, Human Capital and Earnings in Japan

Foreign firms and employment in Japan Inward foreign direct investment (FDI) remains relatively low in Japan, especially accounting for the scale of its economy and high income levels (Urata, 1996). A report released by Japan External Trade Organization (JETRO) in October 2002 (hereafter the JETRO report) found that workers employed by foreign-owned firms in Japan represent only 2.3 per cent of the entire Japanese labour force. However, FDI penetration is expected to increase given the undergoing deregulations and the various incentives to induce foreign capital into Japan (Blomström, Konan and Lipsey, 2001; JETRO, 2002). We briefly review the highlights of what we know about employment and employment practices of foreign-owned firms in Japan as described by two representative government reports.

JETRO report In May 2002, JETRO released the results of their survey of employment status among foreign firms in Japan. The JETRO report is the first of its kind which focused exclusively on employment-related issues among foreign firms. Unlike the 2001 METI report, the JETRO report covers all industry sectors, and employs survey weights to estimate proportions representative of the general working population in Japan. JETRO follows the OECD Benchmark Definition of FDI (1999) and defines a foreign firm as one with at least 10 per cent foreign ownership of equity by a single foreign investor. Under this definition, JETRO estimates that there were approximately 1 million workers employed by foreign firms in Japan, which represents 2.3 per cent of the Japanese working population. This is less than half of the proportion confirmed in the USA (5.4 per cent) and Germany (5.3 per cent). Highlights of the JETRO report include the following: (1) Of the 11 industry sectors covered in the survey, finance and insurance sector has the highest proportion (12 per cent) of workers employed by foreign firms, while the proportion is zero or 0.1 per cent in agriculture, mining, utilities and real estate; (2) 52 per cent of workers in foreign firms are employed in Tokyo; and (3) of the total number of workers employed by foreign firms, 50 per cent are employed in manufacturing. An important finding in the JETRO report is that 80 per cent of the foreign firms surveyed claimed that they plan to either increase or sustain employment levels in the future, and 95 per cent of these firms plan to do so through mid-career intakes of administrative and professional staff. The outcome confirms the general trend that foreign firms plan to step up their activities in Japan. It is also consistent with the perception that foreign firms primarily recruit (or poach) workers from other firms.

Hiroshi Ono 121

METI report The Ministry of Economy, Trade and Industry (METI) monitors the activities of foreign firms in Japan and reports their results in the publication, Survey of Trends in Business Activities of Foreign Affiliates (hereafter the METI report). The report provides a comprehensive overview of the business activities of foreign affiliates, but information concerning their employment is limited. One shortcoming is that the survey does not include the finance and insurance sector. This caveat should be noted in interpreting the outcome of the survey. The 2001 METI report finds that (of the total number of foreign firms in Japan), the proportion of US firms is 41 per cent, and is equivalent to the proportion of European firms. The remaining proportion is represented by firms from Asia and other regions. The proportion of sales is roughly equivalent, with American firms at 44 per cent and European firms at 45 per cent. In terms of the number of employees, US and European firms represent over 90 per cent of all employees in foreign firms, with 52 per cent employed in US firms and 41 per cent employed in European firms. Of the foreign firms included in the survey, 52 per cent had adopted an annual salary system. The Ministry of Health, Labour and Welfare (MHLW)’s definition of an annual salary system (nenposei) is ‘a system under which wages are decided on an annual basis and is determined primarily by ability and performance’. However, in practice, the annual salary system involves negotiation of employment renewal and not just wages. Hence the system is taken to be synonymous with short-term contracts and characterizes an employment relationship which contrasts greatly from the implicit longterm contract representative of Japanese firms. The METI report finds that the proportion of foreign firms with annual salary systems is: (1) Higher in the non-manufacturing (versus manufacturing) sector; (2) Higher among managers (versus regular employees); and (3) Higher among firms with higher proportion of foreign ownership, for example, 60 per cent among firms that are 100 per cent foreign-owned. Among Japanese firms, the proportion of firms with an annual salary system was 12.3 per cent in 1998 (Ministry of Labour, 1999). The proportion is higher among larger firms – 25.6 per cent among firms with more than 1,000 employees versus 10.8 per cent among firms with less than 100 employees. The 12.3 per cent marks an increase from the 8.6 per cent in 1996, but it is still small in comparison to the comparable proportion (52 per cent) among foreign-owned firms. And, finally, the METI report explains that 42 per cent of foreign firms surveyed claimed difficulty in securing human resources. Higher proportions were reported among firms with higher percentage of foreign ownership. The outcome confirms in part the latecomer disadvantage confronting foreign firms and their operations in Japan. Their lack of brand recognition is a major deficit as they must compete for human resources in the Japanese labour market.

122 Foreign Ownership, Human Capital and Earnings in Japan

Data For our empirical analysis, we use the dataset Working Persons 2000, administered by the Recruit Works Institute in August 2000.4 The data were collected from men and women employed in the labour force at the time of the survey in the greater Tokyo metropolitan area (Tokyo, Kanagawa, Chiba, Saitama, and Ibaragi prefectures). Ages of respondents range from 18 to 59, and the total sample size after accounting for missing values is 9,285, composed of 6,907 men and 2,378 women. The data are weighted using the survey final weights.5 We exclude part-time workers in our analysis. The survey asked a wide range of questions concerning the respondents’ employment. This information includes: education, annual earnings, total years of work experience, tenure, various measures of skills (for example, English ability, computer literacy), and demographic characteristics (for example, age, sex, marital status, and so on.). The distinction between foreign versus domestic firm is binary and self-reported. The proportion of workers who were found to be working in foreign firms at the time of the survey was 2.8 per cent. This is slightly higher than the proportion estimated in the JETRO report (2.3 per cent in May 2002), but it is consistent with their finding that the concentration of foreign firms is higher in the Tokyo area. One shortcoming of the dataset is that we do not know the nationality of the foreign firms. However, given the majority representation of US firms among the foreign-owned firms in Japan (as documented in the METI report), the USA may be a reasonable reference group for the foreign firms in our analysis.

Analysis and results Characteristics of workers in foreign firms in Japan Table 6.1 highlights some of the main characteristics of workers in domestic and foreign firms. In the current discussion and hereafter, work experience Table 6.1

Main characteristics of domestic versus foreign firms Domestic

Age Work experience in years Tenure in years Proportion female Education in years Firm size Income (million yen)

35.7 16.1 11.1 26.9% 13.6 1,761 5.20

Foreign 35.7NS 15.2NS 9.4 25.4%NS 14.5 2,401 7.06

Note: NS = not significant. All other differences in means between domestic and foreign firms significant at £ = .01 level.

Hiroshi Ono 123

refers to the total number of years of work experience, and tenure refers to the duration of employment with the current employer. The mean age of workers is 35.7 years for both domestic and foreign firms. Work experience is 16.1 years in domestic firms and 15.2 years in foreign firms. Since the mean age is the same for both types of firms, it is not surprising that the difference in years of work experience is also not statistically significant. Although not reported here, we find that the age distribution among both types of firms is similar except at the high end of the distribution; domestic firms employ a larger proportion of older workers, especially workers in their 50s. Mean tenure is 11.1 years in domestic firms versus 9.4 years in foreign firms; on average, workers in domestic firms are more likely to remain with their employers for a longer duration than are workers in foreign firms. The proportion of women working in domestic firms is 27 per cent versus 25 per cent in foreign firms. This difference is not statistically significant. Average education in years is 13.6 years in domestic firms versus 14.5 years in foreign firms. Education and human capital measures will be discussed in greater detail below. The average firm size of domestic firms is 1,760 employees and is smaller than that of foreign firms at 2,401 employees. And finally, average earnings among workers in domestic firms is 5.20 million yen which is 36 per cent lower than the earnings among workers in foreign firms.

The stock of human capital We examine a number of measures to assess the quantity and quality of human capital among domestic and foreign firms. Table 6.2 reports the education measures. All differences in means between domestic and foreign firms are significant at the p = .01 level. On average, workers in foreign firms have more education. This difference is more pronounced among women. Table 6.2

Education measures by sex Total

Education completed In years University Elite universities1 Graduate school

Men

Domestic

Foreign

Domestic

13.6 38.8% 5.0% 3.0%

14.5 57.5% 8.9% 5.1%

13.8 45.4% 6.5% 3.9%

Foreign 14.5 62.2% 10.4% 5.8% NS

Women Domestic

Foreign

13.3 21.0% 0.9% 0.6%

14.3 43.6% 4.3% 3.2%

Notes: NS = not significant. All other differences in means between domestic and foreign firms significant at p = .01 level. 1 Elite universities include top national universities (Hokkaido, Tohoku, Tokyo, Tokyo Institute of Technology, Hitotsubashi, Nagoya, Kyoto, Osaka, Kobe and Kyushu) and the two top private universities (Waseda and Keio).

124 Foreign Ownership, Human Capital and Earnings in Japan

In fact, on average, women working in foreign firms are more educated than men working in domestic firms. In addition to the longer years of education, workers in foreign firms are more likely to be university graduates, more likely to be graduates of elite universities, and more likely to have completed graduate school. We observe a consistent pattern across all categories. Men working in foreign firms are most educated, women in domestic firms are least educated, and the two remaining groups fall somewhere in between. In fact, the means test comparisons between the education measures for men in domestic firms versus women in foreign firms confirm that the two groups are not significantly different from each other. Statistically speaking, the two groups are on equal terms. Table 6.3 examines the self-reported responses regarding computer usage and skills. All differences in means are statistically significant at the p = .01 level, with the exception of computer programming among women. We find that in all categories of computer use, workers in foreign firms outscore workers in domestic firms. Women working in foreign firms are the most computer literate except in the category of computer programming. Over 80 per cent felt comfortable with the level of computer skills demanded at work while less than 60 per cent did so among men and women in domestic firms. And finally, we examine English ability of the workers (Table 6.4). All differences in means are statistically significant at the p = .01 level. English ability may be a prerequisite for working in foreign firms, and the results confirm this. Self-assessed English conversation skills are much higher among workers in foreign firms. The proportion of workers who have passed the certified

Table 6.3

Computer skills by sex Total

Men

Women

Domestic Foreign Domestic Foreign Domestic Foreign Ability to use: Email Internet Office software Database Programming

60.7% 57.5% 56.8% 16.8% 22.5%

78.6% 72.7% 77.8% 32.6% 34.2%

61.0% 58.2% 58.7% 19.1% 24.5%

76.0% 69.9% 77.4% 31.9% 38.0%

59.9% 55.8% 51.5% 10.6% 17.2%

I cannot use a computer

23.8%

9.9%

23.6%

11.1%

24.3%

6.3%

Do you feel comfortable with the level of computer skills demanded at work? Yes 57.5% 77.7% 59.2% 75.5% 52.8% No 17.8% 11.8% 17.6% 13.0% 18.1% Computer skills are not 24.8% 10.5% 23.2% 11.6% 29.1% demanded at work

84.2% 8.4% 7.4%

86.3% 81.1% 78.9% 34.7% 23.2% NS

Note: All differences in means between domestic and foreign firms significant at p = .01 level.

Hiroshi Ono 125 Table 6.4

English ability by sex Total

Men

Women

Domestic Foreign Domestic Foreign Domestic Foreign English conversation skill (1: low to 4:high) Certified English1

1.29

1.79

1.31

1.77

1.27

1.82

29.9%

39.6%

23.2%

30.3%

47.9%

66.3%

Do you feel comfortable with the level of English demanded at work? Yes 18.8% 40.6% 20.5% 40.1% No 22.1% 35.2% 23.7% 37.2% English is not demanded 59.1% 24.2% 55.9% 22.7% at work

14.2% 18.0% 67.7%

42.1% 29.5% 28.4%

Note: All differences in means between domestic and foreign firms significant at p = .01 level. 1 See text for explanation.

English examinations administered by the Ministry of Education is also much higher among workers in foreign firms.6 We find that women in foreign firms have the highest English ability according to the measures examined here. In sum, the results point quite convincingly that foreign firms have a higher stock of human capital than do domestic firms. Workers in foreign firms have more education, higher computer literacy, and higher English ability. Women in foreign firms are highly endowed with computer and English skills, much more so than men and women in domestic firms. The high level of human capital accumulation among women in foreign firms confirms in part Ono and Piper’s (2004) finding that foreign firms attract highly-skilled women in the Japanese labour market.

Estimating the earnings premium We run a set of earnings regressions in order to estimate the earnings premium (Table 6.5) for working in foreign firms before and after controlling Table 6.5

Earnings premiums in foreign firms (1)

(2)

(3)

Foreign firm Constant

0.257** (0.037) 15.317** (0.007)

0.174** (0.026) 14.040** (0.039)

0.159** (0.026) 13.983** (0.040)

Controls Human capital Firm characteristics R2

No No 0.006

Yes No 0.564

Yes Yes 0.589

Note: ** p < .01. Robust standard errors in parentheses.

126 Foreign Ownership, Human Capital and Earnings in Japan

for various characteristics. We have thus far established that, on average, workers in foreign firms have a higher stock of human capital, and are more likely to be employed by larger firms. It is therefore conceivable that earnings in foreign firms may be driven up by these individual and firm-level attributes.7 Human capital variables include education, experience, experience squared, tenure, tenure squared, English ability, computer skills, sex and marital status. Firm characteristics include logged firm size and industry sector dummies for manufacturing, retail, finance and insurance, services and other industries. The unadjusted premium which does not control for any of the above variables is 25.7 per cent (column 1). The earnings premium is reduced considerably when we control for human capital (column 2), which is expected since foreign firms have a greater stock of human capital than do domestic firms. However, despite the reduction we are still left with a premium of 17.4 per cent. Controlling for firm characteristics further reduces the earnings premium, but it is still significant and positive at 15.9 per cent. Workers in foreign firms have higher earnings even after accounting for human capital composition and employer attributes.

The structure of earnings Here we examine in greater detail differences in the determinants of earnings between domestic and foreign firms. Specifically, we conduct F-test model comparisons to assess the extent to which the inclusion of certain variables improves the prediction of earnings. Our baseline model (Table 6.6) includes the standard variables of the Mincer earnings regression – education, experience, experience squared and sex. For workers in domestic firms, the inclusion of tenure and tenure squared significantly improves the prediction of earnings. The R-squared improves from .485 to .549, and this difference is highly significant (as reported by Table 6.6

Model comparisons of earnings regressions

Model Variables

1 2 3 4 5

Education, experience, experience squared, sex Model 1 + tenure, tenure squared Model 1 + industry sector Model 1 + log firm size Model 3 + log firm size

Note: * p < .05, ** p < .01.

Domestic df

R2

4

0.485

Foreign F prob

-

df

R2

4

0.562

F prob -

6 0.549 vs 1 0.000**

6 0.564 vs 1 0.567

8 0.493 vs 1 0.000**

8 0.593 vs 1 0.000**

5 0.524 vs 1 0.000** 9 0.528 vs 3 0.000**

5 0.569 vs 1 0.028* 9 0.598 vs 3 0.066

Hiroshi Ono 127

the F probability statistic). Inclusion of industry sector (in model 3) also improves the fit of the model (compared to the baseline model). In model 4, we include the variable ‘log firm size’ which also significantly improves the fit of the model. However, note that the improvement in R-squared (compared to the baseline model) is greater in this case compared to the previous model which includes the industry sector; controlling for firm size improves the R-squared from .485 to .524 while controlling for industry improves it from .485 to .493. Firm size is therefore a better predictor of earnings than is industry sector in the case of workers in domestic firms. And finally, in model 5 we find that controlling for both industry sector and firm size further improves the prediction of earnings. For workers in foreign firms, the results are quite different. First, in model 2 we find that tenure and tenure squared does not significantly improve the fit of the model. Inclusion of industry sector and firm size both improve the fit, but judging by the differences in R-squared, we find that firm size is a better predictor of earnings than is industry sector. And finally, in model 5 we find that accounting for firm size does not improve prediction of earnings after we control for industry sector. In sum, we find notable differences in the structure of earnings between workers in domestic firms and foreign firms. We find that earnings among workers in domestic firms exhibit features that are generally consistent with the stylised view of the Japanese labour market. The significance of tenure effects on earnings suggest that these workers benefit from an automatic increase in earnings in return for their ‘loyalty’ for remaining with the same employer. Further, their earnings are significantly determined by the size of their employer, much more so than the industry sector they are employed in. In contrast, tenure has no effect on earnings for workers in foreign firms. Firm size effects on earnings persist, but they are weaker than the effects of industry sector on earnings. These findings are consistent with previous comparative research which has found that tenure and firm size effects on earnings are considerably stronger in Japan than they are in the USA.

Variance in earnings We next examine the variance in earnings (Table 6.7), and we use Gini coefficients to estimate the degree of earnings inequality. The Gini coefficient ranges from 0 to 1 with higher values indicating a greater degree of inequality.8 We also estimate the ratio of the top 10th percentile versus the bottom 10th percentile in earnings (reported under the column ‘P90/P10’). Overall, we find that the earnings are more dispersed among workers in foreign firms. Both the Gini and the top/bottom ratio are higher among these workers than their domestic counterparts. The results are therefore consistent with the generalized view that income inequality in Japan is lower than is found in other industrialized societies. The smaller variance in

128 Foreign Ownership, Human Capital and Earnings in Japan Table 6.7

Variance in earnings Mean earnings (million yen)

S.D.

Gini

P90/P10

All

5.27

3.04

0.290

3.91

Domestic Men Women

5.20 5.95 3.04

2.92 2.88 1.67

0.287 0.245 0.255

3.91 3.33 3.32

Foreign Men Women

7.06 8.18 3.68

5.07 5.33 1.64

0.334 0.300 0.231

4.29 3.61 3.12

earnings for workers in domestic firms may be an outcome of the automatic wage growth associated with tenure. In contrast, workers in foreign firms are rewarded more for their ability and performance, and less so for their tenure. Having a greater portion of the salary determined by individual performance may result in greater variance. When we breakdown the sample by gender, we find that the Gini coefficient is slightly larger among women than men in domestic firms, but the reverse holds true in domestic firms. This finding may reflect the intermittent pattern of labour-force participation among Japanese women. Frequent entry and exit from the labour force imply that women do not benefit from tenure effects on earnings. Moreover, interruptions in their labour force experience are likely to result in higher variance in earnings.

Summary and conclusions This chapter has examined differences in the distribution of human capital and the structure of earnings between domestic and foreign-owned firms in Japan. On average, we find that workers in foreign firms have a higher stock of human capital and have higher earnings than do workers in domestic firms. Our results suggest that the differential human capital composition and industry sector distribution of the workers can explain some but not all the differences in earnings between the two groups of workers. The evidence presented here suggests that foreign firms may import their human resource practices when they enter the Japanese market. We find strong evidence of the persistence of Japanese employment practices operating in domestic firms – mainly tenure and firm-size effects on earnings. The strong association between tenure and earnings is convincing evidence that the seniority wage system remains the norm in Japanese firms. On the other hand, we find that seniority does not apply in the case of foreign firms. This may be a source of their having a greater variance in earnings.

Hiroshi Ono 129

In 2003, Prime Minister Koizumi called for a doubling of foreign direct investment into Japan from 6.5 billion yen to 13 billion yen by 2008 (Financial Times, 18 February 2003). The JETRO report also claims that a majority of the foreign firms plan to increase employment in the future. Research that examines the interactions between FDI and human capital in Japan will remain an increasingly important topic for the foreseeable future.

Notes 1. The wage premium associated with foreign affiliates has been confirmed in Ghana (Görg, Strobl and Walsh, 2002), Indonesia (Lipsey and Sjöholm, 2003, 2004), the UK (Girma, Greenaway and Wakelin, 1999) and the USA (Feliciano and Lipsey, 1999; Lipsey, 1994). Heyman et al. (2004) examine the effect of foreign ownership on individual wages in Sweden and find that the foreign-ownership wage premium is significantly reduced after accounting for individual and firm heterogeneity. See also Lipsey (2001) for a review of empirical findings concerning foreign ownership and wages. 2. For example, MacDuffie and Kochan (1995) report that Japanese plants (in the auto industry) located in Japan provide the longest hours of training followed by Japanese plants in North America. The lowest level of training was found in plants located in the USA and Australia. 3. For example, Bronfenbrenner and Yasuba (1987) find that in 1960 the ratio of mean wages in establishments with 5–29 workers versus establishments with more than 500 workers was .46. In 1980, this ratio was .58. See also Lincoln and Kalleberg (1985) and Lincoln and McBride (1987) for explanations of firm-size differences in Japan. 4. For detailed description of the dataset and summary of main findings, see Recruit Works Institute (2001). 5. Survey weights are weighed by age group and employment status as reported in the 1995 Employment Status Survey, Ministry of Public Management, Home Affairs, Posts and Telecommunications. 6. These tests are known as the Standard Test of English Proficiency (or Eiken) and are administered by the Ministry of Education. Test levels range from grade 4 (lowest) to grade 1 (highest). The proportion here includes respondents who have passed any of these four levels. 7. Görg, Strobl and Walsh (2002) distinguish three groups of control variables – human capital, job characteristics and firm characteristics – where job characteristics include tenure and tenure squared. However, one interpretation of tenure is that it captures the extent of on-the-job training, or firm-specific human capital (see previous discussion). We therefore include tenure and tenure squared as human capital variables in our analysis. 8. Following Pyatt et al. (1980), the Gini coefficient (G) was estimated as follows:

2Con ( Y ,r Y ) G = -----------------------------where n is the sample size, Y is mean income, Y is income, and rY nY is the rank of all income earners ranging from lowest (r = 1) to highest (r = n). The caveat here is that the Gini coefficient is sensitive to the sample size (n) such that larger sample sizes produce lower estimates.

130 Foreign Ownership, Human Capital and Earnings in Japan

References Akerlof, G.A. (1982) ‘Labour Contracts as Partial Gift Exchange’, Quarterly Journal of Economics, 97: 543–69. Auer, P. and Cazes, S. (2000) ‘The Resilience of Long-term Employment Relationships: Evidence from the Industrialised Countries’, International Labour Review, 139: 379–408. Becker, G.S. (1993) Human Capital (Chicago: University of Chicago Press). Blomström, M., Konan, D. and Lipsey, R.E. (2001) ‘FDI in the Restructuring of the Japanese Economy’, in M. Blomström, B. Gangnes and S. LaCroix (eds), Japan’s New Economy: Continuity and Change in the Twenty-First Century (Oxford: Oxford University Press): 245–62. Blomström, M. and Kokko, A. (2003) ‘Human Capital and Inward FDI’, EIJS Working Paper no. 167. Bronfenbrenner, M. and Yasuba, Y. (1987) ‘Economic Welfare’, in K. Yamamura and Y. Yasuba (eds), The Political Economy of Japan, Volume 1: The Domestic Transformation (Stanford: Stanford University Press): 93–136. Feliciano, Z. and Lipsey, R.E. (1999) ‘Foreign Ownership and Wages in the United States, 1987–1992’, NBER Working Paper no. 6923. Girma, S., Greenaway, D. and Wakelin, K. (1999) ‘Wages, Productivity and Foreign Ownership in UK Manufacturing’, Center for Research on Globalisation and Labour Markets, Research Paper no. 99/14. Görg, H., Strobl, E. and Walsh, F. (2002) ‘Why Do Foreign-Owned Firms Pay More? The Role of On-the-Job Training’, IZA Discussion Paper no. 590. Hashimoto, M. and Raisian, J. (1985) ‘Employment Tenure and Earnings Profiles in Japan and the United States’, American Economic Review, 75: 721–35. ——(1989) ‘Investments in Employer–Employee Attachments by Japanese and US Workers in Firms of Varying Size’, Journal of the Japanese and International Economies, 3: 31–48. Heyman, F., Sjöholm, F. and Gustavsson Tingvall, P. (20049 ‘Is There Really a Foreign Ownership Wage Premium? Evidence from Matched Employer-Employee Data’, Stockholm School of Economics, EIJS working paper no. 206. Howenstine, N.G. and Zeile, W.J. (1994) ‘Characteristics of Foreign-Owned US Manufacturing Establishments’, Survey of Current Business, 74: 34–59. International Labour Organization (2000) Year Book of Labour Statistics (Geneva: International Labour Office). Japan External Trade Organization (JETRO) (2002) Gaishikei kigyou koyou chousa – Kekka gaiyo (Summary from the Employment Survey of Foreign-owned Firms) (Tokyo: JETRO). Kalleberg, A.L. and Lincoln, J.R. (1988) ‘The Structure of Earnings Inequality in the United States and Japan’, American Journal of Sociology, 94: 121–53. Kato, T. and Rockel, M. (1992) ‘Experiences, Credentials, and Compensation in the Japanese and US Managerial Labour Markets: Evidence from New Micro Data’, Journal of the Japanese and International Economies, 6: 30–51. Kawashima, Y. and Tachibanaki, T. (1986) ‘The Effect of Discrimination and of Industry Segmentation on Japanese Wage Differentials in Relation to Education’, International Journal of Industrial Organization, 4: 43–68. Lincoln, J.R. and Kalleberg, A.L. (1985) ‘Work Organization and Workforce Commitment: A Study of Plants and Employees in the US and Japan’, American Sociological Review, 50: 738–60. Lincoln, J.R. and McBride, K. (1987) ‘Japanese Industrial Organization in Comparative Perspective’, Annual Review of Sociology, 13: 289–312.

Hiroshi Ono 131 Lipsey, R.E. (1994) ‘Foreign-owned Firms and US Wages’, NBER Working Paper no. 4927. ——(2001) ‘Foreign Direct Investment and the Operations of Multinational Firms’, NBER Reporter, Winter 2000/2001. ——(2002) ‘Home and Host Country Effects of FDI’, NBER Working Paper no. 9293. Lipsey, R.E. and Sjöholm, F. (2001) ‘Foreign Direct Investment and Wages in Indonesian Manufacturing’, NBER Working Paper no. 8299. ——(2003) ‘Foreign Firms and Indonesian Manufacturing Wages: An Analysis with Panel Data’, NBER Working Paper no. 9417. ——(2004) ‘Foreign Direct Investment, Education, and Wages in Indonesian Manufacturing’, Journal of Development Economics, 73: 415–22. MacDuffie, J.P. and Kochan, T.A. (1995) ‘Do US Firms Invest Less in Human Resources? Training in the World Auto Industry’, Industrial Relations, 34: 147–68. Mincer, J. (1971) Schooling, Experience, and Earnings (New York: Columbia University Press). Mincer, J. and Higuchi, Y. (1987) ‘Wage Structures and Labour Turnover in the US and in Japan’, NBER Working Paper no. 2306. Organisation for Economic Co-operation and Development (OECD) (1999) OECD Benchmark Definition of Foreign Direct Investment – Third Edition (Paris: OECD). ——(2002) Education at a Glance: OECD Indicators 2002 (Paris: OECD). Ohta, K. (2000) ‘Kokusai hikaku kara mita Nihon no shotoku kakusa’ (Income distribution in Japan from an international perspective), Japanese Journal of Labour Studies, 42: 33–40. Ono, H.(2004) ‘Are Sons and Daughters Substitutable? Allocation of Family Resources in Contemporary Japan’, Journal of the Japanese and International Economies, 18: 143–60. Ono, H. and Piper, N. (2004) ‘Japanese Women Studying Abroad: The Case of the United States’, Women’s Studies International Forum, 27: 101–18. Pyatt, G., Chen, C. and Fei, J. (1980) ‘The Distribution of Income by Factor Components’, Quarterly Journal of Economics, 95: 451–73. Rebick, M.E. (1993) ‘The Persistence of Firm-Size Differentials and Labour Market Segmentation in Japan’, Journal of the Japanese and International Economies, 7: 132–56. Recruit Works Institute (2001) Working Persons Chosa 2000 – Shutoken (Working Persons Survey 2000 – Greater Tokyo Metropolitan Area) (Tokyo: Recruit Works Institute). Tachibanaki, T. (1984) ‘Labour Mobility and Job Tenure’, in M. Aoki (ed.), The Economic Analysis of the Japanese Firm (Amsterdam: Elsevier Science Publishers): 77–102. Tachibanaki, T. and Ohta, S. (1994) ‘Wage Differentials by Industy and the Size of Firm, and Labour Market in Japan’, in T. Tachibanaki (ed.), Labour Market and Economic Performance: Europe, Japan and the USA (New York: St Martin’s Press): 56–92. Ushiogi, M. (1986) ‘Transition from High School to Work: The Japanese Case’, in W.K. Cummings, E.R. Beauchamp, S. Ichikawa, V.N. Kobayashi and M. Ushiogi (eds), Educational Policies in Crisis: Japanese and American Perspectives (New York: Praeger): 197–209. Urata, S. (1996) ‘Tai-nichi chokusetu toushi no genjo to sogai youin’ (Barriers to Foreign Direct Investment in Japan), Nihon Keizai Kenkyu, no. 31: 66–82.

7 Gaining Societal Advantages in Emerging Markets: International Stakeholder Management in Malaysia Hans Jansson

International stakeholder management of MNCs in emerging markets focuses on the social context of the MNC, with a major premise being that this strategic context differs from the Western market context. Institutional theory, models from international business, resource-based theory, stakeholder management, corporate social responsibility (CSR) and legitimacy are integrated into a coherent theoretical framework. This development is based on case study methodology, where stakeholder management in Malaysia is used to illustrate the theory developed. The matching strategy, that is, the correspondence between the strategies employed and successful outcomes, makes it possible for the MNC to legitimize its operations by adapting to the values, norms and thought styles of the stakeholders. One major way of achieving legitimacy is the demonstration of social responsibility. Through this kind of matching strategy, social values and environmental concern are created among the various stakeholders, which may lead to societal advantages and, in the end, sustainable competitive advantages. The main factor behind the matching strategy is the MNC’s managerial and organizational processes, which are shaped by the values, norms and thought styles of the internal institutional environment, and are constrained by institutional elements external to the institutional environment.

Introduction Since it is not possible to separate the world of business from the world of ethics or politics, social and environmental issues belong within the international business strategy field. MNCs need to adapt to the combined challenges of climate change, biodiversity, social equity and human rights in a world of increased transparency, with more explicit values and more fragile corporate assets. The long-term viability of MNCs depends on how various societal problems are dealt with, especially since MNCs today are facing greater responsibilities than before (WIR, 1999). It is vital to have sustainability 132

Hans Jansson 133

from a societal point of view and not rely only on resources and capabilities for sustaining a competitive advantage. These social and environmental issues are more pressing in emerging markets, and the relationships between business, the state and private non-profit organizations are different from mature Western markets. It is important to not only create job opportunities, for example, but also to contribute to environmental protection, healthcare, infrastructure, education and so on. One such key social aspect concerns MNC strategy towards local stakeholders. According to a stakeholder approach to strategic management, the central task is to manage and integrate the relationships and interests of those groups that have a stake in the business so that the long-term success of the MNC is ensured (Freeman and McVea, 2001). A firm, whose longterm survival is determined by its entire network of relations – business as well as non-business – is defined as an ‘extended enterprise’ (Post et al., 2002) or a ‘civil corporation’ (Zadek, 2001). To direct such a course for a MNC in a local market, it is necessary to consider how the ‘extended’ firm can affect the diverse environment and how the environment may affect the firm. The key strategic problem is to develop a consistent policy that deals with the diverse stakeholders in and outside the markets and this challenge being even larger in the complex and dynamic environment of emerging markets. The question taken up in this chapter is, therefore, how stakeholder management by MNCs takes place in emerging markets. Since research on this topic is inadequate (Laserre and Schutte, 1999; Luo, 2002; Meyer, 2000; Tallman and Yip, 2000), a theoretical framework has been developed. The first problem encountered is that stakeholder management deals with social issues, while mainstream strategy theory is based on economic issues. So the economic basis needs to be replaced by a social basis, which is done by taking an institutional perspective to strategic management (Jansson, 2005). MNCs’ strategic behaviour is assumed to be controlled by prevailing values, norms and thought styles in society and is under pressure from the various laws, charters and guidelines in the public sector. This initial description of institutions is in turn based on defining ethics as ‘the principles, norms, and standards of conduct governing an individual or group’ (Treviño and Nelson, 1999: 12). The second problem is to integrate the various perspectives from a variety of traditional strategic management models into one coherent socially-based theoretical framework, mainly based on theories from the resource-based view, the institutional view of the firm, and the CSR view. A third problem considered is that the strategic context of MNCs in emerging markets is different compared to markets in Western Europe and North America (Jansson 2005). When institutions found in Western societies are missing, for example a pension system, the MNC needs to adapt to this new situation, where the strategic objective could be to win legitimacy by showing to employees and government that the company adopts social responsibility for its business

134 International Stakeholder Management in Malaysia

activities in the country. Social responsibility issues are therefore of high strategic importance for MNCs in emerging markets and CSR views deserve more attention from companies, whereas they are taken up as part of the stakeholder approach to international business management. The key strategic stakeholder management issue studied in emerging markets is formulated in the same terms as the classical international strategic dilemma of the MNC concerning the trade-off between local responsiveness and global integration (Tallman and Yip, 2000): To what degree, we must ask, is the MNC locally responsive to the social context by following local ethical standards, and to what degree are these local codes of conduct integrated with the Group’s standards?

Methodology The integrated theoretical framework reported in this chapter is a result of striving for ‘abductive’ development of theory (Jansson, 2002). This involves an ongoing process of developing a theoretical framework relevant for international business management in emerging markets. The overall strategic framework based on Jansson (2002, 2005) is presented below. A part of this conceptual framework is deepened further in this chapter, namely the one dealing with IBM which focuses on the social context of the MNC, especially with regard to stakeholders and corporate social responsibility. The need for depth and comprehensiveness in research with such an aim implies that only a small number of firms can be studied. A first, more preliminary case study of a MNC operating in the PRC (Martinsson and Zellman, 1998), followed by a case study in Malaysia (Johansson and Larsson, 2001) are examined. Both countries are characterized as emerging markets, which go through interesting but different liberalization processes, and have strong governments that stress social issues for MNCs. In line with the theoretical and methodological direction above, empirical facts have been collected by means of an extensive field-study in one company in Malaysia. As a condition for obtaining full access, names cannot be openly revealed. A major source of empirical data during the field studies was a series of in-depth interviews with major representatives of the subsidiary and stakeholders. Information has also been collected from various kinds of documents. Based on the first field-study in China, a preliminary theoretical framework was developed, which was refined in the case study in Malaysia.

The stakeholder management framework The base behind the stakeholder management framework in emerging markets is institutional theory, according to which society is divided into different social groupings characterized by different regularities or rules.

Hans Jansson 135

Such a grouping forms an institution of its own, where behaviour follows the specific rules inherent in it. Besides having their own rules, these groupings influence each other. The MNC, therefore, is defined as being organized according to institutional principles, where MNC strategy and organization are influenced by institutional factors within the MNC and by rules of outside institutions (Peng, 2003; Redding, 2005; Scott, 1995). The basic influential types of external societal organizations are segmented into two major groupings or institutional systems: organizational fields and societal sectors. Behind a certain type of activity pattern, defined as strategy, is found a main reason, according to which strategic management is rationalized. Two such reasons are discerned: the efficiency-based rationality based on the economic view, and the legitimacy-based rationality based on the social view (Jansson, 2005; Jansson et al., 1995; Oliver, 1997). The major strategy based on the latter rationality is denoted as ‘matching strategy’. The idea is that the stakeholders belongs to a single MNC-centred network, where relationships between the MNC and each of its stakeholders share many common features and at the same time also common interests as well as conflicts. The main force behind a strategy resulting in competitive advantages is the MNC’s managerial and organizational processes, shaped by its resources and capabilities and constrained by the external environment available to it. Competitive advantage of the MNC is therefore determined by factors of the external institutional setting as well as factors of the internal institutional setting. Through applying resources and capabilities via matching strategy so that social values and ‘natural’ values are created within various societal groups, a societal advantage is achieved. If these values benefit society in the long run, the MNC’s business is sustainable. In the case that a societal advantage leads to a competitive advantage, then these values cannot be duplicated by competitors and the competitive advantage is sustainable.

Societal advantages and sustainable business As noted, by adding value to society and making its business sustainable the MNC gets a societal advantage. This happens when the MNC does business so that the possibilities are not compromised for future generations to enjoy similar standards of living as the present generation. Sustainable business is achieved by enhancing long-term shareholder value by addressing the needs of relevant constituents and adding economic, natural and social value through the MNC’s core functions. This can be formulated as a major objective function of the MNC: Sustainable business = Economic value + Social value + Natural value Economic value is created within the economic sector, the basis of it being profitability from customer value. Social values as well as natural values are

136 International Stakeholder Management in Malaysia

created through social responsibility acts. Natural value is separated from social value as the specific value inherent in protecting the natural environment and conserving resources so that nature is not destroyed and the needs of future generations are considered. Social value and natural value may also add to economic value by creating more satisfied customers. The values are related to each other and these three values of sustainable business constitute, for example, a ‘triple bottom line’ for the performance of the MNC.

Matching strategy There are a number of strategies open to MNCs in matching internal and external institutional frameworks to each other. These are listed in Table 7.1. A strategy is defined as a matching principle, which is executed by following organizational routines relevant for this principle. The proactive strategies are presented at the top of the table, with the activity of the strategic agent decreasing gradually down the table, and with the passive strategies and organizational routines found at the bottom. The table is based on the assumption that the MNC mainly has at its disposal more proactive and active strategies and fewer passive strategies. The table is also based on Table 7.1 Matching strategies and organizational routines Strategies

Org. routines

Examples of organizational routines

Innovate

Generate change Move fast

Developing a new product development routine

Manipulate

Co-opt Influence Control

Importing influential constituents Shaping values and criteria Dominating institutional constituents and processes

Defy

Dismiss Challenge Attack

Ignoring explicit norms and values Contesting rules and requirements Assaulting the sources of institutional pressure

Avoid

Conceal Buffer Escape

Disguising nonconformity Loosening institutional attachments Changing goals, activities, or domains

Balance Pacify Bargain

Balancing the expectations of multiple constituents Placating and accommodating institutional elements Negotiating with institutional stakeholders

Habit Imitate Comply

Following invisible, taken-for-granted norms Mimicking institutional models Obeying rules and accepting norms

Compromise

Acquiesce

Creating flexible capabilities and organizational controls

Source: Adapted from Oliver (1991).

Hans Jansson 137

Oliver (1991) and her useful classification of strategic responses to external institutional pressures. These different strategic responses put different demands on the MNC’s resources, mainly on the ability to adjust the resources to a specific response. Thus, according to this table, MNCs could react to external influences such as demands from and changes in the external framework in various ways. At one extreme, the MNC is proactive and is leading the way by following two major organizational routines, for example, by setting quality standards. This is a kind of environmental leadership, where the MNC meets its self-imposed obligations to society and sustainable development. The MNC changes its strategy by developing a new set of rules which are adapted to by the external environment. One example is when a new industry standard is created by the MNC and is followed by other actors in the market. In another active strategic posture, the MNC tries to manipulate constituents of the external framework by following three major types of organizational routines: co-opt, influence and control. For example, the MNC might want to influence stakeholders in the new external milieu by shaping their values and norms. Here, the external institutional framework adapts to the internal institutional framework of the MNC. This strategy, like all other matching strategies, is enacted in response to pressures toward conformity with the institutional environment (Oliver, 1991). However, a MNC may also replicate a strategy developed elsewhere without even thinking about the necessity to manipulate the environment. This is a passive strategy of acquiescence found at the other extreme in Table 7.1. The remaining matching strategies of defy, avoid and compromise have ingredients of both an active and passive choice behaviour.

Legitimacy The base of the matching strategy towards constituents is that MNCs legitimize their operations in emerging markets by adapting to the values, norms and thought styles prevailing in society (Jansson, 2002, 2005). Stakeholder management is therefore guided and shaped by a quest for legitimacy, which is given to an organization or person by other organizations/persons from the actions of that organization or person. Such an acceptance is based on a test or assessment of these actions, where ideologies, valuations and norms are the criteria. The actions themselves, or more precisely the reasons behind them and how ‘justified’ they seem, are tested. Legitimation is a two-way communication process. From above it is a claim of validity for what one knows is justifiable; from below this claim is justified according to the rules of a certain group which are expressed as valuations, norms and thought styles (Cipriani, 1987). This means that the MNC and the local stakeholders are involved in communication activities with each other, claiming and giving legitimacy.

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Legitimacy concerns the instrumental aspect of the MNC strategy, and is related to the normative, cognitive and regulative constraints both internal and external to the MNC. These constraints are either institutionalized into specific societal groups (for example, constituents) or institutionalised into society in general. A stakeholder group mainly carries the values, norms and thought styles on which the MNC justifies itself. Legitimacy is based on the calculative self-interest of such a constituent, that is, the MNC is supported by such a group, which in turn receives kind of benefits from the existence of the MNC. These benefits can be of an economical, social or natural type. Another sort of legitimacy concerns the impact on society and its welfare at large, where the MNC and its activities are perceived as righteous according to some socially constructed general value and belief system. According to Suchman (1995), the former type of legitimacy is pragmatic in nature, since it is based on calculative judgements regarding immediate benefits for the legitimizing interest groups. This is not the case for the latter type of legitimacy, which is more of a moral type. However, this does not mean that self-interest can be disregarded as a basis for moral legitimacy. Rather, the perception of some group of what is righteous for society at large often has a tendency to intermingle with what is beneficial for the self-interest of that group, that is, the group legitimizes its interest from such basic societal values, for example, being formed to defend such values and beliefs.

Corporate social responsibility Demonstrating corporate social responsibility (CSR) is thereby seen as a key way to achieve legitimacy and to make the MNC business sustainable from a societal point of view. According to, for example, Alkhafaji (1995: 294), WIR (1999) and Zadek (2002), corporations have responsibilities that go beyond the production of goods and services at a profit by having responsibilities that involve helping to solve important social problems, especially those that business have caused. Social and natural values are thus created through sociably responsible acts, and by following norms, values and thought styles in society. These rules are both formal (for example, in the public sector), or informal (for example, morale). This is of particular importance in transition economies due to their underdeveloped public sector, for example, the legal and political systems. Even if in place, public rules are not always enforced in these ‘soft’ societies. Corporations can be socially responsible in various ways (Laughlin and Ahsan, 1994; Pava and Krausz, 1997; The Prince of Wales Business Leaders Forum, 1998), for example by training local managers and labour for enterprise and business partners in the labour market; developing local suppliers, products and services; setting and raising standards and making social investments in education and community development. The MNC might raise legitimacy by gaining acceptance by governments, communities and interest groups as well as potentially critical observers, and in that way improving its reputation.

Hans Jansson 139

The stakeholder management model Behind the purpose of getting societal advantage through the right matching strategy lies an analysis of the strategic situation of the MNC. This is done as a network and institutional analysis of the external and internal environments of the MNC. Through an analysis of the relationships between the MNC and actors connected to it, the constituents are possible to identify; they are actors connected to each other through an organizational network. This stakeholder network operates in an institutional environment of organisational fields and societal sectors which influence their behaviour, the social issues and their relevance through the rule systems prevalent in the fields and the sectors. In that way the network actors become infused with values, norms and thought styles. Competitive advantages in emerging markets are created through a mix of economic values, natural values and social values, for example increasing the profits and raising benefits, or by reducing harm from pollution or congestion, for example. Societal advantages have a positive influence on competitive advantage especially when they lead to higher profits earned in comparison with competitors. Adding social and natural values are often of special importance for getting sustainable competitive advantages since it will be more difficult for competitors to duplicate the resources/capabilities on which societal advantage is based. This becomes even more difficult if the social and natural values created are sustainable. Thus, a sustained competitive advantage is achieved when competitors are unable to duplicate the benefits of a strategy originating from economic values, social values and natural values. The relation between corporate social responsibility and legitimacy in matching strategy is illustrated in Figure 7.1. A claim for validity is made for its activities in a country by claiming social responsibility for a critical issue

Matching strategy

Societal advantage (reputation)

Figure 7.1

Claims/ justifications • Responsibility • Credibility • Trustworthiness • Reliability • Respectability

Legitimacy (reputation)

Sources of competitive advantage • Differentiation • Cost

Competitive advantage

Matching strategy for societal and competitive advantage

140 International Stakeholder Management in Malaysia

of a stakeholder. If the actions or decisions taken by the MNC based on this claim are considered valid for the constituent in question and thus justified by it, the MNC has gained legitimacy from this group. Thus, by demonstrating social responsibility, legitimacy may be achieved. Indirectly, legitimacy could also be gained with other stakeholders, for example government, as well as within society in general by contributing to the welfare of society, for example in healthcare, infrastructure, education. By demonstrating CSR in specific ways, the norms, the values as well as the thought styles of different stakeholders are matched so that legitimacy is achieved. Depending upon the degree of legitimacy at hand, the MNC can gain legitimacy, maintain or lose it. Lost legitimacy can also be repaired. If legitimacy is achieved, social and natural values have been created, which results in societal advantages. So the factors behind legitimacy become sources of societal advantages because of the benefits they create for the constituents. These benefits imply that social and natural values have been created in society from the actions of the MNC, leading to societal advantages, which in their turn have the potential to make business more sustainable. A matching strategy is then a societal value creating strategy. Thus, legitimacy gained or repaired creates societal advantages, while legitimacy lost creates societal disadvantages. Legitimacy is achieved when the MNC activities are recognized, accepted or ratified by the stakeholder(s). The acceptance of these activities is facilitated if the reasons behind them are seen to be responsible. Other ways to justify actions are that they are viewed as being respectable, credible, trustworthy or reliable. Together with responsibility, these reasons are the sources behind societal advantage. Thus, the more the MNC is seen as being responsible, credible, trustworthy and reliable, the higher the legitimacy and the higher the stakeholder values and the higher the societal advantages. The degree to which actions or programmes are accepted because of these reasons, and to a varying extent match the norms, values or thought styles of the justifying stakeholder group, the result is that the benefits of various constituents increase, decrease or are kept constant. The higher the social and natural values, the higher the societal advantage of the MNC and the more sustainable its business might be. Reputation, for example, arising as a result of legitimacy is a major intangible resource of the MNC. This resource is closely related to the identity/ image of the MNC, originating from other intangible resources, for example, brand equity. Increased reputation from improved legitimacy is possible to transform into a competitive advantage through the sources of competitive advantage. A high reputation, for example, could in its turn become a source of a differentiation advantage, making pricing concessions possible (differentiating price), enhancing marketing opportunities, developing unique product service offerings or increasing strategic flexibility. It could also become a source of a cost advantage, for example if a better use of natural resources means cost-efficiency, or satisfied workers in the factory make it possible to better take advantage of economies of scale in production,

Hans Jansson 141

raising barriers of entry. Through this process, reputation is translated into a sustainable competitive advantage. There is also a feedback loop from sustainable business to reputation in the way that a matching strategy that achieves high social and natural values improves the reputation of the MNC. Normally, the higher the customer value, natural value and social value are, the better the reputation is.

Gaining societal advantages in the Malaysian bearings industry Developing a matching strategy to improve legitimacy in order to increase the societal advantage of the MNC is now illustrated by a case study of a leading MNC in the highly global bearing industry. Its main markets are in Western Europe and North America, but it also has important operations in East and South Asia. The example concerns its operations in Malaysia. This case is based on a study of the CSR of the MNC in this industry, mainly the factory it operates in the country. Initially, the local strategic situation of the MNC is analysed. The constituents and the social issues involved are identified by using the CSR matrix, followed by a strategic analysis of the external and internal institutional settings of the MNC in Malaysia. Based on this analysis, the matching strategies of the company are discussed and the influence on societal advantage and competitive advantage evaluated. This illustrative part of the article builds on Johansson and Larsson (2001).

The CSR matrix The CSR matrix is used as an important strategic tool to relate the external and internal institutional settings of the MNC to each other. The key constituents are related to the key issues of corporate social responsibility through a matrix of the type shown in Figure 7.2. The importance of each issue for each constituent is shown by the different shades of the cells. The darkest squares are the most important ones to focus on for the MNC. The dimensions in the matrix are made more concrete by applying the matrix to the situation of the MNC operating in Malaysia. Three criteria were used to select the 10 constituents: authority, contribution/influence, and outcome of relations. The 11 key constituents are the Group: (A) shareholders (worldwide for the group); (B) stock analysts (having a direct influence over investors in the MNC and the trustees handling pension funds that own the MNC); (C) employees; (D) customers and distributors; (E) suppliers; (F) competitors; (G) government authorities; (H) professional and interest organisations; (I) local community; (J) media; and (K) general public. The key issues are environmental care (the most frequent issue in the empirical material, including many norms such as adjustments to ISO 14001, discharge systems for industrial waste and education of the

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(Continued) employees and their families): (1) creation of employment opportunities; (2) employees’ family benefits; (3) education, training and personal development; (4) working conditions; (5) auditing and reporting; (6) community development; (7) customer development; (8) supplier development; (9) technology transfer; and (10) market development. The importance of each issue for each constituent is shown by the different shades of the cells in Figure 7.2. The darkest squares are the most important ones to focus on for the MNC. The squares with strong interest for the constituents with the most interest in the local subsidiary in Malaysia are the group and product division, the employees, the governmental authorities, professional and interest organizations, and the local community. Although the MNC subsidiary does not have much direct contact with them, also the customers, distributors, suppliers, media and general public have fairly much interest in the factory.

CSR issues \ Key stakeholders A

B

C

D

E

F

G

H

I

J

K

1 2 3 4 5 6 7 8 9 10

Weak interest

Medium interest

Strong interest

1 Environmental care

A Group

2 Creation of employment opportunities

B Shareholders

3 Employee benefits

C Stock analysts

4 Education

D Employees

5 Working conditions

E Customers and distributors

6 Auditing and reporting

F Suppliers

7 Community development

G Competitors

8 Customer development

H Goverment authorities

9 Supplier development

I Professional and interest org.

10 Technology transfer and market development

J Local community K Media and general public

Figure 7.2

The CSR matrix of the bearing MNC

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The external institutional setting The CSR matrix is an important strategic tool for identifying both the constituents and the social issues involved. The relevance of these social issues is based on analysing the institutions or rule systems prevalent in the external environment; that is, how the organizational fields and societal sectors influence the constituents’ behaviour. An analysis of the institutional context of the bearings industry case produced a number of institutional characteristics of the Malaysian environment, which are summarized in Figure 7.3 and discussed below. The organizational fields and societal sectors of this external framework consist of a number of general norms, values and thought styles that influence the specific norms, values and thought styles relevant for each of the CSR issues. These latter contents of institutions are taken up in connection with the analysis of the matching strategy for each issue below, while the general ones are discussed next.

Organizational fields Five organizational fields were identified and important characteristics of each field reduced down to between two–five factors per field. The organizational fields are the product market, the labour market, the financial market, the official establishment and the public interests. The product market consists of the customers and distributors, the suppliers and the competitors. It is characterized by product differentiation, equal bargaining power between sellers and buyers, geographically-oriented customer preferences, homogenous rule systems in the market regarding

Concentrated political power

Ethnical diversity Product market • Differentiation • Equally strong actors • Geographic-baxed preferences • General awareness • Networking

Insufficient education system

New technological norms

Inconsistent legal system Labour market • Brain-drain • Regional differences • High power distance • Lack of trust

Official establishments • Powerful • Uneven enforcement • High expectations on the private sector Ethnical and family-oriented business norms

Figure 7.3

The bearing MNC

Contradictory Financial market Asian • Foreign norms values • Powerful analysis • Increasing longsightedness

Public interests • Increased awareness • Uneven enforcement Strong family values Religious freedom

The external institutional setting of the bearing MNC

144 International Stakeholder Management in Malaysia

customers and suppliers, and networking. The labour market is signified by brain-drain, regional differences in the supply of skilled labour, a high power distance between employers and employees and a lack of trust in people not being part of the family. The financial market is characterized by foreign values and norms, powerful foreign analysts and increasing long-sightedness from an earlier stage of short-term orientation and speculation. The official establishment incorporates the government authorities and the non-government interest organizations, since they are closely related to the government. These organizations are powerful, in their connections to the government regulating the product, labour and financial markets. However, enforcement is uneven and selective, for example between domestic and foreign companies. There are also high expectations on the private sector; the government many times wanting the sector to take more responsibility than is mandated by law, for example by applying the higher environmental standards of the home country to the host country. Due to the relative power of the interest organizations within the private business sector, the interests of the companies are often regarded to a larger extent than the interest of the consumers by the Malaysian official establishment. The public interests are represented by the community, the general public and media, and the consumer interest groups. This organization field is seen as the unstructured equivalence to the official establishment. The activities of these groups have led to increased awareness among the members of the groups and the general public, which has increased pressures on MNCs to behave well. Media, with its increased power to change public opinion, has altered the rules of how companies can behave. The globalization of media has also made information more accessible to the general public in developing countries and has led to the reality that a mistake in one part of the world might have implications for the image and reputation in other parts. Another factor contributing to the increased awareness of the general public is the appearance of different non-profit organizations.

Societal sectors Nine major characteristics were found in the societal sectors, namely ethnical diversity, contradictory Asian values, concentrated political power, inconsistent legal systems, strong family values, religious freedom, ethnical and family-oriented business norms, new technological norms and an inadequate education system.

The internal institutional setting The major values and thought styles of the internal institutional setting of the Malaysian subsidiary of the bearings MNC are discussed below.

Hans Jansson 145

Values The vision expresses the key values of the MNC. The vision is to be the world leader in bearings by providing customer value, developing the employees and creating shareholder value. Even if this vision is not formally emphasized, the impression is that it is embedded in the organization of the local subsidiary. Four values are further articulated within the group: teamwork, empowerment, openness and high ethics. These values are long-term, consistent and rather well-embedded in the organization of the local subsidiary. These values have a long history within the group and are well-institutionalized throughout the group. The MNC has actually focused on these values since the beginning and most subsidiaries are in line with the mother company, which implies consistency and entrenchment. There are, however, differences among these values at the subsidiary, which implies that not all of them are given the same attention and that the degree of their institutionalization varies. The four values are somewhat akin to Malaysian society and can be viewed as Swedish values. The openness does not always work due to poor communication and because managers and workers do not speak the same language. Some employees are also afraid to approach managers even though there is an open-door policy.

Thought styles A number of main themes of the strategic thinking in the MNC were found, for example: • Conformity. The subsidiary is so closely tied to one division within the group that there is not much room for its own initiatives and innovations. Therefore, people within the subsidiary tend to think in the same way as within the Group, this being in accordance with the norms, values and other rule-systems of the Group. • Quality and product focus. Stressing quality has been a major ingredient of the thought style ever since the Group’s early days and is well-institutionalized in the organization. This is manifested in the large investments in R&D by the Group, the existence at the local company of modern machinery that produces a highly qualitative product, and a total quality management (TQM) approach. • Employee focus. Human-resource management is always pinpointed and accordingly there is a wide range of educational and training programmes. However, nobody at the managerial level at the subsidiary mentioned the employees as an important goal, which shows that the local institutionalization of this aspect of the thought style can be improved at the local company. • Cost focus. Being a large company with small margins, it is natural to place a focus on cost management. Recently, this belief has become more

146 International Stakeholder Management in Malaysia

important within the Group with the increased focus on cutting costs. The risk is that it negatively influences more long-term themes, for example customer focus. This also seems to have happened in the Malaysian company, which has become more short-sighted and does not stress business development to the same extent as before.

Stakeholder specific matching strategy for key CSR issues – examples The CSR matrix gives a good picture of the specific strategic situation of the MNC regarding the relevant social responsibility issues involved and for which key stakeholders. This matrix is based on the analysis of the external institutional environment and the internal institutional setting as exemplified above. Based on this analysis and the matrix, the matching strategies are formulated; that is, how the company should demonstrate social responsibility in order to earn legitimacy with the stakeholders. Discussed below are the matching strategies for a selected number of the key social responsibility issues stated in the CSR matrix (Figure 7.2). The first issue exemplified concerns how societal advantage is achieved by creating natural value, while the other issue relates to social value.

Environmental care Environmental care is one of the largest areas for activities within both the Group and the local subsidiary. The MNC is quite proactive, has specific environmental policies and reports and is certified according to ISO 14001 standard. The local subsidiary is at the cutting edge regarding environmental issues and the majority of the respondents at the company mentioned environmental care as an important issue. The three constituents with the strongest interest in the subsidiary’s environmental care are the employees (D), the governmental authorities (H), and the local community (J). The MNC largely complies with the norms of these constituents, since they are at the forefront of environmental issues and applies rules that are above average. Legitimacy is thereby achieved and natural value created together with a societal advantage. Simultaneously, since the company is proactive in the field, they have used manipulate strategies, where there has been an influence on the immediate surroundings. The MNC has, for example, educated local companies close to the factory in environmental issues and the employees have also been educated in environmental care. Regarding the Group (A), the subsidiary complies with the rules. There is relatively little room for own initiatives and the annual environmental report is made for the whole Group, not specifically for the local subsidiary. The increased interest in environmental care among the stock analysts (C), customers and distributors (E) are also complied with, which is shown by the

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implementation of the ISO 14001 standard, which was initiated on demand from the major customers, and the membership in Dow Jones Sustainability Index. All together, the local subsidiary further complies with the norms of the professional interest groups (I), and the media and general public (K) by their environmentally friendly approach and environmental reports. This shows that the MNC is aware of the importance of having a sustainable business in Malaysia by creating natural value.

Community development Community development is most important for the employees (D) who mainly come from the local area; the governmental authorities (H) which want to develop the local area; and of course the local community (J) itself, which is rather dependent on the large companies. The MNC’s mere presence in the area has had a great influence on the community through a manipulative strategy, even having some control over the local community, for example, by providing employment, giving benefits to the employees’ families; engaging in community projects together with other companies such as fire protection and road tolls; giving small donations; and inviting the surrounding companies for education in environmental care. Furthermore, it is important for the Group (A) to have smooth community interaction wherever in the world the MNC chooses to establish itself. The subsidiary has therefore complied with the norms and values regarding community interaction within the Group. The pioneer status further signifies a smooth integration into Malaysian society and the governmental authorities’ (H) satisfaction with the MNC’s local establishment and operations, validating legitimacy. Actually, it was the first foreign company to establish in the area, which means that the company complied with the government’s norms of attracting companies to the area. Similarly, the rule systems of the professional organizations (I) have been complied with, since the local presence can develop not only the area but also the industry and other manufacturers. Some respondents, however, believe that there could be more facilities at the factory that can be utilized by the people in the area and that the MNC could contribute more donations, social activities and so on. In any case, community development is mentioned by the respondents as one of the company’s achievements in Malaysia, indicating that this is a key responsibility area, which is of critical importance for getting social advantages by achieving legitimacy and creating social values.

Societal advantages and sustainable competitive advantage The activities directed at specific constituents exemplified above create legitimacy with each stakeholder, which improves the societal advantage of the MNC, since the constituents benefit from the situation. The business of the MNC becomes more sustainable through the higher natural and social

148 International Stakeholder Management in Malaysia

values created. More benefits for stakeholders improve the reputation of the MNC. This increased reputation in turn produces a competitive advantage, if the reputation leads to a differentiation advantage (for example, trained employees becomes better salespeople) or a cost advantage (for example, more efficient production due to higher motivation). However, it is hard to know if improved reputation has created any competitive advantage in Malaysia, since the subsidiary did not make profits during the initial years of operation studied. However, future profitability looks good. Moreover, the governmental authorities have extended the tax exemptions, which is a positive sign that they believe the subsidiary will be profitable in the future. In any case, through the societal advantage created, a solid foundation has also been laid for achieving future sustainable competitive advantages.

Major conclusions The major conclusion of this chapter is that the integrated theoretical framework developed seems to be valid for international stakeholder management of MNCs in emerging markets. It confirms that business cannot be usefully analysed if separated from social and natural environmental issues, demonstrating that sustainable competitive advantage has an important social aspect, being broader and involving sustainable business. The CSR matrix is shown to be a valuable tool for analysing strategic situations in international stakeholder management. It gives an overview of the degree of importance of each CSR issue and stakeholder. Moreover, it shows a profile of issues for each stakeholder together with making it possible to analyse the common and conflicting issues for the stakeholders. The MNC studied has solved the critical international business strategy dilemma of global integration versus local responsiveness in a certain way. For all CSR issues, the MNC has acquiesced in the rules of the Group at the same time as it has complied with the rules of the government authorities. Very little compromising has been necessary between global and local rules, which creates a good fit between these key stakeholders. This performance was based on a thorough analysis of the external institutional setting in Malaysia and the internal institutional setting of the MNC. Acquiesce is also the leading matching strategy for stock analysts, professional and interest organizations, and the media and general public. The manipulative and compromise strategies dominate for the employees, while the manipulative strategy dominates for customers and distributors, suppliers and the local community. Thus, the influence of these constituents takes place in accordance with the values and thought styles established at the Group and the government authorities as well as according to norms found in the media and general public. It was established that major group values and thought styles had been internalized in the local subsidiary.

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Although all matching strategies are used, ‘acquiesce’ and ‘manipulate’ are the leading ones. As expected, the manipulative strategy of influencing standards is an important issue in emerging markets. Since the bearing MNC is the only foreign producer in its industry in Malaysia, it has set some standards and therefore manipulated norms and values. It shows to the stakeholders that the company is powerful in the market, which enhances its legitimacy and creates a good reputation and social values. The employees at the factory have a large interest in the company’s ability to set standards regarding salaries, benefits, the working environment and so on, especially in a country like Malaysia where standards are lower than in Sweden. However, since part of the reason for establishing in this local area was the low labour costs, the Swedish standards regarding salaries, and so on, have only partly been followed. Hence, the MNC has compromised between the group and the Malaysian stakeholders on this issue. For the market actors, higher standards lead to a developed market and new business opportunities. Finally, the government, the professional interest groups, the local community, as well as the media and general public, have an interest in the subsidiary’s ability to set new social standards, since it might develop the whole country. The company has the ability to move early, at least in the field of product development and related issues. Issues 2–5 in Figure 7.2 all concern the labour market, where matching strategy for these issues were influenced by the characteristics of the labour market; for example, regional differences and high power distance, and internal values (for example, employee development, teamwork and empowerment) and thought styles (for example, employee and cost focus). Creating transparency through establishing suitable auditing and reporting routines was shown to be critical part of CSR in order to improve legitimacy with constituents. All in all, matching strategy is stakeholderspecific. For one specific issue, the strategy varies between the constituents, as well as there is some variation of strategy for a specific stakeholder. Through avoiding the requirements of formal reporting within the company on CSR-related issues as well as lacking in supplier development, the MNC risks losing legitimacy. The lack of reporting is also a sign that CSR as a practice is inadequately institutionalized within the subsidiary, as well as within the group.

References Alkhafaji, A.F. (1995) Competitive Global Management: Principles and Strategies (Florida: St Lucie Press). Cipriani, R. (1987) ‘The Sociology of Legitimation: An Introduction’, Current Sociology, 35(2): 1–20. Freeman, E.R. and McVea, J. (2001) ‘A Stakeholder Approach to Strategic Management’, in M.A. Hitt, R.E. Freeman and J.S. Harrison (eds), Blackwell Handbook of Strategic Management (Oxford: Blackwell Business).

150 International Stakeholder Management in Malaysia Jansson, H. (2002) ‘Changing Government Strategy of Multinational Corporations in Transition Countries: The Case of Volvo Truck Corporation in India’, in V. Havila, M. Forsgren and H. Håkansson (eds), Critical Perspectives on Internationalisation (Amsterdam: Pergamon): 387–413. Jansson, H. (2005) International Business Strategy in Emerging Markets. The InstitutionalNetwork Approach. Book manuscript, Baltic Business School, Kalmar University. Jansson, H., Saqib, M. and Sharma, D.D. (1995) The State and Transnational Corporations. A Network Approach to Industrial Policy in India (Aldershot: Edward Elgar). Johansson, E. and Larsson, P. (2001) ‘Pole Position with Corporate Social Responsibility’, Masters thesis, School of Economics and Commercial Law, Göteborg University. Laserre, P. and Schutte, H. (1999) Strategies for Asia Pacific: Beyond the Crisis (London: Palgrave Macmillan Business). Laughlin, J.L. and Ahsan, M.B. (1994) ‘A Strategic Model for Multinational Corporation Social Responsibility in the Third World’, Journal of Marketing, 2(3): 101–15. Luo, Y (2002) Multinational Enterprises in Emerging Markets (Copenhagen: Copenhagen Business School Press). Martinsson, P. and Zellman, P. (1998) ‘Corporate Social Responsibility – A Case Study of Volvo Truck Corporation in China’, Masters thesis 1998: 17, School of Economics and Commercial Law, Göteborg University. Meyer, K.E. (2000) ‘International Business Research on Transition Economies’, in A.T. Rugman and T.L. Brewer (eds), The Oxford Handbook of International Business (Oxford: Oxford University Press): 716–59. Oliver, C. (1991) ‘Strategic Responses to Institutional Processes’, Academy of Management Review, 16(1): 145–79. Oliver, C. (1997) ‘Sustainable Competitive Advantage: Combining Institutional and Resource-based Views’, Strategic Management Journal, 18(9): 697–713. Pava, M.L. and Krausz, J. (1997) ‘Criteria for Evaluating the Legitimacy of Corporate Social Responsibility’, Journal of Business Ethics, 16(3): 337–47. Peng, M.W. (2003) ‘Institutional Transitions and Strategic Choices’, Academy of Management Review, 28(2): 275–96. Post, J.E., Preston, L.E. and Sachs, S. (2002) ‘Managing the Extended Enterprise: The New Stakeholder View’, California Management Review, 45(1): 6–28. Redding, G. (2005) ‘The Thick Description and Comparison of Societal Systems of Capitalism’, Journal of International Business Studies, 36(2): 1–33. Scott, W.R. (1995) Institutions and Organizations (Thousand Oaks, Cal.: Sage). Suchman, M.C. (1995) ‘Managing Legitimacy: Strategic and Institutional Approaches’, Academy of Management Review, 20(3): 571–610. Tallman, S.B. and Yip, G.S. (2000) ‘Strategy and the Multinational Enterprise’, in A.M. Rugman and T.L. Brewer (eds), The Oxford Handbook of International Business (Oxford: Oxford University Press): 317–48. The Prince of Wales Business Leaders Forum, Responsible Business in the Global Economy (1998), Financial Times Guide no. 1. Treviño, L.K. and Nelson, K.A. (1999) Managing Business Ethics (New York: John Wiley). World Investment Report (WIR) (1999) Foreign Direct Investment and the Challenge of Development (Geneva: United Nations, UNCTAD). Zadek, S. (2001) The Civil Corporation (London: Earthscan).

8 The Impact of Foreign Direct Investment on the Economic Development of ASEAN Economies Hafiz Mirza and Axèle Giroud

Introduction It is acknowledged in the literature that foreign direct investment (FDI) impacts on the growth and development of host countries in a variety of ways (Giroud, 2003; Klein et al., 2001; UNCTAD, 1999; 2001), ranging from ‘direct effects’ on employment and training, through classical ‘multiplier effects’ (for example, workers use their wages to buy goods which stimulates other industries) to ‘spillover’ effects whereby indigenous firms acquire knowledge and technology from foreign firms through a variety of transmission mechanisms. In this context, the 10-member Association of Southeast Asian Nations (ASEAN) is a prime target for investigating FDI impact because it has been a major recipient of investment by transnational corporations (TNCs) for three decades, albeit the scale of inward FDI flows has declined in recent years. Figure 8.1 presents principal examples of the direct, multiplier and spillover effects in a single integrative model or framework: the stylized world depicted is divided horizontally between an international/regional economy and the host country economy. For a variety of reasons (not discussed here), the TNC in the diagram has established a subsidiary in the developing host, with the primary – and fairly typical – aim of conducting assembly and production operations for local, regional and/or global markets. The subsidiary may or may not be a joint venture, but it is perforce involved in a number of local relationships. First of all, the subsidiary must set up shop by building a factory and related facilities, buy necessary equipment and supplies and, most importantly, hire workers who will frequently need to be trained-up. These interfaces between 151

Marketing & distribution

R&D, design

Assembly & production

Located in ASEAN, source or third country

152

TNC parent company

International and regional economy

Reinvestment Initial investment, transfer of capital, management, knowledge

Independent foreign suppliers

Affiliated foreign suppliers

TNC domestic suppliers

Local domestic suppliers

Assembly & production Laboratory, factory, office, warehouse

JV

KNOWLEDGE & TECHNOLOGY

pa

rtn

er

People & training

Foreign sales • To ASEAN, source or third countries • To affiliated or independent countries Domestic sales • Via distributors, sales organizations or direct outlets

Link with universities Spillovers of knowledge and formal/tacit skills through training, demonstration effect, competitive effect, and human mobility improves productivity and competitiveness

Host country economy

Figure 8.1

Competitors

Charitable and voluntary links

Enterprise spin-offs

Pool of mobile, trained labour

Consumption effects tax revenues trade effects (Multiplier effects)

Equivalent spillovers in marketing and distribution

Short and longterm growth from: • Direct effect • Multiplier effect • Spillover effect

The impact of FDI on a developing host country: an integrated model of the direct, multiplier and spillover effects

Hafiz Mirza and Axèle Giroud 153

the subsidiary company and the economy are typical of the main direct effects that FDI has on the host country. The extent of these direct effects depends on the scale of the initial FDI; the technology employed; the numbers of people employed and the training, wages offered; the degree to which the firm can procure essential goods and services (for example, machinery, construction engineers); and the proportion of profits reinvested periodically in the subsidiary (or other local expansion). These direct effects are indicated by ‘D’ in the appropriate parts of Figure 8.2, which highlights the impact of FDI in a stylized form. Secondly, inasmuch as the subsidiary company is a manufacturing company, it is a part of the value chain, both within the country and internationally (Figure 8.1). These links are both backwards (with suppliers) and forwards (with distributors and sales organizations). Inasmuch as these linkages stimulate activity, employment and so on in supplier and distributor firms and organizations, then the initial FDI has a multiplier – that is, amplified – effect beyond the initial direct effect on the local economy. This multiplier can be referred to as the value chain multiplier effect and its extent depends on similar factors to the direct effect. In addition to the value chain multiplier, there is also a consumption multiplier effect: for example, the subsidiary and its linked firms all pay taxes and their workers purchase goods and services (and pay taxes), all of which results in a boost to other sectors of the

International and regional economy Parent transnational corporation

D

Subsidiary company

D M

S

M

S S S S

S S Host country economy

S

S

M

Key: D = Direct effect M = Multiplier effect S = Spillover effect

Figure 8.2 A stylized version of the integrated model highlighting the loci of the direct, multiplier and spillover effects

154 The Impact of FDI on ASEAN Economies

economy. These two types of multiplier effect combined are indicated by an ‘M’ in the relevant parts of Figure 8.2. Finally, the subsidiary plays a role in transferring, encouraging or obliging the transfer/take-up of knowledge, technology and skills – in a myriad of forms – to other organizations in the host country, principally through training, demonstration and competitive effects. Collectively this is known as the spillover effect and can be the result of both deliberate (for example, training of workers, quality-control enforcement at suppliers, or student scholarships) or non-deliberate actions (for example, competitive pressures on local firms or the subsidiary as ‘benchmark’, model and source of ‘best practices’). As Figures 8.1 and 8.2 (that is, the parts of Figure 8.2 denoted by ‘S’) indicate, there are many routes and transmission mechanisms through which knowledge from the TNC parent (ultimately) can reach indigenous firms and entities. The extent of the spillover effect will depend on a very wide range of issues, including the resources and capabilities of indigenous firms, and is elusive to quantify. Nevertheless, as the foremost reason for encouraging FDI,1 it is the holy grail of FDI impact and needs to be researched assiduously. The three types of effect discussed above impact on the host economy over different time scales. The direct effect on the economy is immediate, but, we suggest, declines relatively over time (even in the event of new investments or reinvestments), provided the multiplier and spillover effects are of a sufficient level (which may not be the case, especially with regard to the latter). The multiplier effect kicks in immediately after the direct effect, but takes time to work its way through the economy, via the value chain and the propensity of governments and individuals to consume. Finally, the spillover effect takes time to take hold – possibly years – but will ideally become dominant as indigenous firms develop their capabilities and competitiveness. Figure 8.3 depicts the stylized evolution of the relative effects of FDI on a host economy over a period of time. In light of the above discussion, the remainder of this chapter discusses the impact of FDI on the economic development of ASEAN. The discussion is based on the results of a research project, conducted by the authors, whose aim was to interview subsidiary firms about their local linkages, impact and contribution to ASEAN economies. The main issues and relationships investigated included direct effects (for example, employment and human resources development), international and regional integration (including aspects of forward and backward linkages), backward linkages, forward linkages and ‘links’ with competitors. A questionnaire was used to interview managers in five ASEAN countries, namely Malaysia, Thailand, Cambodia, Vietnam and Singapore. Subsidiaries in Malaysia and Thailand were chosen because they are relatively advanced newly industrializing countries with a significant level of FDI, accumulated over a number of decades; contrarily, Cambodia and Vietnam which are poorer, newer member countries of

Hafiz Mirza and Axèle Giroud 155

Relative contribution to economy

100% Spillover effect Multiplier effect

50%

Direct effect 0% 1

2

3

4

5

6

7

8 9 10 Notional period

Figure 8.3 Stylized impact of FDI: the changing relative contributions of direct, multiplier and spillover effects over time

ASEAN have only quite recently opened their economies to TNCs. Singapore, an industrialized country at the heart of ASEAN, is the local headquarters for many TNCs and is in the survey for this reason (but will not play much of a role in the analysis and discussion below).

Characteristics of the companies interviewed A total of 113 companies were interviewed. A number of these companies were ‘pure’ regional headquarters (RHQ) firms; that is, they had no manufacturing activities whatsoever (although others were also engaged in manufacturing). In addition, 10 companies interviewed were indigenous firms (normally direct competitors with one or more TNC subsidiaries in the sample) and some firms were in other industries (for example, 2 automakers in Thailand) by way of comparison. Most of the quantitative information presented below relates to 88 manufacturing companies in the five host countries and four industries surveyed. Some key characteristics of the 88 manufacturing firms are given in Tables 8.1 to 8.4. Reflecting the overall picture of FDI in ASEAN, about a third of the interviewed companies were established by Japanese TNCs, followed by USA, European and Taiwanese firms (12–14 per cent each). Firms from two other newly industrialized economies (NIEs), Hong Kong and South Korea, own 7 per cent and 9 per cent of subsidiaries each, respectively; while the remaining companies belong to ASEAN firms (from Singapore and Malaysia) and firms from ‘other’ countries (for example, India and Australia). Apart from Singapore and Malaysia, two early recipients of FDI, most surveyed companies (84 per cent) were established after 1980. The timing of establishment mirrors the fanning out of investment in Southeast Asia after the initial footfall by TNCs in Singapore in the 1970s, as

156 Table 8.1 Characteristics of interviewed companies by country of ownership, destination, period of establishment and degree of parent’s involvement Characteristic

Country of origin (number of firms and per cent)

Host country

Date firms started operations (no/%)

Number, per cent

Comments

USA

12 (14%)

Japan

27 (31%)

Europe Taiwan

11 (12%) 11 (12%)

Concentrated in Malaysia – 7 out of 12. Fairly equally dispersed between Malaysia (10), Thailand (9) and Vietnam (7). Biggest number in Malaysia – 5 Fairly equally dispersed between Malaysia (2), Thailand (4), Vietnam (3) and Cambodia (2) Fairly equally dispersed between Thailand (3), Vietnam (2) and Cambodia (2) Entirely in Cambodia (3) and Vietnam (1) Biggest number in Vietnam (3) Both in Vietnam Biggest number in Thailand (4)

Hong Kong

8 (9%)

Singapore

4 (4%)

South Korea Malaysia Other

6 (7%) 2 (2%) 7 (8%)

Malaysia Thailand Vietnam Cambodia Singapore

27 (31%) 25 (28%) 22 (25%) 11 (12%) 3 (3%)

Mostly in EE (18) and CE (7) Mostly in EE (16) and CE (5) Mostly in CE (8) and G (8) Entirely in G (11) Entirely in EE (3)

Before 1980

14 (16%)

1980–1985

8 (9%)

1986–1990

20 (23%)

1991–1995

19 (22%)

1996–2000

19 (22%)

67% of firms in Singapore commenced operations before 1980; 33% in Malaysia 16% of firms in Thailand commenced operations Big growth years in Malaysia (37% established in this period) and Thailand (36%) Growth years in Thailand (16%), Vietnam (45%) and Cambodia (27%) Growth years in Thailand (16%), Vietnam (27%) and Cambodia (54%) Continuing expansion in Vietnam (23%) and Cambodia (18%)

2001 or 2002 Mean ownership Share (%)

8 (9%) 86%

Most companies (57) are wholly owned by the foreign company; only 9% are minority owned. The mean ownership by source country in reverse order is: Europe (99%), USA (94%), Japan (84%), NIEs (82%); ASEAN (77%); Other (77%)

157 Number of companies owned by foreign parent in host country

1

47

Over 1

41

Nearly a half of parents have additional companies in the host country in which they are invested. This is the case for more than a half of Japanese parents (17 out of 27); Multiple companies are more common in Malaysia (17 out of 27) and Thailand (16 out of 25), reflecting longer periods of establishment

Note: CE = consumer electronics; EE = electrical and electronics; G = garments; NIEs = newly industrialized economies (South Korea, Taiwan and Hong Kong).

Table 8.2 Reasons for investing in ASEAN host countries Reason

Government incentives/policies Political stability International trading systems Economic stability Growth rates Size of the local market Socio-cultural issues Labour-related issues (cost, quality, capability development) Language ability Low production costs Good infrastructure Regional dynamics/ prospects Regional penetration (incl. intra-regional relocation) Gain local market share Follow customers

Singapore

Malaysia

Thailand

Vietnam

Cambodia

Total

No.

%

No.

%

No.

%

No.

%

No.

%

No.

%

2

40

9

13.4

12

17.9

10

16.1

2

12.5

35

16.1

1 0

20 0

4 2

6.0 3.0

4 1

6.0 1.5

2 1

3.2 1.6

0 3

0.0 18.8

11 7

5.1 3.2

0 1 0

0 20 0

5 0 6

7.5 0.0 9.0

4 0 3

6.0 0.0 4.5

2 0 9

3.2 0.0 14.5

0 0 0

0.0 0.0 0.0

11 1 18

5.1 0.5 8.3

0

0

0

0.0

3

4.5

0

0.0

0

0.0

3

1.4

0

0

8

11.9

15

22.4

15

24.2

3

18.8

41

18.9

0 0

0 0

4 3

6.0 4.5

0 0

0.0 0.0

1 1

1.6 1.6

0 1

0.0 6.3

5 5

2.3 2.3

0 1

0 20

5 1

7.5 1.5

0 2

0.0 3.0

0 1

0.0 1.6

0 0

0.0 0.0

5 5

2.3 2.3

0

0

1

1.5

0

0.0

0

0.0

0

0.0

1

0.5

0

0

1

1.5

1

1.5

1

1.6

0

0.0

3

1.4

0

0

5

7.5

4

6.0

0

0.0

0

0.0

9

4.1

158 The Impact of FDI on ASEAN Economies Table 8.2 (Continued) Reason

Singapore

Malaysia

Thailand

No.

No.

No.

%

%

%

Vietnam No.

%

Cambodia No.

%

Total No.

%

Customer recommendation/ decision Follow competitors Brand building Prior business contacts (OEM or other) Rationalization/ reorganization policy Diversification policy Other

0

0

1

1.5

1

1.5

1

1.6

2

12.5

5

2.3

0

0

2

3.0

1

1.5

1

1.6

0

0.0

4

1.8

0 0

0 0

1 4

1.5 6.0

0 6

0.0 9.0

0 8

0.0 12.9

0 2

0.0 12.5

1 20

0.5 9.2

0

0

1

1.5

4

6.0

1

1.6

0

0.0

6

2.8

0

0

1

1.5

2

3.0

2

3.2

0

0.0

5

2.3

0

0

3

4.5

4

6.0

6

9.7

3

18.8

16

7.4

Total

5

100

67 100.0

67 100.0

62 100.0

16 100.0 217 100.0

Note: Multiple responses apply: each firm was asked to give up to three reasons for investing in the host country.

well as the liberalization of regimes in nearby countries (including Cambodia and Vietnam’s more recent entry into ASEAN). This has resulted in a wave-like entry by investors into the five countries, in the following order: Singapore, Malaysia, Thailand, Vietnam and Cambodia (there is also a linear correspondence with these countries per capita incomes). Because many companies were established some time ago, about 50 per cent before 1990, nearly a half of all parents have more than one subsidiary company in their respective host country – and this is the case for a majority of Japanese parents (which are more intensely integrated into Southeast Asian economies). In a similar vein, a majority of companies in Malaysia and Thailand report that they have sister affiliates in these host countries, mostly because these countries are longer-term major recipients of manufacturing FDI in the region. Most companies are wholly owned by their foreign parent company and only 9 per cent are minority owned. Companies belonging to European and US parents are more likely to be wholly owned, but 100 per cent or majority ownership is preponderant for all parent firms, regardless of origin (Table 8.1). The reasons for investing in ASEAN countries as a whole are varied (Table 8.2), but the foremost concerns, in descending order, are: labour (cost, quality, language ability), government incentives and policies, previous business contacts (including OEM business) and size of the local market. Essentially this is a formula for international production more than for local/regional market-oriented investments (although both occur). In the

Hafiz Mirza and Axèle Giroud 159 Table 8.3 Scale of activity by host country and industry Singapore Malaysia Thailand Vietnam Cambodia Average number of factories Ave. no. of greenfield factories Average annual output, US$ millons Average number of employees Female workers as % of shop floor

Size of Company (%)

Small Medium Large V. large Big

Total

1.33

2.19

2.36

1.64

1.18

1.94

1.33

1.88

2.20

0.95

Na

1.49

78

1,504

1,053

2,699

327.6

3,750

20

11

86

443

–

48

71

–

0 33 0 67 0

4 11 23 35 27

0 24 16 32 28

60 36 4 0 0

Na

1,998

–

–

64 27 0 0 9

24 24 13 22 17

Electrical & Consumer electronics Garments Textiles electronics Average annual output, US$ millions Average number of employees Female workers as % of shop-floor: Small Medium Size of company (%) Large V. large Big Does the company have a strategic role? (%)

Yes No

1,050

452

9

201

3,194

1,487

369

2,214

79

40

–

56

5 18 15 36 26

30 20 15 20 15

52 35 4 4 4

20 40 20 0 20

65 35

45 55

26 74

20 80

Note: Small = up to 50 employees; medium = 51–250 employees; large = 251–1,000 employees; very large = 1,001–3,500 employees; and big = over 3,500 employees.

case of Malaysia and Thailand, following (industrial) customers and economic stability are significant motives, and these tie in with the importance of investment post-reorganization in the case of Thailand. Language is a chief reason in Malaysia, presumably for US and other companies which prefer an

160 The Impact of FDI on ASEAN Economies Table 8.4 Direction of outputs/exports (Percentage share, reading across rows)

Local ASEAN Japan East Asia Europe North Rest of America the world

Total exports (100%) Industry

Host country

28

7

13

8

20

22

4

35

11

12

8

14

17

2

Elec. & electronics Cons. electronics Garments Textiles

36

5

15

7

13

20

11

2 52

1 6

16 1

8 16

40 7

33 9

0 10

Singapore Malaysia Thailand Vietnam Cambodia

40 29 26 40 0

10 7 13 2 0

0 10 14 21 1

20 8 8 8 5

10 20 14 10 57

20 23 23 13 36

0 3 2 10 0

Note: Export requirements are imposed by governments on 57% of companies, but this tends to reflect their inclinations.

English medium. Cambodia is a little unusual because all of the investors are in garments and have moved to the country because of the availability of quotas in the USA and Western Europe. For this reason, international trading systems stand out as a reason, as does recommendations by customers (for example, a number of clothes brands have encouraged suppliers to invest in Cambodia because of its recently troubled, high-profile past). Table 8.3 indicates some of the scale and scope of the companies interviewed. On average each company has roughly two factories, though this varies from a mean of 1.18 in Cambodia to 2.36 in Thailand, which is to be expected given the different scale of manufacturing activity in each country and the length of time investors have been established in both countries. Greenfield factories predominate because there were very few indigenous manufacturing companies when investments first began in each country. There are some extremely big firms in both Malaysia (as measured by output) and Thailand (as measured by employment). Some of this is explained by the differential presence of electrical/electronic firms (which are large), as opposed to garments/textiles (which are smaller and more commonly located in Cambodia and Vietnam).

The impact of FDI on ASEAN economies: empirical findings Direct effects It is clear from just the scale of foreign company operations in Malaysia and Thailand that there is likely to be a large direct impact on their local economies. In addition, Table 8.3 implies a direct effect via an increased participation

Hafiz Mirza and Axèle Giroud 161

by women in the workforce. In both Malaysia and Thailand, women are heavily employed by foreign manufacturers (as in the other countries); and this is the case in all four industries, with the lowest rate of female participation – still high, at 40% of the shop-floor workforce – being in consumer electronics. Detailed questioning during the interviews also revealed that a very large proportion of workers were from provincial areas, also resulting in a strong direct effect on poverty reduction. Finally, it is also worth mentioning that most electronics companies in Malaysia and Thailand have been assigned a strategic role by the parent company and that this improves the chances of greater direct and, especially, indirect FDI effects on their respective economies (this is less commonly the case in garments and textiles). Looking at the underlying data, 40 out of 88 companies have been assigned a strategic role. This role is divided almost equally between, ‘additional R&D-related functions’ (12 firms), ‘additional role in two or more functional areas’ (13 firms) and ‘totally autonomous subsidiary’ (13 firms). In the case of Malaysia and Thailand, even if spillover is less significant at present, these strategic trends bode well for the future.

International and regional integration Intrinsically, these companies are likely to be highly integrated with the international economy, as is clearly indicated in Tables 8.4 and 8.5. Overall, Table 8.5 Direction of inputs/imports (Percentage share, reading across rows)

Local ASEAN Japan East Asia Europe North Rest of America the world

Total exports (100%) Industry

26

13

15

29

7

7

3

30

9

21

13

11

11

3

34

19

26

14

0

3

3

10 33

13 16

3 1

61 37

7 0

5 6

3 7

Singapore Malaysia Thailand Vietnam Cambodia

2 35 35 20 0

40 8 1 23 18

5 22 18 14 0

2 11 25 30 82

10 13 3 7 0

0 11 16 0 0

40 0 2 6 0

Japan USA Europe 3 NIEs ASEAN Others

33 37 15 23 5 34

12 6 21 2 58 10

39 16 2 3 9 3

10 9 9 62 37 32

0 1 43 3 0 4

2 23 8 6 0 16

3 5 0 4 0 4

Elec. & Electronics Cons. Electronics Garments Textiles

Host country

Source country

Note:

Local content requirements are imposed by governments on 8% of companies.

162 The Impact of FDI on ASEAN Economies

over 70 per cent of the output is exported from host economies, 7 per cent to other ASEAN economies (Table 8.4), making the local/regional sales 35 per cent of the total. The output sold internationally is fairly evenly distributed between North America, Europe and Asia (mostly Japan), in keeping with the relative scale of these economies. However, there are significant differences between industries and host countries. Thus, 97 per cent of garment output is exported out of ASEAN, indicating the nature of this value chain – that is, exclusively the production of goods by sub-contractor manufacturers for major retailers and brands in rich, industrialized countries. By contrast, the majority of the output by textile companies is sold locally or regionally (58 per cent in total) because these companies supply inputs to garment manufacturers (and the rest of the output goes to linked firms in East Asia). This leaves a higher local/regional share of output for the electrical and electronics (46 per cent) and consumer electronics (41 per cent), but for slightly different reasons: the former industry is more likely to be supplying inputs to other companies; whereas the latter industry has a greater inclination to sell to final consumers (via distributors and sales companies). These industry differences are reflected in the direction of outputs/exports for individual countries, especially Cambodia which is only represented by the garment industry. With regards to inputs/imports, about three-quarters of inputs are imported, 13 per cent from ASEAN countries, giving a local/regional input ‘content’ of 39 per cent (Table 8.5). In contrast to outputs, however, the bulk of non-local/regional inputs are from Japan (15 per cent) and East Asia (29 per cent), reflecting their proximity to ASEAN and importance in both the electrical/electronic and garment/textiles industries. Again there are marked differences between industries. Electrical and electronics has a much larger share of inputs from Japan, North America and Europe, probably reflecting the value chains of particular products (for example, semiconductors and hard-disk drives). This is also reflected in the input shares for Malaysia, which is a base to proportionally more such companies in the sample (this applies to a lesser extent to Thailand, which is also more dependent on North America). Consumer electronics is more dependent on local/regional and Japanese inputs, probably reflecting its relative local/ regional market orientation and long local presence, as an industry, in the region (as well as the origin of companies, many from Japan and South Korea, which are more likely to have regional-level operations). The links of garment and textile companies to parents/affiliated companies in East Asia and ASEAN also comes through strongly (mirrored especially in Cambodia). Singapore, as a regional hub, receives 40 per cent of its inputs from ASEAN (and, intriguingly, the same proportion from the ‘rest of the world’). Unsurprisingly, companies with parents in particular source countries import a larger share of inputs from these locations. This is especially the case for NIE firms (62 per cent of total inputs, especially tied to the division of labour in

Hafiz Mirza and Axèle Giroud 163

the garment industry). ASEAN, European and Japanese firms receive about 40 per cent of inputs from their home countries, on average. However, this is far less the case for USA originated companies (23 per cent) and those from other countries. On the other hand, Japanese, USA and ‘other’ companies are more inclined to buy inputs in host economies; and European and ASEAN firms buy more from the region. Some regional value chains undoubtedly exist. Turning to parent companies’ regionalization policies and companies’ degree of ASEAN integration, a little over a third of foreign parents divide their international operations on a regional basis. However, 70 per cent of consumer electronics firms have regional divisions (driven by market orientation, undoubtedly) and this is also the case for 44 per cent of parents in the electrical and electronics industries (albeit this sector contains a wide variety of types of firm). Of those with regional divisions, only 42 per cent of parents regard ASEAN as a region (that is, a bare 15 per cent of all firms); and, when they do, Singapore is the regional headquarters (RHQ) of choice. If the firms which cannot integrate their operations in ASEAN (for example, they only have activities in one ASEAN country) are excluded, the level of integration of ASEAN operations is quite high: 57 per cent of companies have ‘moderate’ integration or above, and a quarter have very close integration. By host country, regional integration is highest for Singapore (regional hub) and Cambodia (many investors are based in ASEAN); by source country it is highest for Europe (probably reflecting a division of labour in electronic companies, for example, consumer electronics and semiconductors), ASEAN (firms are based in the region) and other companies; and by industry, as expected, it is highest for garments and textiles. Companies which regard ASEAN as a region do not appear to integrate regional operations more tightly than others; however, companies which operate regional divisions overall seem to have a greater inclination to integrate at the ‘loose’ to ‘close’ levels. (It is likely that very close integration is driven more by the nature of the product itself.) Four-fifths of equipment used by the surveyed companies was purchased new (most investments were greenfield), but only 7 per cent was bought locally (except in Singapore where the share was 23 per cent, implying the existence of machinery or tool-making manufacturers). Interestingly, no matter the nationality of the firm, most new equipment purchases were from Japanese manufacturers, followed by manufacturers from companies’ home economies. In summary, foreign companies based in ASEAN host countries are heavily integrated internationally in terms of output and inputs. A moderate level of local integration has been established, especially in terms of supply of inputs, and regional integration – though small – is expanding. There are quite sharp differences between industries, source countries and host countries and these nuances have to be carefully considered as a guide to policy.

164 The Impact of FDI on ASEAN Economies

Local linkages, the value chain multiplier and spillovers Although foreign firms in ASEAN host countries are integrated with the international and local economies, it is also important to (a) take into account whether these links are with affiliated or non-affiliated companies (that is, do the benefits seep to independent companies?) and (b) especially in the local economy, determine whether the links with non-affiliated companies are with indigenous firms or foreign companies based in the same host country (that is, do indigenous, locally-owned firms benefit?).

Backward linkages Table 8.6 shows that, overall, inputs are predominantly purchased from non-affiliated companies (68 per cent), although this is less the case for Malaysia, Thailand and Vietnam (reflecting the necessity for key inputs in certain industries, Table 8.7). However, a higher proportion of inputs from affiliated companies are bought regionally or internationally. Thus (as Table 8.6 also shows) an appreciable percentage of inputs purchased from nonaffiliated companies are bought in local markets, especially in the case of Malaysia and Thailand. In essence, this represents the higher purchase of parts and components in these host countries by companies in the electrical and electronic industries (including consumer goods). It is not possible to fully discern from the data-set what proportion of purchases from host-country-based firms are inputs sourced from indigenous concerns, but these are likely to be appreciable in Singapore, Thailand and Malaysia, and far lower in the two newer ASEAN member countries, approaching zero in Cambodia. More importantly, it is important to know something about the nature of the inputs bought from indigenous Table 8.6 Purchase of inputs from affiliated and non-affiliated companies by host country Singapore Malaysia Thailand Vietnam Cambodia Total Share (%) of Affiliated inputs companies purchased from non-affiliated companies

17

27

32

50

8

32

83

73

68

50

92

68

Share (%) of inputs from non-affil. companies

Local market

22

41

48

32

0

na

ASEAN Rest of world

30 47

9 46

3 46

8 46

11 89

na na

Note: Because of missing values the shares purchased from non-affiliated companies do not sum to 100% (especially for Vietnam).

Hafiz Mirza and Axèle Giroud 165 Table 8.7 Purchase of inputs from affiliated and non-affiliated companies by source country and industry

Share (%) of Inputs purchased from

Affiliated companies Non-affiliated companies

Japan

USA

Europe

3 NIEs

ASEAN

Others

40

26

41

24

39

14

60

74

59

76

61

86

Elect. & elec. Con. electronics Garments Textiles Share (%) of Inputs purchased from

Affiliated companies Non-affiliated companies

31

48

14

65

69

52

86

35

Note: Because of missing values the shares purchased from non-affiliated companies do not sum to 100% (especially for Vietnam).

suppliers. Table 8.8 compares the types of inputs purchased in the host economy from locally-owned versus foreign-owned suppliers, and there is a very marked difference between the two. Only 10 per cent of the interviewed companies (7 out of the pertinent 68 firms) buy any high-tech inputs from indigenous firms, whereas this share rises to 60 per cent for foreign-owned suppliers based in ASEAN countries. Most purchases from locally-owned firms are for low-tech inputs and, even more so, for secondary products (for example, packaging). Despite this, two-thirds of companies interviewed said that they were using indigenous suppliers ‘adequately’, mostly because the relevant inputs were not available or were of low quality. The implications of this is that the spillover that we should be looking for initially is not the capability to make competitive additional/other products, but rather to Table 8.8 Type of inputs purchased from locally-owned and foreign-owned firms Percentage of good purchased from firms

Local suppliers

Foreign suppliers

Note:

None (number of purchasing firms) Some or all (number of firms) None (number of purchasing firms) Some or all (number of firms)

Hi-tech inputs

Low-tech inputs

Secondary products

61

26

17

7

42

51

26

27

57

38

37

7

65% of companies say that they use local suppliers ‘adequately’.

166 The Impact of FDI on ASEAN Economies

improve the availability, quality and competitiveness of the principal inputs themselves. This improvement of locally-owned suppliers’ capabilities can come about in various ways, including the suppliers’ interface with their foreign-owned customers in the host economy. Thus Table 8.9 illustrates how some foreign companies (about 30 per cent of the sample) have a direct and immediate policy of improving the quality and competitiveness of their locally-owned suppliers using supplier partnership schemes. This implies commitment, actions and activities (for example, training) and – often – necessity, inasmuch as world-class standards (especially the ISO 9000 and 14000 series) require quality inputs and a commitment to quality, the environment and other elements all the way down the supply chain. In our sample, supplier partnership schemes are run most commonly by larger, resource-rich, committed companies, especially those from Europe and North America (and to a lesser extent Japan). They are found entirely in Malaysia and Thailand, reflecting the stronger European and USA presence, as well as greater investment by electronics companies. In many cases, Singapore suppliers may not gain much from supplier partnership schemes, but their absence in Vietnam (and Cambodia) needs to be explained. The mostly likely reason is that the electronics industry is relatively new in Vietnam and therefore a supplier base has not yet been established or arisen2 (the inputs structure for garments and textiles tends to differ quite markedly and, in particular, depends heavily on high-volume commodities). The Table 8.9 Proportion of companies with supplier partnership schemes (%)

Is there a supplier partnership scheme?

Is there a supplier partnership scheme?

Japan

USA

Europe

Yes

29

50

56

6

0

50

no

71

50

44

94

100

50

ASEAN

Others

Elect. & elec.

Con. electronics

Garments

Yes

35

35

9

0

No

65

65

91

100

Singapore Is there a supplier partnership scheme?

3 NIEs

Malaysia

Thailand

Textiles

Vietnam

Yes

0

52

32

0

No

100

48

68

100

Note: Only 30% of companies have a formal supplier partnership scheme. Only 13% of companies provide financial assistance to suppliers.

Hafiz Mirza and Axèle Giroud 167

country’s authorities can therefore learn a lot from the experience of Malaysia and Thailand. Apart from the formalized system of learning inherent in supplier partnership schemes, indigenous firms can benefit from knowledge transfer ‘simply’ by working with foreign companies. The inputs these customers use must meet world standards; they are usually very specific products, of high quality (and may be technology), need to be produced within very narrow tolerances, and involve not just ‘physical’ technology but also managerial, engineering and technical skills and techniques. It is in the interest of the purchasing companies to ensure that the inputs are produced efficiently and that the product is of a high order. Thus, considerable knowledge can flow down the supply chain, both explicitly and implicitly, and foreign companies are often willing to assist suppliers when problems are encountered. Overall, not unexpectedly, the type of knowledge most commonly transferred in our sample of companies relates to specifications for standard materials and components (a mean of 4.12 out of a possible 5). A bit further behind in terms of likelihood of transfer are other specifications, such as operational requirements or technological aspects, followed – not uncommonly – by jointly designing materials or components. The main support offered to suppliers by our surveyed companies is in technical management (that is, quality, production issues), but occasionally other types of support are also offered (for example supplying tools, machinery or materials). Knowledge transfer is much more common in Malaysia and Thailand than Vietnam, reflecting the better-established supply firms and the extensive electrical and electronics industries; it is pretty minimal in garments and textiles. The degree of transfer is also much higher for US, Japanese and European firms than for firms from NIEs or ASEAN. Finally, even in the absence of supplier partnership schemes, foreign companies are willing to offer training, but it is pretty limited and mostly confined to electronics and technological issues. (For further discussion, see Mirza et al., 2003; Mirza and Giroud, 2004.) Of course, more important than the potential transfer of technology and expertise per se is (a) the extent to which the knowledge is actually absorbed; and (b) the extent to which this improves the capabilities of local suppliers and results in improvement gains. Table 8.10 attempts to measure these gains in terms of critical capabilities and skills acquired by indigenous suppliers, as assessed by the foreign companies in our survey (which are probably in a better position to evaluate improvements than the suppliers themselves). It seems that there has been an appreciable level of spillover to supplier firms, especially in terms of improvements in capabilities of most importance to the foreign firms themselves: cost, quality, delivery, leadtime performance and service focus (the mean out of five is over three for all these skills – and much higher in Malaysia and Thailand) (Table 8.10). There is also some improvement in related production (inventory control,

168 The Impact of FDI on ASEAN Economies Table 8.10 Supplier improvement as a result of working with foreign firms, by host country Improved performance in terms of: Cost Quality Delivery Inventory control Lead time performance Continuous improvement Technical skills Design skills Innovation skills Safety Business focus Commercial awareness Service focus Professionalism Note:

Mean ratio (on a 1–5 scale) Malaysia N = 24 Thailand N = 23 Vietnam N = 19 Total N = 67 3.83 3.88 3.96 2.88 3.54

2.83 3.57 3.39 2.70 3.09

2.47 2.95 2.53 2.05 2.26

3.09 3.51 3.36 2.58 3.00

3.21

2.91

2.21

2.82

3.38 2.58 2.79 3.29 3.35 3.42

2.57 1.35 1.48 2.35 2.26 2.39

2.32 1.58 1.16 1.21 1.74 1.74

2.79 1.86 1.86 2.36 2.52 2.58

3.83 3.70

3.17 2.70

2.16 2.05

3.12 2.86

1 = no improvement; 5 = very large improvement.

continuous improvement, technical skills and safety) and business (business focus, commercial awareness and professionalism) skills. The least improvement is in more fundamental R&D-related expertise, such as innovation and design skills – but these would, in most cases, not be transferred to suppliers (or, indeed, subsidiary companies themselves). Suppliers in Malaysia have improved more than in Thailand, and those in the latter more than firms in Vietnam. The differences between the means of specific skills/capabilities between the three countries are quite marked and significant. In a similar vein, (not shown in Table 8.10) there is a transition in skills improvement by industry from electrical and electronics (highest improvement) through consumer electronics and garments to textiles (least). This reflects the nature of each industry, the degree to which transferable skills exist, the existing capabilities of local suppliers and the opportunities which exist for the transfer to take place. Finally, suppliers working for US firms are significantly more likely to improve (partly because of the industries in which these firms operate, partly the capabilities inherent in the main host country – Malaysia – and partly because the firms themselves are more likely to run supplier partnership schemes) than firms from Europe or Japan. On the other hand, improvements are much more marked for firms from these countries than those from NIEs and ASEAN

Hafiz Mirza and Axèle Giroud 169

(although this difference should be examined more carefully before definitive conclusions are drawn). Having said this, on a qualitative basis, the interviews threw up ‘best practices’ in the case of firms from most source countries; and, indeed, for all host countries and industries (see Mirza et al., 2003 for further discussion). The upshot of the above analysis of backward linkages is that, although the indirect effects of FDI are not as great as might be desired (because of the purchase of inputs overseas and the existence of foreign-owned suppliers in each host country), nevertheless spillovers are incurring and locallyowned suppliers are improving in their capabilities. In the first instance, this should allow them to supplant foreign-owned suppliers (to a degree) and, in the longer run, allow them to become fully-fledged manufacturers in their own right. There are many nuances to this picture, for example, in terms of host countries, source countries, industries, size and other firm characteristics, all of which need to be taken into account at the policy level.

Forward and other linkages In terms of forward linkages, it is worth bearing in mind that, on average, only 28 per cent of outputs are sold or exchanged in the host countries (with an additional 7 per cent in ASEAN). This is good in terms of the foreign-trade multiplier (one of the benefits of export-oriented industrialization), but it means that there is less likelihood of spillovers through links with local sales and marketing organizations. An additional complication is that the sales and marketing of their output is wholly controlled by only 15 per cent of foreign companies in our sample (sales/output exchange is mostly determined by parents, sister sales organizations and international purchasers) and this reduces the scope for forward linkages. In addition, many local sales are, in fact, inputs for other TNC-originated enterprises (or occasionally large locally-owned manufacturers) and therefore there are no relevant forward linkages. Because of these complications, only 50 sample companies are selling appreciable amounts in the local market and mostly to foreign industrial customers. In consequence, a mere 14 companies claim to contribute to the development of local distributors or sales organizations, mostly in consumer electronics. A half (seven) of companies assisting distributors are in Vietnam because most investments there by electronics firms are local market orientated (whereas the preponderance of investors in this sector in Singapore, Malaysia and Thailand are a part of international value chains). In conclusion, as long as manufacturing FDI in ASEAN countries is primarily export-oriented, spillover gains from forward linkages in host/ regional economies will be less than those from backward linkages (though it is true that local sales orientation by foreign firms is increasing). However, although this judgment will most likely apply equally to other export-oriented

170 The Impact of FDI on ASEAN Economies

manufacturing FDI, it is worth mentioning that this study has not examined forward linkages by sales subsidiaries,3 as opposed to manufacturing subsidiaries. Given the consumption multiplier, such sales subsidiaries have been established in many economies to service expanding local markets for international goods. Such subsidiaries will have a dynamic of their own in terms of forward linkages, impact on competitors and the training of workers with sales/marketing skills. Inasmuch as there is a large presence of locally-owned companies (including ethnically Chinese ones) in some of these countries, this is indicative of additional FDI effects missed in this study.

Effects on local competitors Moving to influence on locally-owned competitors, most companies were not able to reply because there were no direct competitors for their products or activities. Of the 30 or so who could respond, about 80 per cent agreed that local competitors had improved since they arrived in the host country, although nearly all stressed that local competition was based primarily on price.4 Despite this, it was deemed that the competitive level of 75 per cent of local companies was three or less (on a scale of 1 to 5). Nevertheless improvements were being made in production techniques (53 per cent of companies), the development of similar products to the foreign company (50 per cent) and the adoption of better management methods (55 per cent). In overall terms, through a combination of competitive and demonstration effects, local companies are improving, although there is still some way to go – especially because of the technology gap and the difference in scale of local versus foreign companies (for example, Table 8.3 shows that the average employment of foreign companies in consumer electronics in the sample is about 1,500 people which dwarfs virtually all local competitors).

Human-resources development It can be argued that, because of the scale of FDI in the ASEAN-5 countries (and increasingly in Vietnam and Cambodia in recent years), the direct effect of FDI on employment-generation has been immense, a conclusion confirmed by the sample companies in this survey. The number and average size of foreign investors, especially in the electronics industries, is large (Table 8.3) and this alone is likely to have a huge consumption multiplier effect. Table 8.11 shows that the vast bulk of shop-floor workers in the sample companies are educated to at least secondary-school level;5 only in Cambodia does this proportion slip, with 50 per cent of workers possessing no formal education. Beyond this, a considerable amount is expended on human-resource development and training. On average, 1.9 per cent of the payroll is spent on training and over six days devoted to training per worker per year. These amounts are higher for the electronics industries and, therefore,

Hafiz Mirza and Axèle Giroud 171 Table 8.11 Human-resource development indicators Proportion of shop-floor workforce educated at the secondary school level or higher (%)

Average share of annual payroll spent on human-resource development (%)

Average number of days spent on training per year (number)

Does training lead to in-house qualifications? (average score from 1–5 range)

All companies Industry Elec. & Electronics Cons. Electronics Garments Textiles

82 89

1.9 2.6

6.3 6.7

2.6 3.2

92

1.7

7.7

2.8

60 82

0.1 0.2

3.8 9.7

1.4 2.6

Host country

Singapore Malaysia Thailand Vietnam Cambodia

90 90 89 78 49

3.0 1.9 2.7 1.5 0.0

5.5 6.3 6.2 9.0 0.0

2.5 3.5 2.7 2.2 1.0

Source country

Japan

na

1.8

6.8

2.5

USA Europe 3 NIEs ASEAN Others

na na na na na

3.4 2.8 0.5 0.0 3.0

7.3 6.0 6.3 4.2 6.2

3.1 3.7 2.5 1.2 2.3

Notes: 50% of Cambodia’s workforce has no formal education. In-house qualification range: 1 = never; 5 = always.

Singapore and Thailand (Malaysia stands exactly at the average), see Table 8.11. In contrast, there is very little by way of human-resource development expenditure in garments and in Cambodia because, after initial training, there is very little need for additional training.6 On the other hand, the current level of training is very high in Vietnam because many investors have only recently arrived. In terms of source countries of companies, the USA stands ahead of Japan and Europe, but not overwhelmingly so, especially in terms of training days. Companies from the NIEs and ASEAN devote less expenditure or training days to human-resource development. It is also noteworthy that training leads to in-house qualifications in many companies, especially in the electronics sector – often this is ‘only’ certification for specific jobs, but there is usually a link to pay and/or promotion. Staff training is conducted in a variety of facilities, ranging from the shop-floor (on-the-job training) through seminars in training rooms to offsite training at specialist training centres or educational institutions. Of course, the latter facilities are mostly for managerial training or the development of functional skills. Many companies send their engineers overseas, especially to the parent company, for advanced training. Larger companies

172 The Impact of FDI on ASEAN Economies

have their own training centres and some – especially in high-tech sectors – have a branch of the global company’s University or College. In addition, companies with extensive regional operations or an RHQ sometimes subdivide training among different regional training facilities, reflecting the relative advantages of particular subsidiary companies. Given the amount of resources expended, on the whole, on staff training, it is important to evaluate how this impacts on the capabilities of the workforce. Table 8.12 is based on companies’ assessment of the level of skills attained by their workforce (a few skills are general, some apply to shopfloor workers and others apply to specific groups of employee, for example engineers or marketers). Companies rate their employees quite highly – there are very few skills rated below 3 on average – and higher than the equivalent skills imbibed by supplier firms. This is to be expected, since employees are instructed or trained directly, whereas suppliers normally receive technology, knowledge or expertise indirectly. As before, skill levels are far higher in the older member countries of ASEAN (Singapore, Malaysia and Thailand), partly because companies arrived some time ago and partly because of the industry effect – the skills level is higher in electronics firms (which invest more in human-resource development and relevant systems).7 In a similar vein, and for related reasons, the skills-set of firms originating in the USA, Japan and Europe is somewhat higher than that of those from the Table 8.12 Current level of employees’ skills, by host country Level of attainment in terms of:

Mean ratio (on a 1–5 scale) Singapore Malaysia Thailand Vietnam Cambodia Total N=2 N = 25 N = 24 N = 22 N=9 N = 82

Cost Awareness Quality Control Delivery Adherence Inventory Control Specific Technical Skills Design Skills Innovation Skills Safety Awareness Business Focus Commercial Awareness Work Motivation Service Focus Inter-personal Skills Team Working Professional Attitude Problem Solving Note:

4.5 4.5 5.0 3.5 4.5 4.5 4.0 4.0 4.0 3.0 4.0 3.5 4.0 4.5 3.5 4.0

3.6 4.1 4.0 3.8 3.9 2.8 3.1 4.4 3.6 3.5 3.6 3.7 3.5 4.2 3.7 3.7

3.5 4.1 4.1 3.6 3.5 2.3 2.5 3.7 3.2 2.7 3.7 3.6 3.2 3.9 3.4 3.5

1 = low skill attainment; 5 = very high skill attainment.

2.8 3.6 3.3 3.5 3.6 2.4 2.5 3.5 2.7 2.7 3.4 2.7 2.8 3.4 3.3 3.2

1.8 3.0 3.0 2.7 2.7 1.6 1.8 2.7 1.9 1.9 2.8 2.5 2.9 3.3 2.0 2.2

3.2 3.8 3.7 3.5 3.6 2.4 2.6 3.8 3.1 2.9 3.5 3.3 3.2 3.8 3.3 3.3

Hafiz Mirza and Axèle Giroud 173

NIEs or ASEAN (for further details see Mirza et al., 2003). It is interesting to note that about a half of the companies surveyed reckon that the skills level of their work-force is on par with that of their foreign parent firm – or better. The above discussion confirms that there is a very strong direct FDI effect on the scale of employment and the quality of the workforce (through training) and, thereby, on poverty reduction in the older ASEAN countries. This effect is not so strong, as yet, in newer ASEAN member countries, but there is much that can be learnt from the ASEAN-5, especially Malaysia and Thailand. Beyond this, there is clearly a significant pool of skilled, trained labour in Singapore, Malaysia and Thailand, ripe to be married to new industrial experiences. On the whole, this has yet to happen and governments need to consider ways of encouraging spillovers potentially emanating from the development of relatively high levels skills among workforces throughout ASEAN.

Conclusions Because of the earlier arrival of FDI to Malaysia and Thailand,8 these two countries stand out as exemplars for other countries aiming to utilize FDI in their development process. In addition, given the number of companies in our sample, it is possible to draw relatively robust conclusions about these two countries. For these two reasons, Table 8.13 summarizes, in detail, their Table 8.13 Summary of Malaysia and Thailand’s experience of FDI effects on the economy, growth and poverty reduction (based on this research study) Type of FDI effect Direct effects

Degree of impact Comments Employment

High

Very high levels of FDI in both countries means that large numbers of people are employed by manufacturing TNCs. Many subsidiaries are large, resulting in a big direct impact on the economy, growth and poverty reduction. A very high proportion of workers are women and from poorer provinces

Training, human capital

High

Relatively advanced segments of value chains transferred to both countries, the quality of local products has to be high in order to meet expectations of international markets, many subsidiaries assigned strategic roles (for example, related to R&D) or autonomous. High expenditures on HRD and many days devoted for training

174 Table 8.13 (Continued) Type of FDI effect

Consumption multipliers

Value chain multipliers

Spillover effects (training, competitive effects, demonstration effects and human mobility)

Degree of impact Comments (Reinvestment) Middling

Primary source of future FDI expansion in these economies; TNCs need to be convinced to reinvest more

Consumption

High

High rise in employment and wages led to this and the growth of ancillary industries from real estate to retail services. Local conglomerates grew on the back of this expansion

Taxes

High

Facilitated the improvement of social benefits, infrastructural development, education and training and so on (note careful urban planning in Malaysia as opposed to Thailand)

Net exports

High

Import of consumption goods low compared to exports

Suppliers

Middling

Import of inputs from abroad; many local foreign-owned suppliers

Distributors & Low to mid sales orgs.

Most output shipped overseas or to manufacturing TNCs in each country

International links

High

Results in high exports, but a source of concern when too large a share is imported. Key issue is to improve the local supplier base. Opportunities for regional value chains, especially taken up by ASEAN TNCs and consumer electronics firms (among others)

Suppliers

Middling

Still not enough spillovers in high-tech goods, but international supply chains mean that ‘world standard’ technology, knowledge and expertise is imparted or seeps to suppliers. A half of subsidiaries maintain supplier partnership schemes in Malaysia; a third in Thailand

Hafiz Mirza and Axèle Giroud 175

Distributors & sales orgs.

Low

As above. Sales subsidiaries related to imported consumption goods might be significant in spillover effects (but not surveyed)

Competitors

Low to mid

Direct competitors few, but improving. However, exemplars of more robust competition provided by entrants (for example, locally-owned conglomerates which have grown wealthy because of consumption multipliers) and spin-offs

Human capital

Low to mid

Still only a minimal flow of skilled labour to locally-owned suppliers and manufacturers. Spin-offs minimal. Loss of skilled women workers back to provinces and other occupations?

experience with the impact of FDI – and therefore the types of lessons that other countries can learn.9 Our findings indicate, especially for Malaysia and Thailand, that the impact of FDI in terms of ‘direct effects’ and the ‘consumption multiplier’ are middling to high (we are also taking into account the considerable growth of ASEAN economies over extended periods, as well as other factors not discussed in this chapter); however, with regard to the ‘value-chain multiplier’ and – crucially – ‘spillovers’, the impact of FDI is, thus far, low to middling. Inasmuch as Malaysia and Thailand received FDI earlier than most other ASEAN countries, we can conclude that the overall positive impact of FDI on these other countries is, as yet, correspondingly lower. In terms of Figure 8.3 above, the relative contribution of the different types of FDI over time, the overall implication is that ASEAN countries (including Malaysia and Thailand) are still at an early stage of receiving the potential benefits of FDI (stylistically depicted as ‘current period’ in the figure) – and, of course, there is no guarantee that the benefits will definitely arrive. Of course, it may seem a little churlish to downplay the contribution of foreign investors to the ASEAN region. We should not lose sight of the considerable growth, development and poverty reduction experienced by the ASEAN countries in the 1980s and 1990s, much of which resulted from the large-scale inflow of FDI from the 1970s onwards. This boon continues today in ASEAN as a whole; and increasingly in ASEAN-410 countries, such as Vietnam and Cambodia. Certainly if we were measuring benefits in terms of job-creation, human-resource development and sustained economic growth, foreign companies have contributed considerably to the development

176 The Impact of FDI on ASEAN Economies

of ASEAN economies – not least Malaysia and Thailand – nuances and qualifications notwithstanding. However, it is important that ASEAN – and other developing – countries gain greater economic autonomy, integrity and choice through the development of their indigenous enterprises; and this is why, because the value-chain multipliers and spillovers (to local enterprises) are low, we argue that the impact of FDI on ASEAN economies is low to middling (the level varies from country to country). Of course, this does not mean that foreign subsidiaries are necessarily (or entirely) responsible for this situation. For example, one of the main reasons why few spillovers occur is either because of a dearth of local companies (certainly competitive ones in the manufacturing sector) or because they lack the capabilities to absorb foreign knowledge (Mirza and Giroud, 2004). In this and other respects, there is much that governments can do to improve the possibility and actuality of spillovers; and many enlightened, far-sighted foreign investors can be coopted as partners in the process.

Notes 1. In theory, if there was no spillover then a TNC’s departure would simply reverse the direct and multiplier effects. 2. Most of the foreign companies interviewed in Vietnam were importing inputs and had few links with local businesses, although this had as much to do with the absence of appropriate suppliers. Nevertheless, a number of state-owned and non-state firms were attempting to create backward links with foreign firms in all industries. In electronics, local firms were also using the route of joint-venturing for linkages and learning, assisted by FDI legislation which requires JVs in most cases. 3. Such subsidiaries might be sister affiliates of foreign manufacturing companies in the host economy; or they might be independently established with no direct link with manufacturing in the country. 4. Some companies referred to the likelihood that local companies were becoming more competitive by importing Chinese sourced products, rather than because of an improvement in their production methods. 5. It is worth mentioning that, as discussed elsewhere in the chapter, an educated workforce is a precursor to improving the beneficial impact of FDI. 6. In addition, during the fieldwork it was discovered that much of the training was, in fact, conducted by various NGOs which played a role in skilling women to work in garment factories. 7. Of course, garment companies may well argue that the skills set required in this industry is relatively lower. 8. Leaving aside Singapore whose economy differs so significantly from the ASEAN-4 that comparisons are not so meaningful. 9. Of course, the precise nature of the lessons will depend on the circumstances of each country and a whole variety of contingencies. For example, in our discussion it has become clear that the following factors, among many others, matter: industry, market orientation, size, source country, government education and human-resource training policies, and so on. Many complexities need to be taken into account, but the experiences of ASEAN countries such as Malaysia and Thailand are a good place to start. 10. The four newer, poorer member countries, that is Cambodia, Laos, Myanmar and Vietnam.

Hafiz Mirza and Axèle Giroud 177

References ASEAN Secretariat (2002) Statistics of Foreign Direct Investment in ASEAN: Comprehensive Data Set, Jakarta. Giroud, A. (2003) Transnational Corporations, Technology and Economic Development: Backward Linkages and Knowledge Transfer in South East Asia (Cheltenham: Edward Elgar). Klein, M., Aaron, C. and Hadjimichael, B. (2001) ‘Foreign Direct Investment and Poverty Reduction’, World Bank Working Paper, no. 2,613. Mirza, H. and Giroud, A. (2004) ‘Regional Integration and Benefits from Foreign Direct Investment in ASEAN: The Case of Vietnam’, Asian Development Review, 21(1): 66–98. Mirza, H., Giroud, A., Jalilian, H., Weiss, J., Freeman, N. and Than, M. (2003) Regionalisation, Foreign Direct Investment and Poverty Reduction: The Case of ASEAN (London: Department for International Development). UNCTAD (1996) Transnational Corporations and World Development (London and Boston: International Thomson Business Press). UNCTAD (1999) World Investment Report 1999: FDI and the Challenge of Development (New York and Geneva: United Nations). UNCTAD (2001) World Investment Report 2001: Promoting Linkages (New York and Geneva: United Nations). UNCTAD (2002) World Investment Report 2002: Transnational Corporations and Export Competitiveness (New York: United Nations).

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Part III China’s Recent Surge of Industrialization has Caused a Massive Global Redirection in the Movements of Capital, Labour and Technology

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9 China’s Changing Role in Industrial Value Chains and Reverberations on Industrial Actors in Germany Ulrich Jürgens and Rolf Rehbehn

Introduction One of the most marked characteristics of globalization has been the dynamic restructuring of industrial value chains.1 This restructuring has been both a major driver of globalization while itself being driven by globalization. The outsourcing of corporate functions has lead to greater specialization and fragmentation in value chains and the off-shoring of activities are the main features of this transformation. It creates risks and opportunities for corporate and political actors, and its evolution is highly uncertain for all parties. A state of equilibrium in a new international division of labour is not yet apparent. In this restructuring process, China2 has been playing a more and more dominant role since the middle of the last decade. Two factors which explain this are state policies explicitly designed to attract and regulate foreign direct investment, and the dynamic growth of demand in the domestic market. But these factors do not suffice to explain the size and speed of international engagement in China. In analysing recent developments in the automotive and the infocom industries, the chapter addresses four questions: 1. What factors explain the central role of China in the most recent developments in restructuring industrial value chains? 2. What characterizes the ‘embedding’ of new industrial structures and processes in China and what evidence is there for the development of capabilities? 3. What are the commonalities and differences between industries in this regard? 4. What are the consequences for industrial actors and locations in Germany? 181

182 China’s Changing Role in Industrial Value Chains

The chapter is explorative, trying to assess emerging trends. It draws on empirical research conducted by the authors on several occasions during short visits to China.3 The focus of discussion will be the so-called foreign invested enterprises (FIEs),4 that is, foreign companies that have established productive businesses in China mostly in the form of joint ventures with Chinese partners. The development of purely Chinese companies is beyond the scope of this study. The chapter is structured in a straightforward way. The next section discusses differences of industry organization between the automotive and infocom industries and provides some evidence of differences in the speed and direction of their engagement in China. We then deal with the issue of capability development at Chinese locations within the transnational production networks of multinational companies, providing evidence of fast upgrading of competence levels. The relevance of industrial parks as an instrument for ‘embedding’ multinational operations in the Chinese socio-political context is highlighted as a particularly important factor. The fourth section investigates some consequences for home countries discussed against the backdrop of the debate on the future of industry in Germany, and the chapter ends with a brief summary and conclusions.

Comparing industry dynamics in the automotive and the infocom industries China seems to present an almost clean slate for global corporations in deciding how to organize their global value chains. And China certainly offers considerable advantages in terms of wages and salaries. Labour costs, however, are not sufficient to explain the rush into China. Neither the timing nor the speed of relocation (off-shoring) can be explained by this factor alone. Both automotive and infocom activities have developed at a breathtaking speed in China over the last five to ten years, and some illustrative facts and figures may suffice to recall this well-known phenomenon. In the auto industry, the global players have rushed into China – almost all with major investment projects to set up or expand operations there (Weider, 2004; Goldman Sachs Global Equity Research, 2003; Xing, 2002). In 2002, car manufacturers were planning investment projects of more than 2 million cars, doubling the existing capacity for passenger cars (Xing, 2002). In 23 provinces and cities, new automotive factories are currently under construction (Sieren, 2003). ‘Looking ahead’, states the China Industry Development Report on the Auto Industry in China 2003, ‘opportunities are enormous in auto industry. In the next 10 to 15 years, China will become the largest auto market in the world. By then, annual auto production could reach 17 million units and registered autos 100 million units’ (Ministry of Science and Technology, 2002). Obviously, there are all the indications of a bubble situation at this stage.

Ulrich Jürgens and Rolf Rehbehn 183

In view of the growth situation in China, the development of the Chinese auto industry has been geared to the domestic market. But this is about to change. At Volkswagen (VW) it is expected that, within the next three years, 10 per cent of Chinese VW production can be exported, and that exports will play an important role in the future. More important, however, will be the export of parts. General Motors wants to buy US$10 billion worth of parts per year from China, and GM and Ford are pushing their suppliers to open factories in China. American manufacturers are particular keen to benefit from the low-cost conditions in China.5 Indeed, the export of car components from China is increasing rapidly. In 2003, China exported US$2.4 billion in car parts, up from US$1.8 billion in 2002. But this is a small amount compared to the annual car parts export target of US$70 billion to US$100 billion set by the Chinese government for 2010 (Murphy, 2004). To attain this goal, the Chinese parts industry will have to improve their cost and quality levels considerably; at present they are hardly competitive on the global market. ‘Most of the country’s 1,500 or so car-parts makers of a decent scale have bloated pay rolls, outdated manufacturing equipment or little experience mass-producing parts with the rapid design changes that US automakers routinely make’, is quoted by a buyer of the Big Three in an article of Wall Street Journal Europe (Shirouzu, 2003).6 A report by the Boston Consulting Group puts the cost disadvantages resulting from these inefficiencies in the supply sectors at between 10 per cent and 20 per cent for large established joint ventures and up to 40 per cent for smaller car companies in China (The Boston Consulting Group, 2002). Greater competitiveness on international markets is one of the main goals of the new Automotive Industry Development Policy formally declared by the Chinese government in 2004. The new policy reconfirms the goal that the automotive industry should become a ‘pillar industry’ of China by 2010 and, as such, will remain under the macro-level control of the central government. The new policy encourages consolidation in the industry from currently more than 120 to only a few major corporations. The policy also states that the Chinese automotive industry should develop so that it is competitive both domestically and internationally, and eliminates inefficiency and low quality (Auto Industry, 2004). The automotive industry has followed the infocom industry in its rush into China. While the latter had started its frantic development in the second half of the 1990s, the automotive industry has been accelerating only since 2002. The development of the infocom industry has thus been even more dynamic, displaying not only many similarities but also differences. China seems on its way to becoming the world’s main production base for electronics parts. While electronics production in emerging markets will nearly double – from US$65 billion in 2001 to US$125 billion by 2005, China will take the lion’s share of this growth, 77 per cent. It will increase its share in global electronics production from 8 per cent to 14 per cent

184 China’s Changing Role in Industrial Value Chains

according to a study by the International Finance Corporation and Booz Allen Hamilton (2003). The study concludes: ‘China will continue to hold commanding positions in key value chain elements such as assembly, displays, and semiconductors, as it evolves into the hub of electronics manufacturing.’ Research by the Japan Electronics and Information Technology Association (JEITA, 2003) indicates that China, including Hong Kong, is expected to be the top producer of eight out of twelve key electronic products in 2003. China is likely to produce 41 per cent of all DVDRom drives, 62 per cent of all DVD players, 37 per cent of desktop personal computers, 27 per cent of colour televisions and 30 per cent of mobile phones. Within a few years China has become one of the major world exporters of communication equipment. The China Industry Development Report on the communications equipment manufacturing sector in China 2003 expected that communications equipment manufacturers would be going global, that imports will fall further in the next few years. Domestic manufacturer capabilities were greatly enhanced. Much high-end equipment could be made independently in mass production. Sino-foreign joint ventures, with the increasing perfection in R&D, would become production basis to meet global demand. (China Economic Information Network, 2003)

Requirements for capability development and infrastructure of Chinese locations Capability development Driven by globalization as well as technology changes, restructuring in the infocom industry has been a particularly dynamic process. The shift of value-added from final producers to component makers has serious effects on cost and employment structures. Thus, in the case of the infocom industry, suppliers now account for 85 per cent of production costs, and in the case of the car industry their share is around 70 per cent. In any case, achieving cost advantages and assuring consistent, robust quality performance throughout the value chain has become a primary concern for final producers in both industries. Up to now, final producers have mostly relied on pressuring suppliers to reduce prices. In the future, more emphasis will be laid on co-ordinating processes and integrating suppliers more closely, and on harmonizing processes across interorganizational interfaces. In any case, competition in both the automotive and infocom industries will take place between whole process chains and not between single companies focusing on their internal organization and, in particular, on manufacturing. At the same time, the actual value chains will not evolve

Ulrich Jürgens and Rolf Rehbehn 185

into solid organizational structures but remain flexible to allow shifting partial processes in response to changing company strategies. This close integration between processes of the final producers and their suppliers increases specialization among the latter while increasing their dependence on the former. The technology of the end product determines the level of the technological capability which has to be mastered by local suppliers.7 In China, this capability requirement is supported by a Chinese government policy requesting companies investing in China to bring in their latest-generation technology, and requiring them to achieve a certain level of local content and exports after a given period.8 The local-content requirement, however, had to be abolished when China entered the World Trade Organization (WTO) in late 2001. In the infocom industry, technological developments have strongly supported the trend towards shifting value-added functions to suppliers, primarily in the compression of additional functions into integrated circuits or components. This in turn requires changes in casing technology. Both developments, especially under pressure from the dramatic speed of product innovation, have lead to the restructuring of production. One of the main consequences is greater automation. Whereas in 1980 only 40 per cent of all components were fitted automatically worldwide, today the figure is over 90 per cent. Consequently, manufacturers have increased the level of automation in China, too, foregoing some of the advantages of lower labour costs in direct areas. Labour cost advantages remain in the indirect areas, however. Another consequence is the opening-up of product architectures following the example of the PC industry. A result of open product architecture is the high degree of standardization now attainable in production. This allows outsourcing and off-shoring of production to electronic manufacturing service (EMS) companies, so-called contract manufacturers (Lüthje et al., 2002; Borrus et al., 2001). Various factors have contributed to an increase in demand for higher functionality and quality in China, necessitating a better infrastructure and greater competence at Chinese locations. They include local market demand for first-generation products; insistence by the Chinese government that companies introduce their new technologies when investing in China; and the expectation of multinational companies that their Chinese locations will reach world market standards, allowing them to export their products. Mastering this competence development defines the demands being made on the infrastructure at Chinese production locations. In the early 1990s, the standard of production-location infrastructure was low. Second or even third-generation-level technologies were being used in keeping with the low standards of national markets; affiliates were closely integrated into the international corporate structure; while technological competences were concentrated at headquarters from where they were transferred to the foreign locations.

186 China’s Changing Role in Industrial Value Chains

International

3

8

9

2

7 6

5 11

1

4

10

National China

Addressed market

In the case of the infocom industry in particular, this situation has meanwhile changed. While technology competence remains at headquarters, local adaptation engineering and product monitoring, including responsibility for the quality of material purchased in Asia and the quality of the end product have become a local responsibility. This upgrading of demands and capabilities is true not only for Siemens and other brand-name infocom industries but also for component suppliers. The automotive industry is lagging behind this development. Figure 9.1 shows the situation of local affiliates of a number of international companies operating in China with regard to market strategy, capability level, and local competence – based on our own research. It should be noted that all companies are either fully or partially owned by international companies; purely Chinese companies

Production

Centre of competence Local competence

Company

Ownership

Product

1 2 3 4 5 6 7 8 9 10 11

100% Meadvill USA German-Chinese JV German-Chinese JV 100% AMD USA 100% Lite on Taiwan Japanese-Chinese JV 100% Fujitsu Japan 100% Solectron USA Taiwanese-Chinese JV German-Chinese JV German-Chinese JV

Info Com PCB Info Com Info Com Info Com Components Info Com Components Info Com Components Info Com Components Info Com Contr.Manuf. Info Com PCB Automotive Automotive

Meadvill Siemens Network Solution Siemens Mobile AMD Lite on Electronic TMCOM Panasonic Fujitsu Media device Solectron ACP Electronic VW GM

Figure 9.1 Market strategy and capability levels of selected infocom and automotive companies in China, 2002 Source: Based on research by Rolf Rehbehn and Frieder Naschold in 1999, and Ulrich Jürgens and Heinz-Rudolf Meissner in 2002.

Ulrich Jürgens and Rolf Rehbehn 187

currently play only a marginal role in supplying low-tech parts in high-tech production chains. Of the 11 companies, only Volkswagen with its Chinese operations produced almost exclusively for the Chinese market. However, the company has recently begun to export small numbers of cars to other East Asian markets on a trial basis. The majority of companies in the infocom sector we investigated produce for the international market. Some are in the process of systematically increasing the capability of their Chinese operations to develop them into centres of competence, a level which had already been attained by four companies at the time of our research. A centre of competence usually bears region-wide responsibilities with regard to economic results, product planning (road map) and distribution. All companies listed in Figure 9.1 showed above-average performance in process control, meaning a high and consistent production yield throughout 21 shifts per week. Combined with low-wage levels in both direct and indirect areas this affords considerable cost advantages, only slightly offset by lower productivity levels. While infocom products have been designed for world markets since the end of the 1990s – and this is true for both final products and components – automotive products companies are still focusing on regional markets. In product and process technology, multinational auto companies still tend not to transfer their latest technology to China. At Volkswagen, for instance, when the new Golf V was being introduced in Germany in 2003, the Changchun plant started production of its forerunner, the Golf IV in the same year. But this policy seems to be changing. The Touran, the van model built on the Golf platform, was introduced in Germany as recently as March 2003, and production at the Shanghai site started in 2004. At the same time the production of the old Brazilian designed Santana has been moved from its Shanghai site to a Chinese contract manufacturer. In general, as in the case of Volkswagen, multinational car companies have not pursued a policy of developing their Chinese locations into export bases within their global production network or into competence centres for specific company functions. For these companies, the Chinese operations serve the national Chinese market only or, in some cases, they are seen as part of a regional strategy to serve markets in East Asia. There is one notable exception, a new Honda factory in Guangzhou which will start operations in 2005. This plant is to produce cars only for export, specifically targeting the European market. Honda’s Guangzhou plant will have to demonstrate the ability of China-based car manufacturing ‘to climb the value chain’ (Murphy, 2004). As an exclusively export-oriented company, Honda Guanzhou is not subject to the 50:50 rule for joint ventures and is the only FIE among carmakers to retain full managerial responsibility for its operations. Since the beginning of 2000, there have been significant changes in the infocom industry. First-generation high-technology products need special

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local support in this sector. Local product development teams have accordingly been set up, not primarily composed of expatriates but explicitly aiming to recruit local personnel, if possible trained in Western countries or with international experience. These changes in local infrastructure are supported by low-wage costs in both direct and indirect areas. It goes without saying that engineering for local adaptations is now being carried out locally, but main product development activities are still restricted to home country headquarters. Siemens Shanghai Mobile is a good example. The Chinese affiliate produced 14 million mobile phones in the fiscal year 2001–02, accounting for 40 per cent of total Siemens AG mobile production; eight million were exported mainly to Asian countries. Due to increased pressure on costs and profit margins, this activity has been outsourced step by step. The company is now focusing more and more on R&D and the production of networks for third-generation mobile communication. As a consequence, the Chinese business unit is evolving into a centre of competence responsible for product development, production, marketing and financial results. General Electric and Sharp were both planning to expand their production operations and establish centres for research and development in 2002, thus developing in the same direction as Siemens. This development is typical for the orientation of large multinational infocom companies in China, and, as we have seen, is reflected in foreign trade statistics for high-tech products. Five trends are apparent: • A first trend is the establishment of competence centres in China by an increasing number of multinational infocom companies. American companies, General Electric and Motorola, the German Siemens group and the South Korean company Samsung Electronics are among the pioneers in China in this regard.9 • A second trend is in focus of investment. Whereas investment used to go mainly into manufacturing, the service sector is now gaining in importance. This is true for maintenance functions, repair services, and for marketing and finance. • A third new trend concerns the ‘system orientation’ of projects pursued by multinational companies with their investment in China. Companies are now planning their projects with a view to integration into their global business strategies from the outset. • A fourth new trend is in corporate governance. Whereas most past investment was in the former joint ventures with equal shares of foreign and Chinese partners, foreign companies are increasingly able to obtain licences as majority shareholders or as 100 per cent foreignowned affiliates. • A fifth trend is the establishment of regional Asian headquarters by global players in China. In Shanghai, more than 70 global players have

Ulrich Jürgens and Rolf Rehbehn 189

established regional headquarters, including leading multinationals like Alcatel, General Electric, Microsoft, and Siemens. To a large extent, developments in the automotive industry are displaying the same trends. A marked difference, however, lies in the degree to which Chinese operations are integrated into the global business strategies of the multinational companies. Chinese affiliates are restricted to national or regional strategy. Another difference is due to regulation. For the automobile companies (OEMs) the 50:50 rule still holds under the new automotive policy issued in 2004. However, this rule has been rescinded for automotive suppliers, including car-engine production. On the whole, government regulation seems to play a stronger role in the automotive industry (Harwit, 1995). There is no local-content regulation any longer, which would no longer have been possible after China’s accession to the World Trade Organization (WTO), but new investment projects are required to include engine production, which would ensure a minimum of 40 per cent local production anyway. In contrast to the original draft, the new policy does not oblige foreign investors to transfer technology to Chinese local manufacturers. The aim is rather to foster local technology development through the growth of domestic research and development centres. In brief, China has successfully established itself in recent years as a leading centre of production worldwide in many areas of the infocom industry, and in a number of cases is developing further to the level of competence centres. We now go on to look at one of the factors supporting this development which we regard as highly important in explaining the astonishingly smooth insertion of multinational activities into a foreign culture and a socialist political-economic context.

The relevance of industrial parks A major factor explaining the extent and speed of China’s recent industrial development is the industrial park concept. The development began with the opening of special economic zones in the coastal regions of China in the 1980s (Debresson et al., 2003). Since the early 1990s, the industrial-park concept has been an explicit vehicle for modernizing the Chinese economy, and by early 2000 industrial parks had proved to be highly efficient in attracting foreign companies, allowing them to set up their operations at breathtaking speed. Building on the experience with industrial parks gathered in the Small Tiger Economies during the 1990s, the concept has become an element in a state-led modernization policy of a socialist country. Industrial parks appear to have offered multinational companies such ideal conditions that they have attracted these companies in great numbers. There is only scant information about the recent industrial park movement in China,10 and the following information is therefore largely based on

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Internet sources. After China set up first four, and then five special economic zones in the 1980s, all kinds of development zones followed in their wake. Only a limited number of all these parks have attracted foreign direct investment (FDI). A business guide published by China Knowledge Press (2002) lists around 270 parks in the whole of China. A list provided by the law consultant firm Lehman et al. (2002) contains names and short descriptions of 174 industrial parks in total. The establishment of Science and Technology Industrial Parks (STIPs) was decided upon by the Chinese government at the beginning of the 1990s to speed up development of high-tech industries. In August 1988, China’s National High and New Technology Industrial Development Plan, the TORCH Programme, was put into effect. Since 1991, 53 science and technology industrial parks have been approved as National STIPs by the State Council. In 1997, 10 STIPs in China have opened up to APEC members. In 2000, the Ministry of Science and Technology (MOST) and the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) jointly identified 20 STIPs as ‘National High-tech Export Bases’. By 2000 there were altogether 20,796 enterprises in the STIPs. They employed 2.51 million workers, including 560,000 scientists and engineers. By 2005, according to this report, total revenue from technology transfer, industrial product and trade will be doubled to Rmb 1700 billion (€189 billion) and total value of industrial production Rmb 1400 billion. By 2010 the report expects that total STIPs revenue will constitute 20 per cent of the total industrial increase in national GDP and 20 per cent of national exports (China Internet Information Centre, 2002a). A report ‘National Science & Technology Industrial Parks of China’ (China Internet Information Centre, 2002b) summarizes the development of the STIPs in the first decade: After 10 years of construction and development, the new and high-tech zones have made gigantic progress in reform and development, in construction of an innovative system and of the enterprise incubation capacity, in fostering innovative personnel and in making important contributions to obtaining the second-stage strategic objective of China’s socialist modernisation drive . . . [The New and High-tech Zones] have promoted the reforms of property rights, distribution, labour, personnel and social security systems and the establishment of a modern enterprise system. Obviously, the STIPs have played a central role in developing a high-tech industry in China. To illustrate the enormous dynamic and potential of this development we will take a brief look at the – admittedly outstanding – example of the Suzhou Industrial Park.

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The Suzhou Industrial Park was founded in 1994 as a joint venture between the Chinese and Singapore governments, adopting Singapore’s experience in economic development and public administration. It has a total area of 70 square kilometres; in the first phase an area of 12 square kilometres was developed. When fully developed, it will accommodate a population of 600,000 and provide 360,000 jobs. The Suzhou Industrial Park had attracted over 764 foreign enterprises by mid-2002, a cumulative total contractual investment of US$13.4 billion and utilized contractual investment of US$4.9 billion (the aim is to secure US$10 billion in actual foreign investment within the next three years). Located in the park are 81 companies from the global Fortune 500, and 63 per cent of the projects recorded more than US$100 million in investment. Of all projects accumulated up to November 2001, 45 per cent were financed by European and American investors, 26 per cent by Singapore investors, and 12 per cent by Japanese and South Korean investors. The IT sector alone absorbed 43 per cent of foreign investment projects. The Suzhou Industrial Park is run by a joint venture company (originally 50:50, since 2000 65 per cent held by Chinese and 35 per cent by a Singapore-led consortium). The park administration provides services in every stage as a ‘one-stop shop’ (plant construction, labour recruitment, business administration). Companies only rent the premises for their operations and can focus investment on equipment and machinery. The park has established a computer-based customs declaration and taxation system, a human-resources centre, real-estate consultant market, and a number of finance and public accounting firms. An export processing zone (EPZ) enables companies to bypass many customs restrictions. As the example of the Suzhou Industrial Park shows, industrial parks for foreign companies setting up operations in China offer a number of valuable services and functions: 1. Administrative support: the administrative organs of the new and hightech zones on the basis of the TORCH Programme are granted ‘provincial-level management powers’ regarding planning, construction, land use, finance, industrial and commercial administration, taxation, examination and approval of projects, labour and personnel, and imports and exports’ (China Internet Information Centre, 2002b). Rather than establishing a bureaucratic structure, emphasis is laid on streamlining administrative structures, strengthening service and simplifying formalities (‘small organs and extensive service’). 2. Tax reductions and preferential arrangements: the TORCH Programme specified preferential conditions such as reduced income tax, provision of special financing sources and so on. The individual parks are increasingly competing to offer special conditions in order to attract investors.

192 China’s Changing Role in Industrial Value Chains

3. Human-resource management support: human-resource management seems an easy task for companies in the industrial park context. All of the managers we interviewed at seven manufacturers, located in four different industrial parks in June 2002, underlined that a number of human-resource functions were taken care of by the industrial park very efficiently. Thus, despite the speed of the build-up of employment, recruitment went smoothly. And in some cases there were large numbers of recruits to be handled. One of the companies at the Suzhou Industrial Park had started operations in 1997; at the time of our visit the company employed 3,500 and the plan for the following year was to increase the workforce by another 1,400. This enormous intake of new personnel took place while many companies in the park were also looking for personnel. The hiring routine at company APC in Suzhou’s municipal industrial park further demonstrates the ease of dealing with labour: The local government has a human resource data base. Their human resource department picks up people from there. A human market exists – an open space where companies have a booth with a banner. At a certain date of the month, job seekers come and in some cases job interviews are carried out right on the spot . . . Common factor for companies is to go to a school and interview students in this school. Our company has a contract with certain schools to hire each year a certain number. Here in China you hire a lot and also fire a lot. (Interview, 19 June 2002) As this quote indicates, there is no problem in hiring and firing individual workers. However, there is no experience as yet with how larger-scale redundancies can be handled. 4. Industrial relations: last but not least, the local government and industrial park administration serve as a buffer in all questions of industrial relations. Again, all companies visited mentioned their satisfaction in this regard. There is no union representation in the plant. Labour union representatives are present in the local or provincial government and, as we have seen, for instance, park administrative organs control recruiting policy, and deal with employee complaints. But grievances were apparently seldom articulated; at any rate, this was not a concern mentioned by the companies we visited. There is no interference by labour unions in operations management. The labour union also seemed not to exert influence in the area of wages. Low labour costs have, after all, been one of the motives for coming to China mentioned by most companies visited. This was even true for Taiwanese companies. Wages at one of the Taiwanese companies we visited were between 15 per cent and 20 per cent of those paid in Taiwan. In any case, the union has not sought to obtain special wage increases from foreign companies. For instance, one

Ulrich Jürgens and Rolf Rehbehn 193

of the American-owned electronic manufacturing service (EMS) firms we visited set the base salary at 60 per cent to 70 per cent of the local market level. A bonus programme allowed only better-performing employees to add a further 20 per cent to 30 per cent. In sum, it can be said that the industrial park movement has played an enormously important role in China’s development into the world’s leading electronics functional location. Industrial parks have played a key role in capability development through close horizontal and vertical communication and cooperation within the industrial park. This development also demonstrates the great importance of capability development and competences of municipal and regional governments to manage the industrial parks and deal with multinational companies.

Differences in location structures between the two industries The industry-park movement of the 1990s specifically aimed at attracting information technology (IT) companies and did so with great success. By 2002 about 50 per cent to 80 per cent of IT products were being produced by enterprises based in the New and High-tech Zones. Xiaojuan stresses the importance of the emergence of FIE industrial clusters as ‘a salient feature in China’s effort to attract foreign direct investment’ (Xiaojuan, 2003: 23). ‘Judging from the trend’, Xiaojuan continues, ‘FIEs industrial clusters are emerging in more cities and regions in China. If this trend is allowed to continue, some Chinese cities are likely to become global manufacturing centers for some of the major industries’ (ibid.). A characteristic feature of the industrial clustering phenomenon in China is that certain cities have become leading centres for specific industries. Thus Dongguan, a small city in the Guangdong province, one of the earliest industrial clusters on the Chinese mainland, has become the leading desktop computer and computer parts manufacturing centre. The industrial chain in Dongguan is so complete that the city is able to supply 95 per cent of all component parts needed to assemble a computer.11 While the Dongguan cluster has focused on mid-level technologies, the Suzhou cluster has become the centre of laptop computer manufacturers requiring high-tech capabilities and a better-educated workforce. The higher technological level implies higher requirements for supplementary industries. Taiwanese investors have played a central role for both the Dongguan and Suzhou industrial clusters. Typically, these clusters encompass leading multinational companies in each of these industries, component manufacturers, often from Taiwan, and a range of contract manufacturers (EMS firms) offering general and specific manufacturing functions. In many cases these component suppliers and EMS firms have been persuaded by the lead firms to set up their operations in the surroundings.

194 China’s Changing Role in Industrial Value Chains

A new type of industrial park is the Xingwang Industrial Garden established in Beijing in 2001. This ‘industrial garden’ was set up mainly to serve Beijing Capitel Nokia Mobile Telecommunications, a joint venture between Nokia and its Chinese partner, the Capitel Group (to be referred to as Beijing Nokia). Beijing Nokia produces and sells cellular system equipment and digital mobile telephones in China. Nokia is one of the largest FIEs in China, and the company is a major exporter selling over 50 per cent of its products to European and Asian countries. The Xingwang Park is China’s first industrial cluster for mobile telecommunication equipment encompassing the complete industrial chain. The Xingwang Park also is the first industrial park centring on one multinational lead company. Nokia, however, stresses that it does not object to companies operating in the park supplying its competitors with components, and invites other telecommunication companies to set up in the park. The aim of the park is to engage in research and development, manufacturing, marketing, and services for mobile telecommunications products. In the final stage, more than 30 enterprises are expected to be clustered in the park, creating more than 15,000 jobs. (Nokia.com, 2001) The Xingwang (Nokia) Park is an important element in the strategy of the mother company to remain a manufacturer of mobile phones. The decision to set up the park was made against the backdrop of a global slump in demand for mobile phones and telecommunication equipment in general. All multinational companies had to cut back their workforces and lower their sales forecasts in this period. While Ericsson transferred its production of phones to a Singaporean company, and Motorola expanded its outsourcing also to save costs, Nokia insisted on producing its handsets independently. By setting up its production operations in closest proximity to the supplementary companies in the industrial park and concentrating its worldwide production operations there, Nokia expects to realize the greatest manufacturing efficiencies. Nokia has very consistently pursued the just-in-time industrial-park idea, while Siemens is too small to follow this model. The Siemens Industrial Park located in the Pudong development area of Shanghai accommodates only few of its suppliers. Other Siemens suppliers are located in Suzhou, or in Shenzhen province. Motorola has tried to pursue the industrial-park idea, but a lack of business success induced the company to change its strategy and contract out a considerable share of its products to original design manufacturers (ODMs), that is, contract manufacturers which design and produce complete products sold under Motorola’s name. As we have seen, the industrial park movement of the 1990s was aimed specifically at the information technology (IT) industry. Automotive activities have so far been marginal in these parks. Lehman et al. (2002) names 60 parks with activities in electronics, IT and related industries, but only nine parks with automotive activities.

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While in China an infocom company has thus assumed the leading role in setting up a modern industrial park operating on just-in-time principles, outside China this form of industrial organization has so far primarily been the domain of the automotive industry. On the basis of experimental European and American projects in Latin America, industrial parks in this sector have been established primarily in Western Europe around carmaker assembly plants. Similarly, clusters of R&D firms have formed around the development centres of auto manufacturers (Jürgens, 2003). Since the 1980s, after the central government had declared the automotive sector to be a key industry, a decentralized structure has developed in China, owing to the ambition of individual provincial governments to form complete value chains in their provinces around the respective provincial champions. The resulting structures resembled the Japanese keiretsu. The establishment of joint ventures with Western carmakers induced the strategic suppliers of these firms to set up as FIEs in China, with the support and on the insistence of the automotive firms. Since the joint venture principle initially applied, firms set up largely in existing regional structures. The creation of modern industrial parks in the vicinity of auto firm assembly plants is a very recent phenomenon. An important difference between the infocom and automotive industries is the size of components and modules to be supplied and the complexity of final assembly processes. The need for just-in-time delivery and the resulting reduction in transport costs are less urgent requirements in the infocom industry. This means that industrial parks can include suppliers (and contract manufacturers) of different final producers. Carmakers, in contrast, seek to form supplier clusters that are as model-specific as possible and in the immediate vicinity of their own assembly locations. Another difference is that FIEs in the infocom sector have to rely on the group of internationally leading suppliers – especially from Taiwan and Japan – except for a very small percentage of simple components that can be provided by local Chinese firms. And it is these leading international firms that locate as FIEs in the industrial parks. Carmaker industrial parks designed on just-in-time principles, in contrast, bring together only a small group of strategic (module) suppliers, so-called first-tier suppliers. Second, third, and fourth-tier suppliers provide the first tier with the components they require. Such a tier structure has not yet developed in China. But many first-tier suppliers of multinational auto firms have meanwhile also set up as FIEs in China. These FIEs, as well as a small number of local Chinese producers, attain world-class standards in terms of quality, as a benchmarking study on selected components has shown (Sutton, 2004). The quality problem mentioned at the beginning is, as this study shows, primarily a problem of local second-tier and lower-level suppliers.12 In China, the establishment of international industrial parks to attract multinational automotive suppliers and develop integrated production complexes

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has not been promoted by central government but by provincial and municipal governments, and only very recently. Particularly worth noting are the industrial park projects in Guangzhou, geared particularly to Japanese carmakers, and in Shanghai where VW and General Motors have located. In brief, two differences are apparent between the automotive and infocom industries. First, development in carmaking lagged a decade behind, but can now draw on the experience and capabilities of regional policy-makers; second, automotive industrial parks are more strongly shaped by regional development goals and adapted to regional OEM locations.

Reverberations on industrial actors in Germany As we have seen, the two industries seem to assign different roles to China in their global strategies. The automotive industry has been setting up its Chinese operations mainly to serve the Chinese market, and, in some cases, to become the hub for their regional strategy for East Asia. Due to the need to serve the automakers in China first, or due to a lack of competitiveness in costs and quality at the current stage, automotive suppliers in China are also still focused on the national market. However, there are high expectations of steeply rising export rates in the medium term. The exceptional case of Honda setting up an export-oriented factory aimed specifically at the European market can be seen as a sign that the regional strategy adopted by carmakers might be for a transitional period only. The infocom industry has assigned China a central role in its global production strategy. In this sector, Chinese locations are part of the transnational value chains of end producers and manufacturers for world markets. Processes in multinational companies’ home countries thus tend to compete directly with (potential) Chinese processes. In the enlarged EU, competition is also developing with Eastern European locations. In contrast to multinational strategies for China, there is no trend towards developing competence centres in Eastern European locations, however. Outsourcing or offshoring activities seem rather designed to realize labour cost advantages while benefiting from a good level of education within the EU internal market. Both strategies have a direct impact on working time and pay systems at German locations. One example is the dispute at the Siemens AG plants in Kamp-Lintfort and Bocholt, where mobile telephones and digital cordless telephones are made. Both products are facing strong competition, also conducted through ‘market pricing’. A comparison of labour costs at these locations with those at a potential Hungarian site for outsourced production reveals a labour-cost disadvantage of more than 30 per cent. Faced with the alternative of accepting an adjustment to safeguard their jobs in KampLintfort – some 2,500 employees were affected – a works agreement was reached to reintroduce the 40-hour week without pay compensation and waive the

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holiday allowance and Christmas bonus. This reduced labour costs by about 30 per cent. In return the company gave a two-year job guarantee. This internal company conflict was followed with great attention by the media because it was in the nature of a pilot dispute. Later on, this deal was emulated by other companies such as DaimlerChrysler and VW, imposing wage settlements lower than industry-wide pay agreements at the plant level that take account of the competitive situation of the location – settlements which a few years ago would not have been accepted by labour and management. With respect to labour costs, China looks like the ultimate low-wage location. The debate on locating in China has so far concentrated far too much on this angle, however. It is only now that tapping markets and the quality aspect are become more important arguments. In fact, as was argued earlier, a very high degree of automation in electronics manufacturing has been reached also in China in the meantime. In China as well as in Eastern Europe, capability standards for achieving quality have been increasing very fast. This aspect was stressed in a study by Roland Berger Strategy Consultants that looked at the factors and motives driving the latest wave of foreign offshoring by Germany industrial enterprises.13 Companies mentioned not only the expected advantages in wages and salaries but especially the high manufacturing quality to be achieved in East Asian locations. Eighty-three per cent of the companies questioned saw no change in conformance quality in comparison with German locations, 17 per cent judged conformance quality to be between −1 per cent and −10 per cent below German standards, no one judged quality to be below −10 per cent. The most important causes stated were excellent training of production personnel, high resource input for quality control, reworking directly during production. Conformance quality at Chinese locations is therefore considered higher than in Eastern Europe. Sixty per cent of companies observed no difference in Eastern Europe, 30 per cent detected a drop of between −1 per cent and −10 per cent from German quality standards, and in 10 per cent of cases the difference was more than 10 per cent (Berger, 2004: 30, 32). Our own findings support the competitiveness of Chinese production performance vis-à-vis Western competitors. A comparison of production quality and field-call rates for a standard electro-mechanical component used in mobile telephones offers a concrete example (Table 9.1). One of the current world market leaders produces the identical product in large numbers at a location in Western Europe and at a location in China. The product was launched in lead production in Europe. With the expansion of the Chinese mobile telephone market and customer demand for national supply, a major proportion of capacity was transferred to a new Beijing location in 2003. At this site the component is produced for the Chinese and world markets in almost identical, highly automated processes.

198 China’s Changing Role in Industrial Value Chains Table 9.1 Performance differences between a Chinese and a Western European production line for InfoCom products Jan. Fall-off rate (FOR)* Chinese production line West European prod. line Overall efficiency (OEE)** Chinese production line West European prod. line Field-call rate (FCR)*** Chinese production line West European prod. line

Feb.

Mar.

April

May

June

July

Aug.

0.28

0.29

0.38

0.37

0.29

0.27

0.29

0.32

0.75

0.95

0.86

0.93

1.22

1.11

0.81

0.78

71

71

72.2

75

79

78

76

76

80

81

84

80

83

82

84

85

20

5

1

48

249

32

87

99

310

226

118

109

114

344

77

–

Notes: *FOR (fall-off rate): faults in final stage of process; **OEE (overall efficiency): actual versus set utilization of production line; ***FCR (field-call rate): failure rate at customers measured in parts per million.

To compensate for competitive disadvantages, German production locations have, as we described, conducted more and more rigorous cost-cutting programmes in recent years.

Summary and conclusions Spurred by China’s accession to the WTO, more and more global players are setting up operations in China. Cooperation with multinational companies in China’s socialist modernization policy is seen as a primary means of increasing the competitiveness of its domestic industry. As we have shown in this chapter, the new factories in China are as good or better in terms of performance and control over their industrial processes. However, this can be said almost without exception only for foreign firms that have set up their operations in China since the early 1990s. Chinese companies which have not entered a joint venture with foreign companies clearly lag still farther behind. The comparison between the infocom and automotive industries shows similarities and differences in the timing and the direction of their rush into China. While in the infocom sector China is becoming the ‘worldwide

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production platform’ for core components and finished products, the impact on global industrial process chains will be more limited in the case of the auto industry. Market and product characteristics in the automotive industry as well as the capabilities and cost levels of local manufacturers are limiting the development of the Chinese automotive industry towards meeting the needs of the domestic market and, to a certain degree, East Asian markets. The future is far from clear. There are obvious risks and many doubts about the sustainability of the Chinese rate of development. Nevertheless, the development described in this chapter poses tough challenges to manufacturing companies and high-wage countries such as Germany. They will have to aim for even higher degrees of automation to offset higher labour costs, and they will have to further improve their process-chain mastery. This would reduce the costs of quality assurance which have strongly increased in proportion in recent years. Robust control processes have also to be introduced in indirect production and in view of their increasing relevance in terms of costs, this could be turned into a real competitive advantage. Proximities to markets or to R&D activities will not, as the example of infocom shows, guarantee a domestic manufacturing base.

Notes 1. Cf. on the term ‘value chain’: Sturgeon (2001). 2. In this chapter, China stands for the People’s Republic of China. 3. A one-week study tour by Ulrich Jürgens and H.-R. Meissner with company interviews in the supply chain of telecommunication companies in China in summer 2002, and several study trips to China by Rolf Rehbehn between 1992 and 2001 as President of Quality Management, Siemens Communication Devices. 4. Based on the ‘Law on Foreign-Capital Enterprises’ of 1986 (Taylor et al. 2003: 63). 5. ‘The rush to source automotive parts from China has turned into a stampede’, writes G. Mercer from McKinsey. ‘Sourcing from China, the Organisational Challenge’, in Automotive & Assembly Newsletter, 31 July 2003. 6. ‘It is such a concern’, the article continues, ‘that Ford has decided to build parts – receiving centers in the U.S. to verify the quality of goods being shipped from China and other low-cost countries’ (Shirouzu, 2003). 7. Cf. on related conceptual issues, Ernst and Kim (2001). 8. Cf. on the automotive policy of the Chinese government, Harwit (2001). 9. Thus, Siemens intends to increase its turnover in China to €11 billion, this is more than 10 per cent of the total turnover of the group. 10. Cf. Xiaojuan (2003); cf. the business guide published by China Knowledge Press (2002). 11. ‘Of the importance of Dongguan’s IT manufacturing industry, an IBM vice president remarked to the effect that a mere 15-minute traffic jam on the Dongguan– Shenzhen express way is enough to cause worldwide fluctuations in computer prices!’ (Xiaojuan, 2003: 17). 12. The investigation on which this study is based addressed supplier structures for multinational carmakers in China and India. The findings were similar for both countries: ‘Manufacturing best practice has spread remarkably quickly to first-tier

200 China’s Changing Role in Industrial Value Chains suppliers in both India and China over the past decade . . . These practices have not as yet permeated through the lower tiers of the supply chain’ (ibid.: 24). 13. The study was conducted in the first quarter of 2004. The sample of 70 companies included the sectors general mechanical engineering, plant engineering and special mechanical engineering, automotive components suppliers, and electronics, as well as microelectronics.

References Auto Industry (2004) ‘China Announces New Automotive Industry Policy’, 3 June 2004, http://www.autoindustry.co.uk/news/industry_news/news-55640fi3oi (17 June 2004). Booz Allen Hamilton (2003) ‘Electronics Manufacturing in Emerging Markets – Summary of the Key Findings’, http://www.boozallen.com (18 August 2003). Borrus, M. Ernst, D. and Haggart, S. (2001) International Production Networks in Asia. Rivalry or Riches? (London, New York: Routledge). The Boston Consulting Group (2002) ‘Rethinking “Made in China” Cars and Parts’, http://www.bcg.com/publications/files/Rethinking_Made_China_OfA_Dec02.pdf (14 September 2003). China Economic Information Network (2003), http://ce.cei.gov.cne_report/hy/ txsb.htm (6 September 2003). China Internet Information Centre (2002a) ‘National Science & Technology Industrial Parks of China’, www.chinagate.com.cn/english/559.htm (24 August 2003). China Internet Information Centre (2002b) ‘China’s New and High-tech Development Zones’, http://www.chinagate.com.cn/english/1856.htm (24 August 2003). China Knowledge Press (2002) ‘Building A Successful Plant in China. An Insider’s Guide’, http://www.chinaknowledge.com/publication_tm.asp?category=190#book15 (25 August 2003). Debresson, C. Wei, X. Shiquin, X. and Mohnen, P. (2003) ‘China’s Re-Entry – Innovative, Learning and Catchin-up Capabilities’, Background Papers for the Preparation of the IDR 2002/2003 (http://www.unido.org/en/doc/5227). Ernst, D. and Kim, L.(2001) ‘Global Production Networks, Knowledge Diffusion, and Local Capability Formation. A Conceptual Framework’, East-West Center Working Papers, Economic Series, no. 19, May 2001. Goldman Sachs Global Equity Research (2003) ‘Global Automobiles. The Chinese Auto Industry’, unpublished report. Harwit, E. (1995) China’s Automobile Industry. Polities, Problems and Prospects (Armonk, New York, London: M.E. Sharpe). JEITA (2003) Data Map for the Electronics and Information Technology Industries in Japan. Jürgens, U. (2003) ‘Characteristics of the European Automotive System: Is there a Distinctive European Approach?’, Discussion Paper SP III 2003-301, Berlin: Wissenschaftszentrum Berlin für Sozialforschung. Lehman et al. (law firm) (2002): http://www.lalawfirm.com.cn/links/hightech.htm (8 September 2003). Lüthje, B., Schumm, W. and Sproll, M. (2002) Contract Manufacturing: Transnationale Produktion und Industriearbeit im IT-Sektor (Frankfurt, New York: Campus). The Ministry of Science and Technology (2002) TORCH Programme (http:// www.most.gov.cn/English/Programs/torch/menu.htm (21 August 2003). Murphy, D. (2004) ‘Honda Blazes New China Path’, in Wall Street Journal Europe, 25 May.

Ulrich Jürgens and Rolf Rehbehn 201 Nokia (2001) ‘Nokia Drives Expansion at New World-Class, High-tech Industrial Park in Beijing’, 20 December 2001, press.nokia.com/PR/200112/844052_5.html (24 August 2003). Roland Berger Strategy Consultants (2004) ‘Global Footprint Design – Die Spielregeln der internationalen Wertschöpfung beherrschen. Studie’, München, June 2004. http://www.rolandberger.com/ Shirouzu, N. (2003) ‘Auto Makers Hope Cheap China Parts Drive Costs Lower’, in Wall Street Journal Europe, 19 June. Sieren, F. (2003) ‘In Tränen enden’, in Wirtschaftswoche, 26 June 2003. Sturgeon, T.J. (2001) ‘How do we Define Value Chains and Production Networks’, in IDS Bulletin, 32(3), http://www.ids.ac.uk/globalvaluechains/publications/sturgeon.pdf (15 August 2003). Sutton, J. (2004) ‘The Auto-component Supply Chain in China and India: A Benchmarking Study’, 26 January 2004, http://personal.lse.ac.uk/sutton/auto_component_sutton. pdf (17 April 2004). Taylor, B. Kai, C. and Qi, L. (2003) Industrial Relations in China (Cheltenham, UK and Northampton, MA: Edward Elgar). Weider, M. (2004) ‘China – Automobilmarkt der Zukunft? Wie nachhaltig und zukunftsorientiert sind die Strategien der internationalen Automobilindustrie in China?’, Discussion Paper SP III 2004-105, Berlin: Wissenschaftszentrum Berlin für Sozialforschung. Xiaojuan, J. (2003) ‘Geographical Distribution of Foreign Investment in China: Industrial Clusters and Their Significance’, China & World Economy, 1: 16–24. Xing, W.B.J. (2002) ‘Auto Makers in the Fast Lane’, China Business Review, 29(4), July–August.

10 Local Responsiveness of German Firms in International Joint Ventures in the PRC Alexander T. Mohr and Jonas F. Puck

Whereas research has been carried out on multinational enterprises’ (MNEs) attempts to balance global integration and local responsiveness, there has been hardly any research into the degree to which foreign firms respond to differences that exist between themselves and their local joint venture (JV) partners in host countries. This chapter discusses MNEs’ responsiveness to inter-firm differences in IJVs as a special case of MNEs’ responsiveness to differences that exist between home and host country. We also highlight the role of perceptions for (empirical) research into firms’ decisions about the degree of responsiveness. Based on empirical data gathered by means of a questionnaire survey among 76 managers representing German partner firms of German–Chinese IJVs in the Peoples’ Republic of China (PRC), we provide some empirical evidence for the importance of individuals’ perceptions of responsiveness. A first finding of this study is that MNEs’ responsiveness in the specific context of international joint ventures warrants further scholarly attention and is of high practical relevance for firms interested in improving the management of their IJV. A second result of this chapter is that perceptions need to be taken into account when empirically studying the degree of local responsiveness of MNEs.

Introduction Theories such as contingency theory (Lawrence and Lorsch, 1967) or evolution theory (Nelson and Winter, 1982) have been employed to show the consequences of a company’s maladjustment to its environment (see also Kraatz, 1998). Within international business research the concept of ‘local responsiveness’, that is, the adjustment of MNEs’ operations to host-country conditions, has taken a central place in the theoretical discussion of global strategies (Bartlett and Ghoshal, 1989; Fayerweather, 1969; Yip, 1992). The focus of studies in this area lies in the analysis of the extent to which products, services or the management of overseas subsidiaries have to be adapted to the specific conditions in the host country. Existing studies have, for instance, 202

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analysed the need for adjustment in different fields of human-resource management, for example leadership style (Kumar and Steinmann, 1990); compensation practices (Schuler and Rogovski, 1998); flexible employment practices (Mroczkowski and Hanaoka, 1997; Raghuram et al., 2001); selection methods (Clark, 1993; Ryan et al., 1999); staff-related management practices (Liberman and Torbiörn, 2000); the motivational level of managers (Mathur et al., 2001); or performance appraisal (Snape et al., 1998). One of the recurring themes encountered during interviews with German and Chinese JV managers carried out for this study was the theme of adjustment that takes place between the partner firms; that is, the level to which firms are responsive to differences that exist between the partners of an IJV. Extant literature, however, is remarkably short of studies analysing the antecedents, nature and consequences of inter-firm adjustment processes in IJVs. So far, this issue has mainly been analysed in the context of (international) industrial marketing and long-term buyer–supplier relationships (Brennan and Turnbull, 1999a, 1999b; Hakansson, 1982; Hallen et al., 1991; Heide and John, 1990). When looking at strategic alliances in general, however, there has so far been little scholarly interest. In the few cases in which adjustment has been picked up by researchers, it has been used as a context variable in the analysis of other aspects (Child et al., 1994; Parkhe, 1991; Sarkar et al., 1997). Parkhe (1991), for instance, saw the level of interfirm adaptation as a moderating variable in the relations between inter-firm diversity and longevity as well as the effectiveness of global strategic alliances. To the best of our knowledge there are no studies that have (empirically) analysed the issue of inter-firm adjustment for the specific case of IJVs, and its consequences for the performance of IJVs. This is surprising, given the fact that most of the decisions by managers of IJVs have to be taken considering both the foreign and local partner’s approaches to running the JV. This chapter is structured as follows. In the following section we will revisit literature on MNE responsiveness and argue that the responsiveness to differences between partner firms in overseas operations run as IJVs is a crucial, yet so far neglected, aspect of local responsiveness. We will discuss three modes of responsiveness and relate them to this special case of responsiveness. In the subsequent section we provide empirical evidence for these issues and discuss their implications for research into responsiveness. A final section concludes by summarizing the main findings, outlining the limitations of the study, and outlining some worthwhile alleys for further research in this area.

MNE responsiveness in IJVs Global integration/coordination and local responsiveness have been suggested as the main dimensions that MNEs have to take into account

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when devising global strategies. Whereas global integration refers to efforts by firms to achieve competitive advantage by closely coordinating their overseas activities and standardizing their products in order to reap location and scale economies, local responsiveness relates to attempts to beat competitors by closely matching their overseas operations as well as their local product offerings to the host-country conditions. The dichotomization of each of these dimensions has resulted in four strategic alternatives, which are discussed in extant literature. Although authors have labelled the resulting strategies differently, the main characteristics remain similar. Using the terminology suggested by Bartlett and Ghoshal (1998), the four options are: international strategy (low integration/low responsiveness); global strategy (high integration/high degree of responsiveness); multinational strategy (low degree of integration/high degree of responsiveness); and transnational strategy (high degree of integration/high degree of responsiveness). While some researchers regard global integration and local responsiveness as factors that force firms to adopt a specific strategy that matches the specific requirements for integration and/or responsiveness in order to be successful (contingency approach), other researchers suggest that MNEs need to strive for global integration and local responsiveness at the same time (Bartlett and Ghoshal, 1998; Fayerweather, 1969; Yip, 1992). When analysing the issue of responsiveness, so far, most research analysing MNEs’ responses to host-country conditions (local responsiveness) has focused on the adjustment of products, services or the management of overseas subsidiaries to differences. In this study we suggest that extant research has failed to address a specific type of responsiveness, namely the (non-) adjustment of MNEs’ management practices in IJVs. This is surprising given the large body of anecdotal and empirical evidence that shows that differences between the partners in IJVs are often one of the main factors behind unsatisfactory IJV performance. This insight has been corroborated by the analysis of the interviews carried out for this study, which suggests that partner firms’ adjustment is a sine qua non for the effective management of IJVs. One of the managers, for example, stated that: There has to be some sort of adjustment that basically should be carried out by both sides. Of course, it depends on the type of pairing. If your partner is best not to be tangled with, all the effort you put into adjusting is in vain. If your JV partner is willing to work together and make adjustments as well, the JV is more likely to succeed. In a similar vein, Parkhe (1991: 590) regards the ‘problem of effectively combining the diverse systems of autonomous international firms, each accustomed to operating in a certain manner’ as one of the main problems in managing global strategic alliances. As a solution he suggests the ‘establishment of unitary management processes and structures’ which can be

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argued to require responsiveness by at least one of the partner firms. Furthermore, it can be assumed that differences between partners are of higher importance in IJVs than in other forms of strategic alliances as they are characterized by a comparatively higher level of interaction and interdependency between the involved firms (see for instance, Harrigan, 1985). In addition, responsiveness in IJVs may take place in various areas of an IJV’s management: German managers frequently mentioned the importance of adjusting the way they communicate to the ‘Chinese way’ of communication in order to avoid conflicts. In terms of functional areas of JV management, the interviews made clear that there were crucial differences between the German and the Chinese side as to how the market should be served, and as to how customers of the JV should be treated; in particular, the attitude towards ‘bribes’ as exemplified by the following statement of a German manager: There is one crucial issue: bribery! We arrive with our western mentality and say: ‘We do not pay bribes!’ This leads us to the first problem. Suddenly there is nothing to be gained any longer; you have problems with your customer because the manager of the customer doesn’t make money on the side anymore. Well, I take him out for lunch but that’s what you do in Germany as well. The point is that this is not enough in many cases. For instance, we invited one of our customers and our Chinese partner explained to us what the customers expected us to do. We had to pay for their accommodation, give them presents – not small presents but very, very expensive ones and so forth. That was hard for us to swallow because we were not used to that and the costs were just amazing. Then again, it seems to me that you have to play the game according to their rules. These differences between partners may therefore lead to frictions and affect the performance of the IJV negatively. An MNE’s responsiveness can thus be seen as a means to reducing the negative consequences of differences between partner firms. In what follows, we build on the work by Kumar and Steinmann (1990) and distinguish between three different modes firms can adopt regarding the degree to which they adjust their management to differences between their home country and host countries they operate in. In the following, we outline these three modes and adapt them to the specific context of responsiveness within IJVs (see also Figure 10.1).

Responsiveness mode 1 – social reaction In this first mode, the level of foreign JV partners’ responsiveness is lower than the degree to which they perceive differences between the partner firms. Foreign firms, thus, consciously accept that they do not respond to

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the difference and focus more on global integration and coordination of their activities. The differences that exist between the partner firms are recognized, but the foreign firm does not use these differences as a reason to adjust its practices. Rather, firms may (a) accept the differences that exist and expect that they do not have negative consequences, or (b) be convinced that the local partner firm should adjust its practices to the foreign firm’s. By not adjusting, firms may attempt to compensate the ‘liability of foreignness’ on the basis of their ownership-specific advantages. Responsiveness for these firms may imply that they forego the advantages and positive consequences that are possible when using their own practices. Foreign firms may attempt to implement their practices against the will of the local partner, despite the fact that this is likely to lead to conflicts between the partners. A number of the interviews carried out for this study highlighted the propensity of the respective firm to adopt this approach. Our interviews also showed that the choice of this mode was common in, but not exclusive to cases in which the German firm perceived a lack of resources and competences on the side of the local JV partner. At the same time it has to be borne in mind, however, that in many cases the local firms are interested in acquiring technological and management know-how from the foreign firm and thus expect foreign firms to bring their knowledge into the IJV. A lack of responsiveness of the foreign firm may therefore not necessarily lead to resentment on the local side but may actively be expected by the latter.

Responsiveness mode 2 – social acceptance In this second mode, the level of foreign JV partners’ responsiveness is greater than the perceived differences between partners. This implies that

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from the perspective of the foreign firm, a lower degree of adjustment would be efficient as well, and responsiveness thus fulfils other purposes than merely bridging the perceived gap between the partner firms. There may be a number of explanations for foreign firm’s choosing this mode. First, given the increasingly recognized role that trust plays in strategic alliances, responding and adjusting to the local partners approaches may be used as a sign of commitment in order to improve the relationship between the partner firms. A second reason for this high level of responsiveness may be the foreign firm’s interest in learning from the local firm. Instead of merely implementing a workable solution in the IJV, the foreign firm attempts to learn as much as possible about the local firm’s practices and its way of doing business in the host country. Firms may thus choose this mode if they see the IJV primarily as a means to increase their own competence for operating in the particular host country. Researchers such as Kogut (1991) regard IJVs as a ‘real option’ on entry into a host country; by entering via setting up a JV, a foreign firm can learn about the host country’s market and then decide to buy out the local partner (exert the option) or withdraw from the market instead. A third reason for comparatively high levels of adjustment of the foreign firm in its overseas JV may be the overall strategy chosen by the firm. Firms that have divided to pursue a multinational strategy generally try to base their competitive advantage on their superior ability to respond to local conditions and may prefer a high level of adjustment. A final reason may be for the firm to reduce its image as a ‘foreign’ firm by operating in similar ways to local firms. One of the main problems associated with this second mode is that high degrees of responsiveness may prevent the firm from exploiting and leveraging the foreign firm’s ownership-specific advantages. The foreign firm’s approach to marketing may, for instance, be superior to the local firm’s approach, and would thus lead to better JV performance. If the foreign firm, however, prefers to adjust its practices to the local firm’s approaches for one or more of the reasons outlined above, this ownership-specific advantage is not fully exploited. The high levels of responsiveness, furthermore, limit the foreign firm’s efforts to globally integrate and coordinate its activities.

Responsiveness mode 3 – the balanced approach In this third mode, the level of foreign JV partners’ responsiveness reflects the level to which they perceive differences between the partners firms. In their study of the general adjustment of German firms’ operations to different conditions abroad, Kumar and Steinmann (1990) suggest that this mode would mainly be the result of firms’ being ‘forced’ to adjust their operations by legal requirements in order to prevent negative consequences. For the case of IJVs, there may be areas where adjustment is necessary in order to prevent frictions, but there may be others in which adjustment would be good but not necessary. Secondly, in contradistinction to the

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general case suggested by Kumar and Steinmann (1990), in the case of IJVs it is also possible that the partner firm adjusts its practices. In this mode, firms try to achieve a balance between adjusting to differences without surrendering the possibility of improving practices and leveraging their competitive advantages. The adoption of one of the modes, however, is not a static decision. It can be argued that foreign firms may change their approach over time (see arrows in Figure 10.1). For example, firms that are operating according to mode 2 may decide to reduce the level of adjustment. During our interviews, many managers reported that initially they had tried to adopt the practices suggested by the local partner firm, because (a) they were seen as more adequate, and (b) this was seen as conducive to building a harmonious relationship between the partner firms. After failing to produce the expected results, however, German firms reduced the level of responsiveness and forced the adoption of their own approaches. On the other hand, firms that have adopted mode 1 may struggle to implement their own practices in the face of very significant differences between the partner firms. Some of the interviewed managers reported that their side had originally attempted to ‘run the company in China in the same way as they would run a company in Germany’, only to realize that this would lead to conflicts with the local partner firm. As a consequence, they had to increase the level to which they adjusted to the differences between the partners in order to avoid further negative effects on the management, and thus the performance of their IJV. One of the central aspects of the adjustment modes suggested by Kumar and Steinmann (1990) is the importance of the perception of differences, which is the basis of foreign firms’ decision as to the degree to which they adjust their operations. Researchers in various disciplines have recognized the role of perceptions and the fact that there are differences in individuals’ perceptions that influence managerial decisions about the level to which firms respond to their local operating environment. Perceptual differences have long been recognized as a particularly salient problem for (empirical) research crossing two or more cultures. The relevance of cultural differences in individuals’ perception has been stressed in many different contexts, such as cross-cultural differences in the perception of women as managers (Owen and Scherer, 2002); of brands (Romaniuk and Sharp, 2003); of ethics and morals (Ahmed et al., 2003; Elahee et al., 2002); and of risk (Weber and Hsee, 1998). So far, however, the issue of perceptions has been largely ignored in research on MNEs’ global strategies, and the difficulty for MNEs to find an optimal balance between global integration and local responsiveness. Because of the importance of perceptions, researchers in international management have to take into account the firm’s managers’ perceptions of differences between home and host country in general, and between the partner firms in particular when assessing the level to which firms respond

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locally. However, to the best of our knowledge no attempt has been made to explore the perceptions of, and the responses to differences between, foreign and local partner firms in IJV. In the following, we will explore how MNEs’ responsiveness in overseas subsidiaries run as IJVs relates to the perceived differences between the partner firms in these subsidiaries.

Empirical basis and measurement For the exploratory part of the study, we compare the level of German firms’ responsiveness in their IJV to their perception of differences between themselves and their local partner firm. The empirical basis for this study consists of 76 questionnaires that were filled in by representatives of German JV partners in the PRC.1 In order to measure the level of adjustment of the JV partner, the managers were, in a first series of questions, asked to evaluate the extent of the existing differences between their side and the partner firm regarding the way 11 functional areas should be run. Respondents were then asked to estimate the level of their company’s adjustment in the 11 functional areas. In both cases, 5-point Likert-type scales were used, from ‘1’ no difference/no adjustment to ‘5’ large differences/ high degree of adjustment.

Exploratory analysis of local responsiveness of German MNEs Figure 10.2 shows the descriptive results of the questionnaire survey (N = 76), as to the level to which the representatives of German MNEs in China perceive differences between themselves and their Chinese JV partner. The results show that the representatives of German MNEs see the greatest differences between the partners in sales and marketing (3.27) and personnel

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management (3.18). To a certain extent this may be due to the greater relevance of cultural factors in these areas, as opposed to, for instance, quality management which may be less culture-bound. We have argued that firms adjust or respond to these differences, and Figure 10.3 shows how far the German firms adjust their practices, that is respond to these differences, in the 11 functional areas. The highest degree of adjustment of the German firm was reported to take place in the areas of personnel management, R&D, and procurement. The lowest degree of adjustment, on the other hand, took place in the areas of controlling, quality management, and sales planning. It might be argued that the German side saw its particular strength and contribution to the competitiveness of the IJV in these latter areas and was thus reluctant to respond to the partner’s ‘way of doing things’. Overall, the average across all the functions is below the theoretical mean of 3, which implies that on the whole German firms do not respond to the perceived differences shown in Figure 10.1. This means that German firms either accept the differences that exist between the partner firms, or they expect the local partner firms to respond and change their approaches to the approach used by the German MNE. As we have argued above, however, any analysis of the responsiveness of a firm operating abroad has to take into account the perceived level of differences. High stated levels of responsiveness can be misleading if the perceived differences are low, and vice versa. Thus, we compare the perceived differences with the level of responsiveness, and Figure 10.4 shows the results regarding the perceived differences, and the degree to which they respond to these differences in the 11 areas.

Alexander T. Mohr and Jonas F. Puck 211

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The figure shows that the average level of adjustment of German MNEs is in all areas lower than the level of perceived differences. Using the terminology we introduced above, the German MNEs in our sample opted for the ‘mode of social reaction’: German firms involved in IJVs do not regard the perceived differences between the partners as a reason for them to adjust to the same extent. This might be interpreted as the German side regarding their methods as superior, and adjustment to the Chinese way of doing things as unnecessary. This view was corroborated by the interviews that were carried out as part of this study. Adjustment is lower than the perceived extent to which partner firms differ, implying that German MNEs do not see local responsiveness as being of particular importance in their IJVs with Chinese partner firms. One reason for this may be that German firms see responses to differences as (1) barriers to further integration and coordination of their activities, and/or (2) leading to a potential erosion of competitive advantages that are seen to be reflected in specific ways of doing things. At the same time, however, it has to be noted this result cannot solely be attributed to cultural factors, that is, a reluctance of the representatives of German firms to report high differences and comparatively low levels of adjustment as some of the German side representatives were Chinese.

Conclusion This chapter contributes to the understanding of IJVs by analysing the – so far largely neglected – issue of inter-partner adjustment/responsiveness and the perception of differences between partner firms. We distinguished and

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discussed three different modes of responsiveness available to MNEs when operating abroad through IJVs with local firms. Based on this conceptualization, the study then empirically explored the degree to which German firms respond to perceived differences between themselves and their local joint venture partners, that is which of the discussed modes German firms adopt in their IJVs in the PRC. The result was straightforward and showed that while German firms perceive a degree of differences between the partner firms, the level to which they adjust to these differences is significantly lower. There are a number of limitations that have to be borne in mind. First, our empirical basis was limited to German firms and their IJV operations in the PRC. This can be seen as limiting the generalizability of our findings. Responsiveness within IJVs may play a different role in IJVs in which both partner firms are from developed countries or in which the cultural distance is lower. Future studies should thus investigate how far the results of this study are contingent on the specific partner constellation of the analysed IJVs. However, our primary research objective was to compare the level of responsiveness to the perception of differences rather than identifying generalizable relationships. Future research should also analyse the link between responsiveness and perceived differences for firms from different cultures and/or operating in different host countries. Secondly, the concept of inter-partner adjustment should be elaborated in more detail. For example, it might be argued that adjustment takes place in a cyclical way with strong/ high adjustment at first – since the necessity to adjust has been expected – and the extent of adjustment then leveling off. Equally, research into the determinants of the extent of adjustment is needed. In particular, factors such as inter-firm diversity, bargaining power, trust or the development stage of the JV, are likely to be relevant in determining the extent to which JV partners implement adjustments. These deserve further analysis. A further limitation of our study is its cross-sectional nature, which prevents any insight into the dynamics behind the issues discussed here. It might, for example, be argued that adjustment takes place in a cyclical way with strong/ high adjustment at first – since the necessity to adjust has been expected – and the extent of adjustment then leveling off. Equally, research into the determinants of the extent of adjustment is needed. In particular, factors such as inter-firm diversity, bargaining power, trust or the development stage of the JV, are likely to be relevant in determining the extent to which JV partners implement adjustments. This deserves further analyses. Future research should thus integrate additional variables and investigate their interdependencies with inter-partner adjustment as well as the consequences of the latter on IJV performance. Finally, this study has identified a so far neglected specific dimension of the general concept of local responsiveness by focusing on an MNE’s

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responsiveness to differences between itself and local partner firms in IJVs. However, we suggest that there are further specific aspects of responsiveness that have not yet been fully discussed and analysed in their importance for the performance of MNEs and for other important variables in the area related to the management of MNEs. A more detailed elaboration of these issues, however, seems necessary to push the rather vague concepts of global integration and local responsiveness onto a more operational level and by doing so increase the usefulness of these theoretical concepts for managerial decision-making in MNEs.

Note 1. The data are part of a larger data-set acquired by the authors through questionnaires from 100 respondents and interviews with 21 managers representing German or Chinese firms involved in German–Chinese IJVs in the PRC in 2001.

References Ahmed, M.M., Chung, K.Y. and Eichenseher, J.W. (2003) ‘Business Students’ Perceptions of Ethics and Moral Judgement: A Cross-Cultural Study’, Journal of Business Ethics, 43(1/2): 89–103. Bartlett, C. and Ghoshal, S. (1989) Managing Across Borders (London: Random House). Bartlett, C. and Ghoshal, S. (1998) Managing Across Borders: The Transnational Solution, 2nd edn (London: Random House). Brennan, R. and Turnbull, P.W. (1999a) ‘Adaptive Behavior in Buyer–Supplier Relationships’, Industrial Marketing Management, 28: 481–95. Brennan, R. and Turnbull, P.W. (1999b) ‘Managing Inter-Firm Adaptation Processes. An Examination of Case Study Evidence from the European Telecommunications Industry’, Journal of Euro-Marketing, 7(2): 9–27. Child, J., Markoczy, L. and Cheung, T. (1994) ‘Managerial Adaptation in Chinese and Hungarian Strategic Alliances with Culturally Distinct Foreign Partners’, in N. Campbell and S. Stewart (eds), Joint Ventures in the People’s Republic of China (Greenwich CT and London UK: JAI Press Inc.): 211–32. Clark, T. (1993) ‘Selection Methods used by Executive Search Consultancies in Four European Countries: A Survey and Critique’, International Journal of Selection and Assessment, 1: 41–9. Elahee, M.N., Kirby, S.L. and Nasif, E. (2002) ‘National Culture, Trust, and Perceptions about Ethical Behavior in Intra- and Cross-Cultural Negotiations: An Analysis of NAFTA Countries’, Thunderbird International Business Review, 44(6): 799–819. Fayerweather, J. (1969) International Business Management. A Conceptual Framework (New York: McGraw-Hill). Hakansson, H. (ed.) (1982) International Marketing and Purchasing of Industrial Goods, (Chichester: John Wiley & Son). Hallen, L., Johanson, J. and Seyed-Mohamed, N. (1991) ‘Interfirm Adaptations in Business Relationships’, Journal of Marketing, 55(2): 29–37. Harrigan, K.R. (1985) Strategies for Joint Ventures (Lexington, Mass.: Lexington Books). Heide, J.B. and John, G. (1990) ‘Alliances in Industrial Purchasing. The Determinants of Joint Action in Buyer–Supplier Relationships’, Journal of Marketing Research, 27(1): 24–36.

214 Local Responsiveness of German Firms in the PRC Kogut, B. (1991) ‘Joint Ventures and the Option to Expand and Acquire’, Management Science, 37(1): 19–33. Kraatz, M.S. (1998) ‘Learning by Association? Interorganizational Networks and Adjustment to Environmental Change’, Academy of Management Journal, 41(6): 621–43. Kumar, B.N. and Steinmann, H. (1990) ‘Die internationale Managementstrategie in Niederlassungen deutscher Unternehmen in Japan’, in M.K. Welge (ed.), Globales Management (Stuttgart: Poeschl): 117–33. Lawrence, P.R. and Lorsch, J.W. (1967) Organization and environment. Managing differentiation and integration (Boston: Harvard Business School Press). Liberman, I. and Torbiörn, I. (2000) ‘Variances in Staff-related Management Practices at Eight European Country Subsidiaries of a Global Firm’, International Journal of Human Resource Management, 11(1): 37–59. Mathur, A., Zhang, Y. and Neelankavil, J.P. (2001) ‘Critical Managerial Motivational Factors: A Cross Cultural Analysis of Four Culturally Divergent Countries’, International Journal of Cross Cultural Management, 1: 251–68. Mroczkowski, T. and Hanaoka, M. (1997) ‘Effective Rightsizing Strategies in Japan and America: Is there a Convergence of Employment Practices?’ Academy of Management Executive, 11(2): 57–67. Nelson, R.R. and Winter, S.G. (1982) An Evolutionary Theory of Economic Change (Cambridge: Belknap Press). Owen, C.L. and Scherer, R.F. (2002) ‘Doing Business in Latin America: Managing Cultural Differences in Perceptions of Female Expatriates’, SAM Advanced Management Journal, 67(2): 37. Parkhe, A. (1991) ‘Interfirm Diversity, Organizational Learning, and Longevity in Global Strategic Alliances’, Journal of International Business Studies, 22(4): 579–601. Raghuram, S., London, M. and Larson, H.H. (2001) ‘Flexible Employment Practices in Europe: Country versus Culture’, International Journal of Human Resource Management, 12(5): 738–53. Romaniuk, J. and Sharp, B. (2003) ‘Measuring Brand Perceptions: Testing Quantity and Quality’, Journal of Targeting, Measurement and Analysis for Marketing, 11(3): 218–30. Ryan, A.M., McFarland, L., Baron, H. and Page, R. (1999) ‘An International Look at Selection Practices: Nation and Culture as Explanations for Variability in Practice’, Personnel Psychology, 52(2): 359–91. Sarkar, M., Cavusgil, S.T. and Evirgen, C. (1997) ‘A Commitment-Trust Mediated Framework of International Collaborative Venture Performance’, in P.W. Beamish and J.P. Killing (eds), Cooperative Strategies. North American Perspectives (San Francisco: The New Lexington Press): 255–85. Schuler, R.S. and Rogovski, N. (1998) ‘Understanding Compensation Practice Variations Across Firms: The Impact of National Culture’, Journal of International Business Studies, 29(1): 159–77. Snape, E., Thompson, D., Yan, F. K. and Redman, T. (1998) ‘Performance Appraisal and Culture: Practice and Attitudes in Hong Kong and Great Britain’, International Journal of Human Resource Management, 9(5): 841–61. Weber, E.U. and Hsee, C. (1998) ‘Cross-cultural Differences in Risk Perception, but Cross-cultural Similarities in Attitudes’, Management Science, 44(9): 1205–18. Yip, G.S. (1992) Total Global Strategy (Englewood Cliffs, NJ, London: Prentice Hall).

11 Foreign Direct Investment Communities and the Legitimation of Wholly-Owned Foreign Subsidiaries in China Jiatao Li and Jing Yu Yang*

Introduction In this chapter, data on the establishment of wholly-owned foreign subsidiaries in China are used to study to what extent the prior existence of whollyowned subsidiaries in a host country has the effect of legitimizing this form of subsidiary. The legitimization process is explored applying institutional and ecological perspectives at the population level, rather than as a firm-level phenomenon. The results will show that the establishment of wholly-owned subsidiaries was related to the prior existence of both wholly-owned subsidiaries and joint ventures in China, and that this legitimizing effect spilled over from foreign investors in other industries and from other home countries. The choice of ownership level in foreign subsidiaries is one of the most important decisions for multinational corporations (MNCs) entering international markets (Li, 1995; Stopford and Wells, 1972), and has been widely studied in the international business literature (for example Caves, 1996; Guillén, 2003; Werner, 2002). Studies addressing this choice have taken various theoretical perspectives, including a transaction-cost approach (Anderson and Gatignon, 1986; Buckley and Casson, 1985), a corporate strategy perspective (Hennart and Larimo, 1998; Kim and Hwang, 1992), and organizational learning and capability theory (Barkema and Vermeulen, 1998; Chang and Rosenzweig, 2001). More recently, macro organization theories such as institutional theory and organizational ecology have been applied to the study of foreign entry decisions (for example Guillén 2002, 2003; Henisz and Delios,

* We would like to thank Sten Söderman and the participants at the 2003 Stockholm EAMSA meeting for their helpful comments. We gratefully acknowledge support from Hong Kong’s Research Grants Committee in the form of grants HKUST6150/02H, HKUST6196/04H and DAG03/04.BM48.

215

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2001; Kostova and Zaheer, 1999; Lu, 2002; Yiu and Makino, 2002). For example, Lu (2002) and Yiu and Makino (2002) have demonstrated that institutional theory provides incremental explanatory power when analysing foreign entry-mode choices beyond that provided by transaction cost theory. Guillén (2003) has shown that Korean MNCs in the same industry mimic each other’s choices in opting for wholly-owned subsidiaries in China. These studies greatly enrich our understanding of how the legitimacy of different entry modes (for example, joint ventures or wholly-owned foreign subsidiaries) in a specific context affects entry mode choices at the firm level. They mostly treated the legitimacy of each entry mode as an explanatory variable. What is missing, however, is a study to investigate what factors legitimate a particular foreign entry mode in a particular context. This topic is of great theoretical interest and practical relevance, as foreign subsidiaries have to conform to or be consistent with established cognitive structures in the host country to be legitimate (Kostova and Zaheer, 1999; Suchman, 1995). Previous studies at the firm level have not been able to examine this research question, which requires a research design at the level of a population of organizations (Carroll and Hannan, 1989; Hannan and Freeman, 1989; Meyer and Rowan, 1977). This study, thus, constitutes one of the first conceptual and empirical investigations of how a foreign entry mode gains legitimacy and develops over time in a host country from a macro-organization-theory perspective, filling the void in the foreign entry-mode literature at the population level. This study focuses on the legitimization of a foreign entry mode. First, the proliferation of wholly-owned foreign subsidiaries in China was treated as a legitimization process, and was examined at a population level. Second, the concept of ‘FDI communities’ was developed, categorizing MNCs in terms of their home country of origin and their industry. Intra- and intercommunity influences on the proliferation of wholly-owned foreign subsidiaries (WOFSs) in China were then examined. This study was thus designed to yield insights into the emergence of WOFSs as an entry mode for foreign investors and the interaction with the communities of other foreign investors in China. The study covered all foreign subsidiaries established in manufacturing industries in China from 1979–95. China started its economic and institutional transitions in late 1978, officially opening its doors to foreign direct investment. The research setting thus allowed us to study the emergence of WOFSs from the beginning of China’s economic transition and to examine the dynamics of the foreign investment process over time. Unlike previous research examining MNC entry decisions from a single home country in a single host country or multiple host countries, this study examined foreign subsidiaries from multiple home countries and operating in multiple industries in a single host country. This allowed investigation of the broader FDI community effects on the legitimization process as applied to WOFSs, an area previously unexplored.

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Theoretical background and the research context Legitimacy of foreign entry modes in a host country Institutional theory (for example Meyer and Scott, 1983; Scott, 2001) provides a foundation from which to examine how foreign entry modes gain legitimacy in a host country. Scholars have defined the legitimacy of a MNC’s subunit (that is, a foreign subsidiary) as its acceptance by the institutional environment in a specific host country (for example, Kostova and Zaheer, 1999). In the context of this study, legitimacy of a WOFS is defined in terms of its acceptance and/or approval by the specific host-country institutional environment. The legitimization of an organization is likely to be a complex and bounded-rational process (Baum and Oliver, 1996; Hybels, 1995), which is usually sociopolitical and cognitive in nature and involves the continuous testing and redefinition of the legitimacy of the organization through ongoing interactions with the environment (Meyer and Rowan, 1977; Scott, 2001). In this process, organizations attempt to make sense of the legitimacy requirements of the institutional environment by observing, learning, interpreting and even counter-influencing those requirements. The legitimating environment also tries to make sense of the organizations within it and to evaluate their acceptability (Kostova and Zaheer, 1999). The implications of the complexity of this process become particularly apparent when considering the entry of MNC subsidiaries, since in this case both the MNC and the host-country’s institutions may lack the information and the cognitive structures required to understand, interpret and evaluate each other (Guillén, 2002; Kostova and Zaheer, 1999). This study assumes that the legitimacy of any wholly-owned FDI subsidiary entering the market as having a ‘taken-for-granted’ status in the host country. In international expansions, each foreign subsidiary of a MNC is faced with the task of establishing and maintaining both its external legitimacy in its local host country environment and its internal legitimacy within the MNC parent network (Kostova and Zaheer, 1999; Rosenzweig and Singh, 1991). Initial pressures from host-country institutions may induce MNCs to trade their ownership for legitimacy in the local environment, for example through joint ventures with local partners (Lu, 2002; Yiu and Makino, 2002). Over time, as the wholly-owned entry mode gains legitimacy in a host country, it will become a viable form of entry for MNCs. Therefore, because of the complexity inherent in the legitimization process, the legitimacy of a WOFS in a host environment is not independent of the legitimacy of alternative entry modes (for example, through a joint venture) (Meyer and Rowan, 1977; Ruef, 2000; Scott, 2001). When the host-country institutional environment judges the legitimacy of a particular foreign entry mode, it will also refer to the legitimacy of entry modes considered alternatives to the one chosen.

218 FDI Communities in China

Legitimacy influences in FDI communities In light of the above idea, we develop a FDI community concept drawing on institutional and community ecology perspectives (Hannan and Freeman, 1989; Ruef, 2000; Scott, 2001). Such a concept can then systematically be applied to examining the legitimacy influences inferred from other MNCs invested in the host country on the emergence of WOFSs. Although scholars disagree as to how best to define the membership of an organizational ‘community’, they generally agree that each community should include all closely related and interacting organizations (DiMaggio and Powell, 1983; Hannan and Freeman, 1989). Thus, a 4-cell typology of FDI communities in a host country can be defined using two key dimensions: home country and industry type. These two dimensions have frequently been proposed as relevant organizational fields or reference points (Fligstein, 1985; Yiu and Makino, 2002), and they will be used here to define spheres of activity within which actors mutually recognize each other’s presence and actions (DiMaggio and Powell, 1983; Scott, 2001). Based on the two dimensions, foreign-invested firms in a host country can be grouped into four communities: (1) community I includes foreign subsidiaries from the same home country and in the same industry; (2) community II comprises subsidiaries from the same home country but in different industries; (3) community III consists of foreign entries in the same industry but from different home countries; and (4) the remaining subsidiaries from different home countries and operating in different industries compose community IV. Figure 11.1 maps these four FDI communities. In this study, we focus on the establishment of WOFSs as the dependent variable which is measured as the entry rate and classified in terms of home country and industry. The establishment of WOFSs was hypothesized as

Different

II: Same country Diff. industry

IV: Diff. country Diff. industry

I: Same country Same industry

III: Same industry Diff. country

Same

Different

Industry

Same

Home country Figure 11.1

4-cell typology of FDI communities

Jiatao Li and Jing Yu Yang 219

affected by the perceived legitimacy of this entry mode. This, in turn, was indirectly measured in terms of the number of previous entries taking the form of wholly-owned subsidiaries in the same FDI community. The decision to set up in the form of a wholly-owned subsidiary might also be affected by alternative entry modes selected by firms in the same industry and from the same home country. In addition, the influence of WOFSs previously established in other FDI communities was examined (that is, WOFSs from the same home country but in different industries (community II) and WOFS in the same industry but from different home countries (community III)).

Hypotheses Intra-community legitimating effects on WOFS establishment Gaining legitimacy is critical for the emergence and prosperity of whollyowned foreign subsidiaries in a host country. Initially, the legitimization process for a WOFS is likely to be difficult and slow. In this process, MNCs attempt to make sense of the legitimacy requirements of the host country’s institutional environment, and the legitimating environment also tries to make sense of the MNC’s new subsidiary and to evaluate its acceptability. Over time, as more WOFSs are established successfully in a host country, the accumulative number of WOFSs in the market will enhance the perception of the WOFS as an acceptable and approved entry mode, which in turn will encourage more foreign investors to establish subsidiaries using this entry mode (Carroll and Hannan, 2000). However, once such an entry mode becomes prevalent, further proliferation is unlikely to have much influence on its legitimacy. Cognitive legitimacy thus grows with the cumulative number of entries at a decreasing rate (for example, Greve, 2000). The institutional perspective emphasizes that uncertainty increases the importance of social considerations relative to technical ones (Meyer and Scott, 1983). Under conditions of high uncertainty, frequent use of certain organizational practices implies that these practices are legitimate, valuable or have become a common practice, which in turn increases the likelihood of their subsequent adoption (Haunschild and Miner, 1997). Moreover, bounded rationality and information asymmetry conditions make firms more likely to be affected by others that are easily observable, similar to themselves, or socially prominent (Henisz and Delios, 2001; Greve, 2000). The FDI context is considered as a complex setting involving high inherent uncertainty. Therefore, foreign investors are eager to fit in with the host country’s political and economic environments by conforming to the legitimate organizational practices adopted by other FDI entries. This legitimacy influence is likely to be particularly strong among foreign investors from the

220 FDI Communities in China

same home country and industry (community I) (Guillén, 2002; Hensiz and Delios, 2001). Therefore, we predict: H1: The entry rate of wholly-owned foreign subsidiaries in Community I (same industry, same MNC home country) will increase with the number of WOFSs already established in the same community. MNCs can also enter a foreign market through alternative entry modes such as joint ventures with local companies. Such an entry mode, by trading ownership for legitimacy in the host market (Rosenzweig and Singh, 1991; Yiu and Makino, 2002) will reduce uncertainty for MNCs (Barkema et al., 1996; Chang, 1995) and also help local partners better understand the foreign parent firms. Furthermore, the increased experience of foreign investors with local companies will help legitimate their identities in the host market. Therefore, the presence of joint ventures as an alternative entry mode in the host country might be expected to have a mutual spillover effect legitimizing the wholly-owned entry mode and promoting its emergence and proliferation in the host country. This perspective is consistent with research in community ecology (for example Ruef, 2000) which suggests that the legitimation of a new form of organization is subject to population-dependent effects for organizations within existing relevant populations. The legitimacy of organizations with relevant identities will increase the probability of the emergence of the new form of organizations to a point, but highly saturated regions of the identity space will tend to be competitive for new organisations (Baum and Singh, 1994; Hannan and Freeman, 1989; Ruef, 2000). Following the same logic, it seems reasonable that the initial growth of joint ventures may stimulate the establishment of wholly-owned subsidiaries by legitimating a broad identity of foreign direct investment in the host country; but the continued growth of JVs may eventually depress the entry rate of WOFSs by exhausting the limited resources available in the host country. As a result, a positive interaction between the two FDI entry modes (WOFS and joint venture) would dominate in the early stage, but competition effects will emerge and intensify with the increasing number of foreign subsidiaries in the host country. H2: The entry rate of wholly-owned foreign subsidiaries will have an inverted U-shaped relationship with the number of JVs established in the same community.

Inter-community legitimating effects on WOFS establishment Institutional processes tend to operate across industries and national borders (see for example Hannan et al., 1995). However, owing to data

Jiatao Li and Jing Yu Yang 221

limitations, prior studies have not been able to examine these broad effects because of the ‘boundary specification problem’ (Laumann et al., 1989), and more studies are needed to explore these higher-level institutional processes (see for example Lee and Pennings, 2002). In the international management literature, studies adopting the institutional perspective to examine MNCs’ foreign entry mode choices have mostly focused on foreign investors from a single home country, such as Japanese FDI in multiple host countries (Yiu and Makino, 2002) or Korean FDI in China (Guillén, 2002). Owning to data constraints, they were unable to investigate foreign direct investors from different home countries. For example, in the context of FDI in China, the entry rate of WOFSs in a particular industry by Australian investors could be influenced by the population of foreign investments from other home countries (for example, American or Japanese MNCs). The international management literature emphasizes the importance of home-country characteristics in affecting MNCs’ international strategies (for example, Kogut and Singh, 1988). The home country has often been referred to as a normative constraint on MNCs’ international expansion and entry-mode choices (see for example Guillén, 2002; Henisz and Delios, 2001; Yiu and Makino, 2002). Therefore, the legitimacy of the WOFS mode should be enhanced with the increasing adoption of the same entry mode by foreign investors from the same home country, even in different industries. H3: The entry rate of wholly-owned foreign subsidiaries in Community I will increase with the number of WOFSs established in Community II (same MNC home country, different industries). Similarly, foreign subsidiaries in the same industry but from different MNC home countries (community III) may also affect the legitimization of the wholly-owned entry mode. Industries often become ‘pools of information about the characteristics and behaviours of firms’. Even rivals in an industry often engage in ‘collective sense-making’ (Porac and Rosa, 1996). In addition, states and financial communities tend to group and compare firms within industries (Guillén, 2003). The industry thus has been frequently regarded as a critical organizational trait or reference point (Fligstein, 1985; Henisz and Delios, 2001; Scott, 2001). Studies have shown that the industry context invariably remains a major factor determining FDI expansion and entry-mode choices (Caves, 1996), which suggests that foreign subsidiaries in a specific industry are, in general, regarded as a relevant group that needs to gain legitimacy in the host country. Therefore, foreign investors are likely to conform to the emerging norms within their industry when choosing a mode of entry. The greater the number of MNCs in the industry choosing a specific entry

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mode, the more likely this mode will become legitimate and taken for granted. However, not every foreign subsidiary will contribute the same level of legitimacy influence to the foreign entry mode. Institutional theorists (see for example DiMaggio and Powell, 1983) suggested that firms adopt the practices of ‘legitimate’ organizations and that legitimacy can be inferred from organizational traits such as large size and success. Organizations can reduce uncertainty and search costs, as well as acquire status, by emulating the practices of or affiliating to high-status organizations (Fombrun and Shanley, 1990). As a natural extension of this logic, the relative status of WOFSs in each industry might be differentiated in terms of their home-country’s trade relationships with China. Close trade ties can help foreign investors accumulate host-country-specific experience, such as local knowledge of customer preferences and government regulations, and thus reduce the uncertainty of doing business locally (Johanson and Vahlne, 1977). Therefore, entries from home countries with close trade ties might be expected to hold higher status than other foreign entries, and imitating them might confer greater legitimacy. The legitimacy of the WOFS mode might thus be enhanced with the adoption of the WOFS mode by foreign investors from home countries that have close trade ties with China. H4: The entry rate of wholly-owned foreign subsidiaries will increase with the trade-weighted status of the WOFSs established in Community III (same industry, different MNC home countries).

Research methods Research setting The establishment of wholly-owned foreign subsidiaries in China was studied over the period 1979–95. There are several reasons making China an excellent setting for studying the legitimation of this entry mode. First, China started an economic and institutional transition in late 1978, officially opening its doors to foreign direct investment. Second, acquisitions or takeovers were in general infeasible for foreign investors entering China during the study period (Guillén, 2003). The feasible options were almost entirely limited to whole or partial ownership for foreign investors. Finally, China’s institutional environment during the study period was widely considered as complex and highly uncertain. For example, the fragmentation of governmental authority and periodic sudden promulgation of new regulations, policies and laws was quite unsettling, even for domestic firms. In the face of such high environmental uncertainty, social considerations about conforming to and learning from others were of critical importance (Guillén, 2003; Scott, 1995).

Jiatao Li and Jing Yu Yang 223

Sample and data sources The raw data on foreign entries were obtained from the research institute of the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) in Beijing. This database contains brief profiles on each foreign-invested firm that has operated in China from 1979–95, providing data on ownership structure, nationality of the foreign parent, location, industry and total investment. All foreign entries in manufacturing industries were included for analysis, excluding entries in service sectors where the government tended to place more restrictions on foreign ownership. Focusing on manufacturing industries also facilitated comparing the results with those of previous studies on the same topic applying the institutional perspective (for example, Guillén, 2002; Henisz and Delios, 2001; Yiu and Makino, 2002). This data-set was matched with another on bilateral trade flows (Feenstra, 2000) to allow for the influence of relative trade share of the different home countries. The final sample included 83,333 foreign entries from 117 home countries in 28 manufacturing industries (2-digital SIC), among which 19,774 (24 per cent) were in the wholly-owned entry mode and 63,559 (76 per cent) entries were joint ventures. The unit of analysis for the study was at the industry and home-country level. The foreign entry data was first aggregated from the subsidiary level to the home-country-industry level. The data structure then consisted of 55,692 cells. Following the lead of previous studies, the first entry at the home-country-industry-year level was defined as the beginning of the observations for our unit of analysis (Carroll and Hannan, 2000). One year of observations was then discarded by using a one-year time lag for the independent and control variables. The final sample thus consisted of 6,084 home-country-industry-year cells.

Variables and measures Dependent variable WOFS entry. This dependent variable was measured in terms of the number of entries of wholly-owned foreign subsidies (WOFS) per year from a particular home country into a particular industry. Wholly-owned foreign subsidiaries were defined as having 100 per cent of foreign ownership.

Independent variables Intra-community firms: WOFS and JV entries were measured in terms of the total number of wholly-owned and joint venture subsidiaries from the same home country and in the same industry established in prior years. Inter-community firms: Home-country WOFS firms were the total number of wholly-owned foreign subsidiaries from the same home country, but in different industries. Same-industry WOFSs were excluded. Industry WOFS firms were the total number of wholly-owned foreign subsidiaries from other home countries, but in the same industry.

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The relative trade status of foreign investors’ home countries was represented by their percentage share of China’s total trade. The square of this relative trade index was used as a weighting to calculate the trade status-weighted WOFS entries in the industry. The formula is: Trade status-weighted WOFS entries ij

n

=

¦ WOFS

2 entries ijt – 1 (Tradeit–1/Tradet–1)

i=1

where WOFS entriesijt − 1 is the cumulative number of WOFSs from country i in industry j at time t − 1, Tradeit − 1 is the total trade between country i and China during year t − 1, and Tradet − 1 is China’s total trade during the same period.

Control variables Several industry controls were included in the formulation, including industry concentration, average profitability, total industry sales and annual sales growth. The local industry concentration was represented by the percentage of industry revenues (at the 2-digit SIC level) accounted for by the eight largest firms in China. The data was taken from China’s Top 100 Companies across Industries (1993–96) and the China Statistical Yearbook. Comparable data could be obtained only for 1992–95, so a four-year average ratio was used to control for the industry competitive structure. Previous studies have shown that the industry-level competitive uncertainty can affect the entry mode of foreign subsidiaries (see for example Anand and Kogut, 1997; Lu, 2002), and industry concentration can influence interorganizational competitive mimicry (Caves, 1996; Guillén, 2002; Hennart and Park, 1994). From this, one would expect industry concentration to have a negative effect on the establishment of wholly-owned entries. To control for the average industry profitability of local firms in China, data obtained from the China Statistical Yearbook (various years) were used. The percentage of local firms suffering losses was taken as an indication of industry profitability (reverse coded). The higher the percentage of firms loosing money in an industry, the less attractive it should be to potential entrants. This ratio of negative profit firms would thus be expected to exert a negative effect on foreign entries. Industry revenues and annual sales growth were also controlled for in the analysis. Both might be expected to have positive effects on new WOFS entries. Data on industry sales and sales growth were obtained from the China Statistical Yearbook as well. Two period dummy variables were included to control for historical and alternative institutional effects on WOFS entries. Even though China allowed MNCs to establish wholly-owned foreign subsidiaries on an experimental basis prior to 1986, China officially promulgated the ‘Wholly-Owned Foreign

Jiatao Li and Jing Yu Yang 225

Enterprise Law’ only in April 1986. To capture this effect, a period dummy was defined to differentiate entries before and after 1986. Therefore, the first dummy, ‘Entry after year 1986’, was coded as ‘1’ if an entry was after 1986, and ‘0’ otherwise. It was expected to have a positive effect on new WOFS entries. Another period dummy controlled for the political disturbances in China in 1989, which might be supposed to have a negative effect on foreign entries because of increased uncertainties for foreign investors during that period. The variable, ‘Dummy for year 1989–90’, was coded as ‘1’ for these two years and ‘0’ otherwise. To account for MNC home-country heterogeneities, home-country trade volumes with China were included in the models. Substantial trade was expected to have a positive effect on WOFS entries according to the staged model of foreign expansion (Dunning, 1993; Johanson and Vahlne, 1977). Considering the possibility of autoregressive influences, a lagged term (Prior entry of WOFSs) for the dependent variable was also included (Hsiao, 1986). Finally, six regional dummy variables were included in the models to control for regional effects.

Analysis The entry rate of wholly-owned foreign subsidiaries was tabulated for each year from each home country and in each industry. An organizational entry can be considered as an arrival process, and the well-known Poisson process serves as a natural baseline model for organizational entries (Hannan and Freeman, 1989). A generalized Poisson process was specified to handle the time-varying variables and estimate the parameters expressing the dependence with time-series data using the method of maximum likelihood. The basic Poisson model for the event count is: Pr(Y = y⏐x) = e −λ(Xt) λ (Xt)y/Y! The Poisson distribution assumes that the mean and variance are equal. However, this condition is rarely satisfied, and over-dispersions appear in many contexts (Baum and Oliver, 1996; Swaminathan, 1998). The presence of such over-dispersion may in some cases overstate the levels of statistical significance, and to correct for this bias, a negative binomial model was used (Hausman et al., 1984). Such a model considers the over-dispersion explicitly in its model specification, with the form: Var(Yt) = E(Yt)[1 + ωE(Yt)] The negative binomial regression analysis was conducted using the STATA software package (STATA 2001).

226 FDI Communities in China

Results Descriptive statistics and correlation coefficients are presented in Table 11.1. The correlation matrix shows high correlations among several variables, including WOFS entries, JV entries, and home-country WOFS entries. Therefore, the theoretical variables of interest were added incrementally in the models. Table 11.2 reports the results of the negative binomial regressions (Greene, 1996) for the entry rates of WOFSs at the home-country-industry level. Models 1 and 2 examine the intra-community effects of legitimacy conferred by prior WOFS and JV entries. Models 3 and 4 investigate the inter-community effects of prior home country and the trade status-weighted entries in the same industry. The significant Chi-square statistics across models 2–4 show a significant improvement in model fit compared with their respective baselines. Hypothesis 1 on the intra-community legitimacy effect of the same entry mode (WOFS) on the emergence of WOFSs received strong support across models 1–4. The entry rate of wholly-owned foreign subsidiaries increased with the number of WOFSs already present in the same community. Hypothesis 2, examining the intra-community legitimacy effect of an alternative entry mode on the emergence of WOFSs, was supported in models 2 through 4, in which the linear terms of JV density are positive, and the square terms are negative. The results support the idea that foreign joint ventures, as an alternative foreign entry mode, may help legitimate the wholly-owned entry mode in China initially. However, as the number of joint ventures increases, competitive effects emerge and become dominant as the two foreign entry modes may compete for same resources. Hypothesis 3 proposes that inter-community legitimacy based on MNCs from the same home country (community II) will promote the emergence of WOFSs in China. The results generally corroborate this prediction (see models 3 and 4), showing that same home-country WOFS entries had a positive and significant effect on the entry rate of WOFSs. Foreign subsidiaries from home countries with high trade value with China in this community might convey greater legitimacy than those from home countries with low China-trade volumes (H4). Model 4 supports this hypothesis, and demonstrates that the trade status-weighted legitimacy of same industry has a positive and significant influence on the entry of WOFSs. These results thus suggest a refined model of industry-based legitimization; that is, foreign investors from home countries with a closer trade relationship with China contribute a higher level of legitimacy on new foreign entry modes. Most control variables showed the expected effects across all models. Among the industry-level controls, local industry concentration was negatively correlated with the entry of wholly-owned foreign subsidiaries in China. It

Table 11.1 Means, standard deviations and correlationsa Variable 1. WOFS entries 2. WOFS entriest−1b 3. Joint venture entriest−1b 4. Home-country WOFS entriest−1b 5. Trade status-weighted WOFS entriest−1b 6. Industry concentration 7. Ratio of negative profit firms 8. Industry revenueb 9. Industry sales growth 10. Home country trade value in China 11. Entry after year 1986c 12. Dummy for year 1989–90d 13. Prior entry of WOFSs/100

Mean

S.D

1

3.63 21.42 – 0.62 1.13 0.55 1.35 1.45 0.48 2.32 2.15 0.37 2.57 1.58 −0.07

2 – 0.86 0.79 0.05

3

– 0.84 0.02

4

– 0.00

5

6

7

8

9

10

11

12

–

10.73 0.24 6.66 0.29 0.05

9.00 −0.05 −0.05 −0.05 0.13 −0.27 – 0.20 0.03 0.11 0.07 0.06 0.44 0.03 – 0.79 0.01 −0.03 0.03 −0.09 0.05 0.08 0.10 – 0.21 −0.01 0.00 0.01 −0.01 −0.03 −0.09 −0.06 0.00 0.10 0.47 0.60 0.66 0.59 −0.38 0.07 −0.07 −0.04

0.93 0.05 0.03

0.26 0.04 0.10 0.12 0.16 0.43 −0.01 0.09 −0.03 −0.02 −0.05 – 0.22 −0.02 −0.04 −0.02 −0.05 −0.25 0.00 −0.15 0.00 0.00 0.04 0.07 – 0.21 0.82 0.57 0.48 0.38 −0.05 −0.04 0.08 0.01 0.00 0.42 0.04 −0.03

– 0.00

–

Notes: a Number of observations is 6,084. Correlations above | 0.025 | are significant at the 5 per cent level. b Logarithm transformation. c ‘1’ indicates the period from 1987 to 1995. d ‘1’ indicates both year 1989 and 1990.

227

228 FDI Communities in China Table 11.2 Negative binominal analysis: entry of wholly-owned foreign subsidiaries in China, 1979–95 Variablesb Intra-community effects WOFS entriest−1

H1+

Joint venture entriest−1

H2+

Joint venture entriest−12

H2−

Inter-community effects Home-country WOFS entriest−1

H3+

Trade status-weighted WOFS entriest−1 Controls Industry concentration Ratio of negative profit firms Industry revenue Industry sales growth Home country trade value in China Entry after year 1986 Dummy for year 1989–90 Prior entry of WOFSs/100 Dispersion Degrees of freedom Chi-square Chi-square change (df) Baseline model

Model 1

Model 2

Model 3

1.07*** (0.02)a

0.69*** (0.03) 0.42*** (0.03) −0.04 (0.03)

0.61*** (0.03) 0.20*** (0.03) −0.06** (0.02)

0.60*** (0.03) 0.19*** (0.03) −0.06** (0.02)

0.24*** (0.02)

0.24*** (0.02) 0.06** (0.02)

−0.02*** (0.00) −0.66*** (0.10) 0.04† (0.02) −0.07 (0.08) −0.01 (0.15) 0.59*** (0.10) −0.12 (0.08) 0.02 (0.08) 0.68 18 6321 118(1)*** Model 2

−0.02*** (0.00) −0.78*** (0.11) 0.04† (0.02) −0.06 (0.08) 0.35† (0.19) 0.47*** (0.11) −0.05 (0.08) 0.05 (0.08) 0.68 19 6314 7(1)** Model 3

H4+

−0.02*** (0.00) −0.76*** (0.10) 0.04† (0.02) −0.04 (0.09) 1.03*** (0.14) 0.94*** (0.10) −0.26*** (0.08) −0.29*** (0.14) 0.74 15 6960 –

−0.01*** (0.00) −0.75*** (0.10) −0.05† (0.02) −0.07 (0.08) −0.11 (0.15) 0.79*** (0.10) −0.23** (0.08) −0.13 (0.09) 0.69 17 6439 521(2)*** Model 1

Model 4

Notes: a Standard errors are in parentheses. Number of observations is 6,084. b All models including 6 regional dummy variables not reported here; †p < .1 *p < 0.05 **p < 0.01 ***p < .001

demonstrates that MNCs avoid entering industries which are dominated by a few large players. It also suggests that legitimacy of the WOFS entry mode might be more difficult to establish in highly-concentrated industries. Further studies are needed to clarify this interesting issue. Another industry

Jiatao Li and Jing Yu Yang 229

control, the ratio of local firms with negative profitability in an industry, was negatively related to the entry of wholly-owned subsidiaries. Total industry sales showed a positive relationship with WOFS entries, as might be expected. As to the MNC home country effect, the trade value of a foreign investor’s home country with China displayed the expected positive relationship with WOFS entries. The institutional period dummy ‘Entry after year 1986’ showed a positive and significant correlation with WOFS entries across all models, consistent with expectations. Similarly, the institutional dummy for year 1989–90 confirmed its expected negative correlation with WOFS entries, although its significance disappeared after the intercommunity variables were added in models 3–4. Finally, the prior entry of WOFSs added to the models to account for autoregressive influences, largely did not show any significant effect.

Discussion and conclusions One of the most useful indicators of profound institutional change in an organizational field is the rapid emergence of new forms of organizations (Scott, 1995: 70). In China’s transitional economy, new forms of organization such as private firms, foreign joint ventures and wholly-owned foreign subsidiaries brought new economic and social logic to the markets. Most of these new forms of organization may be said to be taken-for-granted in developed economies, but for China, these new forms of organization involve fundamental changes in the type of social actors and their legitimacy in the host country. They imply changes as well as in the institutional logic that governs their actions and the processes that legitimate them (Scott, 1995). In this study, the emergence of wholly-owned foreign subsidiaries in China was treated as a legitimization process, and explored at the population level. This differs from previous studies which have treated entry mode choice mainly as a firm-level phenomenon. Drawing on macro-organizational theories, including institutional and ecological perspectives, the concept of ‘FDI communities’ was developed, and the legitimacy influences embodied in three FDI communities were examined. The results show that the number of same mode entries established in community I consistently promotes the entry of WOFSs. The number of joint ventures established in the same community, on the other hand, only promotes the entry of WOFSs in the early stage. The effect is attenuated later as the number of JVs passes a threshold beyond which competition effects dominate. The cumulative number of WOFSs already established coming from the same home country but different industries (community II) also encourages the entry rate of WOFSs, indicating a strong effect of home country-based legitimization for a foreign entry mode. In addition, when MNCs are differentiated by their home countries’ relative trade volumes with China, such trade-weighted entries had a positive relationship with the entry rate of WOFSs.

230 FDI Communities in China

The choice of the wholly-owned entry mode was explored at the population level in this study, which differs from previous studies treating the entry mode mainly as a firm-level strategic choice. The FDI community concept makes it possible to examine intra- and inter-community effects on the legitimization, addressing directly the ‘boundary specification problem’ that has limited the utility of many previous institutional studies (Laumann et al., 1989). The findings about inter-community legitimacy influences suggest the importance of examining these higher-level institutional processes in the FDI context. The results of this study thus provide additional empirical evidence to support Hannan et al.’s (1995) finding that institutional processes can exert influences in a broader social context. Finally, rather than assuming that all social actors are equal in conveying legitimacy, this study differentiated foreign investors in FDI community III by their home country’s relative trade status with China, and confirmed its positive effect on the legitimation of the wholly-owned entry mode. The refined model of industry-based legitimization demonstrates that legitimacy influences embodied in FDI community III are heterogeneous and contribute unequally to the emergence of a new foreign entry mode. This is then the first study to investigate the legitimation process of an entry mode in a host country and systematically examine the legitimacy influences emanating from different communities of foreign investors in the host country institutional environment.

Limitations and future research Weaknesses in this study provide several suggestions for future research. First, both the host-country environment and the MNC parent network are expected to exert legitimating pressure on foreign subsidiaries (Kostova and Zaheer, 1999). Future research is needed on how the legitimacy of the WOFS mode within the MNC parent network affects its adoption, particularly in comparison with alternative entry modes such as joint ventures. Second, our understanding of the legitimacy of the wholly-owned entry mode will benefit from exploring the influences of the regulative and normative domains, in addition to the cognitive domain that was the focus of this study. While the effects of government regulations and home-country trade volumes were controlled for here, more fine-grained measures of regulatory and normative influences are clearly needed in future studies (Scott, 1995). In summary, this study offers insights into the dynamics of FDI in a transitional economy. The core logic of the present study – a community perspective on the legitimization of a foreign entry mode – can be applied to a number of other related topics, such as the legitimation of FDI location choices, use of expatriate managers, and the diffusion of human-resource management practices. These should be examined in future studies.

Jiatao Li and Jing Yu Yang 231

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232 FDI Communities in China Hannan, M.T. and Freeman, J. (1989) Organizational Ecology (Cambridge, MA: Harvard University Press). Hannan, M.T., Carroll, G.R., Dundon, E.A. and Torres, J.C. (1995) ‘Organizational Evolution in a Multinational Context: Entries of Automobile Manufacturers in Belgium, Britain, France, Germany and Italy’, American Sociological Review, 60: 509–28. Haunschild, P.R. and Miner, A.S. (1997) ‘Models of Interorganizational Imitation: The Effects of Outcome Salience and Uncertainty’, Administrative Science Quarterly, 42: 472–500. Hausman, J.A., Hall, B.H. and Griliches, Z. (1984) ‘Econometric Models for Count Data with an Application to the Patents-RandD Relationship’, Econometrica, 52: 909–37. Henisz, W.J. and Delios, A. (2001) ‘Uncertainty, Imitation and Plant Location: Japanese Multinational Corporations, 1990–1996’, Administrative Science Quarterly, 46: 443–77. Hennart, J. and Larimo, J. (1998) ‘The Impact of Culture on the Strategy of Multinational Enterprises: Does National Origin Affect Ownership Decisions?’, Journal of International Business, 29: 515–38. Hennart, J. and Park, Y. (1994) ‘Location, Governance, and Strategic Determinants of Japanese Manufacturing Investment’, Strategic Management Journal, 15: 419–36. Hsiao, C. (1986) Analysis of Panel Data (New York: Cambridge University Press). Hybels, R.C. (1995) ‘On Legitimacy, Legitimation and Organizations: A Critical Review and Integrative Theoretical Model’, Best Paper Proceedings of the Academy of Management, 241–45. Johanson, J. and Vahlne, J. (1977) ‘The Internationalization Process of the Firm: A Model of Knowledge Development and Increasing Foreign Market Commitment’, Journal of International Business Studies, 18: 23–33. Kim, W.C. and Hwang, P. (1992) ‘Global Strategy and Multinationals Entry Mode Choice’, Journal of International Business Studies, 23: 29–53. Kogut, B. and Singh, H. (1988) ‘The Effect of National Culture on the Choice of Entry Mode’, Journal of International Business Studies, 19 (3): 411–32. Kostova, T. and Zaheer, S. (1999) ‘Organizational Legitimacy Under Conditions of Complexity’, Academy of Management Review, 24: 64–81. Laumann, E.O., Marsden, P.V. and Prensky, D. (1989) ‘The Boundary Specification Problem in Network Analysis’ in L.C. Freeman, D.R. White and A.K. Romny (eds), Research Methods in Social Network Analysis (Fairfax, VA: George Mason University Press), 61–87. Lee, K. and Pennings, J.M. (2002) ‘Mimicry and the Market: Adoption of a New Organizational Form’, Academy of Management Journal, 45: 144–62. Li, J.T. (1995) ‘Foreign Entry and Survival: Effects of Strategic Choices on Survival in International Markets’, Strategic Management Journal, 16: 333–52. Lu, J.W. (2002) ‘Intra- and Inter-Organizational Imitative Behavior: Institutional Influences on Japanese Firms’ Entry Mode Choice’, Journal of International Business Studies, 33: 19–37. Meyer, J. and Rowan, B. (1977) ‘Institutionalised Organizations: Formal Structures as Myth and Ceremony’, American Journal of Sociology, 83: 340–63. Meyer, J. and Scott, W.R. (1983) Organizational Environments: Ritual and Rationality (New York: Sage). Porac, J.F. and Rosa, J.A. (1996) ‘Rivarlry, Industry Models, and the Cognitive Embeddedness of the Comparable Firm’, in P. Shrivastava, A. Huff and J. Dutton (eds), Advances in Strategic Management (Greenwich, CT: JAI Press) 13: 363–88.

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12 The Changing Environment for Entrepreneurship Development: Private Business in the People’s Republic of China Harald Dolles*

The changing environment for entrepreneurship development After the foundation of the People’s Republic of China (PRC) in 1949, China’s existing market economy was gradually transformed into a socialist economy. To achieve rapid industrialization the first Five-Year Plan (1953–57) stressed the development of heavy industry on the Soviet model. In addition, the government began to collectivize agriculture and nationalized banking, industry and trade. Private enterprises were virtually abolished by 1958, and after ongoing brutal suppression during the Cultural Revolution from 1966–76, private business was close to extinction at the time when economic reform began. The 3rd Plenary Session of the 11th Central Committee of the Communist Party of China (CPC) in December 1978 made the strategic decision to shift the focus of the Party’s work to socialist modernization and formulated the basic national policies of reform and opening-up. Although the plenum itself made no specific announcements concerning private business, it signified the official adoption of economic modernization and growth as a paramount concern. It emphasized economic development and individual incentives, which gave impetus to the revival of private business (Liu and Wu, 1988). Small private businesses were expected by the Chinese government to provide the goods and services that had been neglected by the state, state-owned enterprises and collectives in the years before. Serious unemployment was one of the immediate issues that had to be tackled by

* This research was generously supported by a research grant from the Bavarian Network Area Studies (FORAREA) from 1998 to 2000 (no. F1C, ‘Entrepreneurship in the People’s Republic of China: Conditions and Manifestations’). My thanks also go to the entrepreneurs, managers and officials in China who provided the data on which this study is based. Without their cooperation, there would be no research findings to report.

234

Harald Dolles 235

the reformers. Opening the private sector to absorb the unemployed seemed to be a viable policy option at this time. The International Finance Corporation (2000) claims that the Chinese government took its first steps towards economic reforms without a welldefined strategy or a clear blueprint. Most of the reforms have evolved through cycles of unpublicized experimentation, followed by general approval ‘in principle’, then by ratification and specific regulations only after the reform in question had become well-established. Oftentimes, new regulations have been accompanied by rectification campaigns, which have set the private sector back in its development. Another notable feature of China’s approach to reform is its emphasis on gradual experimentation at the local and sectoral levels, as Gelb et al. (1993) and Harold (1992) point out. Reforms in the PRC have been implemented at first partially within sectors and limited to a certain city or province. In the case of revitalizing agriculture, some villages in the provinces of Anhui and Sichuan had to adopt a pilot household, called ‘contract responsibility system’. This political attempt to decollectivize agriculture linked farmers’ income to their output, rather than giving them equal salaries. This system was accepted in more and more places and by the end of 1984 it covered 98 per cent of China’s farmers. At the same time, with regard to entrepreneurship development, Wenzhou, on the coast of Zhejiang Province, was chosen in 1979 as the first city in the PRC in which private enterprises were allowed again. The reemergence of the private sector was and still is an experiment in itself for the CPC. It was initiated in the rural areas, where private enterprises began to boom. The only private businesses permitted by a 1981 set of State Council regulations were those operated by an individual or a family (called geti gongshang hu or getihu). A getihu is allowed to hire only one or two helpers and several apprentices. The total number of employees may not exceed seven. A small food stall or a street-corner retail shop operated solely by the owner are typical examples. Yet at the beginning of the 1980s, the task of restructuring the macro economy still had an experimental flavour. Main concerns at this time included all aspects of planning, investment, finance, taxation, pricing, material sources, commerce and foreign trade. At this stage of development, the 5th Plenary Session of the 5th National People’s Congress (NPC) in December 1982, adopted a completely revised Constitution of the People’s Republic of China. This constitution recognized for the first time the new economic structure in Article 11: The individual economy of urban and rural working people, operated within the limits prescribed by law, is a complement to the socialist public economy. The state protects the lawful rights and interests of the individual economy. The state guides, helps and supervises the individual economy by exercising administration.

236 Private Business in the PRC

The conspicuous silence on private enterprises called siying qiye, which also began to develop in China at the same time, may have stemmed from ideological considerations. This form of legal discrimination persisted until 1988 when the State Council promulgated regulations governing privately run enterprises. A siying qiye is defined as a profit-making entity that employs eight or more persons and in which assets are owned by private individuals. It may be a sole proprietorship, associated proprietorship, limited liability company or joint-stock company. This type of privately run enterprise is allowed to deal with and to set up joint ventures with foreign companies. Unlike getihu, which are concentrated in agriculture, the retail sector and catering services, most siying qiye engage in light industries and manufacturing. In this process of diversifying the ownership structure of China’s national economy, several creative forms of hybrid ownership, such as ‘town and village enterprises’ (TVEs) have emerged as well (for a comprehensive overview on TVEs, see for example Goodman, 2004; Rohde, 2001; Chen, 2000; Wong et al., 1995, Chang and Wang, 1994). In April 1988, the 1st Plenary Session of the 7th NPC amended the Constitution, introducing a new paragraph which reads: ‘The State permits the private sector of the economy to exist and develop within the limits prescribed by law.’ This amendment affirmed the legal status of the Chinese private sector (getihu and siying qiye),1 stating further that it complements the socialist economy. Deng Xiaoping’s inspection tour of south China in September 1992 was the next defining moment in China’s transition to market, when Deng was calling for continuing reform efforts. This was followed by the big ideological breakthrough when the 1st Plenary Session of the 8th NPC, in March 1993, amended the Constitution by declaring that China would practice a socialist market economy, with emphasis on a rule-based system and on the building of market-supporting institutions. (Article 15: ‘The state has put into practice a socialist market economy. The State strengthens formulating economic laws, improves macro adjustment and control and forbids according to law any units or individuals from interfering with the social economic order.’) The political situation, especially the CPC’s attitude towards private business in the PRC, improved continuously in the following years. In March 1999 the 2nd Plenary Session of the 9th NPC amended the living Constitution from 1982 for the third time by declaring that China would practise the rule of law, and also upgraded the private sector from ‘complement of the socialist economy’ to ‘an important component’ of the country’s market economy. This amendment is widely regarded as a milestone in revitalization of the private sector in the PRC, and since then an all-out effort to encourage private business has been promoted by the government. The private business sector was expected to take over unprofitable state-owned enterprises; absorb surplus workers and those dismissed by government agencies or state-owned companies that have shut down; provide goods and

Harald Dolles 237

services in competition with the state-owned and collective sectors; and last, but not least, pay taxes. At the CPC’s 80th anniversary celebration in July 2001, President Jiang Zemin declared that the party should formally accept private business owners (a full text of this speech can be found at http://www.china.org.cn/english/ features/35725.htm, last accessed 1 June 2005. The point was reinforced three weeks later by the announcement that Jiang Zemin would propose to the Central Committee a change in the party’s constitution to allow businessmen to join the party. To some extent this attempt was a recognition of reality by Jiang Zemin, as despite a 1989 ban some owners of private businesses were already party members. In September 2001, the 6th Plenary Session of the 15th Central Committee of the CPC agreed that promotion of economic development and restructuring should rely on structural and scientific innovation. The plenum also urged that the readjustment of the distribution and ownership structure of the state-owned economy should be promoted, and the healthy development of the self-employed and privately owned businesses, especially those in technically-oriented firms, be supported, encouraged and guided (source: http://www.china.org.cn/e-15/15–3-g/15–3-g-3.htm, last accessed 1 June 2005). During the meeting, Jiang Zemin was targeted for making his bold announcement which was apparently not confirmed before. Subsequently, the central secretariat, headed by Jiang Zemin’s heir-apparent Hu Jintao, decided to drop the open-door proposal from the business of the Central Committee plenary session. To save face for Jiang Zemin, as Xu (2001) writes, ‘it was agreed not to make an issue of his proposal, not even to debate its pros and cons. The plenary session thus simply ignored the proposal. It flopped, ipso facto, in the time-honoured Chinese way of defeating a major policy change.’ In his speech to the 1st Plenary Session of the 16th Central Committee of the CPC in November 2002, Jiang Zemin reports on the achievements in economic development: The socialist market economy has taken shape initially . . . Self-employed or private enterprises and other non-public sectors of the economy have developed fairly fast. The work of building up the market system has been in full swing. The macro-control system has improved constantly . . . Reform in finance, taxation, banking, distribution, housing, government institutions and other areas has continued to deepen. The open economy has developed swiftly . . . With its accession to the World Trade Organization (WTO), China has entered a new stage in its opening up. (http:// www.china.org.cn/english/features/49007.htm, last accessed 1 June 2005) At this session the expected and orderly turnover happened as Hu Jintao was elected as the new General Secretary of the CPC, whereas Jiang Zemin was reelected to be the Chairman of the Central Military Commission.

238 Private Business in the PRC

In March 2004, the 2nd Plenary Session of the 10th NPC amended the Constitution again and adopted an amendment of 14 articles (see all amendments at http://www.cecc.gov/pages/virtualAcad/rol/NPCApproveConstAmendChart.pdf, last accessed 1 June 2005). The Preamble to the Constitution now includes the ‘Three Representations’ (sange daibiao, ‘the CPC represents the most advanced mode of production, most advanced culture, and the interest of the majority of the people’) as the guideline in the national political and social life, reflecting Jiang Zemin’s personal contribution to Communist theory. Recognizing private-sector development as an integral element of economic advancement, further amendments were made to frame entrepreneurial activity in the PRC. So Article 11 of the Constitution was revised as follows: The State protects the lawful rights and interests of the non-public sectors of the economy such as the individual and private sectors of the economy. The State encourages, supports and guides the development of the nonpublic sectors of the economy and, in accordance with law, exercises supervision and control over the non-public sectors of the economy. Further amendments towards the needs of entrepreneurship development clearly states the position of private property in the Constitution and improved the system for the protection of private property. It is now provided that ‘Citizens’ lawful private property is inviolable’ and that the Chinese government ‘protects in accordance with law the rights of citizens to private property and to its inheritance’. A new paragraph was added to Article 14 of the Constitution which provides: ‘The State establishes and improves a social security system compatible with the level of economic development.’ While all amendments since 1982 share China’s successful economic transformation of the past 25 years at a similar rhetorical tone, the focus of the fourth amendment testifies that these constitutional revisions did indeed bring about long-lasting change. Especially the amendment to protect private property possesses the potential to positively influence China’s legal framework, economic development and social system further. As long as the necessary regulatory adjustments and accurate legal interpretations will be efficiently executed during the coming years, private-property protection will be another milestone in China’s ongoing development of private entrepreneurship. During this 25-year period, China’s private sector has grown dramatically in terms of both its total size and its relationship to total gross industrial output value. According to official sources for 2003, there were in total 26,532 million establishments with a workforce of 89,356 million people in the solely Chinese-owned private sector.1 Out of these, 3,006 million enterprises can be characterized as siying qiye, including 67,607 establishments with annual sales already exceeding five million yuan and accounting for a total of US$253,798.2 million (Rmb 2,098,023 million) in gross industrial

Harald Dolles 239

output value (Zhongguo Tongji Nianjian, 2004). China’s private (getihu and siying qiye) are found in primary industries (22 secondary industries (18 per cent), and tertiary industries (60 Economically strong regions in China along the coastline still largest portion of private enterprises (see Table 12.1).

businesses per cent), per cent). house the

Research sample and fieldwork methodology Fieldwork consisted of semi-structured personal in-depth interviews with 60 private entrepreneurs and with 40 representatives from different stakeholder groups. All interviews were conducted between 1998 and 2000, and Mandarin was used in most of them, which were transcribed and translated into German by Chinese natives. The method of a ‘qualitative content analysis’ as described by Mayring (1995) was used to analyse the transcribed interviews. In addition to the questionnaire, a fully standardized semantic personality inventory to discover the self-concept of the entrepreneur was developed.2 This personal inventory was also used to investigate how the entrepreneur is recognized by different groups of stakeholders. The 30 bipolar rating scales for 60 descriptive items were extracted from various studies concerning entrepreneurial values. They were tested in pilot studies to ensure the semantic equivalence of terms used in Mandarin and English and the correct use of the rating scales. This instrument was used at the end of the interview by asking the entrepreneurs to check one of the seven boxes in each of the 30 rows to indicate how much each of the descriptors characterizes them in their business lives. A positive acceptance of this instrument among the participants in China was found, as responses ranged across all seven of the possible ratings, and the option of crossing out items was rarely used. The data from this fully standardized semantic personality inventory was analysed using SPSS (Statistical Package for Social Sciences). In view of the size of the Chinese economy, it was not possible with limited resources to undertake a comprehensive representative survey. Therefore, in order to gain an explorative overview of how Chinese entrepreneurs work and feel about their environment, a rapid assessment approach in the fieldwork was adopted. First, specific locations in China were analysed that could yield usable information and analytical insights within a limited time frame (Beijing, Shanghai and Dalian). The research was then focused equally on only two regions – Shanghai and Dalian. Shanghai is well-known for its long tradition of being a financial and entrepreneurial centre of China, and it has long been familiar to foreign investors. Dalian, in the north of China on the tip of the Liaoning peninsula, has attracted lots of Korean and Japanese FDI, but is not popular among Western investors. Both cities are located on the coast, where we expected to find more mature private enterprises with experience in dealing with political uncertainty since the beginning of the 1980s.

240

Table 12.1 Development and distribution of privately run enterprises (siying qiye) by region Year

1991 1993 1997 2000 2003

Coast

Central

West

Enterprises (000s)

Employment (000s)

Enterprises (000s)

Employment (000s)

Enterprises (000s)

Employment (000s)

Total enterprises (000s)

Total employment (000s)

95.4 159.3 597.0 1,165.0 2,024.0

1,754.5 2,351.3 8,110.0 15,588.0 28,244.0

24.5 44.6 239.0 334.0 541.0

453.4 768.9 3,454.0 4,652.0 8,124.0

19.7 34.1 129.0 263.0 442.0

380.5 600.6 1,929.0 3,796.0 6,625.0

139.6 238.0 960.7 1,730.0 3,006.0

2,588.4 3,720.8 13,492.6 24,065.0 42,991.0

Note: Coast (Liaoning, Hebei, Beijing, Tianjin, Shandong, Jiangsu, Shanghai, Zhejiang, Fujian, Guangdong); Central (Heilongjiang, Jilin, Shanxi, Henan, Hubei, Anhui, Jiangxi, Hunan, Hainan, Guangxi); West (Inner Mongolia, Shaanxi, Ningxia, Gansu, Qinghai, Xinjiang, Tibet, Sichuan, Congqing, Guizhou, Yunnan). Source: Zhongguo Tongji Nianjian (1992, 1994, 1998, 2001, 2004).

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Second, the Chinese Chamber of Industry and Commerce in Shanghai was asked to introduce us to some of their member companies, that is, CEOs from the foreign subsidiaries of their domestic subcontractors or distribution partners, and local authorities for the regional development of potential trading partners. This sampling was difficult to apply, but a sample of privately run Chinese companies was also obtained, which tend to be larger, more mature private enterprises. Small firms with no more than seven employees (getihu) were excluded from the sampling because of their range of activities (catering, services, and so on) and the difficulties of obtaining accurate information on them. While not true entrepreneurs insofar as they were on a contracts system, managers of TVEs were also excluded in the survey. Third, out of the 60 in-depth interviews with Chinese entrepreneurs, 30 of them were handled by Chinese natives to avoid potential biases introduced by foreign interviewers (for example, the problem of loosing ‘face’ and the tendency towards positive self-assessment in the presence of foreigners). The Chinese interviewers were trained at seminars in Dalian and Shanghai. Firms for those interviews were selected by the Chinese interviewers and their privately held contacts. This sampling strategy enabled us to control for possible flaws in the subsample of firms we selected ourselves. Since any significant difference between the two subsamples was not found, the information given to us in the interviews might be considered to be accurate. The structure of the sample by industry and company size is summarized in Table 12.2. To explore the changing macroeconomic environment for entrepreneurship development, local experts were also interviewed. The stakeholder groups in the PRC included municipal commissions for private business (registration procedures for private entrepreneurs); employees of private enterprises (working conditions); labour unions (representation and influence in the private sector); banking houses (questions of financing); chambers of commerce and business (supporting policy towards private business); German companies (questions of supply); and state-owned enterprises (competition with the private sector). Table 12.2

Sample classified by industry and company size (N = 60)

Industry Primary industry Secondary industry Tertiary industry

1 (2%) 43 (71%) 16 (27%)

Size category (full-time employees 1998/1999) Microenterprises (up to 7 employees) Small enterprises (8 to 49 employees) Medium-sized enterprises (50 to 249 employees) Large enterprises (more than 250 employees) Not detectable

1 (1.7%) 13 (21.7%) 32 (53.3%) 9 (15.0%) 5 (8.3%)

242 Private Business in the PRC

Because of the limitations mentioned above, this survey can only be a preliminary analysis of private-sector development in the PRC. Although the full sample certainly offers insight into Chinese private enterprises, it is obvious that it does not reflect all the dimensions of the Chinese private sector. Further, the enterprises covered in the survey do not represent a true cross section of the domestic private sector. More extensive survey work could provide information of even greater value if extended to cover more enterprises, more locations and other segments of the private sector.

Empirical results Personality of entrepreneurs The moral characteristics and attitudes of entrepreneurs were assumed to influence the behaviour and development of their companies in various prior studies (Göbel and Frese, 1999; Brüderl et al., 1996; Bamberger, 1990). The entrepreneurs’ values with respect to, for example, change, risk, innovation and human relations are assumed to determine directly or indirectly their choice of objectives, strategies and policies. They may influence organizational structure as well as management systems and leadership style. Entrepreneurial values are assumed to have an effect on performance and are even considered to be essential factors in a company’s success or failure. In the research the personality of entrepreneurs is approached by using the semantic personality inventory. The analysis of the scaled judgements of personality characteristics shows that a number of descriptors were ranked between 2 (rather true) and 3 (absolutely true), and that these descriptors could be classified into three clusters. The first group describes the orientation towards entrepreneurial targets, descriptors such as ambitious (mean = 2.49, N = 55), active (2.39, N = 56), self-confident (2.39, N = 57) and independent (2.27, N = 56). In the interviews, this tendency is reflected by statements as the following: An entrepreneur continues despite all setbacks . . . If a private entrepreneur wants to be successful he must demonstrate a personality that is courageous – in all the troubles he encounters, he fears nothing, even if a knife is pointed at him, he shows no fear. He must also possess a resilient and strong personality. If he encounters trouble even if everything burns down in one day and nothing is left, he must be ready to start something new, that is the only way to be successful. The second group characterizes how the entrepreneur is likely to reach his goals. These descriptors include self-disciplined (mean = 2.25, N = 57), wellorganized (2.35, N = 55), not impulse ridden (2.30, N = 57), and patient (2.12, N = 56). In the interviews this attitude is demonstrated in statements such as

Harald Dolles 243

before I do something, I first have to think about it and investigate. Above all I want to think whether this is really what I want to do and if I have the ability to do it. If the investigation shows that there is a realistic possibility for action, we would go ahead with the plan. Essentially, as everything is previewed by me, we have never encountered major investment errors, trade conflicts or big changes in personnel. The third group of self-characterizations may be summarized as moderating variables that address the social commitment of entrepreneurial activities, with adjectives such as helpful (mean = 2.22, N = 55), fair (2.31, N = 55), modest (2.30, N = 56), selfless (2.33, N = 55), conscientious (2.56, N = 57), and affectionate (2.16, N = 56). In the interviews this attitude shows as follows: For example, we have completed and adapted the working rules which are however still unsatisfactory . . . I think that we, the private entrepreneurs, are not only focused on our own wealth, we are really aware of our social responsibility. Absolutely true 3

2

1

Partly both 0

Absolutely true 1

2

selfish skeptical unfair proud reserved uncooperative disorganized negligent changeable tricky people-oriented impatient impulse ridden prefer routine weak-willed analytical wait and see attitude doubtful avoid problems content passive conforming relaxed conventional excitable risk-averting modern self-pitying lenient loner

3 selfless believing fair modest affectionate helpful well organised conscientious stable steady task-oriented patient not impulse ridden prefer variety self-disciplined unanalytical decisive self-confident pursue problems ambitious active independent high-strung original calm risk-loving traditional self-satisfied severe joiner

Self-concept by Chinese private entrepreneurs (N = 57) Perception by stakeholder group ‘teachers and students’ (N = 90) Perception by stakeholder group ‘employees’ (N = 36)

Figure 12.1 Self-concept of Chinese entrepreneurs and their perceptions by teachers and students, and employees Note: Data organized to decreasing differences.

244 Private Business in the PRC

To estimate whether the given self-characterizations are biased by self-idealization, representatives of different groups of stakeholders were asked to describe their views of private entrepreneurs. The responses to the semantic personality inventory given in Figure 12.1 by the employees of private enterprises confirmed the self-description of the entrepreneurs. On the contrary, the comparison of self-description by the entrepreneurs and the perception of their personality by university students in economics revealed a negative attitude towards entrepreneurship in both locations. Particularly, the entrepreneur’s self-attributed social commitment to entrepreneurial activities is not confirmed by the judgement of university students. This perception of the Chinese entrepreneur is of great importance as the business students of today will probably become managers of tomorrow. Also, the decision whether to become entrepreneurs themselves will be influenced by this impression. The representatives of other stakeholder groups (local authorities, competitors) in Figure 12.2 painted a different picture of Chinese entrepreneurship as well. This holds especially in the second group (means of strategic use) and third Absolutely true 3

2

1

Partly both 0

1

2

Absolutely true 3 selfless not impulse ridden steady disorganized modest helpful believing fair affectionate persue problems unanalytical conscientious stable traditional self-disciplined original calm loner patient active independent ambitious prefer variety task-oriented decisive relaxed risk-averting severe self-pitying doubtful

selfish impulse ridden tricky well organised proud uncooperative skeptical unfair reserved avoid problems analytical negligent changeable modern weak-willed conventional excitable joiner impatient passive conforming content prefer routine people-oriented wait and see attitude high-strung risk-loving lenient self-satisfied self-confident

Self-concept by Chinese private entrepreneurs (N = 57) Perception by stakeholder group ‘local authorities’ (N = 10) Perception by stakeholder group ‘competitiors’ (N = 11)

Figure 12.2 Self-concept of Chinese entrepreneurs and their perceptions by local authorities and competitors Note: Data organized to decreasing differences.

Harald Dolles 245

group of self characterization (moderating personality variables), which could not be corroborated. These stakeholder groups confirmed, however, the characterization of an entrepreneur’s distinct target orientation. The comparison of self-perception and perception by local authorities and competitors reveals an ambiguous attitude towards entrepreneurship in China. In response to the question of their perception of the private entrepreneur, the interviewees from local authorities pointed out that one has to expect at least two different kinds of Chinese entrepreneurs: the first generation of entrepreneurs who are poorly educated, but well-informed about how to use legal gaps and how to seize the opportunities in a favourable market, versus the second generation with a good education and legal knowledge: One group of entrepreneurs, capable of making money, emerged in the first period after the reform and the opening of China. At that time many political guidelines had been insufficient. These entrepreneurs have a sharp mind and used these gaps in their favour. Within a short time they became rich. During the development of the economy and the completion of the legal system the market became more mature. There were fewer gaps. Then the second generation of private entrepreneurs emerged. They are mostly well educated, have technical skills and are smart. They have a good understanding of politics in China and abroad. By using their knowledge and their will to work hard they developed quite successful. This division also becomes apparent in the sample as about one-third of the interviewed entrepreneurs mention a politically-caused low school education. During the Cultural Revolution, all teaching activities in schools and universities were stopped and instead education through physical work in rural areas was increased. When I was young Mao Zedong let us to live and work in an agricultural production group and did not let us continue to learn . . . My wife and I only had education until the grammar school level.

Entrepreneurial motivation and objectives Various reasons can underlie the decision to establish an enterprise. On the one hand, entrepreneurship can initially be understood as a means towards the attainment of other objectives, particularly such considerations as gaining income, power and status. In this case it could be the result of a fundamentally positive attitude towards doing independent business forced by pull factors. On the other hand, entrepreneurship might be the result of unemployment, a lack of job opportunities or family tradition. These push factors reflect external influences on the decision to become an entrepreneur.

246 Private Business in the PRC

The entrepreneurs were asked about their reasons for ending their previous vocational activities and setting up their own companies (see Table 12.3). As explanations, mainly pull factors were given, including wishing to use and enlarge their own capabilities (41.7 per cent) and making profits and earning high income (33.3 per cent). Push factors were also mentioned, including changes in governmental policy towards private companies (15.0 per cent), dissatisfaction with former living conditions (18.3 per cent), or dissatisfaction with former working conditions (28.3 per cent). The latter argument reflects a lack of praise and sometimes even criticism for their work in state-owned enterprises (SOEs) as well as a decision to take the initiative to escape potential unemployment due to restructuring measurements. Research on the objectives for starting entrepreneurial firms distinguishes between personal objectives of the entrepreneur, and those for his business (Galais, 1998; Bamberger, 1990; Scheinberg and MacMillan, 1988). Figure 12.3 shows the degree of importance of various business objectives for the Chinese entrepreneurs in our sample. In further developing their businesses, the aims of the entrepreneurs are closely tied to their motivation. All entrepreneurs clearly name objectives for their businesses, which can be divided into three major groups. In line with the expectations is the fact that business expansion strategies (50 per cent), internationalization efforts (31.7 per cent), and improvement of market share (28.3 per cent) have the highest scores: this is a renewed expression of the rapid development of the private sector in China. Increasing turnover and realizing profits (28.3 per cent) is also featured among the most important personal motives. The second group of objectives focuses on business survival factors, thus reflecting the second stage after a period of fast development. These factors include consolidation strategy (26.7 per cent), product innovation (30 per cent), and higher quality (31.7 per cent). The third group of objectives is specific to the Chinese situation: compared to international standards, the level of production technology is still low and Table 12.3 Motivation of Chinese entrepreneurs (N = 60; percentages exceed 100 due to multiple responses) Pull factors

%

Using one’s own capabilities

41.7

Making profits and earning high income Realising market opportunities and needs Reaching personal independence Realising personal values and goals

33.3 25.0 8.3 6.0

Push factors Dissatisfaction with former working conditions Dissatisfaction with former living conditions Changes in economic policy Continuing family tradition

% 28.3 18.3 15.0 1.7

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Internationalization strategies

31.7%

30.0%

Product innovation

Realization of profit, increase in turnover

28.3%

Improvement in market share

28.3%

Consolidation efforts

26.7%

24% 25% 26% 27% 28% 29% 30% 31% 32% 33% Figure 12.3

Business objectives for Chinese entrepreneurs

Note: Selection. N = 60, multiple responses, 6 missing cases.

has to be improved (this was cited as a goal by 23.3 per cent of entrepreneurs). Another reported goal, sound liquidity and financial independence (6.7 per cent), stems from the fact that private businesses in the PRC, until recently, did not normally get loans from banks that are state controlled. From the perception of entrepreneurs, state-owned banks still offer loans more on the basis of political considerations than economic ones.

Business strategy and firms’ characteristics The choice of products and markets constitutes a major strategic decision for all firms. The entrepreneur determines his firm’s position in the market and the kind of business (or businesses) the firm wants to be in by his choice of business strategy. The characteristics of a firm’s products and markets influence the functional strategies as well as the organizational structure and management systems. Especially in entrepreneurial firms, decisions on products and markets are strongly interdependent with the competitive advantages and disadvantages of the firm. In this respect, the type of competitive advantage(s) the firm wants to develop or maintain is – according to the research of Bourgeois (1985) and Dess et al. (1997) – strongly related to the firm’s development strategies.

248 Private Business in the PRC

From the personal point of view, 61.7 per cent of the entrepreneurs interviewed cited product quality as the most important competitive advantage of their business (see Figure 12.4), while 53.3 per cent argue that their competitive advantage is due to their workforce which is highly motivated and achievement-oriented. This answer corresponds to the mode of social obligation as a moderating personality factor and leads to the question, what are the objectives of the entrepreneur as an employer? The quantitative aspects of the provision of employment come first in this regard: offering jobs and securing income for the workforce. Qualitative aspects of employment, that is regular vocational training, good working conditions and corporate culture, are ranked as less important. This attitude of Chinese entrepreneurs reflects the developmental stage of the Chinese economy again, in which the basic needs of the people are still not satisfied (for example, living conditions are often poor and health care inadequate). The survey confirms the widely held thesis that SMEs in transition economies are predominantly self-financed, and that retained earnings are

61.7%

Higher product quality

Competence of workers (highly motivated, achievement-oriented)

53.3%

33.3%

Increased flexibility of the firm

Better customer-oriented services

28.3%

Advanced management (decisionmaking process, business experience of the entrepreneur)

25.0%

0% Figure 12.4

10% 20% 30% 40% 50% 60% 70%

Competitive advantages of Chinese SMEs

Note: Selection. N = 60, multiple responses, 2 missing cases.

Harald Dolles 249

of high or very high importance in their financial structure. We also have to take into account that access to capital markets is still very difficult for private enterprises in China. It is not surprising that when it comes to corporate disadvantages financing problems in comparison to the state-owned and collective sector are cited first by Chinese entrepreneurs (28.3 per cent, see Figure 12.5). Second, one-quarter of the sample claim that they have difficulties in obtaining and retaining skilled workers, which they urgently need for further expansion. SOEs still have the reputation of offering greater job security and social benefits (that is, residence rights, housing, health and educational benefits). Even if private companies are willing to pay a higher wage than state firms, many university graduates do not want to work for a Chinese private enterprise. This finding confirms the negative perception of private entrepreneurship by university students in the semantic personality inventory. Third, 18.3 per cent of the Chinese entrepreneurs admit that their formal qualifications and managerial experience do not fully satisfy their companies’ needs; therefore they have to hire managers to bring in additional managerial or other specific skills. Reflecting economic uncertainties, the private enterprises investigated tend to recruit staff in an informal way, with an eye on reducing their risks by using an extensive trial period with less payment. This trial period may help entrepreneurs to identify qualified people, but on the other hand it discourages highly talented

Limited financial capability

28.3%

Narrowed distribution channels

11.7%

Competence of workers (less formal education, weak business skills)

25.0%

Obsolete production techniques and processes

11.7%

Management (less formal education, less advanced management systems) 0%

Figure 12.5

18.3%

5%

10%

15%

Competitive disadvantages of Chinese SMEs

Note: Selection. N = 60, multiple responses, 11 missing cases.

20%

25%

30%

250 Private Business in the PRC

people. Offers of lower wages and uncertain career prospects make it almost impossible to recruit qualified and talented people. The strategic orientation of private enterprises reveals that product quality is considered as the most important factor in getting a competitive advantage in the market; 43.3 per cent of the Chinese entrepreneurs in the sample attribute importance to it. Second, a strong orientation towards the firm’s customers, in terms of reliability of delivery and service performance (36.7 per cent), was found. ‘Cost-leadership strategies’ were named by 25 per cent of the firms, coming in third. The set of changes that smaller, younger firms need to make as they grow constitute the transition to more professional management, which is mainly characterized by delegation of decision-making responsibility and the use of formal control systems. When investigating the management of businesses, it was discovered that entrepreneurs spend most of their effort on marketing and sales activities. Attention is given second to planning, and third to managing tasks. These findings clearly indicate that the management structure of private enterprises in China is still developing, and rely on centralized decision-making and informal, personal control.

Business success Prior research in the fields of industrial organization, strategic management and entrepreneurship suggest that measures of business performance should be based on objective criteria and the growth rates of figures such as employment, capital, annual turnover and annual profit (Nöcker, 1999; Brüderl et al., 1996; Chandler and Hanks, 1993; Murphy et al., 1993; Venkatraman and Ramanujam, 1986; Bourgeois, 1980). However, other measures of performance – such as return on assets, return on equity and return on sales, as suggested by Robinson and McDougall (1998) – are also important indicators of business performance, but these are difficult to find since officially published company data are not available in the PRC. In addition to the first-mentioned measurements of business performance, more subjective criteria are used whereby success is measured as a function of entrepreneurs’ personal satisfaction with the development of their companies. The degree of entrepreneurs’ satisfaction with the development of their companies shows three nearly equal groups: 31.7 per cent of entrepreneurs claim that they are satisfied, 26.7 per cent are partly both, and 25 per cent are dissatisfied. This result is somewhat surprising because nearly all companies achieve positive performance according to the objective criteria surveyed. Asking the two latter groups of entrepreneurs about their dissatisfaction, they compare themselves with other successful private enterprises, they admit a lack of managerial skills, and argue with the general principle that a sense of satisfaction is bad for further business development. To measure the growth of the firms studied, two of the more traditional indicators were chosen: capital growth rate and the growth rate of employment.

Harald Dolles 251

The indicator ‘growth in number of employees’ shows an average rate of 81.4 per cent. The entrepreneurs who characterize themselves as not satisfied with their business development achieve an annual growth rate of 78.6 per cent, while those who are partly both (satisfied and dissatisfied) show a growth rate of 92.3 per cent. Those entrepreneurs who are satisfied achieve a growth rate of 75.1 per cent. The average rate of capital growth is 17.6 per cent, with an average starting capital of US$84,583 (R 761,250). Dividing this figure into the three groups mentioned above, the group of satisfied entrepreneurs achieve annual growth of 14 per cent; those who are partly both, an annual growth of 29.1 per cent; and those who are not satisfied, only 1.6 per cent.

Conclusions and implications In this chapter I have attempted to illuminate many hidden facets of economic reform in the PRC through direct observations of the decisions and practices of entrepreneurs as actors in the marketplace. This is the approach I took to explore the meaning of the broader political and institutional changes underlying entrepreneurship development in China. My reasoning has been that if we are truly to understand the meaning of broader institutional changes, we must examine the ways in which these institutional transformations have meaning for economic actors. Changes at the governmental level and in the legal, regulatory, financial, institutional and physical framework at the state level are important, but we can only begin to understand their true meaning by observing the ways they are adopted and employed by entrepreneurs. In the previous sections I have explored the practices and market activities adopted by entrepreneurs in an economy in transition. In general I have shown that the environment faced by Chinese entrepreneurs in the PRC has constrained them and demands different strategies towards their firms’ stakeholders (for example, employees, local authorities or customers). As for the employees, which one would like to encourage to commit to the company and motivate for top performance, it may be of value to show social commitment – for instance, providing small loans to search for a bride – and stability towards those rather than towards someone external to the company. This argument might be supported as China’s culture is built upon strong social ties and it clearly distinguishes between the interaction with members of the in-group (family, danwei; company, guanxi-network) and the interaction with the out-group (for example competitors, local authorities). The decision to set up one’s own business is heavily influenced by the broader political and institutional changes of the economy as it makes its transition. In analysing the personal goals involved with the new venture, a common chief aim was found to be making profits and earning high

252 Private Business in the PRC

income for the purpose of attaining a higher standard of living (for example, better housing conditions and healthcare). When the founding of a new venture is forced by the lack of other job opportunities the entrepreneur cannot cite a concrete aim for the further development of his enterprise. It can be assumed that as soon as such businessmen find better work, they will close their businesses. When entrepreneurs choose to stay in the market they aim to improve the quality of their products and to offer remarkable service to their customers. However, the main hindrance for further development is financial restrictions, reducing the growth rate to that made possible by predominantly self-financed investments. In general, the strategies and practices of the entrepreneurs still reflect economic uncertainty, leading to risk-spreading behaviour and investments in quick-return markets. As economic uncertainty is strongly related to administrative uncertainty and how reforms are enacted in economies in transition, we have examined the ways that entrepreneurs are experiencing reforms. Currently in the PRC, the government and the CPC are engaged in the project of constructing market institutions. WTO accession means an ‘open market’ and survival of the fittest. Even though there have been closures, the government and local opposition have hindered the process of shutting down all unprofitable enterprises. Several reforms, like the revision of taxes on farmers, the reorganization of the state welfare system, and the reform of SOEs have been delayed. A freeze by the government has been put on the sale of state shares on the stockmarket and on bankruptcies of the bigger SOEs. The reason is mainly the social consequences that would come with joblessness and the high cost of reforming the SOEs. Compared with private entrepreneurs, the SOEs are therefore still enjoying preferential treatment through government policies and regulations. It is not surprising, then, that in the survey 42 per cent of the entrepreneurs claim that there are still disadvantages when compared with SOEs. Even today, SOEs continue to enjoy greater access to raw materials, financial resources and rental real estate. Entrepreneurs in a rapidly changing economic environment need clear guidelines on establishment, growth, enforceable commercial arrangements and reorganizing or closing a business. The Chinese government has been enacting numerous laws in order to provide a regulatory framework in line with a new economic structure that includes a private sector. Nevertheless, as the entrepreneurs in our sample criticize the milieu, there is a long way to go; private enterprises must make their way through a minefield of complex and often contradictory rules and regulations (in our survey, 27.7 per cent made this complaint). On top of that, the vague and confused legal system offers many opportunities for local bureaucratic harassment in the form of collecting licence fees, charges, penalties and the like, from private business owners (31.7 per cent). Still, 30 per cent of the Chinese entrepreneurs in our sample fear that a change of political leaders at the top may cause drastic

Harald Dolles 253

policy shifts. There is still not much confidence by private entrepreneurs in the government’s promises of supporting the private sector in the PRC. Asking local authorities about the present situation and future development of private businesses in China, we learned that they see the situation as constantly improving, but they admit, it will take time to build up credibility. Promises are easy to make, but credible promises are another thing.

Notes 1. Getihu and siying qiye, not including Sino-foreign joint ventures, foreign subsidiaries, or economic units with funds from Hong Kong, Macao or Taiwan (Zhongguo Tongji Nianjian, 2004). 2. A full version of this instrument can be found in Dolles and Babo (2000, 2003).

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Index Notes: b = box; f = figure; n = note; t = table; bold = extended discussion or heading/ word emphasized in main text.

Aaron, C. 177 absorptive capacity 8, 176 ACP Electronic 186f acquis communautaire 33, 48 ADB 36n, 52 adjustment 2 IJVs 203, 205–12 ‘sine qua non for effective management of IJVs’ 204 technical and informational 1, 5, 28 Africa 98f, 98t, 102f AFTA 97, 99, 101, 105, 107–8, 109–11 age 62, 122, 122t, 123, 129(n5) agriculture 11, 44, 120, 234, 235, 236, 245 Ahmed, M.M., et al. (2003) 208, 213 Chung, K.Y. 213 Eichenseher, J.W. 213 Ahrne, G. 54, 69 Ahsan, M.B. 138, 150 airlines/airports 31, 46 Akamatsu, K. 90, 113 Åkerblom, S. 65, 70 Akerlof, G.A. 118, 130 Alcatel 189 Alesina, A. 65, 69 Alfa Romeo 77 Alkhafaji, A.F. 138, 149 Allard, S. 12 amakudari 67 Amazon Japan 82–3 AMD 80, 186f Amelio, W. 81 America Online 75 Anand, J. 224, 231 Anderson, E. 215, 231 Anhui province 235, 240n anti-globalization groups 92 APC 192 APEC 190 Araujo, L. 54, 70 Argentina 97, 98f, 98t Argyris, C. 54, 65, 66, 69

Arthur Andersen 60 ASEAN 4, 15, 76, 86, 89, 92, 96, 97, 101–6 car tariff regime 77–8 ‘historic dependence on natural products’ 31 intra-ASEAN trade 94, 113(n1) Japanese FDI 94 reasons for investment 157–8t Toyota production 111, 113(n12) see also Southeast Asia ASEAN-4 countries (Cambodia, Laos, Myanmar, Vietnam) 7, 175, 176(n10) ASEAN-4 countries (Indonesia, Malaysia, Philippines, Thailand) 101, 111 intra-regional trade 94t Toyota’s production (1996–2002) 103t ASEAN-5 countries (Indonesia, Malaysia, Philippines, Singapore, Thailand) 103, 104t Japanese FDI 92–3, 93t Toyota’s business activities 99, 99t ASEAN-5 countries (Cambodia, Malaysia, Singapore, Thailand, Vietnam): impact of FDI 6–8, 151–77 Cambodia 154–60, 162–4, 164t, 166, 170–1, 172t, 175, 176(n10) Malaysia 154–62, 164, 164t, 166–9, 171t, 171–3, 173–5t, 175–6, 176(n9) Singapore 154–8, 159t, 162–4, 164t, 166, 166t, 169, 171t, 171–3, 176(n8) Thailand 154–60, 162, 164, 164t, 166–9, 171t, 171–3, 173–5t, 175–6, 176(n9) Vietnam 154–61, 164–71, 172t, 175, 176(n2, n10) ASEAN Free Trade Agreement/Area (AFTA) 77, 95, 96

255

256 Index ASEAN Industrial Cooperation (AICO) scheme 101, 105, 107, 113(n5) approved applications 107t Toyota’s production network 108f ASEAN Plus Three Finance Ministers Meetings 95t Summits 95t Trade Ministers Meetings 95t ASEAN Secretariat 107n, 108n, 113(n1), 177 ASEAN trade facilitation initiatives 107–12, 113(n8–14) AFTA implementation 107–8 Chinese and ASEAN production 111, 113(n12) localization 109 planned investments/ disinvestments 108–9, 113(n9) proliferation of FTAs 111–12, 113(n13–14) regional production networks 109–11, 113(n10–11) ASEAN-China FTA (2004) 95t ASEAN-Japan meeting 95t Asia xii, 47, 76, 78, 79, 98f, 98t, 100, 162, 186, 194 patterns of connection and exchange 17 Asia: actors, logics, challenges 1, 15–32 Asia and its actors 28–31 challenges to understanding 19–24 clusters 16 context 21 dominant research paradigm (micro-studies) 20–1 handling of complexity 22–3 material and ideational components of explanation 20, 24f, 26 mechanics or biology 21 missing elements 22 model for explaining variety in capitalisms 24–6 social science (second-order nature) 21–2 strategic implications 27–8 ‘target moving so fast’ 16 themes 28 units of analysis 23–4 workings of business system 26–7 Asia-in-Japan’s-embrace 91 Asia-Pacific 100t Asia-Pacific Economic Cooperation (1994–) 95 Asian Bond Market Initiative 95t Asian business development: integration and responsiveness 1–12

Asia and its actors 28–31 conceptual framework 1, 15–32 corporations and governments (realignment with new realities) 1, 2–4, 8, 13–86 definition of how success or failure occurs 1, 4–8, 87–177 emerging multiplicity 1–12 findings 12 further research 10, 12 hypotheses 12 PRC’s industrialization surge (global redirection) 1, 8–12, 179–254 questions 8, 12, 16, 116, 118, 133, 181 themes 1, 21, 28 Asian ‘dragon’/‘tiger’ economies 31, 48, 51, 189 Asian financial crisis (1997–8) 2, 30, 33, 38, 40, 41, 47, 48, 51, 91, 92, 94, 95, 97 government-level meetings (1997–2001) 95t impact on Toyota 101–5, 113(n5–6) legacies 16 post-crisis transformation 89 associated proprietorship 10, 236 auditing 142b, 142f, 149 Auer, P. 117, 118, 130 Australia 76, 81, 104, 109–11, 129(n2), 155, 221 authoritarianism/totalitarianism 27, 48 authority 24f, 26 Auto Alliance Thailand 77 Auto Industry 183, 200 automation 9, 185, 197 automobile assembly 107, 195 automobile components 106t, 108–12, 113(n8, n13), 183, 199(n5), 200(n13) ‘car engine production’ 189 automobile industry/automotive industry 4, 8, 12, 18, 73, 93, 96, 107, 129(n2), 181, 182, 184 ‘climbing the value chain’ (PRC) 187 ‘largest manufacturing sector in world’ 76 market strategy and capability level (PRC 2002) 186f Thailand 72, 76–8 automobile/car manufacturers 3, 76, 93, 96, 97, 155, 182 Japanese 89–90, 113, 196 multinational 195, 199–200(n12) US 183

Index 257 automobiles/cars 38, 46 ‘Asian cars’ 99 ‘small trucks’ 3, 77 Automotive Emerging Market 105 Automotive Industry Development Policy (PRC, 2004) 183 Automotive Resources Asia 77 automotive sector 194, 195, 198–9 corporate strategy 4–5, 89–115 50–50 rule 189 industry dynamics 182–3, 199(n5–6) location structures (differences from infocom sector) 193–6, 199–200(n11–12) new policy (PRC, 2004) 189 ‘pillar industry’ (PRC) 183 Avalon model 111 Avensis model 111 Babo, M. 253(n2), 253 Bäck, M. 64, 66, 69 Bäckström, U. 61, 62 backward linkages 153, 154, 164–9, 176(n2) purchase of inputs 164, 164t, 165t supplier improvement 168t supplier partnership schemes 166–8, 174t, 176(n2) ‘bad assets’ 3, 53 bad debts 40, 58 bad loans 29 balanced budgets 49 Balassa, B. 48, 52 Balassa–Samuelson effect 48, 51 Bamberger, I. 242, 245, 253 Bangkok 76–7 Bank of China 18, 29 Bank of Japan 65 Bank of Korea 36n, 52 Bank Support Authority (Sweden), 58, 60, 62, 64, 67, 68 banking 25, 29, 41, 55, 56–7, 234, 241 bankruptcy 39, 47, 57, 252 banks 3, 40, 60, 66, 67, 81, 247 nationalized 67 public supervision of management (Sweden) 67 bargaining power 143, 212 Barkema, H.G. 215, 220, 231 Baron, H. 214 Bartlett, C.A. 73, 83, 85, 202, 204, 213 Baum, J.A.C. 217, 220, 225, 231 Baumol, W.J. 253 Bavarian Network Area Studies (FORAREA) 234n Becker, G.S. 130

Beeson, M. 92, 115 Beijing 194, 197, 239, 240n Beijing Capitel Nokia Mobile Telecommunications (‘Beijing Nokia’) 194 belief 15, 20, 84, 138 Benchmark Definition of FDI (OECD, 1999) 120 Bennett, C.J. 59, 69 Bernard, M. 89, 91, 113 best practice 2, 154, 169, 199–200(n12) Biggart, N.W. 20, 31 Bildt, C. 61 biodiversity 132 biotechnology 46 Singapore hub 31 Blomström, M. 117, 118, 120, 130 BMW 77 Bocholt 196 Bogor Declaration (1994) 95 bonded factories/warehouses 44 Boolean algebra 23 Booz Allen Hamilton 184, 200 Borrus, M., et al. (2001) 185, 200 Ernst, D. 200 Haggart, S. 200 Boston Consulting Group 183, 201 boundary specification problem 221, 230 bounded rationality 217, 219 Bourgeois, L.J. 247, 250, 253 brain-drain 144 Brand-to-Brand Complementarity (BBC) 101, 105, 107, 113(n5) brand recognition 117, 121 brands xii, 17, 79, 117, 121, 140, 160, 186, 208 global standardization 83 integrated global marketing 82 luxury goods 80 Brazil 187 Brennan, R. 203, 213 Breslin, S. 113 bribery 205 Bronfenbrenner, M. 119, 129(n3), 130 Brotherhood of St Laurence 81 Brüderl, J., et al. (1996) 242, 250, 253 Preisendörfer, P. 253 Ziegler, R. 253 Brunei 101n, 105 bubble economy 182 Sweden 54–6, 57 Japan 66 Buckley, P. 215, 231 budget deficits 43, 47, 48 bureaucratic choice theory 59

258 Index Burgoyne, J. 54, 70 business 133 cross-border 83 global 83 international patterns 17 international scene 18 private (PRC) 10–11, 234–54 sustainable 135–6, 141, 147, 148 business consultants 73 business contacts 158t, 158 business development x, 12, 250, 251 business discipline 8, 17 business leaders 40 business news 74–5 business opportunities 149 business practices 117 business press 76 business strategy 72, 247–50 global 188 international 6 business success 250–1 business systems 22, 25 across boundaries of nation-states 23 workings 26–7 business theory 28 Business Times 92, 113–14 buyer–supplier relationships 203 cabinet (Sweden) 61 ‘Californization’ (teenage society) 72 Calvin Klein 82 Cambodia 7, 154–60, 162–4, 164t, 166, 170–1, 172t, 175, 176(n10) Camry 99, 106, 106t, 113(n7) Cancún (2003) 92 capabilities 154, 167, 168, 181, 196, 197, 199, 246 capability development 184–9, 199(n7–9) infocom and automotive companies (PRC, 2002) 186f technological 185, 199(n7) capability theory 215 capacity utilization 39, 40 capital 8, 17, 18, 24f, 25–6, 28, 41, 45, 105, 250, 251 cheap subsidized 46 foreign 37 free mobility 49 Japanese 91 monopolistic or oligopolistic control 18 capital allocation 16, 17, 25–6, 27, 28, 29, 30 capital goods 35, 36, 43, 82 imports 37, 47

capital inflow 47 capital markets 249 capital movement 9 capitalism 20 model for explaining variety 24–6 variety 2 Capitel Group 194 Carney, M. 20, 31 Carroll, G.R. 216, 219, 223, 231, 232 Casson, M. 215, 231 catering 11, 236, 241 Caves, R.E. 215, 221, 224, 231 Cavusgil, S.T. 214 Cazes, S. 117, 118, 130 CBU (Completely Built-Up) products 105t, 112 reverse imports 111 cement companies 29 central government 183, 195, 196 Centre Party (Sweden), 62t centres of competence 187, 188 chaebol 17, 30, 39, 40–1, 46–7 concentration of ownership 41 Chandler, G.N. 250, 253 Chang, C. 236, 253 Chang, H.J. 35–7, 39, 52 Chang, S.J. 215, 220, 231 Changchun 187 Chartered Semiconductor (Singapore) 80 Cheesman, B. 85 Chefstjänstemän (top officials) 61 chemical industries 39–40, 50 Chen, C. 131 Chen, H. 236, 253 Cheung, T. 213 Chi square statistics 226, 228t Chiang Mai Initiative 95t Chiba prefecture 122 Child, J. 19–20, 31 Child, J., et al. (1994) 203, 213 Cheung, T. 213 Markoczy, L. 213 China (People’s Republic of China; PRC) xi, 1, 2, 3, 6, 8–11, 15, 16–17, 18, 22, 25, 27–31, 42, 74, 76, 89, 91–2, 96, 100, 101n, 103, 109, 112t, 113(n10), 134 approach to reform 235 automotive policy 199(n8) business guide (2002) 190, 199(n10) computer industry 72, 78–81 ‘core difficulty’ 29 economic development (sustainability) 9 emergence on to world stage 17

Index 259 emigration (C19) 10 FDI (inward) 8–10 FDI communities and legitimation of WOFSs 10, 215–33 German firms (local responsiveness in IJVs) 9–10, 202–14 gross industrial output 239 industrialization 10 integration into global economy 81 internet 75 investment by Toyota 105–6, 113(n7) Japanese FDI 92–3, 93t, 94 optical frame industry 72, 81–2 ‘political disturbances’ (1989) 225 rate of development (sustainability) 199 readjustment challenges 28–9 rise 92–3 state-led economic modernization 189–90 Toyota headquarters (prospective) 113(n4) Toyota production 111, 113(n12) Toyota’s business activities 99, 99t ‘will become largest auto market’ 182 see also Overseas Chinese China: Central Military Commission 237 China: changing role in industrial value chains 8–9, 181–201 chapter structure 182 conclusions 198–9 empirical research 182 industrial parks (relevance) 189–93, 199(n10) industry dynamics (automotive versus infocom industries) 182–4, 199(n5–6) location structures (automotive versus infocom industries) 193–6, 199–200(n11–12) performance differences (PRC versus European) 198t points at issue 181 requirements for capability development and infrastructure 184–96, 199–200(n7–12) reverberations on industrial actors in Germany 196–8, 200(n13) China: coastal regions 189, 239, 240t China: Constitution (1982–) amendments (1993): 236 amendments (1999): 236 amendments (2004): 238 Article 11: 235

Article 11 (2004 amendment) 238 Article 14 (2004 amendment) 238 Article 15 (1993 amendment) 236 Preamble (2004) 238 China: industrialization surge (global redirection of capital, labour, technology) 1, 8–12, 179–254 changing environment for entrepreneurship development: private business in PRC 10–11, 234–54 German firms: local responsiveness in IJVs in PRC 9–10, 202–14 FDI communities and legitimation of WOFSs in PRC 10, 215–33 PRC’s changing role in industrial value chains (reverberations on Germany) 8–9, 181–201 China: Ministry of Foreign Trade and Economic Cooperation (MOFTEC) 190, 223 China: Ministry of Science and Technology (MOST) 182, 190, 201 China Daily 92 China Economic Information Network (data source) 184, 200 China External Trade Association (CETRA) 43 China Industry Development Report 184 China Industry Development Report on Auto Industry (2003) 182 China Internet Information Centre 190, 191, 200 China Knowledge Press 190, 199(n10), 200 China Statistical Yearbook 223, 231, 240n, 254 ‘China threat’ 105 China-ASEAN FTA (2004) 93 China’s Top Hundred Companies across Industries (1996) 223, 231 Chinese Chamber of Industry and Commerce (Shanghai) 241 Chinese characters [calligraphy] 79 choice 7, 176 Christian civilization 15 Christian Democrat Party (Sweden) 62t Chulalongkorn, King 26 Chun Doo Hwan, President 40–1 Chung, K.Y. 213 Cipriani, R. 149 Citicorp 18 ‘Civic’ (passenger car) 77 ‘civil corporation’ 133 civil society 27

260 Index civilization 22 CKD packs 108f Clark, T. 203, 213 climate 15, 132 clothing/apparel 38, 43, 44 clusters firms 73 industrial 193, 194 local-manufacturing 80 Porter-style 76 production 109 R&D firms 195 codes of conduct 134 ‘co-evolution theory’ 20 cognitive domain 230 cognitive legitimacy 219 cognitive structures 217 Cohen, M.D. 54, 69 collective sector 237, 249 collective sense-making 221 collectivization 234 colonialism 42 communication/s 45, 62, 137, 145, 184 ‘Chinese way’ 205 electronic 74 horizontal and vertical 193 top-down 30 communication capacity Swedish policy-making system 62–4 Communist Party of China (CPC) 29, 235, 252 businessmen members 237 control of policy-execution 22 11th Central Committee: 3rd Plenary Session (1978) 234 15th Central Committee: 6th Plenary Session (2001) 237 16th Central Committee: 1st Plenary Session (2002) 237 80th anniversary celebration (2001) 237 communist theory 238 community development 142b, 142f, 147 community ecology 220 companies/firms 4, 15, 16, 58, 60, 63, 74, 83, 84, 147, 173, 187, 200(n13), 240t, 246 affiliates 162, 164, 164t, 165t, 189 Asian xii, 1, 28 characteristics 247–50 Chinese 2, 30, 186f, 198, 241 divisionalized 25 domestic 5, 122t, 123–8, 144 eight largest (PRC) 224 European 121

family-owned 17, 25, 28, 31, 82 FDI impact on ASEAN economies 155–60 financial 57, 67 foreign 1, 5, 6, 7, 28, 38, 45, 78, 90, 116, 117, 120–1, 122–9, 144, 151, 160, 164, 166, 167, 169, 170, 176(n2–3), 182, 191, 192, 198, 202, 205–6, 207, 208, 236 foreign (differences from IJV partners) 9–10 foreign affiliates 118, 121 foreign-invested 80 foreign-owned 5 German 186f, 241 global 18, 84 globalization 73 indigenous 6, 151, 154, 164–5, 167 industrial 197 inefficient 39 institutional view 133 international 186 Japanese 30, 121, 186f joint-stock 10, 236 limited liability 10, 236 liquidation 39, 48 local 7–8, 45, 90, 116, 117, 118, 146, 170, 176, 176(n4), 220 locally owned 170 locational and organizational theories 90 maladjustment to environment (consequences) 202 manufacturing 6, 7–8, 153, 176(n3), 199 new 46 non-affiliated 164, 164t, 164n, 165t Nordic 62 parent 152f, 153f, 154, 158, 161–3, 171, 220 private 229 small 241 Taiwanese 47, 192 US 62, 121, 122, 186f Western 118 see also subsidiary companies company characteristics (impact of FDI on ASEAN economies) 155–60 country of origin 156t date firm started operations 156t host country 156t, 157t mean ownership share 156t number of companies owned by foreign parent in host country, 157t scale of activity by host country and industry 159t

Index 261 company size 159t, 160, 171–2, 241t Compaq 78, 80 comparative advantage 19, 39, 44, 90, 91, 106 competence centres 189, 196 competition 2, 3, 30, 33, 37, 48, 57, 77–8, 184, 196, 220 ‘excessive’ 39 global 85 intensification 84, 85 international 39 ‘competition over meaning’ 22 competitive advantage 9, 79, 132, 133, 140, 141, 199, 204, 207, 208, 211, 247, 248, 248f, 250 sustainable 5, 139, 147–8 competitive disadvantage 249, 249f competitive intensity 28, 30 competitiveness 40, 49, 50, 152f, 154, 166, 176, 176(n4), 183, 196, 197, 198, 210 industrial 31, 34 relative 48 competitors 19, 30, 67, 79, 135, 139, 141b, 142f, 143, 152f, 154, 155, 170, 175t, 194, 197, 204, 244, 244f, 245 local (effect of FDI) 170, 176(n4) low-wage 46 complexity 11, 21, 26, 27 handling 22–3 compliance 146–7 component suppliers 193 components 18, 82, 164, 167, 185, 187, 194, 195 core 199 low-technology 187 computer literacy 124–5, 126 computer programming 124 computer science 46 computers 38, 75, 81, 185 desktop 184, 193 ‘notebooks’ 78 PRC 72, 78–81 ‘conception of control’ (Fligstein) 20 confidentiality 4, 81 conformance quality 197 conformity 137 conformity (thought style) 145 Confucianism 27 conglomerates 174t, 175t consensus 30, 63 consolidation efforts 246, 247f constituents 136t, 138–43 constructing market institutions 252 consultancy fees 67 consultancy firms 60–1

consumer electronics 44, 73, 75, 156t, 157n, 159t, 160t, 160–70, 171t, 174t consumer goods 36, 164 globalization (Levitt-style) 84 consumer market 92 consumers 1, 72, 144 consumption 152f, 174t consumption goods 175t consumption multiplier effect 153 consumption multipliers 174t, 175t, 175 context 21, 22, 23 macro 4 micro 4 organizational 59, 62–4 social 134 contingency theory 202 contract manufacturers 185, 187, 193, 194, 195 ‘contract responsibility system’ 235 ‘controlling’ 209f, 210f, 210 Cooper, R.N. 50, 52 Corolla 99 Corolla Altis 99 corporate assets 132 corporate culture 248 corporate governance 188 corporate social responsibility (CSR) 5–6, 81, 132, 138, 139–41 stakeholder-specific matching strategy (examples) 146–8 corporate social responsibility (CSR): groups competitors 141b, 142f customers and distributors 142b, 141b, 142f, 146, 148 employees 141b, 142f, 144–9 government authorities 141b, 142f, 146–8 local community 141b, 142b, 142f, 146–8 media and general public 141b, 142b, 142f, 144, 147–9 professional organizations 141b, 142b, 142f, 147–9 shareholders 141b, 142f stock analysts 141b, 142f, 146, 148 suppliers 141b, 142b, 142f, 148 corporate social responsibility (CSR): key issues auditing and reporting 142b, 142f community development 142b, 142f creation of employment opportunities 142b, 142f customer development 142b, 142f

262 Index corporate social responsibility (CSR): key issues – continued education, training, personal development 142b, 142f employees’ family benefits 142b, 142f environmental care 141b, 142f supplier development 142b, 142f technology transfer and market development 142b, 142f working conditions 142b, 142f corporate social responsibility (CSR) matrix 141–2b, 143, 146, 148 corporate social responsibility (CSR) view 133–4 corporate strategy 215 automotive sector 4–5, 89–115 micro-level examination 91 Toyota Motor Corporation 96–106 corporations 28, 76, 183 foreign 12 global 182 realignment to new realities 1 corporations and governments (realignment with new realities) 1, 2–4, 8, 13–86 Asia: actors, logics, challenges 1, 15–32 export-led growth in East Asia (lessons for Europe’s transition economies) 1, 33–52 globalization: ‘Levitt emphasized markets but manufacturing leads way’ 2–3, 72–86 organizational learning (Sweden and Japan) 1–2, 53–71 corruption 29, 40, 41, 48, 50 cost advantages 148, 184, 187 cost-cutting 198 cost-efficiency 140 cost focus (thought style) 145–6, 149 ‘cost-leadership strategies’ 250 cost pressures 74 costs 105, 196 lower 79 countries high-wage 9, 199 low-cost/low-wage 76, 197, 199(n6) Covin, J.G. 253 creation of employment opportunities 142b, 142f credit 35, 37, 43 cheap 39 informal 46 state-controlled 41 subsidized 46

credit allocation 35 credit cards 81, 83 credit market 51 Credit Suisse First Boston 60 cross-border linkages 4, 78, 80 CSGR Working Paper No 80/01 (2001) 114 cultural differences 208 cultural distance 10, 210, 211, 212 cultural information theory 20 Cultural Revolution 234, 245 cultural theory 19–20 culture 2, 19, 22–7, 84 foreign 189 organizational 62, 65 Western 20 currency 51 hedging 58 overvalued 43 currency boards 51 customer development 142b, 142f customer orientation 250 customer preferences 117, 222 customer service 79, 248f, 250, 252 customer value 141, 145 customers 6, 79, 143–4, 146–7, 167, 205, 251 final 82 industrial 158t, 159 satisfied 136 customers and distributors 142b, 141b, 142f, 146, 148 customs restrictions 191 Cyberport (HK) 31 Daewoo 77 Daft, R.L. 64, 69 Dagens Industri 64, 70 Daimler-Chrysler 197 Dalian 239, 241 danwei (family) 251 Das, D. 114 data limitations 3–4, 81, 82, 118, 121, 189–90, 220–1, 241, 242 databases 6, 11, 192, 223 dealerships 108 Debresson, C., et al. (2003) 189, 200 Mohnen, P. 200 Shiquin, X. 200 Wei, X. 200 debt 41, 55f domestic 49 foreign 49, 58 decentralization (PRC) 28, 29 definition of how success or failure occurs is changing in face of

Index 263 surrounding technical and informational adjustments 1, 4–8, 87–177 FDI: impact on ASEAN economies 6–8, 151–77 foreign ownership, human capital and earnings in Japanese labour market 5, 116–31 gaining societal advantages in emerging markets 5–6, 132–50 international stakeholder management in Malaysia 5–6, 132–50 Japanese FDI and transformation of East Asian political economy: corporate strategy in automotive sector 4–5, 89–115 Delbridge, R. 20, 31 Delios, A. 215, 219, 221, 222, 232 Dell 79, 81 demand 181 domestic 111 world 2, 30 Demir, R. 12 democracy 30, 41 ‘democratic corporatism’ (Katzenstein) 63 Democratic Liberal Party (Korea, 1990–) 41 demonstration effects 152f, 154, 170, 174t Deng reforms 16 Deng Xiao Ping (Deng Xiaoping) 16, 27 ‘crossing river feeling stones’ 18 inspection tour of south China (1992) 236 Dent, C. 113(n2), 114 Deposit Guarantee Commission (Sweden) 58 depreciation schemes 35, 37, 39 design 31, 76 desktop (computers) 78 Dess, G.G., et al. (1997) 247, 253 Covin, J.G. 253 Lumpkin, G.T. 253 ‘Detroit of East’ (near Bangkok) 76–7 devaluation 47, 51, 55 developed countries 10, 116, 212, 229 ‘advanced economies’ 90 ‘industrialized economies’ 118 ‘OECD countries’ 33, 118, 119 ‘Western countries’ 1, 11, 79, 188 developing countries 40, 90, 116, 117, 144, 176 development 16, 173, 175 sustainable 33, 137

developmental history 16 developmental state 40 differentiating price 140 digital revolution 18 DiMaggio, P. 19, 20, 31, 32, 218, 222, 231 disinvestments (Toyota) 108–9 Disney 82 distribution/distributors 6, 79, 84, 143, 152f, 153, 162, 174t, 175t, 241, 249f divestiture 53 division of labour 8, 89, 162–3 Dixon, N.M. 59–60, 64, 67, 68–9 DKNY 82 Doha (2001) 92 Dolles, H. xiii, 10–11, 253(n2), 253 Dolowitz, D. 59, 69 Dongguan 82, 193, 199(n11) double-loop learning theory (Argyris) 66 Dow Jones Sustainability Index 147 Doz, Y. 73, 85 Dundon, E.A. 232 Dunning, J.H. x, 76, 80, 85, 90, 114, 225, 231 ‘eclectic’ theorist 73 DVD players 184 DVD-ROM drives 184 Dyna 99 Dziobek, C. 53, 70 earnings 117 association with tenure 5 firm-size effects 5 retained 29, 248 earnings premium 125–6, 129(n7) East Asia 2, 11, 94t, 141, 160t, 161t, 162, 187, 196 export-led growth Asia (lessons for Europe’s transition economies) 1, 33–47, 47–52 ‘Far East’ 76 intra-regional trade 94t Japanese FDI 94 regionalism 89, 95, 113 regionalism (new, second-wave) 95 East Asian political economy Japanese FDI and transformation of 4–5, 89–115 responses to Asian financial crisis 92 rise of China 92–3 stalled multilateralism 92 transformation 91–3 Easterby-Smith, M. 54, 70 Eastern Seaboard Industrial Estate (Thailand) 76–7

264 Index ‘eclectic paradigm’ (Dunning) 90 ‘eclectic’ theorist 73 econometrics 116 economic autonomy 7, 176 economic biology 21 economic conditions 54 ‘economic culture’ 19 economic development 89, 191, 234 economic growth 2, 7, 16, 41, 42, 42t, 47, 49, 52, 175 long-term experiences 33 South Korea 36t, 36 strong relation with export orientation 34 economic growth rates 46, 94 economic integration 92 individual countries/world economy 73 single industry 73 economic liberalization 46 economic mechanics 21 Economic and Monetary Union (EMU) 48 economic partnerships 95–6 economic reform 234, 235 economic stability 157t, 159 economics (neo-classical) 19 economies of location 204 economies of scale 37, 40, 44, 97, 140, 204 Economist, The 52, 79, 85 economists 11, 20 economy host-country 7 international/regional 7 education 26, 33, 35, 48, 50, 52, 133, 140, 141–2b, 142f, 145, 174t, 196, 249 ‘schools’ 192 educational attainment 122–4, 126, 126t, 170, 171t, 176(n5), 193, 245 efficiency 27, 30, 37–9, 198t managerial 18 ‘efficiency wages’ 117 Eichenseher, J.W. 213 Einhorn, B. 75, 81, 85 Eisenstadt, S.N. 22, 31 Elahee, M.N., et al. (2002) 208, 213 Kirby, S.L. 213 Nasif, E. 213 electric and electronics 156t, 157n, 159t-161t, 162–8, 171t electricity 37, 45 Electrolux 75 electronic components 44, 183 electronic and electrical appliances 45

electronic manufacturing service (EMS) 185, 193 electronics 38–9, 80, 83, 161, 170–2, 193, 197, 200(n13) global production 183–4 Eleventh September (2001) 92 ‘embedding’ 181, 182 emergence 26, 27, 28 emerging markets 16 gaining societal advantages 5–6, 132–50 international stakeholder management in Malaysia 5–6, 132–50 Emerging Research Frontiers conference (2003) 21 empiricism FDI impact 6 firm-level globalization 73 foreign ownership, human capital, earnings (Japan) 116, 122 IJVs (responsiveness to inter-firm differences) 9 impact of FDI on ASEAN economies 160–3 industrial value chains 182 inter-firm differences in IJVs 202 inter-firm mobility 119 international stakeholder management 134 legitimation of WOFSs 216, 230 perception of inter-firm differences (IJVs) 208, 213(n1) PRC’s changing role in industrial value chains and reverberations on industrial actors in Germany 8–9 wage premium 118, 129(n1) wholly-owned foreign subsidiaries 10 employee focus (thought style) 145, 149 employees 6, 25, 133, 141b, 142f, 144–9, 159t, 172, 235, 243f, 244, 251 employees’ family benefits 142b, 142f employers 121, 123, 127, 144 employment 5, 6, 30, 109, 120, 121, 129, 147, 151, 153, 154, 160, 173, 173t, 174t, 192, 196–7, 203, 238–9, 240t, 248, 250 industrial 44 employment security 117, 249 Employment Status Survey (Japan 1995) 129(n5) employment-generation 7, 170, 175 empowerment 145, 149 engineering 31, 46, 186, 188, 200(n13)

Index 265 engineers 171, 172 Englund, P. 58, 70 entrepreneurs 11, 17, 252, 253 first-generation 245 motivation and objectives 245–7 objectives as employers 248 personality 242–5 second-generation 245 entrepreneurship 8, 10, 17, 33, 49 pull/push factors 245–6 entry mode legitimacy 216, 219 environment 20 business/corporate 80, 133, 135, 139, 252 entrepreneurship/private business (PRC) 10–11, 234–54 IJVs 208 institutional 132, 137, 217, 222, 230 macroeconomic 47, 241 natural 148 organizational 27, 60, 69 physical 139, 166 political and economic 219 social 148 working 149 environmental care 141b, 142f, 146–7 environmental protection 133, 136 environmental standards 144 environmental technology industries 46 environmentalism 22 equality 65 Equality–Hierarchy scale (Trompenaars and Hampden-Turner) 65 equipment 151, 163, 191 Ericsson 194 Ernst, D. 199(n7), 200 Esprit 82 Estonia 49 ethics 132, 134, 208 Euro-Asia Management Studies (EAMSA) Stockholm conference (2003) 1, 215n Europe 15, 55, 57, 77, 79, 97, 98f, 98t, 101, 101t, 102f, 108, 109, 111, 156t, 160–3, 165t, 166, 166t, 168, 171t, 171, 172, 187, 194 Central x, 33, 48 Eastern x, 33, 48, 196, 197 Southern 74–5 Western 133, 141, 160, 195 European Single Market (1992) 49, 51, 95

European transition economies 2 export-led growth (lessons from East Asia) 1, 33–47, 47–52 European Union 33, 48, 49, 53, 82, 93, 94, 196 internal market 196 intra-regional trade 94t European Union: Social Charter 51 Evirgen, C. 214 evolution 26, 27 evolution theory 202 Exchange Rate Mechanism (ERM) 57 exchange rates 47 multiple 43 nominal 48, 49, 51, 52 real 37 stability 51 export bases 187, 188, 194 export credits 50 export financing 52 export growth South Korea 36t, 36 sustainable rates 51 export guarantee 50 export incentives 47 export insurance 43, 50, 52 export markets 17 export orientation strong relation with economic growth 34 export performance 47–8 regulations, incentives, interventions 35 export processing/promotion zones (EPZs) 38, 44, 191 export promotion 2, 48, 49 EU regulations 51–2 microeconomic measures 50 South Korea 36–41 strict discipline in administration of supports 50 successful episodes (common features), 47–8 Taiwan 43–7 export revenues 35, 36 export-led growth (East Asia) 1, 33–52 catching up (key challenge) 33 chapter focus 34 Korea (1950s–1980s) 34–6 Korean export promotion 36–41 lessons for Europe’s transition economies 33, 34, 47–52 Taiwan (1950s–1980s) 41–3 Taiwanese export promotion policy 43–7 export-led growth (Sweden) 55

266 Index exports 38, 80, 91, 92, 94n, 94, 97, 98f, 98t, 104–6, 108, 113(n7), 174t, 183, 184, 187, 196 high-technology 36 manufactured 34 ‘extended enterprise’ 133 F-test model 126–7 ‘fabs’ 80 factories/plants 31, 82, 108, 129(n2), 140, 141, 142b, 147, 151, 152f, 176(n6), 187, 196 automotive 182 greenfield 159t, 160 fall-off rates (FOR) 198t family 27, 147 family tradition 245 FAW Group 106 FAW Toyota Changchun Engine Company Ltd (FTCE) 106t Fayerweather, J. 202, 204, 213 FDI (foreign direct investment) 16–17, 38, 43–4, 45, 118, 129, 190, 193 ‘direct effects’ 6, 7 host country 10 intra-Asian 94 Japanese 91, 221, 239 Japanese (to East Asia) 94 Japanese (and transformation of East Asian political economy: 4–5, 89–115 Korean 221, 239 manufacturing sector 158, 169–70 ‘multiplier effects’ 6, 7 PRC inward 221 ‘spillover effects’ 6, 7, 8 ‘summarizing reasons’ 7 Western theorists 91 FDI: flying-geese (FG) paradigm 4, 89, 90–1 central criticism 90–1 ‘pro-trade’ 90 ‘triumph of analogy over analysis’ 91 FDI: impact on ASEAN economies 6–8, 151–77 chapter structure 154–5 company characteristics 155–60 conclusions 173–6, 176(n8–10) direct effects 151, 152f, 153, 153f, 154, 155f, 160–1, 173–4t, 175, 176(n1) direction of inputs/imports 161t, 162–3 direction of outputs/exports 160t, 161–2

effects on local competitors 170, 176(n4) empirical findings 160–3 human-resources development 170–3, 176(n5–7) indirect effects 161, 169 integrated model 152f, 153f international and regional integration 161–3 lessons 175, 176(n9) local linkages, value-chain multiplier, and spillovers 164–70 ‘low to middling’ 176 multiplier effects 151, 152f, 153–4, 155f, 169, 174t, 176(n1) spillover effects 151, 152f, 153f, 154, 155f, 161, 165, 167, 169, 174–5t, 175, 176, 176(n1) stylized impact of FDI over time 155 summary of FDI effects (Malaysia and Thailand) 173–5t, 175 FDI communities 10, 215–33 analysis 225 autoregressive influences 225, 229 community I (same industry, same MNC home country) 218, 218f, 220, 221, 223, 226, 229 community II (different industries, same MNC home country) 218, 218f, 219, 221, 223, 226, 229 community III (same industry, different MNC home countries) 218, 218f, 219, 221, 222, 223, 226, 230 community IV (different industries, different MNC home countries) 218, 218f core logic 230 discussion and conclusions 229–30 FDI communities (concept) 216 firm-level studies 216, 229 four-cell typology 218, 218f hypotheses 219–22 institutional perspective 219 inter-community legitimating effects on WOFS establishment 220–2, 226, 228t, 230 intra-community legitimating effects on WOFS establishment 219–20, 226, 228t, 230 legitimacy of foreign entry modes in host country 217 legitimacy influences 218–19 legitimation of WOFSs in China 10, 215–33 limitations and further research 230

Index 267 means, standard deviations, correlations 227t negative binomial regression analysis 225, 228t ‘particular context’ 216 regional dummy variables 225 research context 217–22, 229, 230 research design 216 research methods 222–5 research setting 222 results 226–9 sample and data sources 223 spillover effects 220 theoretical background 217–22 unit of analysis 223 variable: dependent 223 variables: control 224–5 variables: independent 223–4 variables and measures 223–5 FDI legislation 176(n2) FDI theory 4, 90–1 Federation of Thai Industries 105n Feenstra, R. 223, 231 Fei, J. 131 Feliciano, Z. 129(n1), 130 Ferdows, K. 74, 85 field-call rates (FCR) 198t finance sector 120, 121, 126 Financial Reconstruction Commission (Japan) 62–3 financial sector 51 liberalization 41 Sweden 56–7 Sweden (comprehensive support package, 1992) 58 Financial Supervisory Agency (Sweden) 62, 64, 65, 66, 67 financial system recovery organizational learning capacities of policy-making systems 1–2, 53–71 Financial Times, The 57, 70 financing 31, 50 Finansbolag (non-bank financial corporations) 55 Finansdepartmentet 66, 70 fire protection 147 firm size 25, 119, 122t, 126t, 126–7, 128 firms see companies fiscal reform 47 fish 38 Fittec Electronics 80 Five Year Plans (FYPs) PRC (1953–7) 234 South Korea (1962–) 35–6

flexibility 61, 78 Flextronics 76 Fligstein, N. 19, 20, 31, 218, 221, 231 Fombrun, C. 222, 231 Ford 76, 77, 183, 199(n6) foreign affiliates 129(n1) foreign aid 47 foreign direct investment see FDI foreign entry decisions 215 foreign entry modes in a host country legitimacy 217 foreign entry-mode choices 216, 221, 222 foreign exchange 35, 56 foreign ownership, human capital, and earnings in Japanese labour market 5, 116–31 analysis and results 122–8, 129(n6–8) chapter purpose 116 characteristics of workers in foreign firms 122–3, 126 data 122, 129(n4–5) earnings: premium 125–6, 129(n7) earnings: structure 126–7 earnings: variance 127–8, 129(n8) foreign firms and employment in Japan 120–1 human capital 123–5, 129(n6) Japanese employment system 118–19, 129(n2–3) summary and conclusions 128–9 theoretical considerations 116–19, 129(n1–3) foreign reserves 29 Foreign-Capital Enterprises Law (PRC, 1986) 182 foreign-invested enterprises (FIEs) 182, 187, 194, 195 industrial clusters 193 Föreningsbanken 56, 58 Föreningssparbanken 67 Första Sparbanken 57 ‘Fortune 500’ 191 forward linkages 153, 154, 169–70, 176(n3) FOURIN 96, 99n, 100n, 103, 103n, 104n, 112, 114 France 22 free markets 2, 33, 47 free press 29 free trade agreements (FTAs) 92, 93, 95–6, 111–12, 113(n2, n13–14) bilateral 92 China-ASEAN (2004) 93 regional 92 freedom of location 78

268 Index Freeman, E.R. 133, 149 Freeman, J. 216, 218, 220, 225, 232 Freeman, N. 177 Frese, M. 242, 254 Friedlander, F. 60, 70 Friedman, M. 21, 31 Fujitsu 186f Fujitsu Media device 186f Fukuyama, F. 114 Gács, J. 50, 52 Galais, N. 246, 253 game theory 21 garments 156t, 157n, 159t, 160–3, 165t, 166–8, 171t, 171, 176(n6–7) Gatignon, H. 215, 231 GDP 2, 15, 40, 43, 45, 46, 47, 49 GDP growth rates 33, 34 Gedaljovic, E. 20, 31 Gelb, A., et al. (1993) 235, 253 Jefferson, G. 253 Singh, I. 253 gender 116, 119 General Electric 188, 189 General Motors (GM) 76, 77, 183, 186f, 196 general public 141b, 142b, 142f, 144, 147–9 ‘generation of information’ (Huber) 59, 60–2, 64 generations future 135, 136 present 135 geography 15, 48, 84 German firms: local responsiveness in IJVs in PRC 9–10, 202–14 chapter structure 203 conclusion 211–13 empirical basis and measurement 209, 212 exploratory analysis 209–11 future research 212 limitations 9–10, 212–13 MNE responsiveness in IJVs 203–5 responsiveness modes 205–9, 212 strategic alternatives 204 German marks 57 German standards 197 German Unification 56 Germany 8, 22, 25, 27, 30, 82, 120, 187 China’s changing role (reverberations) 181 PRC role in value chains (reverberations) 196–8, 200(n13) geti gongshang hu 235

getihu 10–11, 235, 236, 239, 241, 253(n1) Ghana 129(n1) Ghoshal, S. 73, 83, 85, 202, 204, 213 ‘gift-exchange’ relationship, 118 Gini coefficient 119, 127–8, 129(n8) Girma, S. 129(n1), 130 Giroud, A. xiii, 6–8, 151, 154, 167, 177 global integration 206, 208, 212 global integration versus local responsiveness 6, 9–10, 83, 84, 85, 202, 203–4 current business news 75–6 Dell 81 intra-firm level 73 IR grid 73 Legend 80 optical frames 81–2 production 75 theoretical and commercial perspectives 72 Global Leadership and Organizational Behaviour Effectiveness (GLOBE) (Holmberg and Åkerblom) 65 global realignment xii capital, labour, technology 1, 8–12, 28, 179–254 global strategies 202, 204 globalization x, 3, 8, 74, 76, 78, 89, 91, 181, 184 auto industry 72 business 73, 84 consumer products and markets (Levitt-style) 84, 85 ‘different things to different people’ 72–3 Levitt-style (consumer products) 4 macro level 73 manufacturing 85 markets 72 media 144 micro or company level 73 national or country level 73 pace 84 processes 83 production 72, 84 supply chains 85 Taiwanese business 46 globalization: ‘Levitt emphasized markets but manufacturing leads way’ 2–3, 72–86 Amazon in Japan 82–3 another globally-integrated supply chain in China 81–2 assessment 83–4 China’s computer industry 78–81 conclusion 84–5

Index 269 hypotheses 85 some current reality 74–6 Thai auto industry 76–8 GNP 42t Göbel, S. 242, 254 Goldman Sachs Global Equity Research 182, 200 Golf IV/Golf V 187 Goodman, D.S.G. 236, 254 goods 151 free mobility 49 high-technology 174t international 170 goods and services 84, 91, 138, 153, 234, 236–7 Görg, H. 129(n1, n7), 130 Gota AB 67 Gota Bank 56, 57, 58, 67 government authorities 141b, 142f, 146, 147, 148 government incentives/policies 157t, 158 government regulations 189, 222, 230 government spending 47, 49 governments 2, 3, 8, 10, 11, 12, 16, 28, 30, 31, 39, 40, 50, 133, 138, 173, 176, 223, 252 Korean 34 municipal 193, 196 PRC 191, 234, 235, 236, 252, 253 provincial 192, 195, 196 realignment to new realities 1 regional 193 Singapore 191 Sweden 53, 54, 57, 60, 61, 63, 67 Taiwan 43 Granovetter, M. 19, 32 Greenaway, D. 129(n1), 130 Greene, W. 231 Greve, H.R. 219, 231 Griliches, Z. 232 groups 146, 147, 148, 149 Guadalajara (Mexico) 76 Guangdong province 193, 240n Guangzhou 23, 80, 111, 187, 196 Guangzhou Auto 106 Guangzhou Toyota Motor Company Ltd (GTMC) 106t guanxi 29, 251 Gucci 80, 82 Guillén, M.F. 215, 216, 217, 220–4, 231 Gulf War (1990–1) 56 Gustavsson Tingvall, P. 130 Hadjimichael, B. 177 Haggart, S. 200

Hakansson, H. 203, 213 Hall, B.H. 232 Hall, P.A. 27, 32, 59, 70 Hallen, L., et al. (1991) 203, 213 Johanson, J. 213 Seyed-Mohamed, N. 213 Hamilton, G.G. 22, 32 Hampden-Turner, C. 65, 70 Hanaoka, M. 203, 214 Hanks, S.H. 250, 253 Hannan, M. 216, 219, 223, 231 Hannan, M.T. 216, 218, 220, 225, 232 Hannan, M.T., et al. (1995) 220, 230, 232 Carroll, G.R. 232 Dundon, E.A. 232 Torres, J.C. 232 Hara, S. 114 Harold, P. 235, 254 Harrigan, K.R. 205, 213 Hart-Landsberg, M. 91, 114 Harvard Business Review 72 Harwit, E. 189, 199(n8), 200 Hasegawa, H. ii Hashimoto, M. 118, 119, 130 Hatch, W. 89, 90–1, 114 Haunschild, P.R. 219, 232 Hausman, J.A., et al. (1984) 225, 232 Griliches, Z. 232 Hall, B.H. 232 head-hunting 117 headquarters 186 health care 133, 140, 248, 249, 252 Heavy and Chemical Industries Drive (Korea, 1970s) 39–40, 50 opportunity costs 40 heavy industry 36, 46, 234 Heclo, H. 59, 70 Heide, J.B. 203, 213 Henisz, W.J. 215, 219, 221, 222, 232 Hennart, J. 215, 232 Hewlett-Packard (HP) 78, 79 Heyman, F. 129(n1), 130 Hiace 99 hierarchy 65 high context 19 high ethics 145 high technology 2, 165, 165t, 172, 187 high-volume commodities 166 highways 46 Dongguan-Shenzhen 199(n11) ‘road tolls’ 147 Higuchi, Y. 118, 119, 131 Hill, R.C. 254 Hilux VIGO pickup (IMV vehicle) 97–9, 104–5, 107, 109

270 Index Hino (Toyota affiliate) 3, 77 hiring and firing 192 historical legacy 27, 49 history 22, 26, 33 Hofstede, G. 19, 32 Holmberg, I. 65, 70 Holmdahl, T. 76 home country 218–30 Honda 77, 107t, 187, 196 Hong Kong 15, 16, 23, 31, 79, 80, 82, 92, 94, 155, 156t, 157n, 253(n1) Hook, G. 113 Hook, G.D. ii Hosokawa cabinet (1993–4) 61 host countries 109, 151–4, 156t, 161–6, 168–70, 171t, 176(n3), 202, 207, 216, 217, 218, 220, 221, 229, 230 growth and development 6 reasons for investment 157–8t, 158–60 Howenstine, N.G. 130 Howlett, M. 59, 69 Hsee, C. 208, 214 Hsiao, C. 225, 232 Hu Jintao 237 Hualian Group Corporation 74 Huber, G.P. 60, 62, 70 Hughes, C. 114 human behaviour 21, 23 human capital 2, 5, 24f, 26, 31, 42, 47, 50, 116, 118, 123–5, 125t, 126, 128, 129, 129(n6), 173t, 175t Japanese institutions 25 women 119 human resources (HR) 121, 176(n9), 192 development 7, 154, 170–3, 175, 176(n5–7), 191 indicators 171t management 145, 203, 230 practices 5, 118, 128 human rights 132 Hungary 196 Hwang, P. 215, 232 Hybels, R.C. 217, 232 Hyland, A. 80, 85 Hyundai 75 Ibaragi prefecture 122 Ibison, D. 76, 85 IBM 78, 80, 134, 199(n11) PC business acquired by Lenovo ideational forces 26 identity 24f, 26 ideology 137, 236 Ihlwan, M. 75, 85 Ikeo, K. 68

80

‘illicit wealth accumulation’ 35, 40 import restrictions 38 import substitution 34, 36, 37, 38, 42, 43 imports 38, 42t, 82, 94n, 94, 184 incentives 33, 37, 105, 113(n6), 120 income 245, 246 income per capita 46, 158 income distribution 42 income inequality 127–8, 129(n8) income tax 43, 44, 191 incrementalism 59 indebtedness 47 India 11, 75, 109, 155, 199–200(n12) Indonesia 15, 77, 97, 98f, 98t, 101n, 108, 111, 112t, 113(n10), 129(n1) Japanese FDI 93t Toyota’s Asian regional production networks (2004) 110f Toyota’s Asian regional production scheme (1993) 110f Toyota’s business activities 99, 99t Toyota’s production (1995–2002) 103t Toyota’s production network 108f industrial development 42, 46 industrial park movement 189, 193, 194 industrial parks 40 automotive sector 195 new type 194 relevance 189–93, 199(n10) industrial parks: services and functions 191–3 administrative support 191 human-resource management support 192 industrial relations 192–3 tax reductions and preferential arrangements 191 industrial process chains, global 199 industrial relations 192–3 industrial sector 160t, 161t, 162, 165t, 169 industrial structures ‘embedding’ 181, 182 industrialization 28, 36, 43, 234 ‘catching-up’ 90 export-oriented 169–70 industries 6, 15, 28, 30 ‘pools of information’ 221 primary 239 tertiary 239 industry 48, 234 capital- and skill-intensive 46 domestic 39

Index 271 high technology 41, 42–3, 46 inefficient 39 Korean 47 labour-intensive 43 strategic 39, 50 industry concentration 224, 226–8 industry sector 5, 120, 126–8, 241 primary 241t secondary 241t tertiary 241t industry type 218–23, 226, 228–9 inflation 33, 37, 42, 42t, 46–9, 55, 56 inflationary pressures 40 influence 147 infocom industry 8, 9, 181, 186–7, 198t, 198–9 industry dynamics 183–4 investment focus 188 location structures (differences from automotive sector) 193–6, 199–200(n11–12) market strategy and capability level (PRC 2002) 186f restructuring 184 trends (PRC) 188–9, 199(n9) information 3, 26, 29, 46, 50, 59, 117, 217 collective interpretation 59, 64–7 dissemination 52 integration into organizational context 59, 62–4 information asymmetry 219 information base 18 information technology (IT) 31, 194 IT companies 193 IT manufacturing industry 199(n11) IT products 80, 193 IT sector 191 infrastructure 29, 33, 42, 43, 48, 51, 133, 140, 174t export sector 50 Inglehart, R. 19, 32 Ingves, S. 61, 63, 70 initiatives 145, 146 injection moulding 82 Innova model 113(n11) innovation/s 145, 168t, 168 inputs 44, 164–6, 167, 169, 174t, 197 high-technology 165, 165t intermediate 37 low-technology 165, 165t institutional frameworks internal and external (matching strategy) 136–7 institutional perspective 133

institutional processes 220 institutional theory 20, 132, 134–5, 215, 216, 217, 222 institutions x, 2, 5, 6, 10, 12, 19, 23, 27, 35, 38, 63, 135, 217, 236 formal 20, 26, 50 informal 20, 24 key inputs 25 three components 25–6 widening definition 20 insurance/insurance sector 31, 67, 120, 121, 126 integrated production complexes 195–6 integration cross-border industrial and commercial 78–9 international and regional 154, 161–3 intellectual property 79 inter-firm diversity 203, 212 inter-organizational competitive mimicry 224 interest groups 22, 48, 138, 144 interest rates 56, 57–8, 63 preferential 37 intermediate goods 43, 47 intermediate products 82 international business 132 international business (discipline) 1 international business literature 215 international business research 202 international business theory intractable research problems 19 two primary approaches 19 unified field (socio-economics) 19–20 international economy 33 International Finance Corporation 184, 235, 254 International Financial Statistics (IMF) 36n, 52 international joint ventures (IJVs) 203 development stage 212 German-Chinese 9–10 inter-firm differences 202 responsiveness to inter-firm differences 9–10 International Labour Organization (ILO) 119, 130 international management literature 221 International Monetary Fund (IMF) 36n, 53

272 Index International Multi-purpose Vehicles (IMV, 2002–) project 97–8, 99, 105, 109, 113(n3, n11) Innova model 113(n11) production bases 98t supply network 98f internationalization 246, 247f internet 75, 190 interviews 4, 6, 8, 11, 57, 89, 96, 113(n4), 134, 154, 160, 161, 165, 169, 176(n2), 192, 203, 205, 206, 208, 211, 213(n1), 239, 241, 242–3, 245, 248 intra-company trading relationships 79 intra-regional trade 93, 94t, 94, 95 investment 2, 16, 28–9, 35, 41, 47, 49, 73, 78, 100, 107, 145, 252 capital-intensive 40 contractual 191 domestic 37, 42 foreign 46 greenfield 163 intra-regional 93, 95 Japanese MNCs 112 long-term 30 public 46, 51–2 risky 51 Sino-Japanese 92 South Korea 36t, 36 Toyota 108–9 Western (anti-trade) 90 investment projects 182, 189, 191 investors 141b, 158 American 191 Australian 221 European 191 foreign 170 Japanese 191 Singapore 191 South Korean 191 Taiwanese 193 see also FDI Iri (EPZ) 38 Isle of Wight 15 ISO 9000 166 ISO 14001 141b, 146, 147, 166 Israel 111 Isuzu ‘Spacecab’ 77 Italy 15, 82 J.P. Morgan 18 Jacobs, N. 22, 32 Jakarta Post 108 Jalilian, H. 177 Jansson, H. xiii, 5–6, 133, 134, 135, 150

Jansson, H., et al. (1995) 135, 150 Saqib, M. 150 Sharma, D.D. 150 Japan 3, 6, 15, 16, 25–7, 30, 37, 38, 74, 76, 77, 80, 156t, 160t, 161t, 162, 165t, 166, 166t, 168, 171t, 171, 172, 195 Amazon 82–3 appointments (financial agencies) 62 colonialism 42 dependency-inducing relationships 90–1 ‘did not want FDI’ 17 economic dominance 92 economic slow-down 22 employment practices 5, 128 FDI inward 120 financial crisis 53 foreign ownership, human capital, and earnings 116–31 FTA/Economic Partnership with Singapore (2003) 96 neo-Greater East Asia Co-Prosperity Sphere 91 organizational learning capacities for financial system recovery 1–2, 53–71 relationship between banks and public officials 66 Toyota’s Asian regional production networks (2004) 110f trade policy 92 transfer of manufacturing base 8, 17 Japan: Financial Supervisory Agency 68 Japan: Ministry of Economy, Trade, and Industry (METI) 92, 114, 121 METI Report 120, 121, 122 Japan: Ministry of Education 129(n6) Japan: Ministry of Finance 66, 68, 93n Japan: Ministry of Health, Labour, and Welfare (MHLW) 121 Japan: Ministry of Public Management, Home Affairs, Posts and Telecommunications 129(n5) Japan Electronics and Information Technology Association (JEITA) 184, 200 Japan-ASEAN FTAs 112 Japan-Philippines EPA (2004) 113(n13) Japan-Singapore Economic Partnership Agreement (JSEPA) 111 Japan-Thailand EPA Task Force 112 Japanese Electronics and Information Technology Industries Association 78 Japanese employment system 118–19, 129(n2–3)

Index 273 Japanese FDI and transformation of East Asian political economy 4–5, 89–115 ASEAN trade facilitation initiatives 107–12, 113(n8–14) chapter aim 89 chapter structure 89–90 conclusions 112–13 corporate strategy (Toyota Motor Corporation) 96–106 deepening regional economic integration 93–6, 113(n1–2) FDI theory, product cycles, and flyinggeese model 90–1 transformation of East Asian political economy 91–3 Jaworski, B.J. 71 Jefferson, G. 253 JETRO 114, 130 JETRO Report (2002) 5, 120, 122, 129 Jiang Zemin, President 237, 238 job interviews 192 job opportunities 133, 252 job satisfaction 22 Johanson, J. 213, 222, 225, 232 Johansson, E. 134, 141, 150 John, G. 203, 213 joint ventures (JVs) 7, 74, 77, 106, 151, 176(n2), 182–4, 186f, 187, 188, 191, 194, 195, 198, 216, 217, 220, 223, 226–30, 236, 253(n1) Jomo, K. 114 Jonung, L. 55 Journal of International Business Studies 21 Jürgens, U. xiii, 8–9, 182, 186n, 195, 198n, 199(n3), 200 just-in-time delivery 195 just-in-time industrial park idea 194 just-in-time principles 195 Kaga Electronics 80 Kai, C. 201 kaizen 97 Kalleberg, A.L. 119, 129(n3), 130 Kamp-Lintfort 196 Kanagawa prefecture 122 Kaniska, J. 92, 115 Kato, T. 130 Katzenstein, P.J. 63, 70 Kawai, M. 93, 94n, 114 Kawashima, Y. 118, 119, 130 KD kits 98f Keidanren 112, 113(n14) keiretsu 25, 195 Kelly, D. 114

Kim, L. 199(n7), 200 Kim, W.C. 215, 232 Kirby, S.L. 213 Kissling-Näf, I. 59, 70 Kitadai, N. 80, 85 Klein, M., et al. (2001) 151, 177 Aaron, C. 177 Hadjimichael, B. 177 Knopfel, P. 59, 70 knowledge 6, 45, 152f, 172 foreign 8, 50, 176 foreign spillovers 151, 152f, 154, 167 local 79, 80, 222 local-market 117 proprietary 117 knowledge transfer 167 Kochan, T.A. 129(n2), 131 Kogut, B. 21, 207, 214, 221, 224, 231, 232 Kohli, A.K. 71 Koizumi, J. 5, 129 Kojima, K. 90, 114 Kokko, A. xiv, 2, 117, 118, 130 Konan, D. 120, 130 Korea, North 34, 39 Korea, South 2, 15, 16, 25, 30, 33, 42, 46–50, 75, 76, 78, 96, 101n, 156t, 157n, 162, 188 growth rates (GNP, investment, exports, 1962–91) 36t heavy industry drive 44 independence (1948) 34, 35 Korean export promotion 36–41 from 1950s to 1980s 34–6 state development objectives 35 state–business relationship 35, 38–41 ‘success in disciplining industry’ 39 US aid 34, 35, 36, 39 Korea, South: Economic Planning Board 35 Korea Trade Promotion Corporation (KOTRA, 1962–) 38 Korea Traders’ Association 38 Special Fund for Export Promotion (1969–) 38 Korean Institute for Science for Technology 38 Korean Peninsula 34 Korean War (1950–3) 34 Korean won (currency) 37, 41 Kostova, T. 216, 217, 230, 232 Koza, M.P. 20, 32 Kraatz, M.S. 202, 214 Krausz, J. 138, 150 Kripalani, M. 75, 85 Krogh, G. von 62, 70

274 Index Kumar, B.N. 203, 205, 207–8, 214 Kuo, S.W.Y. 42n, 52 labour 28, 157t, 158, 192, 197 cheap 44 free mobility 49 scarcity 45 skilled 42, 144, 175t surplus 45 unskilled 45 labour cost advantages 185, 196 labour costs 9, 41, 48, 56, 92, 149, 182, 192, 196–7, 199 labour force 128 labour markets 20, 26, 27, 138, 143, 143f, 144, 149 labour migration 17 labour shortages 17 labour standards 81 labour supply 17 labour turnover 117 labour-market demarcation 119 Land Cruiser 99 land reform 35, 42, 49 Landes, D.S. 22, 32 language 22, 29, 145, 157t, 159–60 English 11, 79, 83, 122, 124–5, 125t, 129(n6), 160, 239 German 11 Mandarin 11, 239 Laos 176(n10) Larimo, J. 215, 232 Larson, H.H. 214 Larsson, P. 134, 141, 150 Laserre, P. 133, 150 latecomer disadvantage 117, 121 Latin America 15, 98t, 102f, 195 ‘Central America’ 98f ‘South America’ 98f, 111 Laughlin, J.L. 138, 150 Laumann, E.O., et al. (1989) 230, 232 Marsden, P.V. 232 Prensky, D. 232 law 11, 26, 133, 144, 235, 236, 238, 252 Lawrence, P.R. 202, 214 Lawson Inc 74 leadership environmental 137 political 11 ‘leadership dilemma’ (Argyris) 65–6 leadership style 203 learning 27 concept 59 formalized system 167 Lee, K. 221, 232 Left Party (Sweden) 62, 62t

legal system 20, 138, 252 Legend 78–80 legitimacy 6, 132, 133, 137–8, 139f, 141, 146, 147, 149 lost 140 ‘taken-for-granted’ 217, 222, 229 legitimation foreign entry modes in host country 217 industry-based 226, 230 inter-community legitimating effects on WOFS establishment 220–2, 224 intra-community legitimating effects on WOFS establishment 219–20, 223 WOFSs in China 10, 215–33 Lehman, L. 190, 194, 200 Lenovo 78, 80 Levitt, T. 72, 85 Lewin, A. 20, 32 LG Electronics 75 Li, J. xiv, 10, 215, 232 ‘liability of foreignness’ 206 Liaoning 239, 240n Liberal Party (Sweden) 62t liberalization 38, 158 Liberman, I. 203, 214 licences 188 licensing arrangements 3–4, 81 life expectancy 62 lifestyle 84 lifetime employment 116, 118 light industry/manufacturing 11, 40, 236 Likert-type scales 209 Lillywhite, S. 81, 85 Lincoln, J.R. 119, 129(n3), 130 Lind, G. 70 Lindbeck, A., et al. (2000) 64, 70 Molander, P. 70 Persson, T. 70 Petersson, O. 70 Swedenborg, B. 70 Lindblom, C.E. 59 Lipsey, R.E. 116, 117, 120, 129(n1), 130, 131 Lite on Electronic 186f Lite on Taiwan 186f Liu, S. 234, 254 Liu Chuan Zhi 79 living conditions 246, 248 living standards 135, 252 loans 29, 40, 57, 247, 251 concessional 47 foreign 37 ratio to GDP (Sweden) 55f, 55–6

Index 275 lobbying 40, 112 local authorities 241, 244–5, 251, 253 local community 141b, 142b, 142f, 146–8 local competence 186, 186f local content requirements 161n, 185 local government 17, 28, 192 local linkages, value-chain multiplier, and spillovers 164–70, 176(n2–3) backward linkages 164–9, 176(n2) forward and other linkages 169–70, 176(n3) local responsiveness German firms in IJVs (PRC) 9–10, 202–14 local responsiveness: three modes 9 local responsiveness versus global integration, 134, 148 localization 80, 97, 109 locational theories 90 London, M. 214 Lorsch, J.W. 202, 214 Low, L. 92, 114 low context 20 Lu, J.W. 216, 217, 224, 232 Lumpkin, G.T. 253 Lundgren, B. 61, 65, 70 Lundström, S. 61 Luo, Y. 133, 150 Lüthje, B., et al. (2002) 185, 200 Schumm, W. 200 Sproll, M. 200 luxury products 73 Maastricht criteria 48, 49 Macao 253(n1) MacArthur reforms (Japan) 26 McBride, K. 129(n3), 130 McDougall, P.P. 250, 254 MacDuffie, J.P. 129(n2), 131 Macey, J.R. 58, 70 McFarland, L. 214 machinery 34, 39, 46, 113(n6), 153, 163, 191 McKinnon, R. 114 McKinsey & Co. 60–1, 199(n5) MacMillan, I.C. 246, 254 macro organization theory 215, 216, 229 macroeconomic policies 37, 51 macroeconomic stability 42, 49 McVea, J. 133, 149 Mahalingham, G. 75 majority shareholders 188 Makino, S. 216–18, 220–2, 233

Malaysia 7, 16, 31, 77, 96, 101n, 107, 113(n8, n10), 154–62, 164, 164t, 166–9, 171t, 171–3, 175–6, 176(n9) FDI effects (summary) 173–5t gaining societal advantages in emerging markets 5–6, 132–50 international stakeholder management 5–6, 132–50 Japanese FDI 93t Toyota’s Asian regional production networks (2004) 110f Toyota’s Asian regional production scheme (1993) 110f Toyota’s business activities 99t Toyota’s production (1995–2002) 103t Toyota’s production network 108f Malaysia: bearing MNC CSR matrix 141–2b, 143 external institutional setting 143, 143f, 146, 148 gaining societal advantages 141–2 internal institutional setting 144–6 matching strategy for societal and competitive advantage 139f organizational fields 143–4 societal sectors (nine major characteristics) 144 strategic thinking 145 Malaysian society 145, 147 management 24f, 25, 54, 67, 197, 248f, 249f, 250 localization 74 regional 101 strategic 135 management methods 170 management practices 203 management science/scientists 1, 11 management weakness (PRC) 29–30 managers 9, 16, 27, 121, 138, 145, 202, 208, 213(n1), 241, 249 Chinese (in IJVs) 203 expatriate 230 Germans (in IJVs) 203, 205 middle 30 manufacturers 162, 163, 175t, 185 foreign 161 local 169, 199 manufacturing xii, 3, 10, 11, 31, 44, 45f, 74, 84, 92, 96, 106, 108, 112, 121, 126, 160, 173t, 176(n3), 188, 194, 197, 199, 216, 223, 236 cross-border integration 78 domestic base 9 domestic capabilities 184 Japanese 8 migration to lower-cost countries 76

276 Index Mao Tse Tung/Mao Zedong 26, 245 market access 48 market development 142b, 142f market discipline 37 market economy 234 market leadership 79 market liberalization 89 market opportunities 52 market outcomes 33 market place, business-to-business 84 market pressures cathode-ray tubes 75 Lawson Inc 74 LG Electronics and Samsung Electronics 75 Microsoft 75–6 Mitsubishi Electric Thailand 74–5 market prices 50 ‘market pricing’ 196 market research 38, 50, 52, 75 market share 97, 99, 106, 246, 247f market size 157t, 158 market strategy 186 marketing 4, 45, 50, 72, 73, 75, 80, 82, 101, 108, 140, 152f, 169, 170, 188, 194, 207, 250 cross-border integration 78 finished goods 84 international 43 international industrial 203 markets 7, 48, 73, 109, 141, 196, 207, 247 Asian 106 domestic 37, 80, 181, 183, 199 East Asian 4 external 94 financial 143, 143f, 144 global 30, 80, 91, 97, 151 globalization 72 globalization (Levitt-style) 84 home 17, 28, 30 international 79, 173t Japanese 83 local 133, 151, 164, 164t, 169, 170 proximity to 9 ‘real national’ (PRC) 29 regional 151, 187 US 91 Western 133 world 3, 31 Markoczy, L. 213 Marsden, P.V. 232 Marsh, D. 59, 69 Marshall, A. 21 Martinsson, P. 134, 150 Masan (EPZ) 38

Masumura, M. 53 matching strategies 6, 132, 136–7, 143 acquiesce 136t, 148–9 avoid 136t, 137 compromise 6, 136t, 137, 148–9 defy 136t, 137 innovate 136t manipulate 6, 136t, 137, 146–9 societal and competitive advantage 139–41 stakeholder-specific (for key CSR issues) 146–8 material facts 19 material and ideational logics 26 Mathur, A. 203, 214 Maurice, M. 23, 32 Mayring, P. 239, 254 Mazda 77 Meadvill USA 186f media 6, 64, 141b, 142b, 142f, 144, 147–9, 197 Meiji Restoration 26 Meissner, H.-R. 186n, 199(n3) Melco Display Devices 75 Mercer, G. 199(n5) mergers 39, 48 methodological individualism 20 Mexicali 75 Mexico 75–6, 96 Meyer, J. 216, 217, 219, 232 Meyer, K.E. 133, 150 Meyer, M. 79, 85 micro-studies 20–1 microeconomic policies 37 Microsoft 189 ‘Xbox’ video game console 75–6 Middle East 15, 98f, 98t, 102f migration 42 military coups 35, 40 Mincer, J. 118, 119, 131 Mincer earnings regression 126 Miner, A.S. 219, 232 minivans 77, 98t, 108, 113(n3) Mirza, H. xiv, 6–8, 167, 177 Mirza, H., et al. (2003) 154, 167, 169, 173, 177 Freeman, N. 177 Giroud, A. 177 Jalilian, H. 177 Than, M. 177 Weiss, J. 177 Mitsubishi Corporation 75, 76, 77, 78 approved AICO applications 107t Mitsubishi Electric Thailand 74–5

Index 277 mobile telephones 184, 194, 196 ‘cell-phones’ 75 ‘digital cordless’ 196 electro-mechanical components 197 third generation 188 Mod-Style 81, 82 Moderate Party (Sweden) 62, 62t, 66 MOFA 112 Mohnen, P. 200 Mohr, A.T. xiv, 9–10, 213(n1) MOI 76, 85 Molander, P. 70 Möller, T. 66, 69 monetary policy 49, 56 monopoly 18 Moon, C. 40, 41, 52 moral hazard 50–1 moral legitimacy 138 morals 208 motherboards 80 motivation 148, 172t, 203, 245–7 Motorola 188, 194 Mroczkowski, T. 203, 214 Mu, Y. 254 multilateralism 89, 92 multinational companies (MNCs) xii, 5–6, 18, 28, 30, 137–8, 139, 142b, 185, 189, 193, 194, 196, 198, 215, 219, 224, 228, 229 acquisitions and takeovers 222 Asian 12 automotive sector 186f, 187 core functions 135 country of origin 216 definition 135 external and internal institutional settings 141 external institutional setting 143 foreign 38 foreign expansion (staged model) 225 international expansion 221 Japanese 89, 105, 112, 221 Korean 216 managerial and organizational processes 132 parent company 220 social context 134 stakeholder approach to strategic management 133 US 221 multinational enterprises (MNEs) 9, 202 multinational enterprises: responsiveness modes in IJVs 205–9 balanced approach 206f, 207–9 social acceptance 206f, 206–7, 208 social reaction 205–6, 208, 211

multinational enterprises: strategic alternatives 204 global strategy 204, 208 international strategy 204 multinational strategy 204, 207 transnational strategy 204 Murphy, D. 183, 187, 200 Murphy, G.B., et al. (1993) 250, 254 Hill, R.C. 254 Trailer, J.W. 254 Muslim countries 15 Myanmar/Burma 15, 176(n10) NAFTA (1994–) 94, 94t, 95 Nakanishi, K. 114 Nakatsugawa, M. 3, 77 Naschold, F. 186n Nash, J. 52 Nasif, E. 213 nation-states 15, 23 ‘national champions’ 48 National High and New Technology Industrial Development Plan (PRC, 1988) 190 National People’s Congress (NPC, PRC) 5th NPC (1982): 5th Plenary Session 235 7th NPC (1988): 1st Plenary Session 236 8th NPC (1993): 1st Plenary Session 236 9th NPC (1999): 2nd Plenary Session 236 10th NPC (2004): 2nd Plenary Session 238 national savings 36t, 36 ‘National Science and Technology Industrial Parks of China’ (report, 2002) 190 nationalization 3, 53–4, 58, 234 natural resources 34, 140 Needham, J. 15 Neelankavil, J.P. 214 Nelson, K.A. 133, 150 Nelson, R.R. 202, 214 nenposei (annual salary system) 121 neo-Greater East Asia Co-Prosperity Sphere 91 neo-liberalism 41 NetEase 75 network capitalism 25 ethnic Chinese 8, 10, 17 networking 144 networks 24f, 25, 81, 89, 133 global manufacturing 74 institutional 139

278 Index networks – continued MNC parent 217, 230 organizational 139 New Delhi 75 New Democratic Party (Sweden) 62, 62t New and High-Technology Zones (PRC) 193 new regionalism 89 ‘new structures for coordination’ 5 Newco (prospective holding company) 78 newly industrializing countries (NIEs) 94, 154, 156t, 157n, 161t, 165t, 166t, 171t, 173 intra-regional trade 94t Newman, M. 62, 70 Nihon Keizai Shimbun 108, 115 Niskanen, W.A., Jr 59, 70 Nissan 107t Noble, G.W. 92, 114 Nöcker, R. 250, 254 Nokia 194, 201 Nolan, P. 18, 32 non-ferrous metals 39 non-governmental organizations (NGOs) 92, 176(n6) non-profit organizations 133, 144 non-tariff barriers 37 Nordbanken 56, 57, 58, 67 Nordea 58 norms 20, 132, 133, 137–40, 143–9 North America 101, 101t, 102f, 108, 109, 133, 141, 160t, 161t, 162, 166 North American Free Trade Agreement (NAFTA) 93 Norway 57, 61 nuclear power 46 Nyckeln 57 Oceania 98f, 98t, 101t, 102f Ochiai, I. 74 OECD 81, 120, 131 off-shoring 8, 181, 182 official establishment 143, 143f, 144 offshoring 196, 197 Ohmae, K. 72, 85, 114 Ohta, K. 131 Ohta, S. 119, 131 oil crises 45 oil prices 55, 56 oil shocks 40 Okuda, H. 112, 113(n14) OLI (organization, location, internal) paradigm 90 oligopoly 18 Oliver, C. 135, 136–7, 150, 217, 225, 231

Ono, H. xiv, 5, 11, 119, 125, 131 optical frames (PRC) 72, 81–2 ORG-GfK (market research company) 75 organization industrial 90 large-scale 28, 29–30 organization cross-nationally 19–20 high- and low-context approaches 19–20 organization theory 59, 60, 65 organizational ‘community’ 218 ‘organizational defence’ 65, 66 organizational ecology 215 organizational fields 135, 143–4 financial market 143, 143f, 144 labour market 143, 143f, 144 official establishment 143, 143f, 144 product market 143–4 public interests, 143, 143f, 144 organizational learning 30, 215 organizational learning (Sweden and Japan) 1–2, 53–71 authority to take responsible action 59, 67–8 collectively interpreting information 59, 64–7 conclusions 68–9 integrating new/local information into organizational context 59, 62–4 organization of chapter 54 policy-making system 59–68 Swedish financial system crisis and political reactions 54–8 widespread generation of information 59, 60–2 organizational learning capacity 3, 54 organizational routines 136t, 137 co-opt 137 control 137 influence 137 organizational theories 90 organizational types 4, 28 organizations 17, 30, 220, 222 capacities 27–8 Chinese 28 hierarchical 65 private 64 original design manufacturers (ODMs) 194 original equipment manufacturers (OEMs) 82, 189, 196 OEM business 158t, 158 OEM suppliers 76 OEM supplies 30 output 159t, 160t, 160, 169, 235 outsourcing 8, 181, 188, 194, 196

Index 279 Overseas Chinese 8, 17, 23, 46, 170 ‘surrogate nation’ 15–16 Owen, C.L. 208, 214 ownership 24f, 25, 27 ownership-specific advantages 207 ownership structure 236 Page, R. 214 Palgrave Macmillan ii, 12 Park, Y. 232 Park Chung Hee, General 35, 38, 40 Parker, S. 52 Parkhe, A. 203, 204, 214 parliaments 53, 58, 64 partnership-based business 28 party politics 63 path dependence 27 patrimonialism, Korean 22 Pava, M.L. 138, 150 payment on delivery 81, 83 Pazarbasioglu, C. 53, 70 Pearl River Delta 23, 80 Pearson, B. 76, 85 Pempel, T.J. 92, 114 Peng, M.W. 135, 150 Pennings, J.M. 221, 232 pensions 49, 133, 141b perception 9, 10, 202, 206f, 244 perception: inter-firm differences (IJVs) 208–11 empirical basis and measurement 209, 213(n1) exploratory analysis 209–11 functional areas 209–11 performance, individual 128 performance appraisal 203 performance targets 39 personal digital assistants 78 personnel management 209f, 209–10, 210f Persson, T. 70 Petersson, O. 70 Petri, P. 110n, 115 petrochemicals 39, 46, 112 petrol engines 99 Philippines 15, 96, 97, 101n, 107–11, 112t, 113(n8, n10) IMV production 113(n11) Japanese FDI 93t Toyota’s Asian regional production networks (2004) 110f Toyota’s Asian regional production scheme (1993) 110f Toyota’s business activities, 99t Toyota’s production (1995–2002) 103t Toyota’s production network 108f

Philips 75 physical capital 2, 42, 47 pickup trucks 98t, 100, 113(n3) Piper, N. 119, 125, 131 Poisson process 225 policy-makers (Japanese) 53 policy-making systems organizational learning capacity 1–2, 59–68 ‘policy transfer’ 59 political capital 109 political donations 66 political economy 35 East Asian 4–5, 89–115 international 69, 113 post-crisis 91 socialist context 189 transformation (East Asia) 91–3, 96 political leaders 252 political parties government–opposition fracture/ alliance (Sweden) 63 Sweden 66 political science 59 politicians 64, 67 governmental 66 ‘youth’ 61 population 1, 10, 11, 15, 46, 216, 229, 230 population pressure 34–5 Porac, J.F. 221, 232 Porter, M. 19, 32, 76 Post, J.E., et al. (2003) 133, 150 post-war era (1945–) 26, 34, 54, 63 poverty reduction 7, 173, 175 Powell, B. 78, 85 Powell, W.W. 20, 31, 218, 222, 231 power 20, 59, 245 power distance 144, 149 Prado 80 Prahalad, C.K. 73, 85 Preisendörfer, P. 253 premium to retain see earnings premium Prensky, D. 232 Preston, L.E. 150 prices 20, 33, 48, 78, 79, 81, 83, 170, 184 downward pressure 51 preferential 37 PricewaterhouseCoopers 3, 76 pricing concessions 140 Prime Technology 80 Prince of Wales Business Leaders Forum 138, 150 Prius (Toyota) 106

280 Index private business (PRC) 10–11, 234–54 business objectives for Chinese entrepreneurs 247f business strategy and firms’ characteristics 247–50 business success 250–1 competitive advantages of Chinese SMEs 248f competitive disadvantages of Chinese SMEs 249f conclusions and implications 251–3 development and distribution of privately run enterprises 240t empirical results 242–51 entrepreneurial motivation and objectives 245–7 entrepreneurship development: changing environment 234–9, 240t, 253(n1) motivation of Chinese entrepreneurs 246t personality of entrepreneurs 242–5 rapid assessment approach 239 rating scales 239 research bias avoidance 241 research sample and fieldwork methodology 239, 241–2, 253(n2) sample classified by industry and company size 241t self-concepts of entrepreneurs 239, 243f, 244f, 253(n2) private property 238 private sector 8, 11, 17, 23, 27–9, 33, 42, 45f, 48, 144, 236, 238, 246, 253 ‘increasing dominance’ (Taiwan) 44 PRC 242 privatization 44 process-chain mastery 9, 12, 199 process control 187 procurement 76, 209f, 210f, 210 product development 188 product innovation 185, 246, 247f product life-cycles (Vernon) 90–1 product market 143–4 product quality 173t, 248f, 250, 252 product standardization 4, 83 production 78, 79, 80, 82, 97, 106, 140, 148, 151, 167, 186f, 188, 198t, 249f global strategy 196 globalization 72, 75, 84 industrial 43 international 158 internationalization 91 local 189 overseas 3

regionalization 4, 89, 107, 185 restructuring 185 production chains (high-technology) 187 production methods 170, 176(n4) production networks (global) 3–4, 81, 187 productivity 18, 35, 51, 119, 187 ‘tradables’ versus ‘non-tradables’ 48 products 80, 186, 187, 202, 204, 247 finished 199 high-technology 187–8 secondary 165, 165t technical 84 professional and interest organisations 141b, 142b, 142f, 147–9 profit-making 236 profit margins 188 profitability 39, 50, 55, 82, 148, 224, 227t, 228t, 229 profits 18, 50, 56, 58, 75, 79, 138–9, 148, 153, 246, 247f, 250–1 propensity to consume 154 property rights 33, 190 property values 16 protectionism 35, 37, 39, 43, 44, 77–8 Proton (car) 77–8 psychological universalism 20 PT-Toyota Astra Motor 108 public administration 191 public interests 143, 143f, 144 public officials 61, 64, 65, 66–7 autonomy 68 local government 17, 28 Sweden 67–8 public opinion 66 public sector 23, 29, 33, 45f, 49, 133 Chinese-owned 238, 253(n1) under-developed 138 Puck, J.F. xiv, 9–10, 213(n1) Pudong (Shanghai) 194 purchasing power 1, 11 Pyatt, G. 129(n8), 131 QDI (Legend subsidiary) 79 Qi, L. 201 qualitative content analysis 11, 239 quality 145, 166, 167, 168t, 195–7, 199(n6), 246 quality assurance 9, 199 quality control 154, 172t, 197 quality management 199(n3), 209f, 210f, 210 quality and product focus (thought style) 145

Index 281 quality standards 137 questionnaires 4, 11, 89, 96, 154, 202, 208, 213(n1), 239 quotas (garments) 160 R-squared statistic 126, 126t, 127 Raghuram, S., et al. (2001) 203, 214 Larson, H.H. 214 London, M. 214 Ragin, C. 23, 32 Rahman, B. 82, 85 railways 46 Raisian, J. 118, 119, 130 Ramanujam, V. 250, 254 rational-actor model 2, 20 rationale 24, 24f, 26, 30 rationalism 20 rationality, efficiency-based 135 Ravenhill, J. 89, 92, 91, 113, 114 raw materials 34, 36, 39, 82, 252 real estate 66, 120, 174t, 191, 252 real estate bubble (Sweden) 56 ‘reality’ 91 Rebick, M.E. 119, 131 Recruit Works Institute 122, 129(n4), 131 recruiting/recruitment 117, 192 Redding, G. x, xv, 2, 5, 10, 20, 23, 27, 32, 135, 150 Redman, T. 214 redundancies 192 regional economic integration 89, 95 regional economic integration, deepening 93–6, 113(n1–2) government-level meetings initiated after Asian financial crisis (1997–2001) 95t growth of FTAs and economic partnerships 95–6, 113(n2) new regionalism, FTAs, and economic partnerships 95 regional economic interdependence 91 regional headquarters (RHQ) 155, 163, 188–9 regional production networks 109–11, 113(n10–11) regional trading blocs 95 regionalism 89, 92, 95 East Asian 4, 89, 113 ‘new’ 92, 95 regulation/s 189, 235, 236, 252 Rehbehn, R. xv, 8–9, 182, 186n, 198n, 199(n3) religion 15, 20 ‘remiss’ 64 rent 39, 40, 50

reputation 117, 138–41, 144, 148, 149, 249 research and development 9, 46, 108–9, 145, 161, 168, 173t, 188–9, 194–5, 199, 209f, 210f, 210 Research Grants Committee (Hong Kong) 215n resource allocation 33 resource-based view 132, 133 restructuring 181, 246 retail sector 11, 74, 83, 126, 174t, 235, 236 Retriva (service organization) 58 reverse imports 111, 112t, 113(n12) rewards system 83 Ricardo, D. 19 risk 8, 9, 30, 67, 106, 145, 199, 208, 249, 252 risk premium 117 Robins, F. xv, 3–4, 9, 85 Robinson, K.C. 250, 254 Robison, R. 92, 115 Rockel, M. 130 Rogovski, N. 203, 214 Roh Tae Woo 41 Rohde, R. 236, 254 Roland Berger Strategy Consultants 197, 200(n13), 201 Romaniuk, J. 208, 214 Rong, M. 254 Roos, J. 62, 70 Rosa, J.A. 221, 232 Rosenzweig, P.M. 215, 217, 220, 231, 233 Rowan, B. 216, 217, 232 Royal Institute of Technology (Sweden) 61 Ruef, M. 217, 218, 220, 233 rule of law 236 rule-based systems 236 rule systems 139, 143, 145 rules 134, 146, 148, 252 formal/informal 138 rural areas 235, 245 Ryan, A.M., et al. (1999) 203, 214 Baron, H. 214 McFarland, L. 214 Page, R. 214 S-E Banken 67 Sachs, J.D. 34, 51, 52 Sachs, S. 150 safety 168t, 168, 172t Sahrén, A. 62, 65, 67 Saitama prefecture 122 Sakaiya, T. 68

282 Index salaries 149, 182, 235 annual system (nenposei) 121 sales 79, 121, 152f, 170, 250 annual 238–9 annual growth 224, 227t, 228t, 229 domestic 37 local 169 local/regional 162 sales and marketing 209, 209f, 210f sales organizations 153, 174t, 175t sales planning 209f, 210f, 210 sales subsidiaries 170, 175t, 176(n3) Samsung Electronics 75, 188 Samsung India 75 sange daibiao (three representations) 238 Santana (vehicle) 187 Santro (mini car) 75 Saqib, M. 150 Sarkar, M., et al. (1997) 203, 214 Cavusgil, S.T. 214 Evirgen, C. 214 SARS 92 Sato, S. 69 savings 29, 37, 42t scandals 40, 41 Scanlan, T.J. 62, 70 Scheinberg, S. 246, 254 Scherer, R.F. 208, 214 Schnabl, G. 114 Schuler, R.S. 203, 214 Schumm, W. 200 Schutte, H. 133, 150 science 15, 46 science parks 31 science and technology 49 Science and Technology Industrial Parks (STIPs, PRC) 190 National High-Technology Export Bases 190 National STIPs 190 scientific knowledge 18 Scott, R., 217, 218, 221, 222, 229, 230, 233 Scott, W.R. 135, 150, 217, 219, 232 sea transport 31 Seattle (1999) 92 securities (overseas) 56 Securum (‘bad bank’) 58 ‘see and touch’ 81 self-employment 237 self-interest 138 self-sufficiency 43 Selnes, F., et al. (1996) 62, 71 Jaworski, B.J. 71 Kohli, A.K. 71

semantic personality inventory 242, 244 semiconductors 80, 81, 162, 163, 184 seniority effect 118, 119 seniority wages 116, 118, 119, 128 service sector 10, 30, 31, 126, 188, 223, 241 services 202, 204 free mobility 49 Seyed-Mohamed, N. 213 Shanghai 23, 74, 80, 187, 194, 196, 239, 240n regional MNC headquarters 188–9 Shanghai Bai Lian Holdings 74 Shanghai Hualian Lawson 74 Shanley, M. 222, 231 share prices 56, 199(n11) shareholder value 135, 145 shareholders 25, 30, 141b, 142f Sharma, D.D. 150 Sharp 188 Sharp, B. 208, 214 Shenzhen 194, 199(n11) Shimizu, Y. 77, 86 Shimoharaguchi, T. 86 shipbuilding 39, 46 Shiquin, X. 200 Shirouzu, N. 183, 201 short text messages 75 Sichuan province 235, 240n Siemens AG 186, 188, 189, 194, 196 turnover (PRC) 199(n9) Siemens Communication Devices 199(n3) Siemens Industrial Park (Pudong) 194 Siemens Network Solution 186f Siemens (Shanghai) Mobile 186f, 188 Sieren, F. 182, 201 Sina 75 Singapore 15, 16, 31, 80, 100, 101n, 105, 111, 154–8, 159t, 162–4, 164t, 166, 166t, 169, 171t, 171–3, 176(n8) FTA/Economic Partnership with Japan (2003) 96 Japanese FDI 93t local headquarters of many TNCs 155 Toyota’s Asian regional production networks (2004) 110f Toyota’s Asian regional production scheme (1993) 110f Toyota’s business activities 99, 99t Singapore: Ministry of Trade and Industry 114 Singapore India Chamber of Commerce and Industry (SICCI) 115

Index 283 Singh, H. 221, 232 Singh, I. 253 Singh, J.V. 217, 220, 231, 233 siying qiye (type of private enterprise) 10–11, 238, 239, 240t, 253(n1) ‘conspicuous silence’ 236 Sjöholm, F. 129(n1), 130, 131 Skandinaviska Enskilda Banken 56, 58 skills 8, 26, 27, 45, 52, 124–5, 129(n6), 154, 167, 168t, 168, 171–3, 176(n7), 245, 249 managerial 29, 78, 250 small and medium-sized enterprises (SMEs) 2, 30, 38, 41, 43, 44, 46 competitive advantages (PRC) 248, 248f competitive disadvantages (PRC) 249, 249f small states 63 net debtors 53, 54 SmartPC 81 Smith, A. 19 Smith, G. 86 Snape, E., et al. (1998) 203, 214 Redman, T. 214 Thompson, D. 214 Yan, F.K. 214 social acceptance 206f, 206–7, 208 social capital 24f, 25, 26 social contract (France) 22 Social Democratic Party (Sweden) 54, 62, 62t, 68 social reaction 205–6 social responsibility 133–4, 136, 243 social science: second-order nature 21–2 social security system 238 social services 33 social systems 21, 31 socialism/socialist modernization 189, 190, 198, 234, 235 socialist market economy 236, 237 societal advantage 135–6, 139–40, 146, 147–8 societal advantages in emerging markets 5–6, 132–50 societal sectors 135, 143, 143f, 144 societies/society 22–3, 26–7, 134, 137 socio-economics 2, 19–20 sociologists ‘find institutions everywhere’ 20 sociology 19 Söderman, S. ii, 215n software 79 Sohu 75

sole proprietorship 10, 236 Solectron 186f Soluna Vios (Asian car) 99, 106 Sony 73 Soskice, D. 27, 32 source countries 161t, 169, 171t sourcing logistics 31 South Africa 97, 98f, 98t, 111 South Asia 141 South China Sea 8, 16, 17 South-West Asia 102f Southeast Asia 74–5, 99, 105, 109, 111, 155, 158 see also ASEAN Sparbanken Sverige (Swedbank) 56, 57, 58 special economic zones 189, 190 specialization 90, 185 Sproll, M. 200 Sproull, L.S. 54, 69 SPSS 239 stakeholder management (Malaysia) 5–6, 132–50 ‘abductive’ development of theory 134 conclusions 148–9 internal institutional setting 144–6 methodology 134 problems 133–4 theoretical framework 133, 134, 148 stakeholder management framework 134–8 corporate social responsibility 138 legitimacy 137–8 matching strategy 136–7 societal advantages and sustainable business 135–6 stakeholder management model 139–44 CSR matrix 141–2b, 143 external institutional setting 143, 143f gaining societal advantages (Malaysian bearings industry) 141–2 matching strategy for societal and competitive advantage 139f organizational fields 143–4 societal sectors (nine major characteristics) 144 stakeholders x, 11, 239, 241, 244, 245, 251 stakeholders: matching strategy for key CSR issues 146–8 community development 147 environmental care 146–7 societal advantages and competitive advantage 147–8

284 Index Staples, A. xv, 4–5, 103n, 104n, 105n, 110n STATA 225, 233 state, the 37, 133, 234–6 State Council (PRC) 10, 190, 235, 236 state intervention 36, 39, 46, 48, 54, 69 state role 26 state sector 28, 49 state-owned enterprises (SOEs) 43, 44, 48, 79, 176(n2), 234, 236–7, 241, 246, 249, 252 status 245 steel 39, 46, 112 Steinmann, H. 203, 205, 207–8, 214 Stiglitz, J. 34, 52 stock analysts 141b, 142f, 146, 148 stock markets 26, 29, 252 Stockholm 1, 215n Stone, D. 59, 71 Stopford, J.M. 215, 233 ‘stovepipe’ mentality 30 Strange, S. 91, 115 strategic alliances 203, 204–5, 207 strategy theory 133 Strobl, E. 129(n1, n7), 130 strong state 33, 35 structural reform 2–3, 53 students 154, 243f, 244 Sturgeon, T.J. 199(n1) 201 Stymne, J. 55 subcontracting/subcontractors 82, 162, 241 subsidiary companies 7, 78, 82, 134, 142b, 145, 147–9, 151, 153–5, 158, 161, 168, 172, 173t, 202, 204 foreign 7, 241, 253(n1) manufacturing 170 see also wholly-owned foreign subsidiaries subsidies 37, 39, 46, 48, 50, 67 Suchman, M.C. 138, 150, 216, 233 Suh, C.S. 34, 36n, 52 Summers, L. 65, 69 supplier partnership schemes 166–8, 174t, 176(n2) suppliers 6, 138, 141b, 142b, 142f, 143–4, 148, 152f, 153, 154, 160, 172, 184–5, 194, 200(n13) automotive 76, 77, 189 first-tier 195, 199–200(n12) foreign 165, 165t, 169, 174t improvement 168t local/indigenous 165–8, 185 tier structure 195, 199–200(n12) supply 51 supply bottlenecks 40

supply chains 3, 4, 18, 79, 80, 84, 166, 167, 174t, 199–200(n12) globally integrated (PRC) 81–2 supply and demand 2, 20, 47 Survey of Trends in Business Activities of Foreign Affiliates (METI report) 120, 121 Sutton, J. 195, 201 SUV 113(n3) Suzhou Industrial Park (1994–5) 190–2, 193, 194 ‘one-stop shop’ 191 Suzuki, K. xv, 2–3, 11 Svenska Handelsbanken 56, 58, 67 Swaminathan, A. 233 Sweden 15, 129(n1), 149 devaluation (1981–2) 55 export-led growth 55 organizational learning capacities for financial system recovery 1–2, 53–71 ratio of loans and foreign debts of banks to GDP (1980–92) 55f recovery from financial crisis 2–3 relationship between banks and government 66, 67, 68 relationship between banks and public officials 66–7 ‘small net debtor’ 53, 54 state-society fracture 64 structural reform 2–3 ‘substantial progress country’ (IMF) 53 tax reform (1990) 56 Sweden: Central Bank 54, 57, 62, 64, 65 Sweden: Department of Finance 58, 60–2, 64–6 Sweden: financial system crisis (1991–4) and political reactions 54–8, 60, 68–9 rise and fall of bubble economy 54–6 structure of financial sector 56–7 Swedenborg, B. 70 Swedish standards 149 Swedish values 145 Switzerland 82 synthetic fibres 44 ‘system orientation’ (of projects) 188 Tachibanaki, T. 118, 119, 130, 131 Taiwan (Republic of China) 2, 16, 31, 33, 34, 48–50, 52, 78, 80, 81, 94, 101n, 111, 113(n10), 156t, 157n, 192, 193, 195, 253(n1) export promotion policy 43–7 macroeconomic indicators (1952–86) 42t

Index 285 manufacturing production (1952–86) 45f from 1950s to 1980s 41–3 role of successive government policies 42 Toyota’s Asian regional production networks (2004) 110f US aid 42, 43 Tallman, S.B. 134, 150 Tanaka, K. 61 tariff exemptions 37 tariffs 36, 77, 109, 113(n13) ‘import duties’ 111 tax burden 51 tax credits 39 tax exemptions 43, 148 tax holidays 44, 113(n6) tax law 46 tax money 66 tax reductions 191 tax reform (Sweden, 1990) 56 taxation/taxes 2, 47, 105, 152f, 153, 174t, 237, 252 ‘distortionary’ effects 49 preferential treatment 35, 37, 39, 191 Taylor, B., et al. (2003) 199(n4), 201 Kai, C. 201 Qi, L. 201 teamwork 145, 149 technology 6, 9, 19, 20, 28, 31, 34, 48, 75, 153, 172, 185, 187, 246 foreign 38, 50 foreign spillovers 151, 152f, 154 imported 36, 43, 80 Japanese 91 maturing 91 mid-level 193 monopolistic or oligopolistic control 18 pace of change 89 proprietary 117, 118 ‘world standard’ 174t technology changes 184 technology diffusion 50 technology gap 170 technology transfer 52, 73, 142b, 142f, 167, 189 telecommunication companies 194 telecommunications 199(n3) telephones 75 television sets 38, 75, 184 textiles 38, 40, 43, 159t, 160t, 160–3, 165t, 166–8, 171t Thailand 3, 7, 74, 82, 96, 97–100, 101n, 105–11, 112t, 113(n8, n10), 154–60,

162, 164, 164t, 166–9, 171t, 171–3, 175–6, 176(n9) auto industry 72, 76–8 currency 16 FDI effects (summary) 173–5t Japanese FDI 93t regional hub (Toyota) 99, 99t Toyota (capacity utilization), 113(n9) Toyota’s Asian regional production networks (2004) 110f Toyota’s Asian regional production scheme (1993) 110f Toyota’s business activities, 99, 99t Toyota’s production 103t, 104 Toyota’s production network 108f Toyota’s exports of CBUs 105 Toyota’s sales 104t Thailand Board of Investment 113(n6) Than, M. 177 Thatcher, M.H. 26 ‘thinking globally but acting locally’ 73 Thomas, V., et al. (1991) 39, 52 Nash, J. 52 Thompson, D. 214 thought styles 132, 133, 137–40, 143, 144, 145–6, 148 conformity 145 cost focus 145–6, 149 employee focus 145, 149 quality and product focus 145 Tilley, R. 77, 86 Timberland 82 time 7, 20, 31, 33, 64, 84, 85, 154, 196, 198, 208, 216, 217, 239, 253 time lag 223 TMCOM Panasonic 186f TNW 78, 86 Tokyo 5, 96, 120, 122, 123n Tomita, T. 68 Torbiörn, I. 203, 214 TORCH Programme (PRC) 190, 191 Torres, J.C. 232 Toshiba 78, 79 total quality management (TQM) 145 Touran (van) 187 town and village enterprises (TVEs) 11, 236, 241 Toyota Argentina S.A. (TASA) 98f, 98t Toyota FAW (Tianjin) Dies Company Ltd (TFTD) 106t Toyota Motor Asia-Pacific (TMAP) 100, 101, 108f Toyota Motor Corporation (TMC) 3, 4, 76, 77, 93 annual reports 99n, 100n, 101n, 102n, 103n, 104n, (112n)

286 Index Toyota Motor Corporation (TMC) – continued approved AICO applications 107t ASEAN production network 108f ASEAN trade facilitation initiatives 107–12, 113(n8–14) author 115 business activities in ASEAN-5 and China 99, 99t Chinese and ASEAN production 111, 113(n12) corporate strategy 96–106, 113(n3–7) development 99 expansion 99 general strategy 97–8 Hino affiliate 3, 77 impact of Asian financial crisis 101–5, 113(n5–6) IMV project (2002–) 97–8, 99, 105, 108f, 108, 109, 110n, 113(n3, n11) intra-firm trade 107 investment in China 100t, 105–6, 113(n7) localization 109 ‘localized’ regional products 99 management of operations 100–1, 113(n4) overseas sales (1995–2002) 102f, 103, 104t, 105 overview of operations in East Asia 96–7 planned investments/ disinvestments 108–9, 113(n9) production 97–9, 101, 101t, 102–4, 111, 113(n12) production capacity 99, 100t, 100, 106, 109, 113(n9) products 100t rationalization 99, 109 regional production networks 109–11, 113(n10–11) regional strategy 105, 107 restructuring 105 reverse imports 111, 112t, 113(n12) shift reduction 104 strategy in East Asia 99–100 Toyota Motor Management Services (TMSS) 100, 101, 110f Toyota Motor Manufacturing Indonesia (TMMIN) 98f, 98t Toyota Motor Thailand Company Ltd (TMT) 3, 77, 98f, 98t, 108f, 112t Gateway plant 99 Toyota South Africa Motors Pty Ltd (TSAM) 98f, 98t

trade 16, 48, 49, 73, 222, 224–6, 227t, 229, 230, 234 automobiles 76 bilateral 10 international 90, 160 intra-regional 93, 94t, 95 Sino-Japanese 92 world 3, 76 trade balance 42t trade barriers 36 trade deficits 43 trade facilitation 92 trade liberalization 47, 78, 92 trade missions 50 trade promotion 38 trade regime 44 trade status-weighted WOFS entries 224, 226–30 trade unions 22, 192, 241 Trailer, J.W. 254 training 6, 17, 26, 50, 52, 105, 117, 118, 129(n2), 138, 142b, 142f, 145, 148, 151–4, 167, 170–3, 173t, 174t, 176(n6, n9), 248 ‘trajectories’ 27 transaction costs 215, 216 transfer pricing 105 transition economies 138, 229, 230, 248, 251, 252 European 1, 2, 33–47, 47–52 transnational corporations (TNCs) 6–8, 151, 152f, 155, 169, 174t ASEAN-owned 156t, 163, 167, 168–9, 174t direct effects 6, 7 European 156t, 158, 163, 166, 167 Japanese 156–7t, 158, 162, 163, 166, 167 manufacturing 173t, 174t multiplier effects 6, 7 NIE-owned 156t, 162, 167, 168–9 parent company 152f, 153f, 154, 158, 161–3, 171 spillover effects 6, 7, 8 US-owned 156t, 158, 159–60, 163, 166, 167, 168 transparency 3, 41, 81, 132, 149 transport/transportation 37, 45, 93, 195 Treviño, L.K. 133, 150 triple bottom line 136 Trompenaars, F. 65, 70 trust 20, 26, 27, 28, 29, 117, 144, 207, 212 trust networking 22 TSMC (Taiwan) 80

Index 287 Turnbull, P.W. 203, 213 turnkey systems 79 turnover 246, 247f, 250 Tushman, M.L. 62, 70 TUV models 99 ultimate low-wage location 197 uncertainty 3, 117, 219, 220, 222, 224, 225, 239, 249, 252 UNCTAD 151, 177 unemployment 234, 235, 246 push factor (entrepreneurship) 245 Unilever 73 United Kingdom 111, 129(n1) United States of America 16, 25–7, 61, 76–8, 80, 82, 83, 91, 111, 117–20, 122, 127, 129(n1–2), 156t, 160, 161t, 163, 165t, 166, 166t, 171t, 171, 172, 195, 199(n6) management–government alliance 22 universities ii, xiii-xvi, 46, 152f, 172, 245 Japanese 123t, 123n, 124 university graduates 249 Urata, S. 131 urban areas 81, 174t US aid 34, 35, 36, 39, 42, 43 US dollar 37 US-ASEAN Business Council: Auto Sector Working Group 76, 86 Ushiogi, M. 131 USI Electronics 80 Vahlne, J. 222, 225, 232 Valuation Board (Sweden) 61 value chains 4, 7, 74, 153, 154, 162, 163, 173t, 174t entire industry 83, 84 global 182 industrial 8, 12 industrial (PRC’s changing role) 8–9, 181–201 international 169 restructuring 181 specialization 181 terminology 199(n1) value-added 38, 44, 184, 185 value-chain multiplier effect 153 value-chain multipliers 174t, 175, 176 values 19, 22, 66, 132, 133, 137, 143, 143f, 144, 145 economic 135, 136, 139 empowerment 145, 149 high ethics 145 ‘natural’ 135–6, 138–41, 146, 147–8 openness 145

social 135–6, 138–41, 146, 147–8, 149 teamwork 145, 149 Venkatraman, N. 250, 254 venture capital 46 Vermeulen, F. 215, 231 Vernon, R. 90, 115 Vietnam 7, 15, 31, 82, 101n, 109–11, 113(n10), 154–61, 164–71, 172t, 175, 176(n2, n10) virtual organization 59 Volberda, H.W. 20, 32 Volkswagen (VW) 183, 186f, 187, 196, 197 Wada, S. 86 wage costs 188 wage level 48 wage premium 116–17, 129(n1) wage settlements 197 wages 6, 121, 129(n3), 151, 153, 174t, 182, 192, 249 gender inequality (Japan) 119 low variance (Japan) 119 lower 250 seniority system 5 variance 5 Wakelin, K. 129(n1), 130 Wall Street Journal Europe 183 Walsh, F. 129(n1, n7), 130 Wang, Y. 236, 253 Warner, A.M. 34, 51, 52 Wayland, R.E. 19, 32 wealth distribution 42 Wealth and Poverty of Nations (Landes, 1998) 22 Weber, E.U. 208, 214 Weber, M. 20, 32 websites 70, 114, 115, 200–1, 237, 238 Wei, X. 200 Weick, K.E. 64, 69 Weider, M. 182, 201 Weiss, J. 177 Wells, L.T. Jr. 215, 233 Wenzhou 235 Werner, S. 215, 233 Westphal, L.E. 37, 52 Whirlpool 75 Whitley, R. 19, 23, 24–5, 32 Wholly-Owned Foreign Enterprise Law (PRC, 1986) 224–5 wholly-owned foreign subsidiaries (WOFSs) definition 223 definition of legitimacy 217 FDI communities and legitimation (PRC) of 10, 215–33

288 Index wholly-owned foreign subsidiaries (WOFSs) – continued institutional and ecological perspectives 10, 215, 220, 229 prior entry 225, 227t, 228t see also subsidiary companies Wibble, A. 61 Winter, S.G. 202, 214 women 123–5, 128t, 128, 159t, 161, 173t, 175t, 176(n6), 208 exodus 119 highly skilled, ‘attracted by foreign firms’ (Japan) 119, 125 Wong, J., et al. (1995) 236, 254 Mu, Y. 254 Rong, M. 254 Woo, W.T., et al. (1997) 34, 52 Parker, S. 52 Sachs, J.D. 52 work experience/tenure 122, 122t, 123, 126–8 association with earnings 5 workers 5, 6, 28, 109, 120, 145, 151, 153, 173t, 236 competence 248f, 249f higher quality 116 Japanese 118 part-time 122 ‘prefer domestic firms’ 117 satisfied 140 skilled 249 USA 118 workforce 161, 171t, 172, 193, 238, 248 workforce quality 173 working conditions 142b, 142f, 248 working hours 196–7 Working Persons 2000 122 World Bank 37, 39, 44, 46, 47, 52, 115 World Investment Report (WIR) 132, 138, 150 world market standards 185

World Trade Organization (WTO) 2, 27, 30, 76, 96, 189, 237 GATT 48 PRC accession (2001) 185, 198, 252 rules 48 World Trade Organization: ministerial meetings (1999–2005) 92 Wu, Q. 234, 254 Xerox 80 Xiamen 81 Xiaojuan, J. 193, 199(n10–11), 201 Xing, W.B.J. 182, 201 Xingwang Industrial Garden (Beijing, 2001–) 194 Xu, Y. 237, 254 Yamada, Y. 69 Yamamura, K. 89, 90–1, 114 Yan, F.K. 214 Yang Jing Yu xvi, 10 Yangtse Delta 23 Yasuba, Y. 119, 129(n3), 130 Yip, G.S. 83, 86, 134, 150, 202, 204, 214 Yiu, D. 216–18, 220–2, 233 Yoshimatsu, H. 115 Yoshino, N. 53 Zadek, S. 133, 138, 150 ‘Zafira’ people-mover (GM) 77 Zaheer, S. 216, 217, 230, 232 Zeile, W.J. 130 Zellman, P. 134, 150 Zhang, Y. 214 Zhejiang Province 235, 240n Zhongguo Tongji Nianjian (China Statistical Yearbook) 223, 231, 240n, 254 Zhu Rangji 16 Ziegler, R. 253 Zukin, S. 19, 32