Innovative Enterprise and Varieties of Capitalism: United States and Japan Compared William Lazonick Ford Foundation Conference on Finance, Business Models,

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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
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  • 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.
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  • 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.
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  • Comparative Capitalism: United States and Japan In the post-World War II decades, United States was the worlds 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 Japans success to its developmental state; but in terms of technology US was Japans 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.
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  • Japanese scholars dont 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, Japans 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.
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  • output (units of quality) price, cost middle income, price matters low income, price sensitive Demand segments Supply 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
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  • output (units of quality) price, cost high income, price insensitive middle income, price matters low income, price sensitive Demand segments Supply 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
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  • Explaining the miracle: Toyoda to Toyota from 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.
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  • 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
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  • 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 economys 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
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  • Social conditions of innovative enterprise: An analytical framework William Lazonick
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  • Social conditions of innovative enterprise Under what conditions do strategy, organization, and finance result in innovation? Conceptualize the firm as a social organization characterized by a set of social conditions that influence the way that strategy, organization, and finance are done Why social? Strategy, organization, and finance reflect relations among people in the economy who occupy different hierarchical and functional 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.
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  • Institutions, enterprises, and sectors in 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?
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  • Social institutions and innovative enterprise Do 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
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  • Strategy and organization within the firm Hierarchical Integration? Integration? Top Executives Technical Specialists MiddleManagers Production Workers Skilled Semi Skilled Unskilled Office Workers Skilled Semi Skilled Unskilled 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: functional integration Deep skill base: