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