Kenji E. KushidaTakahashi Research Associate in Japanese Studies, Walter H. Shorenstein Asia-Pacific

Research Center

12/7/2012FIID Conference

Inside the Castle Gates: International Competition, Inward FDI, and the

Persistence of Japan’s Economic Model

Outline Stability and Change (helping Bill update

the “institutional triad”) Concept of Syncretism Effects of Inward FDI The Case of ICT

Outline Stability and Change (helping Bill update

the “institutional triad”) Concept of Syncretism Effects of Inward FDI The Case of ICT

Stability and Change Only 14% of GDP = export dependent

• Almost ½ of this = yen denominated• Only a few high profile firms damaged by

strong yen “Hollowing out” began in mid-90s, most

competitive suppliers already abroad Core strength in Components, domestic

service sectors not financialized

Employment

Shareholders in TSE

NPLs in Banks, 1999-2011

Exports as % of GDP, 2010

Saudi A

rabia

South K

orea

Germany

Mexico

Russia UK

Canada

South A

frica

China

Italy

France

Indonesia

Argentin

aIn

dia

Turkey

Australia

JapanUSA

Brazil

0

10

20

30

40

50

60 56.852.4

46.8

30.430.029.929.427.427.026.825.524.6

21.721.521.120.9

15.212.711.2

(%)

Stability and Change Japan no longer “Castle” vs foreign

MNCs (image of 80s)• Autos Nissan, Mazda foreign controlled• Financial services Top insurers = foreign

(eg. Aflac), top revenues to foreign securities brokerages, turn-around of venerable bank by foreign investment fund

• Telecom 2001-2006, Vodafone was 1 of 3 nationwide cellular carriers

• Pharma MNCs are top employers

Stability and Change Far more differentiated strategies

• Keiretsu business groups bifurcating • No longer “convoy” or “parallel march”

Far more Open• New Japanese entrants in previously closed

industries banking, insurance, etc

How to Characterize?

Outline Stability and Change (helping Bill update

the “institutional triad”) Concept of Syncretism Effects of Inward FDI The Case of ICT

Syncretism: Japan’s Political Economy Since the 1990s Syncretism: new, old, and hybrid forms

of practices, norms, and modes of organization coexist.

A specific form of diversity.

Syncretism: Japan’s Political Economy Since the 1990s From Kushida and Shimizu ed.,

Syncretization: Corporate Restructuring and Political Change in Japan. APARC/Brookings, forthcoming 2013.

Kushida and Shimizu. “Syncretism: The Politics of Japan’s Financial Reforms.” Forthcoming.

Syncretism: Japan’s Political Economy Since the 1990s Financial sectors: While the breadth of

the new has expanded, and hybridization is occurring to a significant degree, large portions of very traditional organizations, norms, and practices remain within the industry.

Syncretism: Old, New, Hybrid Coexisting New foreign investment banks,

securities firms, insurers, and some new Japanese entrants. • New business models (eg. derivatives and

annuities)• New practices (eg. employment and inter-firm

relations)• New norms (profit max as raison d'etre, max

short-term shareholder returns).

Syncretism: Old, New, Hybrid Coexisting Hybrid melds traditional and new

elements, (big 3 financial groups) • Combination of new and old business models

(eg., traditional deposits to foreign currency denominated accounts, annuities, insurance)

• Multiple forms of employment practices (traditional seniority-based banks versus performance oriented securities subsidiaries),

• New and old interfirm relations (acting as relational “main banks,” but also entering into joint ventures and tie-ups with foreign financial insts).

Syncretism: Old, New, Hybrid Coexisting Old regional banks, retain…

• traditional strategies (continued heavy reliance on retail banking)

• traditional organizational structures (seniority based hierarchies)

• norms (regionally based with close ties to local governments, emphasis on relationship banking as a key source of client information).

• Supported by measures such as “designated bank” for local governments

Japan’s Deposit-Taking Financial System (trillions yen)

Date City Banks Regional Banks Postal Savings*

Deposits      

1995 209.0 217.7 -

2000 230.6 235.0 -

2005 255.7 245.9 200.0

2010 270.3 272.6 175.8

Assets1995 346.9 194.7 -

2000 373.0 200.5 -

2005 395.5 216.7 194.7

2010 419.4 240.1 264.9

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

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

0.00.51.01.52.02.53.03.54.04.5

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

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