Prof. Dr. W. Mark Fruin

Environmental Sustainability
and Economic Development―Transferring Energy Efficient and Clean
Emissions Technology from Japan to China―

W. Mark Fruin
Global warming is the most pressing issue of our day, next to nuclear arms control. Global warming―caused by excessive greenhousegas emissions (GHEs) ―may well be our doom, less dramatic than anuclear cataclysm, but equally disastrous nonetheless. 5％ of global
GDP will be lost annually and forever as early as 2035, according to
the most comprehensive study of the problem (Stern Review, ix).
Moreover, unless carbon emission levels can be stabilized at or below 550 ppm in the next 10-20 years, annual global GDP losses due toglobal warming will increase to 20％ or more. Stabilization at 450 ppm
emissions is already almost out of reach (Stern Review, xv). In addition, the costs associated with stabilization will increase steadily because marginal damages rise with the stock of GHEs, which is rising
constantly. Abatement efforts need to intensify over time.
Mitigation and adaptation are the two means to arrest global warming. Proposed mitigation methods, like carbon sequestration, however,are unproven and alternative energy regimes are as yet far-fetched.

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For now, adaptation alone can harness climatic reversal. Adaptation
includes emissions trading schemes, innovations, such as new crop varieties, reducing deforestation, and technology cooperation.
For two reasons, technology cooperation is the most interesting.
First, the International Energy Agency (IEA) believes that energy, efficiency will be the single biggest source of emissions savings, generating both economic and environmental benefits (Stern Review, xiii). The
most significant savings will occur in energy generation and transmission where 24％ of energy losses occur, and in industry and transport,each accounting for 18％. The IEA further points out that Japan is the
only economic power that has increased research spending on energy
efficiency in recent decades.
Second, Japanese industrial firms are the most efficient and cleanest
in the world (see below). I have spent many years trying to understandand analyze the high performance of Japan's industrial firms. Based onwhat I am able to learn, I want to facilitate the transfer Japan's knowhow to China and the U.S., the two countries most responsible for
global warming. Transfer hinges on creating favorable conditions forinternational collective action. In this paper and related presentation, I
attempt to enumerate and examine what those favorable conditions
may be.

The Problem
For every $1 of economic output, Chinese industrial firms, as compared with Japan’s, produce eight times the greenhouse gas emissions
at six times the cost. American firms do better, but not by much. U. S.
firms produce six times the GHEs at twice the cost (Sakamoto, 2003,

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2005). Given the size of the U. S. and China’s economies, their energy
use and emissions, America and China would have to become twice asenergy efficient or lower carbon emissions by fifty percent to avoid
permanent damage to world economic and environmental systems.
Fortunately, the means to be twice as energy efficient and halvecarbon emissions are available: set efficiency and emissions levels at
Japanese standards. Unfortunately, high standards without the means
to realize them will not work. Transfer of efficient, low-emission technologies, even a phased, programmatic transfer, is not simple. Numerous barriers exist, including identifying and generalizing embedded
process know-how, valuing of firm-specific intellectual property, making energy and carbon credit markets, and institutionalizing industry,
local, national and international government cooperation.

What We Know Country-level Issues
Differences in country of origin have been shown to be significant interms of the consequences of foreign direct investment (FDI), especially with respect to energy efficiency and fossil fuel emissions. FDI from
Western economies, including Japan, is not pollution haven-seeking,but FDI from Chinese origin-countries, Singapore, Taiwan, and Hong
Kong, often is (Eskeland and Harrison, 2003; Dean, Lovely, andWang, 2003) .
Research show that Western FDI goes to provinces and special economic zones characterized by environmental stringency, high wages,
skilled labor, investment incentives, and agglomeration benefits (Headand Ries, 1996; Fung, Iizaka, and Parker, 2002). But Chinese origininvestment often goes to places of lower wages and environmental

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stringency; it is also smaller scale and more export-oriented, factors
linked to inefficiency and pollution output (Head and Ries, 1996;
Cheng and Kwan, 2001; Fung, Iizaka, and Parker, 2002; Dean, Lovely, and Wang, 2003; Zhang and Markusen, 1999).
Country-level differences, such as these, depend little if at all on
government policies. Instead, they stem from where firms are headquartered, a different sort of country consequence. That government
policies have not impeded flows of China-bound investment and technology transfer is advantageous to international technology transfer.
However, this also suggests some likely barriers to effective collective
action. Getting diverse firms and countries to agree on standards andperformance targets for FDI in China may prove difficult. Aside fromcountry-level differences, industry-and company-level differences arealso important.

Industry-and Firm-level issues
The energy efficiency and low emissions technologies of which weare speaking are not really Japan’s, except in an associative sense.
Such technological capabilities are industry-and firm-specific and, in
this sense, they grew out of Japan’s economic history of late development, scare natural resources, high costs of imported energy, and associated industry structure (Brooke, 2001). This makes them hard-toidentify because they are wedded to particularly evolutionary
pathways, hard-to-isolate because they are decentralized and idiosyncratic, and hard-to-imitate because they are part of largely tacitknowledge, know-how and knack.
Research suggests that such capabilities are rooted in three strong

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forms of organization and management―focal factories, strategic
firms, and interfirm networks―that characterize Japan’s industrial organization and constitute multiple layers of organizational embeddedness (Abo, l994; Aoki, 1988; Aoki and Dore, 1994; Fruin, 1992,
1997; Gerlach, 1992; Taniguichi, 2006). Focal factories are management intensive, multi-function, often multi-product, manufacturing-engineering organizations designed to shorten time to market, reduce
costs, and develop new products in rapidly changing markets. The
bulk of Japan’s energy efficient, low emissions technologies are localized at the factory level of organization.
Strategic firms capture share in high-growth markets by tying together the resources of focal factories with the production and distribution capabilities of interfirm networks. Interfirm networks are decentralized organizations where information exchange and mutually
beneficial relations between nodes (subsidiaries, affiliates and suppliers)
lead to complex adaptive routines, such as innovation in production
and distribution capabilities (Aoki and Dore, 1996; Gerlach, 1992;
Fruin, 2007).
In sum, the technological capabilities of Japan’s firms are based on
country-specific models of industrial organization and industry-leading
best practices; some of these are:(1)

High levels of managerial and technical talent concentrated infactories,(2)

High levels of factory performance in terms of quality assurance,
manpower training, and total productivity improvement,(3)

Firms that are adept at connecting and coordinating the activities
of focal factories and interfirm networks,(4)

Networks of subsidiaries and affiliates to carry out Production

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and distribution activities, facilitating technology diffusion, information exchange, and stimulating innovation,(5)

Subsidiaries and affiliates that deploy the most advanced technologies and organizational practices possible because their profitability depends on doing so.

The most important barriers to the transfer of energy efficient, lowemission technologies from Japan to U. S., China, and the rest of theworld are their origin and evolution in the crucible of Japan’s economic
development. In effect, such capabilities are part of the deep structureof Japanese industrial organization expressed in firm functions, boundaries and linkages to other firms.

Autos and Electronics as Exemplars
Firms in the motor vehicle and electronics industries are widely
studied as the industries are characterized by global competition andthe volume and frequency of FDI in these industries are significant.
Japanese firms have performed well on an international basis in theseindustries although their record in terms of energy efficiency and pollution abatement in these industries has not been the main thrust ofresearch to date (Lieberman and Dhaman, 2005; Sakamoto, 2005；
Womack, Jones, and Roos, 1990). Research on the auto industry suggests three sources of Japan’s competitiveness: operational efficiency,
product development, and supplier management practices (Womack, J.
P., D. T. Jones, & D. Roos, 1990; Lieberman and Dhawan, 2005).

Operational Efficiency
Producing more value added for less energy embodies energy sav-

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ing and enhanced managerial practices. Substantial labor productivity
differentials characterize GM and Toyota, the largest auto makers in
the U. S. and Japan (Lieberman and Dhawan, 2005). On average, GM’s
output (value added) per worker was only 62％ of Toyota’s. GM had 13
times as many employees, but only 79％ as much investment per
worker. GM’s plants enjoyed only one-fourth the average volume of
Toyota’s but maintained about 10 times more work in process inventory (WIP) . Internal operations represented 46％ of final sales revenue
for GM, but only 18％ for Toyota (Lieberman and Dhawan, 2005).

Product Development Efficiency
According to MIT’s International Motor Vehicle Research Project,
Japanese companies develop products faster, cheaper, and better(Womack, J. P., D. T. Jones, & D. Roos, 1990; Takahiro Fujimoto,1999). Codesign and development activities with subsidiary and affiliate firms are major reasons why. High-knowledge content, frequentinteractions between core and subsidiary/affiliate firms result in autos
developed quickly, with high quality, and high customer satisfaction.

Supplier Management Practices
Outsourcing to affiliates, good supplier relations, and focused use of
the best available patents, technologies, and organizational practices
are positively related to total factor productivity growth among small
and medium-sized firms in Japan (Nishiguchi, 1994; Urata and
Kawai, 2001). Differences in human resource practices coupled with
supplier relations help explain substantial, sustained performance differences between U. S. and Japanese auto firms (McDuffie and Helper,
1999; Helper, S. R. and M. Sako, 1995).

Environmental Sustainability and Economic Development

165Embedded Capabilities
The magnitude and persistence of these differences suggest thathigh-level organizational capabilities are not easily imitated, evenwhen the bases for them are well known (Lieberman and Dhaman,
2005; Liker et al., 1999). This runs counter to the received wisdom,
popularized by Michael Porter (1996) and others, that argues that operational effectiveness is not sufficient to maintain competitive advantage.
This difference of opinion hinges on the durability of high-performance organizational capabilities. Porter and like-minded scholars believe that they are imitable and, thus, not durable sources of longterm competitive advantage. Others believe that high-level capabilities
are not easily copied because they are organizationally-embedded,
meaning they are embodied in work-based social relations, likely to betacit and proprietary in character (Granovetter, 2004).
They are embedded because they evolve through the interrelated
efforts of many individuals and organizational sub-units. They persist
because, once put into motion, it is easier to continue with them thanto abandon them. As countless minor adaptations and incremental innovations occur, they become increasingly wedded to and expressed
through social and work relations, making them tacit and, thus, hard
to imitate. They differ from firm to firm because they are based on
firm-specific relations, routines, and practices. Research likewise confirms that when firms like Toyota and Toshiba go abroad, such capabilities are maintained, substantiating that they are firm-based and organizationally embedded (Fruin, 1997; Liker et al., 1999).

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What We Don’t Know Transferring Embedded
Capabilities
The technology transfer literature to date has not distinguished between the transfer of non-embedded and embedded capabilities, suchas high performance best practices. Because embedded capabilities
are anchored in work-based social relations and likely to be tacit andproprietary, they cannot be transferred easily.
Non-embedded capabilities are much easier to move overseas, andtheir transfer blends foreign and indigenous elements in organizations
often described as hybrids.“Hybrid organizations”in such cases meanorganizations that combine foreign and local practices. This approachto technology transfer was described in Abo’s Hybrid Factory. However, we prefer to avoid the term“hybrid”because hybridization has
particular meanings in biology. It occurs when genetic materials fromtwo parents are combined; offspring are typically stronger than either
parent, indicating that while hybrids combine parental qualities, they
have unique qualities, superior to either parent (donor).
Hence, using the term“hybrid”is confusing. The term is used in astraightforward way, meaning“a combination”and nothing more, andin a more sophisticated way, meaning the diffusion and domination ofsuperior traits, which is closer to the biology model. We believe thatthe transfer of high-level embedded capabilities is closer to the biological model, which has not been discussed widely in the literature.
Fujimoto is the exception. His work, The Evolution of a Manufacturing System at Toyota (1999), indicates that what Toyota does so well―operational effectiveness-developed as problem-solving capabilities

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with respect to particular work practices. These firm-specific capabilities, analogous to the energy efficient and pollution abatement technologies under discussion, are quintessential embedded capabilities.
By their nature, embedded capabilities cannot be transferred. They
are embodied in tacit, work-related social relations. If transferred,
they have to be re-created. The process for doing so involves five
steps.
(1)embedded capabilities in home organizations have to be identified;(2)

processes by which embedded capabilities appeared and evolved
are analyzed;(3)

embedded capabilities are removed from the social and organizational contexts in which they appeared. Typically, this involves
moving both people and practices from one context to another;(4)facilitative organizational practices and repertoires with supportive social networks are established in new contexts;(5)

new embedded work practices (that mirror those at home) aredeveloped and nurtured. Home practices are templates against
which new capabilities are measured but, as a rule, embedded
capabilities cannot be transferred, only recreated.

What is being Transferred
In order to know if Japan’s firms in the motor vehicle and electronics industries are taking their most energy efficient and environmentally friendly technologies to China or anywhere else, we need to assess:・ is the factory-firm-interfirm network model being re-created in

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China;・ which models are being made and which production processes arebeing implemented;
・ what organization process capabilities are being created, and how
are they normalized against organizational practices in Japan;
・ are production volumes similar to those in Japan―scale-related issues affect the costs and methods of getting the most advanced
products to markets;
・ is Japanese FDI oriented towards producing goods for China or thedomestic market, in which case production is more likely to conform to environmentally stringent standards, or for export (Antweiler et al., 2001; Dean et al., 2003; Eskeland and Harrison, 2003;
Zhang and Markusen, 1999).
By focusing on one or a limited number of special economic zones(SEZs) in China, interprovincial differences with respect to relative
factor abundance, numbers of suppliers, industry policies, and special
incentives in environmental stringency are ruled out as explanatory
variables (Head and Reis, 1996; Cheng and Kwan, 2001). Also, research suggests that development planning is more likely to succeed
when local government policies and corporate commitment are integrated (Jacobs, 2002); this will be most easily achieved in SEZs, likethe Tianjin Economic Development Area (TEDA).

Conclusion
Given the short time frame―one to two decades―within which effective international collective action for mitigating global warming
must occur, all possible means to identify, isolate, generalize, andEnvironmental Sustainability and Economic Development

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transfer the organizational knowledge that Japanese firms possess interms of energy efficient and low emissions technologies is called for.
Given that the transfer will take place across firm, institutional, andnational boundaries, however, transfer will be difficult and transformations of organizational knowledge in new environments should be expected.
Notes
Abo, Tetsuo, 1994. Hybrid Factory, New York: Oxford University Press.
Antweiler, Werner, Brian R. Copeland, and M. Scott Taylor, 2001.“Is Free
Trade Good for the Environment,”American Economic Review, vol. 91, 4,
877-908.
Aoki, Masahiko, 1988. Information, Incentives, and Bargaining in the Japanese
Economy, Cambridge: Cambridge University Press.
Aoki, Masahiko and Ronald Dore, 1994. The Japanese Firm―Sources of Competitive Strength, Oxford: Clarendon Press.
Brooke, James,“Japan Squeezes to Get the Most of Costly Fuel.”New YorkTimes, June 4, 2005, on-line edition.
Cheng, Leonard K. and Yum K. Kwan, 2000.“What are the Determinants of
the Location of FDI? The Chinese Experience,”Journal of International
Economics, 51, 370-400.
Dean, Judith M., Mary E. Lovely, and Hua Wang, Dec. 2003.“Foreign Direct
Investment and Pollution Havens: Evaluating the Evidence from
China,”unpublished paper, presented to Midwest International Economics
Meetings.
Eskelalnd, Gunnar S. and Ann E. Harrison, 2003.“Moving to Greener Pastures?
Multinationals and the Pollution Haven Hypothesis,”Journal of Development Economics, 70, 1-23.
Fruin, W. Mark, 1992. The Japanese Enterprise System―Competitive Strategies and Cooperative Structures, Oxford University Press.
Fruin, W. Mark, 1997. Knowledge Works―Managing Intellectual Capital at170

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Toshiba, OUP.
Fruin, W. Mark, 1998.“Smart Cards and Product Development Strategies inthe Electronics Industry in Japan,”IEEE Transactions on Engineering
Management, 45-3 (August).
Fruin, W. Mark, 2007.“Business Groups and Interfirm Networks,”in Geoff
Jones and Jonathan Zeitlin, eds., The Oxford Handbook of Business History, New York and Oxford: Oxford University Press.
Fujimoto, Takahiro, 1999. The Evolution of Manufacturing Systems at Toyota,
OUP.
Fung, K. C., Hitomi Iizaka, and Stephen Parker, 2002.“Determinants of U. S.
and Japanese Direct Investment in China,”Journal of Comparative Economics, 30, 567-578.
Gerlach, Michael, 1992. Alliance Capitalism, Berkeley: University of California
Press.
Granovetter, Mark, 2004.“Business Groups and Social Organization,”Handbookof Economic Sociology, 2nd edition, Neil Smelser and Richard Swedberg,
eds.
Head, Keith & John Ries, 1996.“Inter-City Competition for Foreign Investment: Static & Dynamic Effects or China’s Incentive Areas,”Journal of
Urban Economics, 40, 38-60.
Helper, S. R. and M. Sako, 1999.“Supplier Relations in Japan and the UnitedStates: Are they converging?”Sloan Management Review, 36 (3), 77-84.
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Jacobs, Andrew James, 2002.“Integrated Development Planning, Supportive
Public Policies, and Corporate Commitment: A Recipe for Thriving Major
Cities in Aichi, Japan,”Journal of Urban Affairs, 24 (2), 175-196.
Lieberman, Marvin B. and Rajeev Dhawan, 2005,“Assessing the Resource Baseof Japanese and U. S. Auto Producers: A Stochastic Frontier Production
Function Approach,”Management Science, 51-5, July 2005, 1060-1075.
Liker, Jeffrey, M. Fruin, and P. Adler, 1999. Remade in America―Transplant-

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171ing and Transforming Japanese Management Systems, New York: Oxford
University Press.
MacDuffie, John Paul and Susan Helper, 1999,“Creating Lean Suppliers: Diffusing Lean Production through the Supply Chain,”in Liker et al., Remade in
America, 154-200.
Nishiguchi, Toshihiro, 2004. Strategic Industrial Sourcing: The Japanese Advantage. OUP.
Porter, M. E., 1996. What is Strategy? Harvard Business Review, 74 (6), 61-78.
Sakamoto, Toshiyuki, 2003.“Structural Options for Future Actions in Annex I
Countries―Part II: Energy and Climate Case Study, Japan.”METI, October.
Sakamoto, Toshiyuki, 2005.“Japanese Climate Technology Policy―Encouraging Technology Development and Diffusion,”May 11, 2005, Climate Policyin the US and Japan: Prospects in 2005 and Beyond, Workshop, METI.
Stern, David, 2006. Stern Review on the Economics of Climate Change, London:
Exchequer; Cambridge University Press will be publishing the report in
hardcopy in 2007.
Taniguchi, Kazuhiro, 2006. Boundaries and Organizational Architecture of the
Firm: Toward a Theory of Business Institutions, Tokyo: NTT Publications.
Urata, Shujiro and Hiroki Kawai,“Technological Progress by Small and Medium Firms in Japan,”World Bank Institute, 2001, Stock number 27193.
Womack, J. P., D. T. Jones, D. Roos, 1990. The Machine that Changed theWorld: The Story of Lean Production., Rawson Associates, New York.
Zhang, Kevin Honglin and James R. Markusen, 1999.“Vertical Multinationals
and Host-Country Characteristics,”Journal of Development Economics,
59, 233-252.

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