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Innovative Enterprise and Varieties of Capitalism:United States and Japan Compared
William Lazonick
Ford Foundation Conference on Finance, Business Models, and Sustainable Prosperity
2012
© William Lazonick
Theory and History
In a discussion of the various tools of economic analysis in the introduction to his posthumously published tome, The History of Economic Analysis, Joseph Schumpeter (1954, 12-13) wrote (with his emphasis): “Nobody can hope to understand the economic phenomena of any, including the present, epoch who has not an adequate command of the historical facts and an adequate amount of historical sense or of what may be described as historical experience”. By “historical experience”, Schumpeter meant the ability of the economist to integrate theory and history. For theory to be relevant to real-world phenomena, it must be derived from the rigorous study of historical reality. That theory can then provide a framework for the further study of a changing economy.
Theory and History
The construction of relevant theory requires an iterative methodology: one derives theoretical postulates from the study of the historical record, and uses the resultant theory to analyze history as an ongoing and, viewing the present as history, unfolding process.
Through this iterative methodology, theory serves as an abstract explanation of what we already know and as an analytical framework for identifying and researching what we need to know.
The theory of innovative enterprise is both a product of the comparative-historical study of economic development and a process for the integration of new knowledge into a more rigorous and relevant perspective on an evolving economic reality.
Comparative Capitalism: United States and Japan
• In the post-World War II decades, United States was the world’s dominant economy, based on the combination of the developmental state and innovative business corporations.
• Then in the 1970s and 1980s, Japanese companies outcompeted US companies in industries in which US had been world leader: cars, electronics, machine tools, memory chips, and steel.
• Many attributed Japan’s success to its “developmental state”; but in terms of technology US was Japan’s developmental state.
• Then in the 1990s US had its “New Economy boom”, while Japan had its “Lost Decade”, and the US business model was extolled.
• In the 2000s, however, Japan had much deeper innovative capability than the United States, with a far more equitable income distribution and much more employment stability.
“Japanese scholars don’t like the term ‘miracle’. A miracle is something that one cannot explain. The reason why we study Japanese history is to explain it.” Kazuo Wada (leading historian of the evolution of Toyota production system), to Bill Lazonick circa 1993
In comparative-historical perspective, Japan’s “Developmental State” was the United States.
In a talk that Lazonick attended on comparative capitalism by Chalmers Johnson in Tokyo in 1997, it became clear that he accepted as valid as a characterization of the United States as depicted by the standard neoclassical theory of the market economy.
output (units of quality)
price, cost
middle income, price matters
low income, price sensitive
Demand segmentsSupply curve t2
Supply curve t1
high income, price insensitive
Entry through product innovation
Accessing market segments via product innovation
What is the source of high income demand? For example: integrated circuits - military; jet engines - military; calculators - engineers; orphan drugs – national healthcare system
©William Lazonick
output (units of quality)
price, cost
high income, price insensitive
middle income, price matters
low income, price sensitive
Demand segmentsSupply curve t2
Supply curve t1
Entry through process innovation
Accessing market segments via process innovation
Key to the indigenous innovation strategies of developing countries: e.g., Japan from 1950s, Korea from 1980s, China from 1990s
©William Lazonick
Explaining the “miracle”: Toyoda to Toyotafrom Textile Machinery to Automobiles
W. Lazonick and W. Mass, “Indigenous Innovation and Industrialization: Foundations of Japanese Development and Advantage,” Association for Japanese Business Studies,
Best Papers 1995, Ann Arbor 1995.
“Liberal Market Economies: The American Case”
Peter Hall and David Soskice, Varieties of Capitalism, 2001, p. 27:
“Liberal market economies [LMEs] can secure levels of overall economic performance as high as those of coordinated market economies [CMEs], but they do so quite differently. In LMEs, firms rely more heavily on market relations to resolve the coordination problems that firms in CMEs [coordinated market economies] address more often via forms of non-market coordination that entail collaboration and strategic interaction. In each of the major spheres of firm endeavor, competitive markets are more robust and there is less institutional support for non-market forms of coordination.”
Critiqued in Lazonick, “Innovative Business Models and Varieties of Capitalism: Financialization of the US Corporation”, Business History Review, 2010
In effect, Hall and Soskice accept the conventional ideology that, in terms of the coordination of productive activity that results in superior economic performance, the United States can be understood as a “market economy” with a deregulated state. There are a number of problems with this perspective. •First, to view the United States as a “market economy” is to ignore the role of powerful business enterprises in the economy’s resource allocation. •Second, the US government has always played a major role in funding the physical and human infrastructure that permits U.S. capitalism to operate at a high level of productivity. •Third, if the deregulation of economic activity and the rise of “flexible” capital and labor markets permit the characterization of the United States as a “liberal market economy” over the past three decades or so, this variety of capitalism may, in fact, be resulting in inferior, not superior, economic performance.
LMEs: Ideological version of NEBM
Industrial Sectors Business Enterprises
Economic Institutions
MarketsTechnologies
Competition
constrainOrganization
Finance
Strategytransform
challenge
GovernanceEmploymentInvestment enable and proscribe
reform
embed
Social Conditions ofInnovative Enterprise
shape
Strategic ControlOrganizational Integration
Financial Commitment
Social conditions of innovative enterprise: An analytical framework
©William Lazonick
Social conditions of innovative enterpriseUnder what conditions do strategy, organization, and finance resultin innovation? Conceptualize the firm as a social organizationcharacterized by a set of “social conditions” that influencethe way that strategy, organization, and finance are done
Why “social”? Strategy, organization, and finance reflect relationsamong people in the economy who occupy different hierarchical andfunctional positions and have different abilities and incentives
Why focus on “the firm” as a social organization? 1) In the modern economy, the firm is the critical unit of strategic
control over resource allocation to investments in innovation.2) The modern firm employs lots of people (50 is a small enterprise
and 100,000 is not unusual), many of whom interact in collective and cumulative learning processes that are central to innovation.
3) The modern firm cannot exist without substantial and sustained funding; innovative strategy and organizational learning increase the need for investment finance.
Institutions, enterprises, and sectorsin the innovation process
Governance institutions and strategic control: What are the rights and responsibilities that govern the allocation of productive resources (labor and capital) in the economy? Where in the economy is control over allocation decisions located? What are the social processes that monitor, sanction, and reform such control?
Employment institutions and organizational integration:To whom does society provide education, training, and access to research? Through what organizations? For what purposes? How do people get jobs? Is a job at a point in time part of a process of building a career over time? Are careers within or across firms?
Investment institutions and financial commitment:How are financial resources mobilized in the economy for investments in productive resources? From what sources? On what terms? With what expected returns?
Social institutions and innovative enterpriseDo governance, employment, and investment institutions enable or proscribe innovative enterprise?:• Need to understand the evolving relation between social institutions and organizations in specific contexts
Do institutions that support innovative enterprise in one era constrain it in another? • Need to understand how, when, and whether, industrial and organizational change drives institutional change
A research agenda:• Comparative-historical study of capitalist development with a view toward constructing a theory of innovative enterprise that explores (not ignores) historical experience
Strategy and organization within the firm
Hie
rarc
hic
al
Inte
grat
ion?
Integration?
TopExecutives
Technical Specialists Technical Specialists
Middle Managers
ProductionWorkers
Skilled“Semi” SkilledUnskilled
OfficeWorkers
Skilled“Semi” SkilledUnskilled
Strategy and Learning Who allocates resources? Are they integrated with learning processes?
Innovative Skill Bases How broad and deep are
the skill bases that the learning process requires?
Functional
Research agenda: how do innovative skill bases vary in breadth and depth across nations, industries, and enterprises at a point in and over time?
Broad skill base:functionalintegration
Deep skill base:hierarchical integration
UK: 20th century legacy of Marshallian districts
Strategic control: • persistence of proprietary control across British
industry; relative underdevelopment of managerial organization
Organizational integration: • control over work organization left with workers, even in
new industries (autos, electronics) in which, until 1960s, unions not a force; administrative & technical specialists segmented from top management decision-making
Financial commitment:• problem of shareholders who demand payouts rather
than leave funds in the firm to finance growth
The US Old Economy business modelStrategic control: • separation of ownership and control secured by the rise
of liquid stock markets and widespread distribution of shareholding; precondition for managerial control
Organizational integration: • career rewards: distinction between salaried managers
and “hourly” workers; hierarchical specialization & hierarchical segmentation; national educational system important for managers, especially higher education
Financial commitment:• retentions (after stable dividends), bonded debt, stock
issues relatively unimportant
Executives
Specialists
Executives
Specialists
Craft Workersand Assistants
XXXXXXXXXX
UnitedStates
“Semi-skilled” workers
XXX =Hierarchical Segmentation
Britain
US managerial control confronts UK craft control
XXXXXXXXXXXXXXXXXXXXXXXXXXXX
=Hierarchical Integration
=Functional Segmentation
The Japanese challenge Strategic control: • secured by stable-shareholding: career managers exercise control
over corporate resource allocation
Organizational integration: • permanent employment: in-house training and career rewards for
blue-collar and white-collar male personnel; hierarchical and functional integration that fosters organizational learning
Financial commitment:• main-bank lending: retentions (with low dividends) highly
leveraged by state-supported bank finance
In historical retrospect, the Japanese perfected US OEBM; by the 1980s Japan were exporting not only higher quality, lower cost products, but also innovative organizational practices (kaizen, JIT, etc.).
Executives
Specialists
Executives
Specialists
Regular Male Operatives
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Females/Temporary Employees
UnitedStates
Japan
XXXXXXXXXXXXXXXXXXXXXXXXXXXX
“Hourly” Operatives
XXX =Hierarchical Segmentation
Organizational integration and international competition United States and Japan, 1980s
=Hierarchical Integration = Hierarchical Interaction
=Functional Segmentation
??? ?
Specialists
Regular Male Operatives
Germany
JapanXXX = Hierarchical
Segmentation
Craft Workers
Executives
Executives
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Most females and temporary employees
Specialists
=HierarchicalIntegration
= HierarchicalInteraction
= FunctionalSegmentation
German and Japanese business models compared
PDG
Ouvriers
X X X X X X X X
France
XXX =HierarchicalSegmentation
XXXXXXXXX
Cadres
Techniciens
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
The French business model
Institutions and international competition: 1980s
Low cost High cost
High quality Japan Germany
Low quality United States
(OE)
Britain
Italy France
Product quality
Product cost
Adaptation and globalization in 1990s and 2000s
OEBM NEBM
Strategy, product
Growth by building on internal capabilities; business expansion into new product markets based on related technologies; geographic expansion to access national product markets.
New firm entry into specialized markets; sale of branded components to system integrators; accumulation of new capabilities by acquiring young technology firms.
Strategy, process
Corporate R&D labs; development and patenting of proprietary technologies; vertical integration of the value chain at home and abroad.
Cross-license technology based on open systems; vertical specialization of the value chain; outsourcing of work and offshoring for lower wages.
Organiza-tion
Secure employment: career with one company; salaried/hourly employees; unions; defined-benefit pensions; employer-funded medical insurance in employment and retirement.
Insecure employment: interfirm mobility of labor; broad-based stock options; non-union; defined contribution pensions; employee bears greater burden of medical insurance.
Finance Venture finance from personal savings, family, and business associates; NYSE listing; payment of steady dividends; growth finance from retentions leveraged with bond issues.
Organized venture capital; NASDAQ listing; low or no dividends; growth finance from retentions plus stock as an acquisition currency; stock repurchases to support stock price.
US Business models, old and new
The rise of the New Economy business model
Strategic control: • control by managers secured by liquid capital markets;
may be owners but all strategic managers highly specialized & experienced in particular industrial sector
Organizational integration: • all salaried (not hourly), career rewards for motivation
plus stock-based compensation as recruitment/retention tool; tap into global labor forces as highly educated labor flows to capital, and capital flows to less educated labor
Financial commitment:• venture capital reallocates money and people, funds
raised in IPO, retentions, little if any dividends and debt
Ver tical
Organization
Global labor
Global marketssales design
Global labor
OEM
Component producers
Venture capital
US-Based Operations Global Operations
Contract manufacturers
Machinery makers
Executives
Specialists
The US New Economy business model
Japanese competition as catalyst to rise of NEBM• In the 1980s the United States was confronted by a formidable
competitive challenge from Japanese companies in a number of industries – automobiles, consumer electronics, machine tools, steel, and microelectronics – in which US companies were world leaders.
• Japanese competition wiped out US consumer electronics industry.
• During the 1980s US car manufacturers attempted to learn from the Japanese, but in the 2000s were still producing lower quality, higher cost cars, and, not surprisingly, had lost significant market share.
• In machine tools, US response to the Japanese from the 1990s was the emergence of export-oriented small- and medium-sized enterprises producing for specialized niche markets.
• In the steel industry, the innovative response of the United States was the emergence of independent minimills, using electric arc furnaces and scrap metal.
Japanese competition as catalyst to rise of NEBMThe most critical, but ultimately successful, US response to Japanese competition was in the semiconductor industry.
By the middle of the 1980s, the Japanese had used their integrated skill bases to lower defects and raise yields in the production of memory chips, forcing major US semiconductor companies to retreat from this segment of the market.
Intel, a leading innovator in the US semiconductor industry, averted bankruptcy by shifting from memories to microprocessors, in which the company had been engaged since the early 1970s.
Led by the Intel microprocessor for the IBM PC and its clones, US companies became world leaders in microcomputers and chip design.
Indeed, the IBM PC and its “Wintel” architecture laid the basis for the rise of NEBM, which by the 2000s had relegated OEBM to history in the ICT industries.
What about Japan’s business model? Is the “institutional triad” still intact? •Stable shareholding and strategic control•Permanent employment and organizational integration•Main bank lending and financial commitment
The extent of stable shareholding has declined significantly: Will shareholder value ideology take control?
Permanent employment has internal flexibility through shukko (temporary) and tenseki (permanent) transfers of personnel – but a hollowing out of blue-collar jobs and more use of “part-time” workers – less employment stability at 2nd and 3rd tier suppliers
Main-bank lending less important – indeed, in Choose and Focus (2008, 107) Ulrike Schaede argues “the main bank of the postwar period is fast becoming history.”
What about Japan’s business model?
nnnnnnnn
MSV-san goes to prison
In the last few years, dividend yields have risen.
Stock buybacks in Japan
Financial Times, November 5, 2012“Japanese payouts increased despite outlook”
Japanese companies are returning more money to shareholders in spite of a darkening economic outlook and subdued earnings forecasts, in a sign of more shareholder-friendly approaches to capital management by these notorious cash-hoarders.
Just over halfway through the second-quarter earnings season, many of the companies to have reported so far, including Ricoh, the office equipment maker, and Nippon Meat Packers, have softened the impact of lower than expected profits by announcing plans to increase payouts through buying back shares and increasing dividends.
Stock analysts have welcomed the trend , which comes as the world's third-largest economy hovers on the brink of recession amid weak conditions in the vital export markets of China and Europe.
Stock buybacks in Japan
Financial Times, November 5, 2012“Japanese payouts increased despite outlook” continued
Listed Japanese groups have long been known for their high gross cash levels, which as a percentage of total assets are about two-fifths higher than those of companies in the US, and four-fifths higher than those inEurope .
"A lot of people claim that Japanese companies are really poor at using cash," said Shun Maruyama, head of equity strategy at BNP Paribas in Tokyo.
Total buybacks in the current fiscal year to March are expected to top Y2tn ($25bn), on Goldman Sachs estimates, which would represent a fivefold increase from the year ended March 2009, when dividends andbuybacks bottomed in the wake of the Lehman Brothers collapse. Dividends may rise to about Y5tn, from Y4tn in 2009.
“Disclosure requirements, in particular, are quite strict, compared to the U.S. In Japan, repurchasing firms are required to file detailed information of their repurchase activity with the stock exchange. Such information includes how many shares they plan to buy back, when to buy back, and which securities firm to hire. Also, once the repurchasing firms execute buyback transactions, the firms have to submit a detailed report to the stock exchange at the close of a trading day. With respect to insiders’ trading activity in conjunction with share repurchase trading, the guidelines set forth by the Tokyo Stock Exchange go to great length to explain “the matters of attention” for insiders. For example, (1) an insider who is in a position to make a firm’s share repurchase decisions should not trade his own holdings of the firm’s shares while a buyback program is underway, (2) a repurchasing firm should establish trading rules for insiders to avoid conflicts of interest, and (3) if there is any potential conflict of interest, the public should be informed of it.”
Survey on Open Market Repurchase Regulations: Cross-countryexamination of the ten largest stock marketsJaemin Kima, Ralf Schremperb, Nikhil Varaiyaa
Regular employment in Japan
nnnnn
Mandatory retirement age in Japan
• no longer crucial for large firms
• banks interested in a client’s profitability, not longevity
• banks have reduced ownership stakes in companies
• new bankruptcy laws reduce main bank’s pivotal role in orchestrating bailouts
• banks still important for small firms but “the breakup of Japan’s rigid interest rate structure and waning political influence in the small-firm-loan markets have finally allowed banks to price loans commensurate with risk.” (p. 108)
Schaede: “main bank fast becoming history”
n
Source: Japan Statistical Yearbook 2012
Total: 41,531 Billion Yen Total: 67,400 Billion Yen
Composition of Japanese exports, 1995 and 2010
Source: Japan Statistical Yearbook 2012
Total: 31,549 Billion Yen Total: 60,765 Billion Yen
Composition of Japanese imports, 1995 and 2010
