Inside the Castle Gates: International Competition, Inward FDI, and the Persistence of Japan’s...
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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
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Outline Stability and Change (helping Bill update
the “institutional triad”) Concept of Syncretism Effects of Inward FDI The Case of ICT
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Outline Stability and Change (helping Bill update
the “institutional triad”) Concept of Syncretism Effects of Inward FDI The Case of ICT
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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
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Employment
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Shareholders in TSE
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NPLs in Banks, 1999-2011
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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
(%)
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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
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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
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How to Characterize?
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Outline Stability and Change (helping Bill update
the “institutional triad”) Concept of Syncretism Effects of Inward FDI The Case of ICT
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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.
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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.
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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.
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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).
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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).
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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
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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
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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
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Effects/Implications of Syncretic Financial System Avoided full impact of 2007-8 financial
crisis Limited size of “shadow banking” system Limited scope of “financialization”
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Outline Stability and Change (helping Bill update
the “institutional triad”) Concept of Syncretism Effects of Inward FDI The Case of ICT
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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.
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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
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Inward FDI Sectors receiving the most inward FDI:
• Automobiles• Finance (Banking, Securities, Insurance)• Pharmaceuticals• Telecommunications
FDI understates presence of foreign MNCs
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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?
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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)
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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
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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
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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)
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Outline Stability and Change (helping Bill update
the “institutional triad”) Concept of Syncretism Effects of Inward FDI The Case of ICT
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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
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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.
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Galapagos
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Galapagos
• Kenji E. Kushida • Stanford Asia-Pacific Research
Center
2007
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Japan’s ICT Sector What’s really happening:
Leading without followers
Japanese firms led in particular technological trajectories
… but the world didn’t follow
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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
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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
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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