& BUSINESS

23rd

REPORT
ANNUALi(II`ileil'":":,kx,

THE RESEARCH INSTITUTE FOR
AND BUSINESS ADMINISTRATIONECONOMICS

KOBE UNIVERSITY
1977

KOBE
& BUSINESSECONOMIC
REVIEW
23rd

ANNUAL REPORT

gs`i'E "l2

THE RESEARCH INSTITUTE FOR
AND BUSINESS ADMINISTRATIONECONOMICS

KOBE UNIVERSITY

1977

CONTENTS

Page
Alternative Approaches to the

AccountingforEducation .....................

Nobuko NossE 1

Personnel Management of Japanese Companies

in Thailand: A FieldPaper .................

Hideki

YosHIHARA 11

Evaluation of Performance Using

Multiple Criteria ............................

Komayuki ITow 63

Some Bargaining Process Models in

the Shipping Exchange .......................

Tetsuji

SHIMOJO 69

Asset Diversification under the Flexible

Exchange Rate System ...................•. ...

Kazuhiro

IGAwA 85

1

ALTERNATIVE APPROACHES TO

THE ACCOUNTING FOR EDUCATION
Nobuko NossE
I Introduction
Because of the rising interest in Education in both sides of the Atlantic, Education

Aecounting has been a major subject of Social Accounting since 1970's. Around thissubject there have appeared several pioneering works, but among those Hofessor
Kendrick's human investment accounting and Professor Stone's education accounting
seem to be most notable ones by their respective special influences in the followers. Bothworks, being built on different ideas, are contrastedly differeni on their scopes,
approaches and their conclusions from each other; Kendrick intends to estimate al1
educational expenditures, gross human capital fortnation and its depreciation and humancapital within the national accounting frarnework and as a 'corollary favors to revise theconvention of the national accounts while Stone intends to build education accounting

matrix outside the frame of the national'

accounts but within the new SSDSi fornon-market activities without proposing any revision of the SNA.

Since the upsurge in interests in education came up later over one decade than thetime of establishment of the national accounting convention, people who have wished toestimate education expenditures along the line of new thoughts, must face a trouble withthe old national accounting way for education which treates outlay for education as acurrent expenditure, that does not enhance hufnan capacity over the future' periods.
Against this long-lived tradition, those people have to be confronted with alternative waysof (i) estimating the education expenditure as afl investment by discarding the conventionof human capital and (ii) building the format for education separately while keeping

the national accounts intact, both correspond to the idea of Kendrick and Stone
respectively. It is thus clear that both works have been in main directions for educationaccounting. We intend to make a survey on both works with a scrutinization as shown

below.

ll HumaninvestmentAccounting
Human capital, now growing to a popular term amongaccountants, is a general name both for tangible and intangibl' UN, Tou,ardsa System ofSocialandDemographicStatistics, 1975.

both economists ande capital concerned toNOBUKO NOSSE

2human being. Among all human capital, education embodied in human being is mosttypical and representative. Under the concept of human capital since Professor T. W.
Schultz's pioneering series on `Economics of Education,'2 diversified topics have beenstudied by his followers.3 Professor Kendrick's human investment accounting4 is apositive application of the human capital theory to mational income and capital
accountmg.
Kendrick's aim is to introduce the expanded capital concept into the national
accounts and to estimate NNP, investme'nt and national capital in the set of the national

accounts and the natiQnal balance-sheet along the line of human capital. Kendrick
attacks first the national accounting convention which does neglect human capital andtreats education outlay as a consumption. Then he points that this treatment is based onwrong convention derived from business accounting which has adhered only to physicalcapital but never has considered human capital as capital at al1.

He asserts that both caPital, either physical or human, should be treated as those on

equal footing, and on this way he transfers education outlay and related expenditurefrom consumption to investment within US National Accounts and estimates the figuresof US for 1929-1969. Kendrick defines capital as a stock from which we can expect toget some stream of income (either monetary or psychic) over future periods. His conceptof capital undoughtedly corresponds to Schultz's capital concept or H.Johnson's`generalized capital concept'5 which is applicable indifferently to both physical capitaland human capital. His estimates of rates of return ofboth capital during 1929-1969
indicate afi evidence of the applicability of this generalized capital concept.

According to his list, human capital expenditure contains many items. It covers
outlay for education both formal and iriformal, al1 sort of training costs, costs for
improving health and safety, mobility costs for occupation and rearing costs of children
to working age. It is obvious that his coverage counts items concerned to human capitalin broadest sence. It is remarkable also that he counts not only actually paid expendituresuch as school fees but also imputed `foregone income' which has foregone and is an

2 T. S. Schultz, The Economic Value ofEducation, 1963.
3 Among thern schoolmg model by Becker, on thejob training modelby Mincer are most famous.
See G. S. Becker, Human Capital, A theoretical andEmpiricalAnalysis with SpecialReference to

Education, 2nd ed., 1975. J. Mincer, `On the Job Training: Costs, Retums, and Some
'Implications; Joumal of Political Economy, VoL 70, No. 5, part 2 (Supplement), 1962, pp.
50-80. For surveying, sep T. W'. Schultz, Human Resources, 1972. J. Mincer, `The Distribution ofLabour Incomes: A Survey with Special Reference to the Hurr)an Capital Approach', Journal of

Economic Literature (Mar. 1970) pp. 1-26, and G. Psacharopoulos, Earning and Education inOECD Countries, 1975.
'` J. W. Kendrick, `The Treatment of Intangible Resources as Capital; The Review oflncomeand"tealth, series 18, No. 1, Mar. 1972. J. W. Kendrick, `The Accounting Treatment of Human
Investment and Capital,' series 20, No. 4, Dec., 1974.

5 H. G. Johnson, `Towards a Generalized Capital Accumulation Approach to Economic
Deyelopment,' 1964, reprinted in Economics ofEducation edited by M. Blaug, VoL 1, 1968, pp.

3444.

3
ALTERNATIVE APPROACHES TO THE ACCOUNTING FOR EDUCATION

opportunity cost but not itself as a cost in the national accounting context. This way ofthought corresponds to that ofhuman capital school's such as Schultz. He calculates also

the maintenance cost of human capital which is to be deducted from labour
compensation.
Another notable point in his work is depreciation of human capital. As Kendrick
assumes that capital whether physical or human equally suffers from depreciation and heestimates the value of human capital depreciation by applying double-declining balancemethod for• tangible capital. The valuation ofhuman capital is taken on cost basis as thatof non-human capital. He estimates the national.total of the human capital and its
depreciation by totaling cummulated costs of educ4tion pf age-groups of the populationof the US and their depreciation cost based on the above method.

Finally Kendrick draws a set of current national account's-production account,income account and capital account-and of balance-sheet in a consistent way. His workis pioneering one in estimating education investment and the related items in the natiQnal

accounts and has been widely referred by human capital accountants such as Bowman6 as

we shall be seen later and has been supported by some national accountants such as
Ruggles and Ruggles7 and Gearly.8

Ill EducationPopulationAccounting

Against the Kendrick's approach based on human capital theory, Stone hasdeveloped education accounting from the viewpoint of the student population analysis.9

At outset he defines education activities ,as a non-market oriented activities which
compose objects ofthe SSDS and then provides a demographic matrix called sometimes as
PAM, while he does not intend to give any revision of the SNA at al1.

Stone himself wrote the reason why he does retain the convention of the SNA on the
education expenditures.iO It is as follows. `Although the fact of "a higher level of
education with a higher level of life time earnings" being undeniable as Becker and his

6 M. J. Bowrnan, `Postschool Learning and Human Resource Accounting; The Review oflncome
and Wealth, series 20, No. 4, Dec. 1974.
7 N. Ruggles and R. Ruggles, `A Proposal for a System of Economic and Social Accounts,' in M.

Moss (ed.), The Measurement ofEconomic and SociaIPerformance, 1973. Rugglesand Reggles,
Design of Economic Accounts, 1970.
s R. C. Geary, `Reflections on National Accounting; TheReview oflncome and Wealth, series 19,
No. 3, Sept. 1973.
9 R. Stone, Demographic Aceounting and Model Building, 1971. R. Stone, `The Fundamental
Matrix of Actiye Sequefice; in A. Carter and D. Br6dy (eds.), Input-Output Techniques, 1972.

R. Stone, `An Example of Demographic Accounting: The School Ages,' reprinted in his
Mathematical Models of the Economy and Other Essays, 1970. R; Stone, `A System of Social
Matrices,' The Review of Income and Wealth, series 19, No.2, June 1973. UN, Towards a
Systems ofSocial and Demographic Statistics, 1975, pp. 42-5e, 93-99.
io UN, Statistical Commission, System of NationalAccounts rS?VA7, Supplementing the IVational
Accounts for Pleiiposes of Welfare Mea.swrement (E/CN. 3/459) July 1974.

4

NOBUKO NOSSE

followers assert and as Psacharopoulos' estimates show, their suggestion that the humancapital concept should be introduced into the nationai accounts raises wider issues. If we

dealt all education and other human expenditures including maintenance and improve-

ment of human capital as capital expenditure according to the suggestion, final
consumptjon would hardly appear on the income account because al1 consumption issplitted into maintenance (that is an intermediate outlay) and improvement (a capital
expenditure) and final output would only be net investment'. He adds that the objective
relation between these expenditures concerned to human capital and future earnings havenot assessed even in the case of education. As for the depreciation of the education
outlay he does not explain but his disagreement wjth the suggestion to introduce theexpenditures of research and development into capital expenditures is notable; his
objection to the suggestion is based on impossibilities of objective measurement and hesays that to trace a pattern of depreciation of su'ch expenditures over their life time ineconomically' meaningful way is difficult that those expenditures should be dealt as
current expenditures. By above reasons Stone concludes that the most reasonable way is

to treat the problem according to the present way of the SNA with some detailed
information if needed, and education activity should be explored in the SSDS as othernon-market oriented activities.

Now• turn to Stone's education accounting. He starts by defining education as anaging phenomenon of population. For the taxonomic convenience, he sets the boundaryof educational (or learning as he says) activity between formal education and informal

education. He takes only the former as to be entered in his education accounts andmakes several formats for recording student population from infaqts to age 25 or a bit
elder. The formats constitute a proto type ofthe education accounts.
The main consideration in designing the education accounts is simple, basically two:
One is `age' and. another is `institution' and both are main categories for classifying thevarious students on different states aefinitely. Institution is, by Stone's explanations,typically a school and generally considered as an organ of performing their own
educational subject to give educational training to students who are coming in and leavingout after schooling. Stone says that the `states' of the student population is distinguishedby these categories.

Instjtutjon can be decomposed jnto its sub-groups further. And one institution andone sub-group of it often performs plural subjects. Stone givesa short explanation forunderstanding `institution'. According to it, `institution' corresponds to `industry' and`subject' corresponds to `commodity' in the 1-O accounts.ii He adds that the institutional division serves for showing different educational products of different quality
produced in different academic streams.
The student population moves age by age, grade by glade, institution by institutionii

Stone,DemographicAccounting, ibid. pp.48-50.

ALTERNATIVE APPROACHES TO THE ACCOUNTING FOR EDUCATION'
5
and then at last leaves from the boundary of whole formal education. Stone explains themechanism of this transition by the idea of `transition coefficients' which he developed itin his demographic accounting. Using his `transition coefficients' or `transition
proportion ratios' which are defined as ratios of survivors to the initial stocks of thestudent popuiation in every state (age, institution, etc.), whole picture of students in an

economy is defined as follows.

AniSi +b (1)where S is a matrix of surviving students, b is a column vector of new students both fromdomestic area and foreign countries, i is .a unit vector, n is a column vector of the student

population at the beginning of a year, Ais a shift operator defined by the relation off('n(T) =n (T + e).
The transition matrix is defined as

C = Sn" -i(2)where C is a matrix of transition coefficients. By combining (2) and (1)An = Cn"i +b= Cn +b(3)

under the stationary equilibrium of ,b"7n =n and !()b =b,n= Cn +b(4)

= (I - a-ib

(5)

where I is a unit matrix.

As a first step Stone assumes that the C-matrix
is constanten herelaxes andit bythadjusting C by its trend of changes during e. Byfuture
these relations,
theof
structure. at thestudent population of which belongs to various
stagescohortof education
can beestimated. .Under thisf frameo assumption of complementarity among students
thinkmg,exists.
This is astrearn
on each step of institutions which composes
one academic
reflexion of theBritish situation wherg little competitiveness among educated population
and among students in diversified academic streams except `six formers'.i2

Stone does not explain explicity
idea onhis
educational
capital and flow accounting.

But we can speculate
it isitaas
nonrmonetary accounting with accounts for flow andstock interms of real unit, and the accounts accommodate the real educational stock andfiow by the numbers of students classified by states,that is, ages
instit,utions
and andother subÅíategories such as grades and• results of tests.

Stone intends to lihk the educationaccounts with the other fields of the SSDS suchas employment accounts which provide man-power
anddataincome formation accounts
which provide data on generation,

distribution and redistribution of incomesi3 which heaims to link it with the education industry accounts of the SNA.
'2 Here exists dual complementarity among students
i.e. complementarityof students
stream and complementarity of graduates of different academic streams. But
academiÅë
formers confront with competition as they have to prepare the state examination.

in onethe sixNOBUKO NOSSE

6

IV Some Comments on Both Works
The survey on both works given in the above section suggests'that they are, very
contrary on the scope and the method and that it is difficult to compare them on thesame dimepsion for fifiding a meeting place of them.

Before trying to find the way of the possibility for co-ordination of them, we must
give scrutiny to their own virtues and defects by referring the comments given on them.

First we take Kendrick's approach. Against his broad coverage of human capital
expenditure commentors.even those people of human capital school make objections. It

is natural because when we read through his long list which is fully contained byschooling, both private and on the job training, improvement of health, labour mobility
outlay, and rearing costs of children to working age we notice that investment feature ofhuman capital expenditure gradually vanishes but consumption feature on the contrally
appears. Actually to set a boundary between current expenditure and capital expenditurein human outlays is utterly a difficult problem because people set the boundary according

to their own purposes. Thus the boundary is not absolute but conditional as Seers andJolly suggest. They indicate that in the poor society even consumption of foods has someinvestment features.i4 Among the Kendrick's list, the most equivocal item is `rearing
costs'. Seers and JollyiS and Bowmani6 and Ruggles and Rugglesi7,also exclude it fromhuman capital expenditure. Opinions on the boundary are diversified even in the humancapital accountants. For example, some people like Seers and Jolly favor to count only
schooling among human capital investment and some like A. Lewis takes it at a certain
level of schooling such as above secondary schooling.i8 As the situation being so, people

is obliged to set the boundary arbitrarily, there has not been any common convention
established yet. Even schooling there is some element of consumption, for•example, in.
the case
ofhigher education for female there is far less definit relation between educationand earning than the case of male. On the other side, if we take maintenance cost of

human capital like Kendrick,i9 we must stand the warning ofSdisappearing tendency of

consumption' given by Stone. All these issues likely invite `entanglement between
consumption and investment' controversy for us, and if we wish to avoid it, we must

i3 Stone, `Social Matrices,' ibid. Stone suggests that it may be useful to consider a number ofsubsystems alonga life sequence. The models of subsystems are conceived in terms of Markov
chains respectiveSy. The subsystems are considered to be combined as a group by interchangeability of data and their isomorphic structure.

i4 D. Seers and R. Jolly, `The Treatment of Education in National Accounting; The Review ofIncome and Wealth, series 12,No. 3, Sept. 1966,P. 199.
is D. Sees and R. Jolly, ibld. p. 199.

i6 Bowman, Principles in the Vqluation of Human Capital,' The Review of Income and Wealth,series 14,No. 3,Sept. 1968, p. 223, footnote 14.
i7 Ruggles and Ruggles, The Design ofEconomic Accounts, ibid. , p. 43.

is SeersandJolly,ibld.,p.201.

7
ALTERNATIVE APPROACHES TO THE ACCOUNTING FOR EDUCATION

abandon the Kendrick's fully contained list ofhuman investment or otherwise have to
make another shorter list of the items by screening the investment nature of humancapital outlays. But even in the latter case we have no objective convention on screening

yet. Moreover, to estimate costs of hurnan capital maintenance in the nationa1
accounts should be posed. These considerations may give some justification to Stone's
standpoint against Kendrick.

Next unsettled problem is that of depreciation. Against Kendrick's favoring to costbasis, Seers and Jolly20 and Bowman2i take rep14cement cost basis. Seers and Jolly's
objection to cost basis is that human capital formation and its depreciation take longer

periods than those of physical capital and as a result likely suffers worse effect ofinflation than physical capital if we use original costs basis. Some part of this objection

may be solved by reflating original costs by price indices but problems may be remained.

On the other hand, Bowman made a catalogue for various methods of measurement of
human capital 22 such as ia number of school years, li efficiency equivalent units, dibase-year life-time earned incomes, and iv approximations to baSe-year real costs.
Bowman herself favors the present value method more than the replacement cost method
as a proxy of the former, for its virtue of logical meaningfulness.23

Lastly on measurement ofhuman capital. Ifwe take human stock concept instead ofhuman capital, we are free from the problem of periodical and monetary estirnation.
Seers and Jolly measure human capital as stock measured by number of educated and oflearning population.M (It wil1 be remembered that Stone's human capital is a real stock

as shown in the above section.) Another problem arises further concerned to humancapital. It is a problem whether we can apply this concept to al1 people, male and female

indifferently or should we introduce some adjustments for female (or should apply only
to male.) This is raised by Bowman and she supports25 the former like Kendrick.

Then we understand that there may exist some different opinions and methods
within the human capital accounting. Surely the existence of such a disagreement on thesubject is caused by immatureness of human cdpital accounting and needs further study
for establishing the convention of the accounting for edlucation.•

Second turn to Stone. We have another population approach to education publishedby Armitage and Smithas which is written abit earlier than Stone. Comparing this with
i9 To deduct human capital keeping costs is meaningful from the point of income distribution
because this deduction makes possible to compare rates of return of human capital and those of
non-human capital. This is, however, beyond the NA study.
20 Seers andJolly,ibid., p. 199.

2i Bowman,`PostschoolLearnipg;ibid,
22 Bowman, `Human Capital: Concepts and Measures.' in H. Hegelund (ed.), Money, Growth andMethodology, 1961, pp. 14768.
23 Bowman,`PostschoolLearning,'ibid.
2` Seersand Jolly,ibld.,p.208.

2S Bowman,`PostschoolLearnins'ibid.,p.493.
26 P. Armitage and C. Smith, Åéomputable Models of the British Educational Systern' (1967),
reprinted in M. Blaug, Economics ofEducation, Vol. 2, pp. 202-37.

NOBUKO NOSSE

8

Stone's education accounting, Armitage and Smith's work provides a simpler and clearer
picture than the latter while Stone's education accounts is more informative because hissuggestive explanation on sectoring. Stone's population matrix, however, have sufferedsome critics, one from 'Ruggles and Rugues and another from Blaug. In their `Proposed

System of Economic and Social Accounts',27 Ruggles and Ruggles gave a comment on
Stone's `Social Matrices,' and criticised as follows: Stone's approach analyses simply froma population side but there exist various needs in social and economic problems foranalysing instead of general need whi.ch Stone's social matrices intend to meet.

We think this comment is right. Actually Stone simply aimed to construct a
sub-system for student population while a lot of topics such as post-schooling, learning by

doing without formal schooling, earning of disadvantaged with higher education haveemerged. For those Stone's population approach hardly serves as a strong weapon and wemust provide another tools for them.

Biaug's comment is given from another angle.28 He explains that the human capital
approach and the population approach are alternative types for education planning, theformgr fits to neo-classical universe like US where high substitutability among students issecured while the latter fits to Leontief universe like UK where `social demand' foreducation has remained to exist and high complementality among educated population isseen because restrictive supply of educational service especially in higher education andhigh complementarity among educational institutions have prevailed. Blaug's comment isvaluable as it helps understanding both theories of education accounting and suggests
where is a solution for co-ordinating thern.

V SurnrnaryandConclusion.Now we reach to make a summary to get a conclusion. First for simpler comparison,
we shoyv Table 1 below.
Table 1; Alternatiye Treat!nent in Accounting for Education

Coverageof
HurnanScope

Valuation

Investment
Mucationinbroad.sence,1.e.

Onthejobtraining,Privatetraining,Outlayforlabour

HumanInvest- Monetary
mentAccount- measurement

ingwithinnationalacÅëount--mgsystem

accounts

Attitudeto
National
Accounting

Conventional

Requirerevi-

sectoring

sionofac-.countmgcate-

Designof

CostbasisgoryespeciallyKendrickinvestmentand

mobility,Outlay
forimprovingin
health,Rearing
costsofchildren

Formaleducation.consumptlon

Education
Population

Accounting
Stoneoutsidenationalac'countmgsys-

tembutwithin

SSDS

Realmeasure-Institutionalment(interms
ofnurnbersof

Institutionis

studentspopu-

groupedby

lation)differentedu-'sectormg.

cational
activity

Norevision

9
ALTERNATIVE APPROACHES TO THE ACCOUNTING FOR EDUCATION

Using Table 1 where both analyses are epitomized we can understand them moreclearly than before and are able to consider their proposals further on the prospect ofeducation accounting. Our conclusion on them is as follows.
1. Kendrick's approach is pioneering and most suggestive. But his proposal to revise
the national accounts and the national balance-sheet seems to raise some problem to besolved further. The reason why we get this .conclusion is that though rnany research aregoing on the problem of demarcating the line concerned to human investment is unsettled
yet and that rules of depreciation for human capital, of measuring human capital and its
maintenance costs also have not been established.

2. Instead of revision of whole national accounting convention, we favor exploring
accounting for education studies within the SSDS or other welfare-oriented accounting,

not only by population accountjng matrjx but by various scopes concerned to humancapital. The new trend in human capital approach has been coming up in one way on
which Psacharopoulos gave a survey and another which are epitomized in the SSDS.
Empirical case studies in the education accounting give a great help to establish
conventions and working rules in this infant field.

3. Stone's analytical tool for education is very strict and effective tool for analysing

the `social demand' from population side. As Blaug wrote it•is usefu1 for al1 countries

where complementarity among educated population and among academic streams areprevailing like UK but not a country like US. But turning to real world, there are,however, no pure Leontief universe nor pure neo-classical universe but are quasi Leontief

world or quasi neo-classical world or hybrid of them. For example, Japanese school
system was a quasi Leontief type and after the postwar revision taken by SCAP she has
been turned to a quasi neo-classical type, but she still remains a hybrid element.29

Contrastedly-to Japan, Western countries such as West Germany and France have notchanged drastically their restrictive education system. But in these countries, and even in

England a gradual change of school system has been emerged.3.0 The situation being such,it is necessary to have an analytical tool based on education population model like Stone

and at the same time another analytical tool based on human capital approach forcomplimenting it.

4. Both approaches of Kendrick and Stone open an entrance of generalized
education accounting for macro-accountants to be explored further. Relied on both
approaches and by solving the issues remained step by step, we shal1 be in a more closed
position for most interesting part of the whole welfare-oriented accounting.

27 Ruggles and Ruggles, `A Proposal for a System of Economic and Social Accounts; ibid., pp.

116'17. '2S M. Blaug, `Approaches to Educational Planning; Economic Journal, June 1967, pp. 262-87.

29 Ministry of Education, Wagakuni-no-KyOikusuiiun (Survey on Contemporary Education in
Japan), 1976, Ch. 2 and Ch 6
3e Ministry of Education, op. cit., Ch. 2 and Ch. 6.

.1O

11

PERSONNEL MANAGEMENT OF JAPANESECOMPANIES IN THAILAND: A FIELD REPORT*
Hideki YosHIHARAI Objectives and Method of the Research(1) Criticisms upon Japanese Personnel Practices
At the end of 1975, the Japanese direct investments represented 38.59o of ab foreign
direct investments in Thailand.' This Japanese share of 38.59o is more than twice as large
as the second largest share (13.99o) of the United States .of America.

More than one hundred manufacturing Thai-Japanese joint ventures are doing
business in Thailand. Although the capital of these companies is owned by Thai partners

and Japanese partners, most of the companies are mamaged by the Japanese partners in amore or less Japanese way. Therefore, in the present paper which deals with the
management practices rather than the ownership of these companies, these companies arecalled "Japanese managed companies" or simply "Japanese companies." In the same way

the Thai-U.S. joint ventures are called "Amercian managed companies" or simply"American companies."
As the presence of Japanese companies in Tndiland has become more and more
conspicuous, the critical views upon them have become stronger and more widespread.
The following are typical criticisms of Japanese personnel practices in Thailand.2

In the first place the aocusation has been made that the pay scales of Thai employees
have been kept at a relatively low level and that the working conditions and environmentare bad or dangerous. It is widely believed that wages are much higher and that working

conditions are much better in Arnerican managed companies than in Japanese managed
companies. Secondly, it hasbeen criticized that in Japanese companies the promotion ofThai employees is slow and strictly limited, and that only little efforts are made to
develop Thai technical and managernl staffs, Thirdly, the attitudes and behaviors ofJapanese staffs have been a target of bitter criticism. It is said that they seldom speak*This paper is a reyis,ed version of the author's earlier paper: Personnel Praetices of lapaneseCompanies in Thailand, the Economic Cooperation Center for the Asian and Pacific Region(ECocEN), Bangkok, Thailand, 1975.
' More accurately, 38.59o of all the registered capital of purely foretgn owned companies andThai-foretgn joint ventures which have been prornoted by the Board of Investment of Thailand(BOI) are owned by Japanese investors at the end of 1975. The source of the data is BOI.
2 For the critical views upon the Japanese way of management in Thailand, see; Khien Theeravit,
Report on Research into Japanese-Thai Economic Interaction, October 1973, translat.ed by theJapanese Trade Center (JETRO) and the Japanese Chamber of Commerce in Bangkok,`Åéhanging the Japanese Image," Business Review, November 1973, pp. 21-23. "My boss isJapanese," Business in Thailand, June 1974, pp. 4g50.

HIDEKI YOSHIHARA

12Thai to their Thai colleagues and workers, that their attitudes are arrogant, and that theytend to form a small closed society ofJapanese people. Lastly, it is widely believed that,mainly because of their poor personnel management, the Japanese companies have been
plagued recently with labor disputes more frequently ahd more seriously than othercompanies such as American managed companies, British managed companies, or Thaimanaged companies.
Then, are these kinds of popular criticisms upon Japanese personnel practices wellfounded on facts and figures? Although a rather arnple amount of arguments andopinions are seen in various academic literatures, commercial magazines and newspapers
regarding the Japanese way of management, data of facts and figures are incredibly smallin amount. This state of "many argurnents but too few data" is unfortunate. It tends todepress motivations of the Japanese companies to search and develop constructive
solution programs, and sometirnes it induces diverse psychic and even destructive
reactions. On the other hand the present situation, where emotionalism clouds the realissues, presents a serious handicap to the Thai Government. In the present situation theThai Govemment wM meet many difficulties in collecting reliable data and formulating aproper foreign investment policy.3 To remedy this situation is the major motivating
force of the present field research.

(2) Framework of the Research
The main objectives of tlie present research are three:

1. to show and analyse the personnel management of Japanese manufacturing
companies in Thailand
2. to identify the nature and the causes of personnel problems in these companies

3. to make recommendations on how personnel management of these companies
could be improved.
. ln' the research the author's attention is centered on the following subject matters:

1 . wages and welfare of Thai employees

2. Thai managerial personnel
3. Japanese staffs sent from Japanese parent companies

4. Iabor problems
In the research three different ways of investigation are employed:
1 . collection and analysis of printed data from publislied and unpublished materials

2. simple questionnaire survey by mail and telephone
3. semi-structured interviewing.

ln order to understand the unique characteristics of the Japanese way of personnel

management, it is necessary to make a comparison of Japanese managed companies with

3

See; "Japanese Investment in Thailand:'77:ailand, March 1974, pp. 64-68.

Many Questions but Few Answers,"

Business in13
PERSONNEL MANAGEMENT OF JAPANESE COMPANIES IN THAILAND

American managed companies or Thai managed companies. So, due consideration is

given to the comparison. The Japanese personnel man.agement has undergone a
considerable change these years and thus in the research an effort is made to make clear
not only the current conditions, but also the past situations of personnel practices inJapanese companies.
There exist several types ofJapanese managed companies in Thailand such as trading
companies, construction companies, travel agencies, banks, insurance companies, restaurants, and manufacturing companies. The present research treats only the manufacturing

companies, that is, those Japanese companies which are engaged in manufacturing
activities with their factories located in Thailand.

These Japanese manufacturing companies are mostly members of the JapaneseChamber of Commerce in Bangkok. Their names and some other important data areshown in Table 1-1 and Table 1-2.

Interviewing was made in sixteen Japanese manufacturing companies. Theirindustrial classfication is:

1. textiles .".. 7 companies
2. iron and steel, and non-ferrous metals .,... 1 company

3. transportation equipment ..... 2 companies
4. electric machnery ..... 2 companies
5. foodstuffs ..... 2 companies

6. chemicals ..." 1 company
7. rubber products .".. 1 company
In the case of these Japanese companies, the interviews were held with their Japanesemanagers. Only in three companies short supplementary interviews were held with Thaimanagerial personner. Each interview usually took two hours and was based on a list ofquestions given beforehand. In order to carry out the comparative approach the author

held interviews with two American managed companies and two Thai managed
companles.
Interviews were also held with top ranking personnel of nearly twenty influential
organizations in Thailand: Officials in the Labor Department of the Ministry ofInterior;
Table 1-1: List of Japanese Manufacturing Companies in Thailand
1 . lton & steel, & non-ferrous metals (17 companies)

Thailand Iron Works Co., Ltd.

Feb., 1960

15,OOOThe Sangkasi Thai Co., Ltd.

Dec., 1960

Thai Yazaki Ele ctric Wire Co., Ltd.

Sep., 1963

409o
409o

Far East Iron Works Co., Ltd.

Jan., 1964

Thai Steel Pipe Industry Co., Ltd.

Apr., 1965

Sinthani Industry Co., Ltd.

JuL, 1967

7,500
35,OOO
20,OOO
24,OOO
5,OOO

G.S. Steel Co., Ltd.

Jan., 1968

60,OOO

409o

Siam Ele ctric Ind ustry Co., Ltd.

Feb., 1970

10,OOO409o

94.299o
22.59o909o
409o

HIDEKI YOSHIHARA

14

Crown Seal Co., Ltd.

Jun. 1970

20,OOO

Sahaviriya Plate Steel Co., Ltd.

JuL, 1970

Chonviriya Steel Co., Ltd.

Sep., 1972

409o

Thai Special Steel Co., Ltd.

Nov., 1973

Phelps Dodge Thailand Ltd.

Jun., 1968

3,OOO
8,OOO
7,OOO
3,500
70,OOO
8,OOO
44,OOO

Yawata Electrode (Thailand) Co., Ltd.

Jan., 1974

6,OOO

459o

Thai Toray Textile Co., Ltd.

Aug., 1964

48.49oThai Teijin Textile Ltd.

Oct., 1966

Toray Nylon Thai Co., Ltd.

Jan., 1967

The Bangkok Nylon Co., Ltd.

Jan., 1967

Sahaviriya Light Gauge Steel Ind ustry Co., Ltd.

Sep., 1970

Thai Kobe Welding Co., Ltd.

Nov., 1968

Thai Tinplate Manufacturing Co., Ltd.

JuL, 1973

379o

409o
379o

53%
45%
499o
10.5 9o

2. Textil.es(32 companies)

Thai Kurabo Co., Ltd.

Jan., 1970

Teijin Polyester (Thailand) Ltd.

Apr., 1970

Thai Filament Textiles Co., Ltd.

Jan. 1971

Thai Synthetic Textile Ind., Ltd.

Oct., 1970

Thai Tricot Co., Ltd.

Jan., 1970

Siam Synthetic Textile Irtd., Ltd.

Jart. 1971

Siam Synthetic Weaving Co., Ltd.

Mar., 1971

Thai Suiting Mills Co., Ltd.

Jan., 1972

60,OOO
54,OOO
97,5006,OOO
75,OOO
218,OOO
35,OOO
80,OOO
62,50024,50018,OOO
22,500WinnerTextileMillsCo Ltd.

Sep., 1971

25 ,OOO

189e

499o

909o

-)

499o
509o
459o
499o
509o
499o
509o

40%
499o
499o
499o

Capital Kanebo Textile Co., Ltd.

May, 1971

Thai Nylon Co., Ltd.

Dec-., 1963

Thailand Jute Baling Co., Ltd.

Dec., 1964

The Thai Cordage Mfg. Co ., Ltd.

Feb., 1966

15,OOO
17,5005,OOO
6,250

Sarab uri Jute Mill Co., Ltd.

Jan., 1970

25 ,OOO

99.89oPeony Blanket Industry Co., Ltd.

Aug., 1962

'14,300

709o

Thai Blanket Industry Co., Ltd.

Jul., 1964

Thai Yazaki Mahaguna Textile Co., Ltd.

Dec., 1963

87.59o259o

50%Erawan Textile Co., Ltd.

Jan., 1965

Thai Towel Co., Ltd.

Apr., 1966

Thai Wacoal Co., Ltd.

Oct., 1970

Tokai Dyeing Co. (Thailand), Ltd.

Mar., 1964

63,60025,OOO
48,4007,OOO
8,OOO
12,OOO

Khonkaen.Jute Mill Ltd.

Jun., 1971

20,OOO

759o

Union Kanebo Spinning Mills Co., Ltd.

Nov., 1972

35 ,OOO

409o

Thai Iryo Co., Ltd.

Aug., 1972

14,OOO

499o

Luckytex (Thailand) Co., Ltd.

Aug., 1972

200POO

20%

Bangkok Weaving Mills Ltd.
Thai-American Textiles Co., Ltd.

Nov., 1973,
Apr., 1972

Union Onuki Sewing Thread Co., Ltd.

909o
499o
44.289o
499o

859o

8,375

309o

May, 1973

150,OOO
10,OOO409o

109e

3. Transportationequipment (18 companies)
Toyota Motor Thailand Co., Ltd.

Oct. 1962

64,500829oPrince Motofs (Thailand) Ltd.

Jan., '1966

6,940

209o

United Development Motor Industry Co., Ltd.

Jun., 1966

5,OOO

609o

IN THAILAND
JAPANESECOMPANIESPERSONNEL MANAGEMENTOF
Thai Hino Industry Co., Ltd.

Oct. 1966
May, 1967

1O,OOO

709o

Thai Honda Manufacturing Co., Ltd.

20,OOO

609e

Thai Suzuki Motor Co., Ltd.

JuL, 1968

9,OOO

659o

NHK Spring <rl'hailand) Co., Ltd.

Nov., 1964

10,OOO85%
959o

Aoyama Thai Co., Ltd.

Feb., 1966

4,OOO

Thai Bridgestone Tire Co., Ltd.

Jan., 1969

50,OOO

609o

Inoue Rubber (Thailand) Co., Ltd.

Oct., 1970

10,OOO

499o

Siam Auto Parts Co., Ltd.

Aug., 1971

10,OOO

109o

Yuasa Battery CThailand) Co., Ltd.

Aug., 1964

6,OOO

409o

Siam GS Battery Co., Ltd.

Jan. 1971
Apr., 1966

7,OOO
34,664499o

Isuzu Motor Co. (Thailand), Ltd.

Nippon Denso (Thailand) Co., Ltd.

Jul., 1972

15,OOO

659o

Izumi Piston Mfg. Co. (Thailand), Ltd.

Nov., 1973

509o
409o

96.549e

NHK Gasket (Thailand) Co., Ltd.

Nov., 1973

5,OOO
1,OOO

Kallawis Autoparts Ind ., Co., Ltd.

May, 1974

5,OOO

Thai Asahi Glass Co., Ltd.

Nov., 1965

24,OOO49%

Kao Industrial Co. (Thailand), Ltd.

Feb., 1966

67.779o

669o

4 Chemicals(26companies)

Takeda (Thailand) Ltd.

Oct., 1970

Thai Mikasa Chemical Ind., Co., Ltd.

Oct., 1970

Thai Polyplastic lndustry Co., Ltd.

May, 1971

9,OOO
21,OOO
8,OOO
8,OOO
6,OOO
20,OOO
5,OOO
9,OOO

G.S. Ceramic Co., Ltd.

Apr., 1971

12,OOO

269o

TJ.C. Chemical Co., Ltd.

Jun., 1971

5,OOO

499o

Bangkok Foam Co., Ltd.

Mat, 1971
May, 1971

5,OOO

499o

50,OOO33.339oThai Asahi Caustic Soda Co., Ltd.

Nov., 1966

The Lion Dentrifrice (Thailand) Co., Ltd.

Jan., 1967

The Lion Fat & Oil Crhailand) Co., Ltd.

Mar., 1969

Hoechst Chemical Ind., Co., Ltd.

Mar., 1970

Thai Plastic & Chemical Co., Ltd.

499o
499o
499o

359o

48%
499o
209e

Dajnjppon Ink and Chemjcals (Thajland) Co.

Oct. 1962

6,OOO

1O09o

Toyo Ink (Thailand) Co., Ltd.

Aug., 1972

1,800

100%

Nippon Paint (Thailand) Co., Ltd.

May, 1968

499o

Thai Kansai Paint Co., Ltd.

Jan., 1970

4,OOO
IO,OOO

Thai D.N.T. Paint Mfg. Co., Ltd.

Jan., 1971

459o

Rock Paint (Thailand) Co., Ltd.

Mar., 1971

Kurita Thailand Co ., Ltd.

Jun., 1972

409e

Cocksec Chemical Industry Co., Ltd.

May, 197 3

3,600
3,OOO
2,OOO
5,OOO

Thai Chemical Corp., Ltd.

Mar., 1974

12,OOO

409o

Songkhla Coconut Charcoal Ind. Co., Ltd.

Nov., 1973

200

309o

Bara Chemical Co., Ltd.

Mar, 1974

45%

Thai Suiko Co., Ltd.

Jun., 1973

Taiken Chemicals Co., Ltd.

May, 1971

5,OOO
2,800
4,OOO

809o
449o
499o

889o
499o

5. Electric machinery (5 companies)
National Thai Co., Ltd.

JuL, 1962
Feb., 1965

18,5006,750499oKang Yong ElectricMfg. Co., Ltd.
Sanyo Universal Electric Co., Ltd.

Jan., 1970

12,OOO

499o

29.6%

15

HIDEKI YOSHIHARA

16

Thai Toshiba Electric Ind., Co., Ltd.

Jan., 1970

20,OOO

509o

UEI-Hitachi Co ., Ltd.

Jan. 1971

10,OOO359o

6. Foodstuffs (10 companies)
Ajinomoto Co. (Thailand), Ltd.

Dec., 1961

31 ,250799o

The Kumphawapi Sugar Co., Ltd.

Dec., 1963

22,5001oogo

Pranb uri Sugar Industry Co., Ltd.

Mar., 1964

21,OOO

95.29oThai Glico Co., Ltd.

Jan., 197 1

1,800

489o

Yakult (Thailand) Co., Ltd.

Jun., 1971

15 ,OOO

75 9o

Thailand Japan Food Ind. Co., Ltd.

Oct., 1972

15,OOO

539o.Thai Pineapple Canning Industry Cofp., Ltd.

Apr., 1972

50,OOO

499o

Thai Volcano Food Ind. Co., Ltd .

Oct. 1972
Sep. 1971
May, 1974

15,OOO

409e

Union Yoshida Industry Co., Ltd .

Jun. 1962

10,OOO

49%

Nikka Wood Co., Ltd.

Jun., 1970

909o

Thai Turbo Refrigerating Co., Ltd.

Oct., 1969

1,OOO
1,OOO

939o

Union Rubber Products Corp., Ltd.

Nov., 1971

12,OOO

23.39oSiam Wood Co., Ltd.

Jun., 1974

2,800

48.29o499o

Ryutaisuisan Co., Ltd.
Summit Food Industries Co., Ltd.

1,200

66.6%

5,OOO

489o

7. 0ther industries (5 companies)

8. Mining, agriculture and fisheries (8 companies)

Oct., 1967

2,OOO

Thai Nippon Minerals Co., Ltd.

May, 1967

500

499o

Nittetsu Kogyo Thailand Co., Ltd.

Mar., 1968

Bangkok Drying & Silo Co., Ltd.

Dec., 1963

1,200
20,OOO

499o

The Thai Marine Food Co., Ltd.

JuL, 1966

499o

Thai Wood Production Co., Ltd.

Nov., 1970

1,OOO
2,OOO

Thai Pineapple Plantation Corp., Ltd.

Oct., 1972

499o

Thai Tekkosha Co., Ltd.

Nov., 1971

40,OOO
8,OOO

Thai Resources Develo pments Co., Ltd.

409o

489o
499o

Notes:

1. Source: Directory ofJapanese Enterprises in Thailand, the Japanese Charnber of Commerce in Bangkok, August, 1974.
2. In the table, the name, the date of starting operation, the amount of paid capital (inthousand baht), and Japanese share (9o) of paid capital are shown for each company.

3. Asof the end ofJune, 1974.
4. It should be taken into account that the industrial classification used by the JapaneseChamber of Commerce in Bangkok is sltghtly different from the standard classification.
For example, companies producing tyres and tubes for automobiles are included in the
category of transportation equipment.
5. The list contains several companieswhich are not managed by Japanese partners.
6. Companies doing business in the sector of mining, agriculture and fisheries are listed at
the end of the list.

Dr. Puey Ungphakorn, who at the time of the research was an economic adviser to thePrime Mmister; Dr. Snoh Unakul, who then was the SecretaryGenerai of the National

Economic and Socia1 Development Board (NESDB); the Executive Director of theAmerican Chamber of Commerce in Thailand.

IN THAILANDPERSONNEL MANAGEMENT OF JAPANESE COMPANIESJapanese Manufacturing Obmpanies in Thai1andTable 1-2:

Industry

Numberof.compames

Totalarnountof
paldcapital(inthousandbaht)

Iron&steel,&non-17

ferrousmetals

17

Textiies

32

346,OOO
1462825}t

Averageamountofpaidcapital

perdornpany(inthousandbaht)

AverageJapaneseshareofpaid
capital(9o)20,35345.5

45,71343.0
67.6

Transportation.equlpment

18273,104

15,172

Chemicals

26

45.3

5

241,400
67,2509,285Electricrnachinery

13,45045.3

Foodstuffs

10

177,750

17,77568.0

Otherindustries

526,800

5,360

40.6

113

2595,129

127,108-8

74,700

9,338

46.6

22,06547.8

Sub-total
Mining,agriculture
andfisheries

Total

'

121

2669829lp

Notes:L

2.

So ur oe: sarne as tab le 1-1

Asof the end ofJune, 1974

All the field studies were conducted in and near the Bangkok metropolitan
during the eight-week period between July 14 and September 7 of 1974.
II Wages and Welfare of Thai Employees(1) Thai Labor Force in Japanese Companies
As is shown in Table 2-1, the population of ,Ihailand in 1972 is almost 38 million
and half of these people are in the labor force. Nearly 80 percent of the labor force is in

the agricultural sector. The total number ofwage-earners wgrking in the non-agricultural

sector is approximately two mi1lion and it is composed of 687,1oo government
employees and 1,258,3oo private employees. And it is estimated that nearly 5oo,ooO
people are in the mining and manufacturing sector.

Although there exist no statistics showing the total number of Thai people employedin Japanese manufacturing companies, it is gstimated that nearly 40,Ooo Thai people are

employed. They represent roughly 8 percent of the total labor force in the mining andmanufacturing sector. Thus, in terms of the employrnent of local labor force theJapanese manufacturing companies are playing an influential role in Thailand's economy.

Concerning the Thai employees in Japanese manufacturing companies, the foilowing
facts seem to deserve our attention (see Table 2-2).

First, in less than five years the total number of Thai employees working in Japanesemanufacturing companies increased from 12,624 to 29,472 and the rate of this increasearea

HIDEKI YOSHIHARA

18

Table 2-1: Population and Labor Force ofThailand

Population
37,971 ,OOO (100.09,)
Persons in the labor force

Personsnot in the labor force

19,023,400 (50.19e)

18,947,600 (49.99,)

Employed persons

Unemployed persons

18,9 67 ,200 (50.09.)

56,200 (O.19,)

Agriculturallabor force
14,828,100 (39.19.)

Non-agriculturallabor force
4,139,100 (10.99o)

Persons under 11
years of age

12,226,700 (32.29,)

Working around house
2,695,100 (7.19o)Students
2,668,200 (7 .09o)SeifÅímployed workers
4,596,7 00 (12.1%)

SelfÅímployed workers
1,324,500 (3.59o)

Unpaid family workers
9,712,400 (25.69o)

Unpaid farnily workers

Government employees
14,800 (O.19.)

Government employees

Priyate employees

415,200 (1.i9.)

Private employees
1,258,300 (3.39,)

Employers

Employers

89,OOO (O.29o)

Others
1,357,600 (3.69o)

740,900 (2.09o)
687,100 (1.89,)

128,300 (O.39,)

Notes:

L

Source: The Department ofLabor in The Ministry of Interior of Thailand.

2. Asof1972.
over these years was 2.3 times. For the respective industry the rate of increase was:textiles (2.4); transportation equipment (2.1); iron and steel, and non-ferrous metals(1.3); foodstuffs (2.2); and others (3.9).`

Second, the textile industry has been constantly employing more than 50 percent of
all the Thai employees of Japanese manufacturing companies over these five years. The

average number of Thai employees per company as of December 1972 is calculated as
foliows: textiles (906); transportation equipment (168); iron and steel, and non-ferrous

metals (332); foodstuffs (428); chemicals (227). There exist at least seven Japanesecompanies which employ more than one thousand Thai people and six of thesecompanies are in the textile industry. Thus, in terms of the employment impact on theThai economy, the Japanese textile companies are especially important.
Third, the textile industry employs more female workers than male workers, while al1
the other industries employ more male workers than female workers.

(2) Japanese Wage System

Whether the wage level of Japanese companies is higher or lower than that of` It means that in the textile industry the total number of employees in 1972 is 2.4 times that of1968.

Table 2-2:

Number ofThai Employees in Japanese Manufacturing Companies

w
m
o
z
Z
m
v
K
>
Z
>
a
m
K
m
z
H
o
vL,
>
v>
Z
tu
m
m
a
o
s
v
>
Z
pm
ca
N
z
el
=
>
-v
>
z
v
pa
ta

AsofDeeember,1970

AsofDeoernber,1969

AsofJune196S'

lndustry

PartMaleFemaleTotaltime

AsofDeecmber,19721

AsofDecernber,1971

PartMaleFemaletimeTotal

PartMaleFema]eTotaltime

MaleFemaleParttimeTotal

MaleFemale?arttime'Total

Textiles

1,8905,656-7,S46

Transpertation

1,637241481,926 1,708268332,O09 1,655267391,961 2,048413602,521.1,710116711,897
1,62S1061061,840 1,8261051632P94
IJ461651052,O16 1,941229IS42,324
61797230944 7221149001,736 79S1076871,S89 8621636391,664 9531851,oo22,140
2,62815801604,368
824294-1,118 1,O174295371.983 1,58766282,257 l,9249161422,982 "568)(368)(106)(2P42)

equipment

Iron&steel,&
non-ferrousmetals
Foodstuffs
Otherindustrics(Chemicats);;=;--==-.=;=
Total

3,3238,70312612,152

3,4779,6S715313,2S7

452011,60114916270 4,9co12,96521418,119994182-11761======;:========.-.--.;==

5,9S36,33S33612,624;==t===-----"--;=;===t==8,5259,S921,77419,S91====----.-=======--;.
=====-`.===;;--=--;=ll--===;-=--==----===`====
10,7e713,1121,07424,893 1251015,3721,59029,472
9,27710,8109S221,037

Notes:

1. Sources: The Report on the Research on the Extent of Contribution to Thai Economy by Japanese Manufacturing Enterpn'ses, JapaneseChamber of Commerce in Banghok, 1969, 1970, 1971, 1972 and 1973.
2. The companies coveredbythe research are shown in the tablebelow.As mentioned earlier,practica11y all the Japanese manufacturing

companies in Thailand are member companies of the Japanese ChamberofCommerceinBangkok.

Dateofresearch

Numberofmember Numberofanswers
companies(A)received(B)June,1968
Dec.,1969

43

37

55

49

Dec.1970'

64
63

54
54

71

64

Dec.,1971
Dec.,1972

B(9o)

T

86
ge
86
86
90

6

20

HIDEKI YOSHIHARA

Arnerican companies or that of Thai companies has been one of the most interesting andalso important questions of the present research. After having attempted for nearly twomonths rather intensive field investigations in Bangkok, the author has found that it washopelessly difficult to give a reliable answer to this question. The following three facts

are the principal obstacles for the comparative approach to wage problems. The first is

the difference in the wage system, the second is the difference in the industrul
distribution of companies, and the third is the insufficiency of reliable wage data. The

explanation of these three facts would hopefully reveal basic features of the wages ofJapanese companies in Thailand.

In the Japanese companjes the pay scale for employees is basjcally determined by
two factors, that is (1) education and (2) length of service in the company.S The kind of
job which he or she performs in a company has only a minor effect, at least in a direct

sense, on the amount of money paid to hini or her. And it should be pointed out that
this wage system is basically same as that which is generally employed by Japanese parent

companies in Japan.6

Table 2-3: Wages of Thai Ernployees in Japanese Manufacturing Companies

Average rnonthly wagesofThaiemployees(baht)

Industry
TextilesTransportationequipment

Iron&steel,&non-ferrousmetals
Foodstuffs
Otherindustries

1968

1969

540
960
877
858

613

1970
644

1,O07

(Chemicals)===--=--=----=----===-Total

1971

673

1972
690
1,309

1,040

1,131

1,279

1,363

1,187

1,231

1,294

721
983

827

931

1,195

1,033

1,156

===
b==
718
812

1,200
(1,347)---- -

795

--- -

841

==--=
903

Notes:

1. Souroes: sameasTable2-2.
2. Average monthly wages are. calculated in the following way:

B 1 A: aVerage rnonthlywages ofThai employees
A = TX fi B: annualtotalwagespaid to allThaiemployees
C: nurnber ofThai employees

S In rnany companies the third factor of sex has a slight but a consistent influence upon the pay
scale. This point will be treated later.

6 James C. Abegglen, The Japanese Factory: Aspects oflts Social Organization, The Free Press,

Glencoe, 1958. James C. Abegglen, Management tznd Worker: The Japanese Solution, Sophia
University (Tokyo), 1973.

PERSONNEL MANAGEMENT OF JAPANESE COMPANIESINTHAILANDIn Arnerican companies in Thailand the pay scale is basically determined by twovariables, that is, (1) kind ofjob which each employee performs in the company and (2)length of period he or she has been holding a specific kind ofjob in the company. The
educational background and the age of the employees do not have any direct influence on
his or her pay scale. This marked difference in the wage system is the first obstacle forthe comparison ofpay scales of Japanese and American companies.'
The second obstacle is a different pattern of the industrial distribution of Japanesecompanies and American companies. Nearly one third of the Japanese manufacturing
companies are in the textile industry and these Japanese textile companies employ morethan 50 percent of ad the Thai people working in Japanese manufacturing companies. In
contrast, the American companies tend to concentrate in such industries as chemicals,
transportation equipment, and foodstuffs. Only a few American companies are found in
the textile industry.8

This difference has an important bearing upon the comparison of wage levels of these
two foreign companies in Thailand. As it is clearly shown in Table 2-3, in the case Qf theJapanese ccunpanies the average monthly wages of textile employees are remarkably
lower than those of the other industrial employees.9 Thiskind of industrial inequa!ity ofwage levels would be more or less also the case for AMerican companies. Then, astraightforward comparison of the aggregate wage data of these two foreign companies
would be quite misleading.

The third obstacle is the lack of wage data. Wage data were considered confidential
by most companies at the time of the research when the Thai economy was characterized
by a widespread labor unrest. In fact, only a small amount of fragmentary wage data are
available for the analysis.

(3-l) StartingWages
In the case of the textile industry nearly ninety percent of the ordinary factory
workers are female workers whose school career is limited to the primary school level. In

other indusuies the bulk of the work fbrce is composed ofmale workers, and the sehool

7 The comparison here may overemphasize the difference between the two wage systems. For
exarnple, in Japanese compdnies the Thai employees are asstgned to different kinds of jobs
according to their attributes such as their educational background, prior work experience, age andsex. Thus, the variable of jobs certainly has an influence, although it is an indirect one, in
determining their pay scale.

8 Foreign Companies in Thailand, the Japanese Chambet ofCommerce in Bangkok,May, 1974.
9 The industrial comparison of wage levels in Table 2-3 clearly exaggerates the relatiye lowness of
the wage level of textile employees since it fails to take into consideration the features of textile

ernployees as compared with other industria! employees. A fairer comparison would improve therelative wage level of textile employees. For example, the initial wages after the probationary
employment period for new young female factory workers with education of the primary schoollevel, show a narrower gap among industries (see Table 2-5 on page 23).

21

22

HIDEKI YOSHIHARA

career of a considerable number of these male workers is extended to the middle schoollevel. An outline of the educational system of Thailand is-presented in Table 2-4.

There exists a considerable difference in the amount of starting wages amongindustries. Table 2-5 shows that workers in such industries as transportation equipment

and chemicals start their workmg career with a higher pay seale than workers of otherindustries.

Male workers enjoy a higher level of starting wages than that of female workers in
any industry as seen from Table 2-5. A main reason for the higher starting pay scale ofmale workers lies in the fact that they usually perform the kind ofjobs in a company

which demand strong muscles and high physical durability. Even when male and female
workers hold the same kind of jobs, the performance by the male workers is believed,
rightly or wrongly, to be more efficient and reliable.

The Thai fernale workers work as efficiently and reliably as the male workers, andmany continue their business career even after getting married. Considering the highquality of female workers in Thailand, the present starting wage system and also theentire wage system in which we recognize a slight but a consistent inequality in the pay

seale between male and female workers, may not be appropriate for the Thai labor
situation. There are several Japanese companies where the same pay scale is equallyapplied both to rnale and female workers performing the same kind ofjobs. It seems

worthwhile for other Japanese companies to review their present wage system andconsider if an equal application of one pay seale for male and female workers is suitable
or not in Thailand.

Table 2-4:

Educational System of Thailand

1.Primaryschool(Pratom)
1.1.Lowerprimaryschool(P4)2.2.Upperprimaryschool(P7)Agerange

Periodofeducation

7-10yearsold

4years11-13

3

2.Middleschool(MawSaw)
2.1.Lowermiddleschool(MS3)
2.2.Uppermiddleschool(MS5)

14-16

3

17-18

2

3.1.Juniorcollege

19-2Q

2

3.2.University

19-22

4

3.Collegeanduniversity

Notes:

1.

Source: The Outlook on the Thailand's Economy in 1974 (in Japanese),the Japanese Chamber ofComrnerce in Bangkok, 1974, pp. 21-24.

2.

Primary school and middle school are called Pratom and Maw Saw
respectively inThailand.

23
PERSONNEL MANAGEMENT OF JAPANESE COMPANIES IN THAILAND

Table 2-5 :Starting Wages of Thai Workers in Japanese Manufacturing Companies

foaht/day)
Upper middle
school (MS5)Male Female Male Female Male Female Male Female

Lower primary Upper primaryschool(p7)school(pt)ofworkers
Industryschool (MS3)

21.5

18.2

27.7

25.1

24.4

19.0

32.5

29.8

23.9

22.0

29.6

31.2

19.5

24.8

22.8

31.6

30.0

21.9

26.2

24.6

40.0

22.3

19.5

29.5

28.3

20.0

28.0

25.0

22.0

19.3

25.4

23.4

19.1

16.6

38.0

14.3

182

26.9

232

32.6

28.6

1969 20.8

192

26.8

19.3

26.0

31.8

2Ll

17.9

27.3

20.7

31.2

26.0

1969 12.0

8.0

12.0

8.0

1969 17.0

14.3

1972 17.6

15.1

1969 22.0

18.6

1972 23.6

19.6

23.9

motorcycles

1972 19.3

18.6

22.9

Iron&steel,&non-ferrous

1969 21.6

18.5

1972 22.5

17.9

1969 16.5

15.0

1972 16.7

14.0

1969 22.8

TextilesLower middle

18.5

15.9

Transportationequipment(1)Transportationequip-

ment(2)Carandmotorcycle
assernbling(3)Partsforcarsand

metalsElectricmachinery

Chemicals

Foodstuffs
Others
Total

24.4

17.1

18.1

14.3

1972

1972

1969 20.3

16.3

1972 20.4

16.7

21.1

21.5

18.4

17.8

23.6

19.8

28.7

27.5

25.4

20.6

30.6

28.3

Notes:

1. Source: Ro'mu Ch6sa (Employment Survey), the Japanese Chamber of Commercein Bangkok, March, 1970 and August, 1972.
2. The date of data is as follows:

1969: Deoember 1, 1969
1972: December 1, 1972
3. The surveyreceived answers from 40 (86.99o) rnember companiesin 1969 and 53 (82.59e)

member companies in 1972.

The starting wages have increased sharply these two or three years. The figures inTable 2-5 show a considerable rise in the initial pay scale in the recent past. At a microlevel of indMdual companies the degree of increase shows itself more vividly as presented

in Table 2•6. Roughly speakmg, the rate of increse of starting wages ofThai workers inJapanese companies over these three years, reaches at least frfty percent and in several
companies reaches as high as one hundred percent or more.
Table 2-7 gives us the data of six Japanese textile companies. As is evident from thefigures of this table, a considerable difference exists in the level of the starting pay seale

HIDEKI YOSHIHARA

24

Table 2-6: Increase of Starting Wages in Japanese Manufacturing Oompanies

AsofAugust1,1974

Company(Industry)

Typeofworkers

AsofJune11972'

CompanyA

P4femaleworkers

16baht/day(=100)

29bahtlday(=181)

P7femaleworkers

17baht/day(=100)

30baht/day(=176)

CompanyB

P4,P7workers

600baht/month(=100)

1000baht/month(=167)

equipment)

MS3workers

600baht/month(=100)1050baht/month(=175)

MS5workers

900baht/month(=100)

1300bahtlmonth(=144)

P4workers

22.5baht/day(=100)

38.5baht/day(=171)

P7workers

25baht/day(=100)

39bath/day(=156)

MS3workers

26.5baht/day(=100)

41.5baht/day(=157)

P7maleworkers

525baht/month(=100)

800bahtlmonth(=168)

MS3maleworkers

625baht/month(=100)

990baht/month(=158)

MS5malewofkers

625baht/month(=100)

11OObaht/month(=176)

aextiles)CTransportation

CompanyC(Rubberproducts)

CompanyD(Foodstuffs)

Notes:
Source: Data collected by interviewing.
1.
For the notations of educational level of workers, P4, P7, MS3, and MS5, see Table 2-4.

2.

Table 2-7: Starting Wages in Japanese Textile Companies(baht/day)

Company
TypeofCompanyECompanyF
CompanyACompanyBCompanyCCompanyD

workers

I.P4maleworkers
P4femaleworkers
II.P7maleworkers

P7femaleworkers
III.MS3maleworkers

MS3femaleworkers

29

30

29

26

unknown

23.5

29

29

28

21

unknown

21

33

31

30

27

28

23.5

31

30

29

21

27

21

35

33

34

31.5

31

24.5

33

32

31

24.5

30

22.5

Notes:

1.
2.
3.

Souroe: data co11ected by interviewing.

As ofAugust 1, 1974.
For the notations of educational level of workers, P4, P7, and MS3, see Table 2-4.

among these companies belonging to the same industry.
Lastly, let us exarnine if any difference is found in the level of starting wages arnong

Japanese companies, American companies, and Thai companies. Although only a very
limited amount of data is available we may say the following (see Table 2-8). In the caseof the automobile tyres and tube industry the level of the starting wages in Americancompanies is remarkably higher than that of in Japanese companies.One American

25
PERSONNEL MANAGEMENT OF JAPANESE COMPANIES IN THAILAND

Table 2-8:

Comparison of Starting Wages in Japanese, American and Thai Companies(I)Tyresandtubesfor
automobiles

AmericanCompanyA
JapaneseCompanyB

1.asofJanuary,1974
P4maleworkers
1.asofJanuary,1974
P4maleworkers
P7rnaleworkers

AmericanCompanyC

2.asofAugust,1974
P4maleworkers
P7maleworkers
1.asofAugust,1974
P4maleworkers

34baht/day
26.5baht/day
29.5baht/day
32.5bahtlday
35.5bahtlday
60.6baht/day(II)Automobileassembler

AmericanCompanyD 1.asofJanuary,1974
JapaneseCompanyE

P4,P7,MS3maleworkers
1.asofJanuary,1974
P4,P7rnaleworkers

MS3maleworkers

850baht/month
950baht/month
1000baht/mQnth(III)Textiles

JapaneseCompanyF

JapaneseCompanyG

ThaiCompanyH

1.asofJanuary,1974
P4,P7femaleworkers
2.asofAugust,1974
P4,P7femaleworkers
1.asofJanuary,1974
P4femaleworkers
P7femaleworkers
2.asofAugust,1974
P4femaleworkers
P7femaleworkers
1.asofJanuary,1974
P4,P7femaleworkers
2.asofAugust,1974
P4,P7femaleworkers

17baht/day

21baht/day
19baht/day
20baht/day

26baht/day
27baht/day
16baht/day

20baht/day

Notes:

1.
2.

Souroe: data co11ected by interviewing.
A slight adjustment was made in the data so that we may make a comparison
on a similar basis as far as possible.

automobile assembling company pays a little bit less to their new workers than its
Japanese counterparts. The level of starting wages is generaily higher in Americancompanies than in Japanese companies. As is Mustrated in Table 2-8, Japanese companies
seem to pay to their new employees more than Thai companies. However, the gap of thepay scale of these two types of companies is not big.

(3-2) MinimumWages
The first labor law of Thailand was enacted in January 1957, but soon repealed on

the enactment of the Announcement of the Revolutionary Party No. 19, dated October

HIDEKI YOSHIHARA

26

31, 1958. In order to supplernent this Announcement and deal with the increasing casesof labor disputes the Settlement of Labor Disputes Act was enacted in December 1965.
These labor laws were operative until the enactment of the National Executive Council

Announcement No. 103, dated March 16, 1972. The Ministry of lnterior Annoucements
which followed were enacted on April 16, 1972.
One of the important changes introduced into the new labor law is the provision forminirnum wages. The minimurn wages have changed as described below:
1. February 1, 1973

12 baht/day applied to four provinces (Bangkok, Nonthaburi, Samut Prakan,

and Pathum Thani)
2. January 1, 1974
16 baht/day applied to the sarne four provinces

3. June 14, 19 74

20 baht/day applied to six provinces (the same four provinces and two newprovinces, Nakhon and Samut Sakhon)
4. 0ctober 1, 1974
20 baht/day applied to the same six provinces, 18 baht/day applied to the SouthRegion and 16 baht/day applied to the North and Northeast Region

in most companies the starting wages for employees with the lowest level of
educational background represent the lowest wages in the companies.iO Examining thedata of starting wages in Japanese cornpanies, American companies, and Thai companies,

we may point out the following findings. First, the lowest wages paid in Americancompanies and Japanese companies are higher than the legally determined minimum
wages in all the companies examined. In most of the American companies and many of
the Japanese companies the positive gap is rernarkably big. Secondly, the author has notfound a single Thai managed company whose lowest wages are lower than the legally
determined minimum wages. However, there is no positive gap at all in some companies.
Thirdly, many Thai employees working in small-sized companies and stores which are notpromoted by the Board of Investment, get wages which are lower than the legally
detemined minirnum wages.

(3-3) Comparison with Wages of Governrnent Employees
Govemment employees represent a 1arge group of wage-earners in Thailand (see'O In fact we find two kinds of starting wages in most companies operating in Thailand. The firstone is applied to their new workers during their probational employment period. According to
the current law the maximum of this period is 180 days. The second kind of starting wages isapplied to their new workers after they fmish their probational employrnent period and is slightly
higher - usually by one or twobahts.per day - than the first one. In the present paper only thesecond kind of starting wages is treated mainly because of the relative sufficiency of the data.

COMPANIESIN THAILAND
MANAGEMENTJAPANESEOFPERSONNEL
Table 2-1). The current monthly wage rates for Thai civi1 servants are presented in Table

2-9. The starting wages are determined according to the level of education of new
employees as follows:
1 . 750 baht/month for graduates of middle sehools

2. 1080 baht/month for graduates of vocational sehools
3. 1645 baht/month for graduates of colleges and universities

4. 2230 baht/month for graduates having a Master's degree
With respect to the wage rates for civi1 servants, two factors need to be taken into

account. First, there exists only one pay scale which Jis equally applied to male andfemale employees. Second, civil servants receive no bonus.

In the case of Japanese cornpanies, the current monthly wage rates for new
employees are as follows:

1 . 700-1OOO baht/month for graduates of primary sehools

2. 7501250 baht/month for graduates of middle sehools
3. 250035oo baht/month for graduates of colieges and universities
In addition to these regular wages, Thai ernployees working in Japanese companies
receive a bonus each year which amounts to at least one month wages and sometimes up
to three-months wages.
It is now evident that the starting pay seale for government officials is remarkably

lower than that for employees in Japanese companies. We may rather safely assume that
not only the starting pay scale but also the overak pay scale is substantially lower for Thai

civil servants than for Thai employees in Japanese companies.
Let us turn our attention again to Table 2-9 which presents us an interesting fact. In

this table we see only very broad ranks or grades of government employees, but we do

not fmd detailed classifications of jobs performed by govemment employees. One
official of the Labor Department has explained to the author that wages ofgovernment

employees are basically detemined by two factors, that is, bY the education and thelength of service in an office. Thus, wage system for government employees resembles

much more that of Japanese companjes than that of American companies. Then, theJapanese wage system may not be strange to the Thai people and therefore may expect aready acceptance by them.

(34) Pay Scale ofThai Workers in Japanese Companies
The wage data collected from 19 Japanese companies are presented in Table 2-1 O andthey tell us the lowest and the highest wages actuady paid to their Thai workers in these19 companies. The wage data collected from American companies and Thai companies
are too scanty to tell whether the Japanese pay seale is higher or lower than the American

pay scale or the Trhai pay scale. A comparison of wages among these three types ofcompanies would be an important subject for future researches.

27

HIDEKI YOSHIHARA

28

Table 2-9: Salary of Government Employees in Thailand

Rank

Monthly salary

No.

UnderfirstgradeFirstgrade

1

750

2

955

34

1220
1645

123

1150

--

123

1860

.--

Thehighestgradeof

123

thecivilservice

rank

3420
4335
5810

4880
6150
8075

--

1220

---

2230
---

1975

---

2680
3630

3420
123

-

1645

2520
Thirdgrade

1295

-

1750

1550
2100

Secondgrade

795
1015

---

---

3630
4600
61SO
5175
6505
8505

---

---

(baht)

845-

1080 -

1375 •1860 1295
1750
2370

2100
2850
3850
3850
4880
6505
5485
6875
8950

--.

900
1150
1460 -1975
1375

-'-

1860
2520
---

---

---

2230
3030
4085

---

1550
2100
1460
1975
2680

2370
3220
4335

4085
5175 -- 4485
6875'
7260

5810
7260 -- 7660
9410
9885

Notes:

L

2.
3.

Source: The Department of Labor in the Ministry of Interior of Thailand.
No bonus is paid to go vernment employees.
Underiined figures show the starting salary for graduates of middle schools (750),
vocational schools (1080), co11eges and universities (1645) and Master's course inuniversities (2230), respectively.

(4) Bonus in Japanese Companies
One of the unique characteristics of the japanese wage system is found in the bonus
which is paid to all employees in addition to their regular wages.

According to Table 2-1 1, it is evident that most Japanese comapnies paid a bonus totheir employees once a year in the past, usually in December. The data collected in thepresent research suggest that more companies than before paid a bonus twice a year in1973 and 1974. Therefore, we may expect a gradual increase of Japanese companies
paying abonus twice a year in the near future.

The amount of the bonus paid in Japanese companies remarkably increased in thesesix or five years. As is shown in Table 2-12, in 1969 companies whose bonus was equal to

one month basic wages amounted to nearly 60 percent of all companies, and in only one
company the bonus was twice as large as one month basic wages. According to the datacollected in 1974, companies whose bonus was equal to one month basic wages decreased

to 10 percent of all the companies and companies whose bonus was more than twice aslarge as one month basic wages increased to 30 percent.

29
PERSONNEL MANAGEMENT OF JAPANESE COMPANIES IN THAILAND

Table 2-10 : Lowest and Highest Wages ofThai Workers in Japanese Manufacturing Companies

Averageofthe

Averageofthe

coveredlowestwages(baht/month)highestwages(baht/month)

Textiles

3

598

1057

Iron&steel,&

2

865

2265

Transportationequipment

2

800

18g8

Electricmachinery

4

735

1650

Chemicals

5

740

1742

Rubberproducts

1

1020

2050

Pulpandpaper

1

600

800

Otherindustries

1

625

1500

19

737

1583

Industry

Numberofcornpanies

non-ferrousmetals

Total
Notes:

Source: the Japanese Chamber ofCommerce in Bangkok.

L
2.

As of August, 1974.
Overtime pay and bonus are not included.

3.

Table 2-11: Frequency of Bonus Payrnents by Japanese Manufacturing (lompanies

Dateofdata
Frequency
Industry
TextilesAsofDecember1,1969

AsofJune11972'

Onoea Twioea Unknown Onoea Twioea Unknown
year
year
year
year
9410325

o2oooo1ooo1oIron&steel,&non-ferrous

14

121ooo1ooo12

4

4

61'2346

metalsTransportationequipment
Electricmachinery
Foodstuffs

Chemjcals
Total

33

2

2

45

Notes:
1.
Sources: Romu Chosu (Employment Survey), the Japanese Chamber of Commercein Bangkok, March, 1970; Angust, 1972; May, 1974.
2. The figures in the table represent the number ofJapanese companies.

30

HIDEKI YOSHIHARA
Table 2-12: Arnount of Bonus Paid in Japanese Manufacturing Companies

Amountofbonus
IndustryDate(year)

O.IF-O.9

1.0

1.1"1.9

1969

2

5

2

Textiles19721974

1

8

4

1

2

3

2

3

1

3

8

2

1969
Iron&steel,&1972non-ferrousmetals

2

2.0

1

8

1

1

1

1
1

1

1

2
1

1

3

2

1

1974

1

1969

Foodstuffs1972
1974

1

1

1

1

1

3

1

1

3

1969

Chemicals1972
1974
1974

Unknown1

2
5

Electricmachinery1972

Total1972

3.1'-

3

1974
1969

1969

3.0

2

1974
1969

Transportationequipment1972

2.1-•2.9

4

1

2

2

1

2

3

1
1

2

22

9

1

4

21

14

5

2

1

1

3

13

2

6

2

3

6
1

1

Notes:

1. Souroes: sameasTable2-11.
2. The amount of bonus is described and classified in terms of the multiples of monthly
basic wages of employees. Thus, the rnultiple 2.0 means that employees receive on the
average that amount ofbenus which is two times as large as monthly basic wages.
3. The figures in the cens of the table represent the number of companies.

With respect to the above analysis of the bonus in Japanese companies, we need tounderstand clearly that the frequency of payment ofabonus is one thing and the amountof the bonus is quite another. Companies that pay a bonus twice ayear may pay less totheir employees than those companies which pay a bonus once a year. In Japanpractically all companies pay a bonus twice a year and usually pay in June or July and in

December of the year.

The American companies doing business in Thailand generally have a bonus system,
In one company the same amount of money which equals one month basic wages is paid
as a bonus to all employees. In another company the amount ofbonus varied from one
month basic wages to two months basic wages according to the length of service of theemployees. Data are too limited to tell if Thai companies also have a bonus system ornot.

IN THAILAND
OF JAPANESE COMPANIESPERSONNEL MANAGEMENT(5) Welfare of Thai Employees in Japanese Companies

The current labor law of Thailand proclaims that companies doing business inThailand need to provide two kinds of welfare for their employees. First, companies areprescribed to provide their employees with clean drinking water, rooms for shower bath,and lavatories in accordance with the sanitary requiTements and jn adequate quantity
according to the law. Second, companies are prescribed to provide their employees with
first-aid or medical treatment facilities.

The author visited factories of twelve japanese companies, two American companies,

and two Thai companies, and had a chance to make first-hand observations concerning

welfare actually provided in these companies. All these factories met the welfare
standard prescribed by the law.
It should be poifited out here that the welfare prescribed by the labor law represents

only a small portion of the whole welfare actually provided in these companies. In thecase of the japanese companies all or many of the following items are included in theirwelfare programs:
1 . night shift allowance

2. full attendance allowance
3. bus service

4. dormitory

5. food
6. working uniforms and shoes
7. Iife and accident insurance

8. retirement money

9.Ioans
1O. playgrounds and other facilities for sports
1 1 . recreational activities

In order to see how these items are actually provided in Japanese companies, let us
pick up one textile company and examine its welfare programs in some detail.

The company has two kinds of allowances: (1) full attendance allowance of 60
baht/month and (2) night shift allowance of 8 baht/shift which is paid to the workers on

the night shift. Every employee receives 70baht/month asafood subsidy. With respect
to working uniforms, the following items are provided for every female worker once a
year: (1) a work cap, (2) apair of shoes, and (3) cloths for two sets of uniforms with 60
baht to cover the tailoring cost. More or less similar items are given to male workers.

The dormitory for male workers is a three-stories concrete building and the room
space is approximately 6m2 per worker, lt has an air-conditioned recreation hal1 (68m2)
with a television set, and a reading room (30m2). The dormitory for female workers is a

two-storied wooden building and the room space is nearly 9m2 per worker. It has tworecreation halls each of which has a television set, and a sewing room (50m2). The
company has a three-storied concrete apartment building for its Thai managerial staffs.

31

32

HIDEKI YOSHIHARA

Each apartment (66m2) has two bedrooms, one living room and one dining room withkitchen. The rent is 100 bahtlmonth and utilities (electricity and gas) are free. There isan independent building for servants.

The company has several facilities for sports such as (1) a twenty-five meter long
Swimming pool, (2) a playground for footbal1, (3) three sets of courts for basketbal1, and(4) three sets of tables for pingpeng. The company subsidy given to sporting and culturalactivities of 750 employees amounted to 170,OOO baht in 1974. 'IThe company has abudget of 120,OOO baht for various recreational activities such as company group trips
and parties.

The company has a clinic with two beds. The clinic provides daily one hour medicalcare by a doctor and 24 hour nursing for employees and their families. Medical
consultation and medicine are free for employees and their families. Free healthexamination including X-ray examination is provided for all employees once a year. The
company gives a subsidy to employees for their medical treatment up to one month basic
wages per year. Sick employees who need medical treatment for a long time are paid halfof their basic wages for three to twelve months depending upon the length of theiremployment period in the company. The company has a provident fund system for
employees.

Lastly, the welfare programs of this company are concerned with education andtraining of the employees. Employees with a low level educational background areencouraged to attend an evening school outside the company. All expenses are paid by

the company. 27 employees are now attending an evening school and they wil1 get pay
increases after they finish the course. The company has a free dressmaking class forfemale employees. For managerial and technical staffs, the company provides anopportunity ofjob training in the parent company. This subject wM be treated in somedetail in a later section when examining the management development program.

The welfare programs of this company represent one of the best welfare programs
provided in Thailand. Howerver, in most of the Japanese companies, welfare programswith more or less similar items and qualities are provided for their employees.

Do American companies and Thai companies provide welfare programs for theiremployees? On the whole the welfare programs provided in American companies andThai companies are not necessarily inferior to those provided in Japanese companies.

This finding was a surpnse to the author since the japanese way of personnel
management has been well known for its great emphasis upon welfare aspects of
employees." He had expected to find an obvious superiority of Japanese welfare
programs over American and Thai welfare programs in Thailand.

" •James C. Abegglen, op. cit., 1958 and op. cit., 1973.

PERSONNEL MANAGEMENT OF JAPANESE COMPANIES IN THAILAND 33
III Management Staffing and Development''(1) Managerial Staffs in Japanese Companies
The data presented in Table 3-1 tell us that the ratio of foreigners to the total

number of employees is higher in Japanese companies than in American and European
companies. Since most of the foreign employeeshold high level management positions in
the companies, we may infer from these data that comparatively less Thai employees arepromoted to the position of top management and middle management in Japanesecompanies than in AMerican and European companies.

Table 3-1: Ratio of Foreigners to Employees
NumberofJapaneseinJapanese.companles

Numberofemployees(Sizeofcompanies)

O--99
100r-299'

300--499500••-999
1000•-1499
1500-•

NumberofforeignersinAmericanandEuropeancompanies

Minimum-Maximum-Average Minimum-Maxirnum-Average(Numberofcompaniescovered)'(Numberofcompaniescovered)

2-3-2.4(5)2-8-4.7(9)O-3-1.2(5)O-2-1.0(5)2-9-4.3(3)1-10-6.2(6).3-18-9.0(8)6-28-13.8(5)7-22-14.5(2)2-12-7.0(4)Notes: 1. Source: Questionnaire survey by-rnail and telephone.

2. As of July or August, 1974.
3. All companies are manufacturing oornpanies having factories in Thailand.

4. Full-time foreignemployeesonly are counted.

The following factors may be pointed out as reasons for the relative insufficiency of

promotion of Thai managerial staffs in Japanese companies as compared with Americanand European companies. First, in terms of the date of their starting operation, theJapanese companies on the whole are younger than the American and European
companies. ,As we shall see soon, the development and promotion of Thai managerial
staffs is a time consuming process.

Second, in the eyes of the Thai people, especially the young ambitious Thai people
with a high level education, the Japanese companies are less attractive as employers thanthe American and European companies. This relative unattractiveness of the Japanesecompanies may be seen as a result of the following facts.

First, under the Japanese lifetime employment system the length of service of theemployees plays a central role in determining their wages and positions, and thus for the

young Thai people the pay scale tends to be lower in the japanese companies than in the

34

HIDEKI YOSHIHARA

American and European companies.
Second, the Western culture on the whole enjoys a high evaluation and admiration
among Thai people, but the Japanese culture does not draw much interest and sometimes
even receives a negative evaluation.

Third, there are many Thai people who speak English and also who want to improvetheir English. American and European companies are very attractive for these people.

On the contrary, to work with Japanese managerial staffs and thus to learn to speak
Japanese companies often presents a negative inducement to the Thai people.

Fourth, the feature of the Japanese way of management that puts much emphasis
upon close direct contacts between managerial staffs and ordinary workers-this feature

may be called "management by direct contact"-presents a negative inducement to Thai
people. Young talented Thai people who are natural candidates for managerial personnel,

generally have a strong dislike for working in factories with ordinary workers. The

American. way of management may be characterized as the "managernent by indirectcontrol," under which managerial staffs rarely have direct contacts wjth ordjnary workers
and mostly work in their office rooms wearing white shirts and ties.

The third factor which may explain to some extent the relative insufficiency of
promotion of Thai managerial staffs in Japanese companies is another feature of theJapanese way of management, that is, the lack of formalization of management
procedures and thus the underdevelopment of manuals for managerial personnel. In
Japanese companies managerial staffs, whether they are Japanese or Thais, learn toperform their jobs mostly through experience. To learn by experience takes much time,

especially when most of the important management procedures are not formalized andremain implicit.

Next, let us examine what kind and level of managerial positions are occupied by'Ihai employees in Japanese companies.

Figure 3-1 outlines the current organizational structure of one Japanese company

who employs more than 700 workers and whose main products are foodstuffs. The
Chairman of this company is a Thai who is one of the major investors in this company.
He is mainly engaged in the public relations activities of the company. More specifically,

his main managerial function is to maintain and develop a good relationship with Thai
Government officials and Thai business leaders. He performs his role in the company ona fu11-time basis, but in many companies the Thai partners who hold the position ofchairman work on a part-time basis. They usually run their own companies on a full-timebasis, and therefore their participation in and influence upon the management practicesof Thai-Japanese joint ventures tend to be partial and limited.

The President of this company is a Japanese and the overal1 responsibility ofmanaging this company falls upon him. He has been sent to this company by the parent
company in Japan, and it is almost certain that he wi11 return to the parent company after

he finishes his work period in Thailand. Some companies have no position of a

Figure 3-1; Organization ofa Japanese Company (Foodstuffs)reChairman1

President

Manager of General

Affairs (A)Plant Mana er

Section Manager ofGeneral Affairs (A)SalesManager(B)

Section Manager of
Production

Assistant

Assistant

Assistant

SectionSectionSectionManager ofManager of

Warehouse

Personnel

Manager ofGeneralManager of P!anning & Control

Section Manager ofEngineering

(B)

(B)

Assistant
SectionAssistant

Assistant

SectionSectionManager ofManager ofMaintenanceManager ofChemicalOperation

Power

Affairs (A)SectionSection

Chief

Chief

Section
Chief

Section

Chief

Notes:

L

2.
3.
4.

SectionManager
ofTechnology

Souroe: data co11ected by interviewing.
Only the outline of the organization is described using general terminology.

As ofAugust, 1974.
Notation is as follows:

M: Japanese employees sent from the parent company (A), (B): The same person holds the managernent posts.

(B)

m
7
ca
o
Z
z
tn
v
:
>
Z
>
o
m
g
m
zo
di
w
>
Z
m
m
m
n
o
K
v>
Z
H
m
ta
N
z
H
=
>
r>
z
U
""

)-l

.t•J

36

HIDEKI YOSHIHARA

chairman. In that case, the position of the president is usually occupied by the Thai
partner, and the vice-president or the managing director is a Japanese.

As shown in Figure 3-1, the President has four subordinate managers. Only theManager of General Affairs is a Thai and the other three managers are all Japanese. It
should be pointed out here that we only rarely find [hais at this level of the managerial

hierarchy in Japanese companies. Especially the management posts which are responsible
for the financial matters, and the export and import activities are almost exclusively filled

by Japanese managers.

The Plant Manager of this company is a Japanese as in most other Japanesecompanies. His main responsibility is to manage the day-to-day operations of the plant.
In this company he holds three additional posts, that is, that of the Section Manager ofTechnology, the Section Manager of Engineering, and the Section Manager of
Production. On the surface this situation is often interpreted as an evidence of the policyof exclusive staffing by Japanese employees in the high level managerial posts. In reality,

however, this situation may be interpreted from the viewpoint of the progress ofmanagement development of Thai employees. This Japanese plant manager may be an
excellent man, but his time and energy would not be sufficient for properly performing
tasks of four different management posts. In fact, a part ofhis managerialjobs are done

by his Thai assistants. These Thai assistants are provided with a good opportunity tolearn how to perform managerial jobs in Japanese companies. They wil1 take over someof this Japanese manager'sjobs and hold higher management posts in a year or two.

Figure 3-1 shows that there are fourteen management posts below the rank of the
Plant Manager. Of these fourteen posts, six posts are occupied by four Japanese and theother eight posts are held by seven Thais. This division of managerial jobs at the plant

between Thais and Japanese seems to represent a general pattern ofJapanese companies
in Thailand. Roughly speaking, half of the management posts below the level ofa plant
manager are occupied by Thai employees.

The lower management posts of this company which are not shown in Figure 3-1 are

al1 occupied by Thai employees. And this seems to be the case for other Japanesemanufacturing companies in Thailand.

Althougli not represented in Figure 3-1, most companies have Japanese technicalexperts and advisory staffs. The forrner Japanese are not a part of the managerial
personnel of the company and the latter Japanese advisory staffs are different from theordinary line managers and supervisors in the sense that they are not given the formal

authority to give orders to 1ine managerial personnel and workers. Many of these
Japanese advisory staffs used to be line managers, and management posts of these line
managers have been gradually ffiled by Thai managerial personnel.

Figure 3-2 outlines the organizational structure of one American company that
produces tyres and tubes for autombiles, and Figure 3-3 shows the outline of theorganizational structure of another company whose main product is electric wire. The

37
PERSONNEL MANAGEMENT OF JAPANESE COMPANIES IN THAILAND

former company employs approximately 700 and the latter company has about 250
employees. All of the lower management posts that are not shown in Figure 3-2 andFigure 3-3 are held by Thai employees. The data available are too insufficient to judge

whether the cases of these two companies correctly represent the overal1 trend of
American companies in 'Ihailand.

Organization of an Arnerican Company (Rubber Products)

Figure 3-2:

Managing Director
CQmptroller

Managerof

Managerof

Methods&

Engineering

Factory Manager

SalesManager

Production

Technical

Managerof

ManagerManagerStandard

Industrial

Relations

GeneralGeneralGeneralGeneralGeneralForemanForemanForemanForemanForemanNotes:

L

Source: data co11ected by interviewing.

2.
3.

As of August, 1974.
Notation is as follows:

O : Foreign managers (four Americans, one New Zealander, and one Filipino).

Figure 3-3:

Organization of an American Company (Electric Wire)
President

ce-President

AdvisoryStaff(Engineering&Marketing)lesManagerPlantManagerComptrollerAdministrative
Manager

Notes:

L

2.
3.
4.

Source: data co11ected by interviewing.
As of August, 1974.
Only the higher portion of managerial hierarchy is described.
Notation is as follows:

O : Foreigners (an American and aBritish) sent from the parent company.

(2) Profile of Thai Managerial Staffs

Table 3-2 summarizes the data of one Japanese company whose main product isfoodstuffs. First, al1 the higher rank 11hai managerial staffs have been in this company

since 1961 when this company was established. One plausible explanation of this

HIDEKI YOSHIHARA

38

Table 3-2 :Profile of Thai Manageria1 Staffs of a Japanese Company (Foodstuffs)

Managementpost
Chairman

Number

Education

1

Chulalongkorn

Dateofentering

thecompany

Monthlysalary(baht)

1961

unknown
10,OOO

Uniyersjty

ManagerofGeneral

1

PoliceCollege

1961

1

MiddleSchool

1961

Affairs

SectionManagerof

9,ooo•-

10,OOO

Personnel

SectionManagerof
Warehouse
SectionManagerof
Maintenance1

MiddleSchool

1961

1

TechnicalSchool

1961

SectionManagerof
Power

1

University(unfinished)

1961

SectionChief

2

University(unfinished)

1961

Chulalongkorn

1961

7,OOO--

9,OOO

University

Foreman

8

University(unfinished)

1961

AssistantForeman

7

University(unfinished)

1961-1966

5,5OO--

6,OOO
4,500•-

5,5OO

VocationalSchool
Notes:

1.
2.
3.

Source: data co11ected by interviewing.
As of August, 1974.

In addition to monthly salary, Thai manageria1 staffs are paid a bonus once a year
which roughly amounts to a two-rnonths salary.

interesting fact may be that this company has followed the policy of lifetime employment
and internal development for its Thai managerial personnel. In fact, al1 of them except

the Chairman have experienced a stepwise promotion from lower ranks to their present
ranks ofmanagement posts. This cornpany has never recruited managerial personnel fromother companies or government organizations. Second, there exists no big gap in the pay

scale between any two consecutive ranks of management posts. It needs to beemphasized here that this type of pay scale for managerial personnel is quite compatible

with the above mentioned company's policy of lifetime employment and internal
development of its managerial personneL

Table 3-3 presents us the data of one Japanese textile company. The profile of theThai managerial personnel of this company is different from that of the first foodcompany. At a glance one difference is apparent. Three of the four high rank Thaimanagerial staffs were recruited rather recently from other companies and governmentorganizations. As this company has grown very fast and the demand of the Thai
Government to replace Japanese employees by Thai employees has been very strong, themethod of internal developrnent alone has not been enough to supply necessary Thai

Table 3-3:

Profile of ThaiManagementpost

Age

Mucation

AssistantFactoryManager

39

ChulalongkornUniversity
SdudiedattheUniversity

Managerial Staffs of a Japanese ()ompany (Textiles)

Dateofentering

Trainingatthe

thecompany

parentcompany

Previousemployer

Monthlysa1ary

Thaicompany

16,900Americancompany

12,900inWestGermany

in1972(2)10days
in1973

11,300ManagerofGeneralAffairs

39

TharmasartUniversity
Master'scourseatKeio
University,inJapan1970

2weeksSectionManagerofFactory

52

ArmyAcademy

1973

17daysin1974Army

Chulalongkorn

1966

3weeksin1974

AnotherThaisub-

35

Administration

AssistantManagerof
Financing&Accounting

University

Notes:

1.
2.
3.

Souroe: data co11ected by interviewing.
As of August, 1974.
These Thai managerial staffs are paid bonus in addition to their monthly salary.

(baht)(1)4months
1971

in1973

w
m
m
o
z
z
m
v
g
>
Z
>
o
m
K
m
z
H
o
T
->
v>
Z
tu
m
m
a
o
K
re
>
z
N
m
ca
M
Z
H
=
>
N
v
>
Z
U
pa

inThailandandBO1'

sidiariesoftheparentcompany

9,750

$

HIDEKI YOSHIHARA

40

managerial staffs. As we wil1 see later in some detail, more and more Japanese companies,

to meet the Thai Government demand, are being forced to rely upon, in addition to theirtraditional method of internal development, the method of recruiting Thai managerial
personnel from outside companies and government organizations.
In order to carry out its policy of recruiting necessary managerial personnel fromoutside, the company has had to adapt apay scale to fit this policy. The effort of thisadaptation has shown itself in the make-up of the pay scale for managers and supervisorsof the company. In contrast to the case of the first food company, the pay scale of thistextile compnay has a rather big gap between the salary for the higher rank and the salary

for the lower rank of management posts. While the lower part of the pay scale ischaracterized by a smooth stepwise increase of salary, the upper part of the pay scale israther discontinuous. In order to recruit first-class managerial staffs from outsideorganizations, it is usually necessary for the company to offer high ranking management

posts and high salaries even when they are incompatible with the existing procedure ofpromotion and pay scale.
The third company producing electric appliances represents one of the very rare cases

in which the responsibility of managing the company is jointly assumed by the Thai andJapanese partners. Thus, this company should be rightly treated as a Thai-Japanesejoint

management company. The data of this company are presented in Table 3-4.
As the Thai partner is actively engaged in the management practice of the company,
there are only five Japanese ernployees sent from the Japanese parent comapny, and fourof them are technical experts whose main responsibility is to assist the Thai technicalexperts and workers. There is a big gap of salaries which exists between the higher rank

management posts and the lower rank ones. While four production managers who are
Thais receive more than 10,Ooo baht/month, the monthly salary of twenty foremen who
are the direct subordinates of these production managers, ranges from 2,OOO baht to
5 ,OOO baht.

(3) Development of Thai Managerial Staffs

The promotion of Thai employees to management posts in Japanese companiest
seems
to have progressed along two lines. The first line is a straightforward replacementof Japanese managerial staffs by Thai managerial staffs. Almost all the Japanesecompanies studied in the research have decreased more or less the number of their
Japanese employees and promoted Thai employees to fil1 the vacant posts.

Table 3-5 and Figure 3-4 present us the data from one Japanese company which isdoing business in the transportation equipment industry. These data show how thedecrease in the number of Japanese employees has followed the promotion of Thai
employees to management posts in this particular company. The case of this company is

not an exception but represents a general trend of many other Japanese companies inThailand.

Table 3-4 : Profdeof Thai Managerial Staffs of a Japanese Company (Electrjc Appliances)

Managementpost
ManagingDirector

Age
41

Educatioh

Dateofentering

Trainingatthe

thecompany

parentcompany

Master'scourseatthe
universityinU.S.A.

1970

Severaltimes

Workexperience

Monthlysalary(baht)

Hasbeenthepresi-

dentofaThaicom-

44,OOOpany

ManagerofFinance

43

ChulalongkornUniversity

1972

None

Thaicompany

unknown

ManagerofPurchase

32

UniversityandstudiedinU.S.A.

1970

None

unknown

unknown

ManagerofPersonnel

42

Universityandstudiedin
EnglandandAustralia

1973

None

Europeancompany

ProductionManager

ofProductA
ProductionManager

ofProductB
ProductionManager

ofProductC
ProductionManager

ofProductD

35

ChulalongkornUniversity

1970

L

inThailand

Twice(twoweeks

Thaicompany
Americancompany

eachtime)

33

ChulalongkornUniversity

1970

Once

28

ChulalongkornUniversity

1971

Onoe

42

ChulalongkornUniversity

1973'

Notes:

2.
3.

Americanor

Source: data co11ected by interviewing.
As of August, 1974.
Thai managerial staffs receive abonus once a year whose amount equals a three-months salary.

Once

inThailand

Japanesecompany
inThailand

Americancompany
inThailand

unknown

g
z
9
g

E
e
B
E
E

8
z
ig

10,OOO--

15,OOO

E
g
m
a
o
:re
>
Z
pta
ta

-z
H
=
>
-v
>
Z
v

..ib.

Figure 3-4 : Organization of'sa Japanese Oompany (Transportation Equipment)

President (P)i

General Manager(P)2Factory Managor(A)ekoduction Manager

Manager of(A)Manager of
Accounting

Planning & Control(P)3[ AssistantManager ]
Chief

Chief

Chief

Chief

Chief

Assistant

Assistant

Chief

Chief

Foreman Foreman

Foreman Foreman

Notes:

1.

2.
3.

ForemanForeman

Chief

Foreman

Source: data collected by interviewing.
As of August, 1974.
Notation is as follows:(P)1: Part-timeThaimanager(P)2, (P)3: Part-time Japanese managerswho have a position in anotherThai
subsidiary of the parent company.
(A): The sarne person holds two posts.

M: Japanese employees sent from the parent company[ ]: Locallyemployed Japanese4.

All the posts of Chief were occupied by Japanese employees in 1966.

5.

This ftgure corresponds to Table 3-5 .

Foreman

=
M
v
m
xN
K
o
ca
=
H
=
>
X
>

43
PERSONNEL MANAGEMENT OF JAPANESE COMPANIES IN THAILAND

Table 3-5: Decrease of Japanese Employees in a Japanese Company (Transportation Equipment)

Year

Typeof

1966

1969

1.1.Full-time

95

1.2.Part-timeo1(2)Locallyemployed

42(3)Total

13

8JapaneseEmployees

1972

1974

3

3

2

2

2

2

2

2

1

7

7

5

1970

(1)Sentfromtheparentcompany

Notes: 1. Source: data co11ected by interviewing.
2. Part-time ernployees are those who have a position in another Japanese company

in Thailand.
3. This company is the same as that ofFigure 3-4.

The second line of progress is less clear-cut than the first one and therefore harder totrace. ManyJapanese companieshave recently increased the Japanese employees who areadvisory staffs to line managers and supervisors. Most of them were once line managers
and supervisorshaving a formal authority to give orders to their subordinates. [Ihese postsof line managers and supervisors are now filled by Thai employees. Thus, the change ofJapanese employees from line managers to advisory staffs have usually followed thepromotion of Thai employees to the posts of line managers and supervisors.

Next, let us examine the pace and the extent of progress in the promotion of Thai

employees to management posts in Japanese companies in the past. The data presented
in Table 3-6 were originally collected in Thailand by two Japanese researchers during May
and June of 1972. This table tells us:

1. 0f al1 the 38 Japanese manufacturing companies covered by the research, 28
companies (749o) increased their value of PI Yl (Percentage of Local Managers).
2. There are 10 companies that did not increase their value of PLM, but none ofthern showed a big decrease in their value ofPLM.

Based upon these results, they concluded that the progress of promotion of Thai
employees to middle management posts in Japanese manufacturing companies was quite
evident.i2

The development of Thai managerial staffs in Japanese companieshas continued its

progress since 1972 when the above quoted research was conducted. When we regard
Figure 3-1 on page 35 as a representative organization ofJapanese companies in Thailand,

we may point out the following three points. First, the move to replace Japaneseemployees by Thai employees has achieved a marked progress for the posts of the'2 Kydchoteki Kaigai-tOshi-kotsudO ni Kansuru ChOsahOkoku (Research Report on Overseas
Japanese Companies in Asia), the Osaka Charnber of Commerce & Industry and the Center for
Small Business Developrnent in Asia, March 1973, pp. 30-32.

HIDEKI YOSHIHARA

44

Table 3-6: Deyeloprnent ofThai Middle Managernent

PLM

PLMin1972O•-19intheyearof

20'"39'40""5960•-79

3

1

2

10

ss 4•-N43

1180•--100

Total

initialoperation

N4hN

O--19
20•-39N2N.

40-•592

N5.....

60•-7980-100Total
Notes:

4

7

7•

12

2

6

3

8

Å~3sN

3

8

38

1. Source: Ky6ch6teki Kaigaitoshi ni Kansuru Ch6sah6koku (Research Reporton Overseas Japanese Companies in Asia), the Osaka Chamber of Commerce& Industry and the Center for Small Business Development in Asia, March 1973,
p. 30, Table 9.
2. PLM (Percentage ofLocalManagers) of each company is calculated as follows:

pLM . number ofThaimiddle management x loo
total numb.er of middle management
3. 0f those 18 companies which are on the dotted diagonal lme, 8 companies
inereased their PLM.

Assistant Section Manager. The majority of these posts are now fdled by Thai
employees. Second, some progress has been made in the promotion of Thai employees tothe management posts of the Section Chief of the production department. It is estimatedthat nearly' half of these posts are now held by Thai employees. Third, only little

progress has been made as for the posts of the Section Manager and the Manager ofvarious functions. The majority of these management posts are stil1 occupied by Japaneseemployees.

'Ihen, how far and how fast wM the development of IThai managerial personnel
progress in the future?. Based upon the data collected, the following trends may bepointed out. First, nearly all the management posts except that of the President and thePlant Manager (we are stM referring to Figure 3-1) wM be filled by Thai emp16yees in the

future. The role of the Japanese managerial staff wil1 be limited to the overal1
responsibility of managing the company. Second, the accomplishment of this replacement of Japanese employees by Thai employees, wil1 take several years. Hasty action
would bring difficulties and troub!es to the companies. Third, several Japanese advisory
and technical experts will help Thai managerial and technical personnel. These Japanese

specialists may work on a full-time basis in the company or they may periodically makeshort visits to the company. . '45
PERSONNEL MANAGEMENT OF JAPANESE COMPANIES IN THAILAND

One large Japanese textile company has an explicit plan to guide its replacement
process ofJapanese employees by Thai employees. As is shown in Table 3-7, it is planned
that the Japanese employees would decrease at a fast pace and after 1978 there would be

only two Japanese employees in this company. However, according to the plan, several
Japanese would periodicaily visit the company as technical advisors and trouble-shooters.

Next, let us examine the factors and forces working toward the reduction ofJapanese employees and the promotion of Thai managerial staffs in Japanese companies.

The first factor is the accumulation ofmanagement experience and the improvementof management skills on the part of Thai employees. It is not hard any more to findqualified Thais who can effectively handle management problems of the day-today
operation of the company.

The second factor is a severe shortage of manpower on the part of the Japaneseparent companies. The Japanese parent companies which have manufacturing subsidiaries
in Thailand, usually have smilar foreign subsidiaries in many other countries. And theseparent companies are facing the problem ofhow to allot their scarce manpower resourcesamong their many foreign subsidiaries. Thus, it becomes increasingly hard for Thai
subsidiaries, that is, Japanese managed companies in Thailand, to procure the necessary
supply of japanese employees from their parent companies.

The third factor is the high cost of sending Japanese employees to foreignsubsidiaries. This cost consists of many kinds of payment such as: (1) basic salaries, (2)hardship allowance, (3) cost-of living allowance, (4) housing allowance, (5) education
allowance, (6) relocation allowance, etc. As Japanese people have enjoyed a great rise in
their wage level in Japan these ten or fifteen years, it is getting harder and also costlier topersuade them to leave Japan and work abroad, especially in deve!oping countries.

The fourth factor is the Thai Government policy and attitude toward foreignbusiness activities and foreign employees in Thailand. The Thai Government enacted twolaws in 1972, that is, the Law on Occupation ofAliens and the Aljen Busjness Law. The
basic aim of these laws is to limit the scope of economic activities of aliens in order toprotect the Thai people and to ensure their fu11 employment. It is quite evident thatthese two laws have a great impact upon the Japanese companies and speed up the
reduction of the number ofJapanese employees in these companies.

lhen, what kind of management development programs have been devised andcarried out in Japanese companies? Japanese companies generaily have three kinds ofprograms, that is, (1) on-the-job training of 'Ihai employees, (2) sending them to training

courses provided by outside organizations, and (3) training them at the parent companies

in Japan. The first and the third prograrn are far more important than the second andthus deserve a briefdescription here.

The first method of on-the-job training, although it may not be conspicuous tooutside people, is the major device for training Thai employees. The training of ordinary

factory workers is carried out by this method alone. And the Thai managerial and46

HIDEKI YOSHIHARA
Table 3-7:

Reduction Plan of Japanese Employees of a Japanese Company (Textiles)
period of staying

Mariagement posts

1974

1975

1976

1977

1978

1979

Presider.

Vioe-PresidentManager of Financing & Acco unting
Sales Mariager

Plant Manager

Produetion Mamager ofProduct A
Productjon Manager of Product B
Manager of Engineering
Business Manager
Sales Experts (two)(two)

Technical Experts (eleven)(two)( fo ur)(two)(three)Supervisors (five){

Total nurnber of Japanese employees
Notes:(three)

(two)

27

25

14

9

6

2

L Source: data provided by the company.
2.
3.

As of August 14, 1974
In the table only the number of full-time regular Japanese employees ispresented. After 1977 there would be several part-time Japanese as technicaladyisers and trouble-shooters.

technical staff also learn how to perform theirjobs in Japanese companies mostly throughthis on-the-job training.

There are good reasons why the method of on-the-job training receives such a greatemphasis in Japanese companies. First, under the "management by direct contact" ofJapanese companies, as compared with the "management by indicrect control" of
American companies, face-to-face contact and interaction among managerial staffs,
technical personnel and workers tend to be frequent and close. In this situation it is easy
and usually fruitfu1 to use the method ofon-the-j'ob training. Second, another feature of

47
PERSONNEL MANAGEMENT OF JAPANESE COMPANIES IN THAILAND

Japanese way of management, that is, the lack of well-prepared manuals makes it anecessity to rely upon this method of training.

The third method of training at Japanese parent companies has been widely used by
Japanese companies in Thailand. ' This method has been applied to two groups of Thai
employees, that is, (1) technical experts and first-line supervisors, and (2) high ranking

managerial personnel. The following four aims seem predominant for this kind of

trammg:l. to get new technical knowledge and learn new skills

2. to get familiarity with the Japanese way of management
3. to get acquainted with Japanese society, economy and culture
4. The chance to go to Japane is given to Thai employees as a reward.

Table 3-8 gives us some data concerning this method of training, that is, (1) the
number of 'Ihai employees who received the training, (2) the date and the length of the
training, and (3) the number of the employees who left the company after training. The
case of this textile company has the following features. First, this company has placed agreater importance upon the training at the Japanese parent company than otherJapanese companies in Thailand. Second, Thai employees who received training in Japan
were mostly managerial personnel and are expected to hold key management posts in thenear future. Ordinary workers, technical experts and first-line supervisors are trained by

the method of on-the-job traming. Third, in this company 30 employees received training

in Japan, but only two of them left the company later. The ratio of spin-outers to al1

trainees is much higher in other Japanese companies. For example, in another 1arge
Japanese textile company, of 47 Thai employees who once received training in Japan,
only 23 stay on at the same company and the remaining 24 lett the company.

IV Japanese Employees(1) ProMe ofJapanese Employees
The "Ugly American" is rapidly being replaced by the "Ugly Japanese" in many
Asian countries. And it is widely believed that Japanese businessmen working in thesecountries are mainly responsible for this situation. As mentioned at the beginning of thispaper, Japanese businessmen working in Thailand are being faced with widespread
criticism and severe accusations. In this section an attempt is made to shed light on the

profile of Japanese employees in Japanese manufacturing companies in Thailand andcheck the validity of the popular criticism made upon them.

(a) NumberandPosts
The number of Japanese employees and their posts in Japanese companies havealready been examined in the earlier part of this paper. The conclusion from thatexamination is that the average number of Japanese employees in Japanese companies islarger than that of foreign employees, mostly Americans and Europeans, in American

HIDEKI YOSHIHARA

48

Table 38:

Training at the Patent Company of a JapaneseYear1969

Employees

1972

1974

1973

20Jun.t13JuL{-,2M.)
14Mayt4Jun.(-,20d.)

Mr,C
Aug.tNov.(3m.,-)'19Mayl29Sep.(4rn.8d.}

50ct.tlSOct.(-,10d,)26JunJ20Dec,(5m,,24d.)

14May/24JuL{2m,,10dJ
14Mayf24JuL(2rn.,10d,)Mr.I

2Apr.t9Jun,(2m,,7dJ

Mr.J

2Apr.19Jun.(2m.,7d.)

Mr,K
Mr.L
Mr.M
Mr.N
Mr.O

2Apr.t9Jun.{2rn,,7d.)

15Jun./27Sep.(3m.12d.)Aug,/Nov.{3m.,-)
14May/24JuL(2m.,10d.)
14May/24Jul.(2m.,10d.)

Mr.P

Mr.Q
Mr.R
Mr,S

14May/24JuL(2m.,10d.}
31Mayt28Aug.{3m.,25d.)2Apr.lllMay{lm.9d,)2Apr.t9Jun.(2m.,7d.)2Apr.l9Jun.(2m,,7d.)

Mr.T

Mr.U
Mr.V
MI.W
Mr.X
Mr.Y

leftthecompany

15Jun.l27Sep.(3m.12d.)15JunJ27Sep,(3m.12d,)

31Mayt28Ang.(3m.2Sd.)leftthecornpany

14May/24JuL(2m,,10d.)

14May124JuL(2m.,10d.)

AugJNov.{3m.,-)23JuLJISep,"m,,8dJ

Mr.Z

23JulJISep,(1m.,8d.)Mr,a23JuLl!Sep.(lm.8d.)Mr.b

28Apr.tISep,{4m,,3d.)Mr.c15Jun.t27Sep.{3m.12d.)

Mr.d

23JulJISep,{1m,,8d.}

Total

5

Grand Tetal

Notes:

Remark

7Feb.t23Feb.(-,16d.)

Mr,A
Mr.B

Mr,D
Mr.E
Mr,F
Mr.G
Mr.H

Company (Textiles)

1.

2.
3.

5

13

10

33(30persons)

Source: data provided by the cornpany.
As of August 8, 1974.
Notations:(1) 19 May/29 Sep. rneans from May 19 to(2) 4m., 8d. means 4 months and 8 days.

September 29.

49
PERSONNEL MANAGEMENT OF JAPANESE COMPANIES IN THAILAb:Dand European companies (see Table 3-1 on page 33). And it has also been found thatmost of these Japanese employees occupy higr{er rank managment posts in theircompanles.
(b) Fluency in Thai
The popular belief that Japanese businessmen in Thailand seldom speak Thai seems

to lack a factual basis. The Japanese employees in Japanese managed companies in[Ihailand are more fluent in speaking [Iliai than Americans in American managed
companies. And there are good reasons for this relative fiuency of Thai by Japanesebusinessmen.
It is said that many of the middle schoo! graduates and almost all of the university
graduates in Thailand speak English. Thus, it is rather easy to find and hire Thais who

speak English. English speaking Americans work with these English speaking [Ihaicolleagues and assistants in their cornpanies. On the other hand, it is hard to find and hire

'Ihais who speak Japanese. Generally speaking, Japanese employees can not rely upon
Japanese speaking Thais in their companies. Instead, in order to communicate with Thaimanagerial staffs, technical experts and ordinary workers, the Japanese employees needto speak Thai. Thus, it becomes a necessity fer the Japanese employees to learn to speakThai.

The second reason is the difference between the Japanese way of management andthe American way of management. Under the "management by indirect control," it isusually not necessary for American managers to learn to speak Thai since they only needto communicate with their Thai managerial assistants who speak English. In Japanesecompanies operating in Thailand, the Japanese managers usually have face-toface
re!ationships not only with the Thai managerial staff, but also with the ordinary Thai

workers. And under this "management by direct contact," the Japanese managers areforced to learn to speak Thai since frrst-line Thai supervisors and Thai ordinary workers

speak only Thai.

(c) Length ofStay in Thailand
The average Japanese businessmen stay in Thailand for three to five years. Those
Japanese who assume an overall responstbhity of managing the companies tend to staylonger than the average Japanese employees. On the other hand, the Japanese technicalexperts tend to stay shorter.

'Ihere seems no substantial difference in the length of term of office between

Arnericans in American managed companies and Japanese in Japanese managed
companies. On the average, the Americans stay in Thailand for three to five years.

However, there are some Americans and Europeans who have stayed in Thailand very
long, say, twenty or even twenty-five years. And these businessmen, although they
represent only a small portion of the whole Western businessrnen working in Thailand,

may probably produce a conventjonal and an exaggerated image that Aniericans andEuropeans generally stay very long in Thailand.

50

HIDEKI YOSHIHARA(d) Remuneration
It is widely believed among Japanese businessmen in Thailand that they are far morepoorly Paid than American businessmen in Thailand. Accroding to their belief, theremuneration of the Americans is twice to three times as high as that of the Japanese.

Since remuneration is composed of not only basic salaries but also various additional

ailowances and fringe benefits, it is extremely hard to make a reliable comparison
between Americans and Japanese in this matter. Howerver, according to the author's
investigations, on the whole there exists no substantial difference in the remuneration

between American businessmen and japanese businessmen working in Thailand.

There exists a big gap of the pay scale between Japanese employees and Thai
employees in Japanese companies in Thailand. It is not uncommon that the amount of
remuneration of Japanese employees is twice to three times as high as that of the highest

paid Thai employees. This big gap basicady results from a big difference in the overal1

wage level and the living standard between Thailand and Japan. Japanese businessmen
working in Tliailand naturally demand that they be paid at least equally as their fellow

businessmen working in the Japanese parent companies. Although there may be goodreasons, such a big gap of the pay scale tends to arouse a bad feeling toward Japaneseemployees among the Thai employees and the Thai people in general.

(e) Vacation and Home Leave
Japanese people are well known throughout the world as hard workers. The Japaneseemployees in Japanese companies in Thailand work very hard indeed. Almost noJapanese employees have ever taken rnore than a three day long vacation during their stayin Thailand which usually lasts three to five years. It should not be thought from this that

the Japanese companies operating in Thailand do not have a vacation policy. On thecontrary, in all the companies studied in the research, the Japanese employees are pro-vided with the right to take a two to three week long vacation every year. But they
simply do not exercise this right.

TThe Americans in 'Ihailand seem to work as hard as the Japanese, but the Americans
take a long vacation in their home country or in Thailand. According to a survey, theAmerican businessmen in Thailand are usually provided with home leave every year or
every other year. 'Ihe length of home leave ranges from three weeks to over five weeks.
They are given local vacations in non-home-leave years. The length of the local vacation

ranges from one week to four weeks. And it should be emphasized that al1 Americans
exercise their right to take their vacation.i3'3 AsialPacific Regr'onal Compensation Survey, Series I, Expatrlate Allowances and Fringe Benefits,

Thailand, 1974 edition, Business International, 1974.

51
PERSONNEL MANAGEMENT OF JAPANESE COMPANIES IN THAILAND(2) Effects of Reducing Japanese Employees
As seen in the foregoing section of this paper, the number of Japanese employees
has decreased considerably these two or three years and is anticipated to decrease further

in the near future. ln this section letus examine what kmd ofeffects are being producedby this reduction of Japanese employees.

The Japanese employees are either rnanagerial staffs or technical personnel. Whensome of these Japanese employees leave their companies, their functions need to be

performed by Thai employees. Thus, we may well expect that the reduction of theJapanese employees leads to the development of Thai managerial and technical personnel
in Japanese companies. In more genera1 terms, it is expected that reducing the Japaneseemployees wM speed up the transfer of management ski11s and technical know-how toThai employees.
As mentioned earlier, the Thai Governrnent enacted two laws in 1972, that is, theLaw on Occupation of Aliens and the Alien Business Law. One important aim of these

two ' narrw rm upon managerr an ec lca foreign
employees and thus to promote the transfer of their management skills and technicalknow-how to Thai employees.
Then, is the reduction of Japanese employees a panacea for the development of Thaimanagerial and technical personnel? In orderto give an answer to this question,we needto examine whether the Thai employees can take over the managerial and technicalfunctions of their Japanese predecessors. This latter question leadsus to the examinationof the following considerations.

First, the efficiency of performance ofmanagerial and technical functions by Thai
employees considerabiy depends upon their management skills and technical expertise.

Thus, in order to promote the replacernent of the Japanese employees by Thai
employees, it is necessary to devise afid carry out an effective traifiing program aimed at

the development of their management and technical capabilities.

Second, we need to understand that the reduction of the Japanese employees proceedssmoothly under certain conditions but not so under other conditions. Generally speaking,when the management and technical problems that Thai employees need to deal with aremostly simple and familiar to them, reducing the Japanese employees may not seriously

hurt the overall efficiency of operations of a company. On the other hand, mainly
because of the lack of experience and the less developed capabilities of Thai employees,
they may probably meet a serious difficulty in dealing with a complicated and novel typeof management and technical problems.
Almost all Japanese manufacturing companies started their operations with the viewto produce and sell their products to the Thai market. Many of them have still retained

this local-market-oriented nature of their operations. But some Japanese companies are
examining the feasibility of entering inte the export business (see Table 4-1).

HIDEKI YOSHIHARA

52

Table 4-1:

Sales and Exports of Japanese ]hanufacturing Companies in Thailand(millionbaht)

Year
Industry

1969

Totalexports

ExportstoJapan
Transporta-

Totalsales

tion.equlpment

Totalexports

1971

1972

645

840

1,366

1774

(1.4)9(O.8)7(2.2)30(3.5)62

1,254

1,405

Totalsales
Textiles

1970

1,OO3

1973

27
1,615

2,086

(O.1)2(O.1)2926(1.8)17983(6.3)62

2

ExportstoJapan
Iron&steel

Totalsales

non-fetrous
metalsTotalexports

Foodstuffs

Totalsales

720(O.7)'5

ExportstoJapan
206

Totalexports

ExportstoJapan
224

Totalsales

OthersTotalexports

ExportstoJapan(2.7)6875(O.5)4273(2.2)6307(8.1)25883(2.0)18289(3.1)9406(O.5)2337

412(3.9)13(19.4)80257(2.8)14847(5.7)48

10

21

507

471

Chemicals(includedin

Totalsales

theabove

Totalexports

category`Others')

ExportstoJapan

Total

Totalexports

Totalsales(6.2)29
10

2,798

3,549

4,349

(O.7)20(1.1)42(1.4)59

5,159(2.1)108

6,652(5.5)365

44

106

ExportstoJapan
Notes:

1. Source: sameasTable2-2.
2.'

The figures in the brackets show the peroentage ratio ofexports to total sales(ttOottaai gaXeertS x ioo) .

3. The item of"Exports to Japan" hasbeen investtgated since 1971.

It needs to be emphasized here that the reduction of the Japanese employees has adifferent impact upon local-market-oriented companies and export-oriented companjes.
When companies enter into the export business, they begin to face many complicated andnovel management and technical problems in addition to their familiar problems. It is
often said that the success in the export business depends upon three factors, that is, (1)low cost, (2) high quality, and (3) reliability in delivery. These three factors need toattain an internationally determined high standard. Thus, in those companies which aregoing to promote their export activities, the reduction of the Japanese employees would
raise more confusion in managernent and technical processes and thus more seriously hurt
the efficiency of operations than in local-market-oriented companies.

The decrease in the overall efficiency of company operations would give a fatal blow

to the competitiveness of the companies in their export market. Those Japanese managed

53
PERSONNEL MANAGEMENT OF JAPANESE COMPANIES IN THAILAND

companies which are exclusively engaged in business activities in Thailand mostly

compete with Thai managed companies and foreign managed companies in the Thai
market which is more or• less sheltered from the outside market. But, in the export

market, the Japanese managed companies in Thailand meet a bitter competition fromother companies such as the Japanese parent companies, the American parent companies
and their foreign subsidiaries. These latter competitors may not have the same kind of

handicap as encountered in replacing the more competent Japanese employees by lesscompetent Thai employees.
As is represented in the figures of Table 4-1, the Japanese textile companies in
TThailand are most enthusiastic in exploring the export business, and these companies aremost seriously troubled with the reducing efficiency due to the replacement ofJapaneseemployees by the Thai employees.

To sum up, it is important to undersqtnd that the reduction of the Japaneseemployees produces two sets ofeffects. The first effect is to speedup the developmentof the Thai managerial and technical personnel. 'Ilhe second effect is an adverse effectupon the overall efficiency of operations of the companies.

(3) Japanese Way ofManagement
So far, occasional references have been made to the features of the Japanese way ofmanagement as compared with the American way of'management. Letus attempt someelaboration on the subject here.

The Japanese way of personnel management has several characterisitcs, but thefollowing three seem to be predominantly important: (1) lifetime employment, (2)collectivism or group-orientedness, and (3) low level of formalization.

When Japanese people enter a company, they usually expect to stay there until they
retire. And the company makes great efforts to meet their expectation. As a matter offact, to fire their employees is a means of last resort available to Japanese companies.

Japanese people usually apply for particular companies, but not for particular jobs
that' the companies offer. They enter the companies with only a general and vague imageof their job assignment. Japanese companies usually do not hire new employees with theintention to ful particular vacant posts. New employees are assigned to particular jobs
after they undergo a series of training which sometimes last one or two years. And theychange their jobs in the same company many times as they grow older and get moreexpertise. This unique feature of the Japanese way of management is called "lifetime

employment system."i4'
Under the lifetime employment system of the, Japanese companies, the remuneration

M JamesC. Abeggien, op. cit.,1958 and op. cit., 1973

54

HIDEKI YOSHIHARA

of employees shows the following characteristics. First, the length of service plays acentral role in determing the pay scale for employees. A particularjob he or she performs

in a company or the efficiency and reliability of doing the job usually does not have a

direct influence in determining his or her pay scale. Second, Japanese companies put agreat emphasjs upon welfare programs. There exists a kind of unwritten agreement
between employers and employees that the formers take care of the welfare of each
employee until he or she retires.

The second feature of the Japanese way of management is collectivism orgroupLorientedness. The following two unique methods of management in Japanesecompanies come out of this feature:(1) decision by consensus and (2) management bydirect contact.

In Japanese companies decisions usually are the product of a group decision process
which involves a close coordination of ideas and opinions of the managerial and technicalpersonnel affected by a certain issue. And the coordination is achieved mainly throughfrequent, informal and face-to-face contacts among the participants.

We have contrasted the "management by direct contact" of the Japanese companies

with the "management by indirect control" of the American companies. In Americancompanies operating in Thailand, the American managerial staff seldom have directcontacts with ordinary workers or even with first-line supervisors. The scope of theirface-to-face relationship is usually limited to their direct subordinates, that is, the Thai

middle management. They receive data concerning day-to-day operations of theircompanies through these Thai managerial assistants, analyse the data, and issue orders andinstructions also through these Thai managerial assistants.

The Japanese way of management shows a marked difference in this respect. The
Japanese managerial and technical personnel usually has a face-to-face relationship not
only with the Thai managerial staff but also with ordinary Thai workers. Japanese plantmahagers know the faces and even the names of most of their Thai workers.

It is an interesting fact that the difference between the American way ofmanagement and the Japanese way of management is clearly represented in the differenceof the layout of their office buildings. A typical office of an American company has

several small rooms provided for the high ranking American and Thai managerial
personnel. Each of them works separately in his own office room with his secretary. On
the other hand, a typical office of a Japanese company in Thailand is composed of one
big room and one small room. The latter smal1 room is provided for the president or theplant manager of the company, but usually used as a reception room. All office staffs
ranging from top ranking managerial personnel to ordinary office workers work together
in one big room. There are no separation walls in the room.

The third feature of the Japanese way of management is that formalization ofmanagement procedures is poorly developed. In order to understand this feature, weneed to pay attention to the different historical background of the Japanese way of55
PERSONNEL MANAGEMENT OF JAPANESE COMPANIES IN THAILAND

management and the American way ofmanagement.
Up until the early days of the 20th century, the labor force of American companies

was largely made up of immigrants from various countries. Many of them were poorly
educated and could only understand fragrnents of English. Interpreters were hired forthem in some firms. The American way of rnanagement has evolved out of the longpractice of managing employees who were heterogeneous in culture, race and language.
So, formalization of the procedure ofmanagement has developed to a high degree arid theimportant procedureal aspects of the management process have come to be explicitly
stated in various manuals such as the managers' guides,job descriptions, and organization
charts.

The Japanese way of management has been formed from a completely different
historical background'. Since the beginning of the Meiji era (1868-1912), the Japanese
ernployees, from the president to the ordinary workers, have been rather homogeneous in
their cuitural background, race and language. They have shared to a relatively high degree

a common basis for mutual understanding. In this situation, formalized methods ofcommunication such as explicitly written instructions and job descriptions have playedminor roles, and instead unstructured methods of communication such as informalinteractions and facial expressions have gained a great importance. Thus, many
management procedures have not been formalized and thus remain implicit.

V LaborProblems(1) DevelopmentofThaiWorkers
In the early 1960s when many Japanese managed companies started their operations'in Thailand, working in a factory was a completely new experience for the Thai people.

Therefore, the Japanese companies had to deal with ma4y primitive labor problems
arising from the lack of work discipline of the Thai workers. Typical labor problems

confronting the Japanese companies at that time were the following: There were Thai

workers
1. who were late and absent without notice,
2. who did not go to work until they had spent all their money,
3. who did not go to work when it rainedjust 1ike farmers,
4. who left their companies without notice,
5. who stole products, materials, and tools from their companies,

6. who did not wear work uniforms or put on work sihoes,
7. who chattered during their working hours,
8. who enjoyed gambling in a factory,
9. who drank during their working hours..
In the relatively short period of ten or fifteen years, the Thai workers have achieved aremarkable development. In a word, they have changed from an undisciplined farm work

HIDEKI YOSHIHARA

56

force to a disciplined work force suitable for modern factories. And most of theprmitive labor problems mentioned above have disappeared.

In his interviews with managers of Japanese companies and American companies inThailand, the author seldom heard complaints regarding absence and turnover by the Thai
workers. Far from that, these managers were satisfied with a good record ofpresence andturnover by their Thai workers. Roughly speaking, the annual turnover rate of the Thai
workers in Japanese companies is around 259o. The same figure 259o also seems to apply

to the American managed companies in Thailand.

Many Japanese managers have expressed satisfaction with the Thai workers withrespect to the efficiency and the reliability of their working. The rapid pace ofdevelopment of the Thai workers affords a welcome surprise to many Japanese people.

(2) Comparison of Labor Strikes between Japanese and American Companies
Thai economy has experienced a sharp increase in labor strikes since 1973 as shownin Table 5-1. While in the seventeen years from 1956 to 1972 there occurred 219 cases oflabor strikes, in 1973 alone there occurred 501 cases. This rise oflabor strikes continued
in 1974 when 241 cases already occurred till August 15.

It is a common knowledge that this abrupt increase in labor strikes in Thailand since
1973 has been brought about by the following causes:

1.worsening of the living standard by recent inflationary price increases in

consumer goods
2. new labor laws which give workers the right to organize themselves

3. misunderstanding and lack of communication between management and workers
4.lack of experience and skMs in dealing with labor problems on the part ofmanagement, workers and government officials
5. recent social and political trends which are favorable to workers rather than to

management
As mentioned at the beginning of this paper, it is widely believed in Thailand thatJapanese managed companies have experienced more labor strikes than Arnerican
managed companies. The author met an official of the Labor Department who was quite
convinced that on the average Japanese companies have had labor strikes more than twice

as often as American and European companies in 'Ihailand. Unfortunately, there are no

statistics which show labor strikes classified by the nationality of management ofcompanies in Thailand.

It may be worth while emphasizing here that any attempt of comparison of thefrequency of labor strikes between Japanese and American companies in Thailand should
give proper attention to the following two facts. First, as presented in Table 5-2, roughly
409(o of ah the labor strikes in the manufacturing sector in 1973 occurred in the textile

industry and approximately one third of the Japanese managed manufacturing companies

IN THAILANDPERSONNEL MANAGEMENT OF JAPANESE COMPANIES
Table 5-1:

Year

Labor Strikes in Thailand, 1956-1974

Numberofstrikesoccurred

Numberofworkersinvolved

Numberofdayslost

1956

12

66

3,673

1957

21

203

12,947

1958

4

8,458

4,202

1959

11

846

8,060

1960

2

3

64

1961

2

68

93

1962

3

81

63

1963

4

118

159

1964

6

300

539

1965

17

3,753

6,566

1966

17

5,413

18,764

1967

2

470

470

1968

14

1,867

3,217

1969

18

5,345

23,593

1970

25

2,888

6,O04

1971

27

5,153

12,646

1972

34

7,803

l9,903

1973

501

177,887

296,887

1974(till

241

69,947228,041.5

Aug.15)
Note: Source:

The Department of Labor in the Ministry of Interior of Thailand.

are doing business in the textile industry. There are only a few American managed textile

companies in Thailand. Second, in some industries such as the transportation equipment

and the rubber products, the AMerican managed companies have experienced more labor
strikes than the Japanese managed companies.
Based upon the data and general observations gained through the ftled research, theauthor is inclined to think on the following lines. On the surface it may appear that on

the average the Japanese companies have had more labor strikes than the Amercan
companies. But, when we examine this difference in some detail and attempt a faircomparison using a more or less similar basis, this difference in the frequency of labor

strikes between Japanese and American companies mostly disappears.

With respect to the duration of labor strikes, there exists a difference between

Japanese and American companies. In the case of the Japanese companies, only twocases of labor strikes lasted more than one week. Most cases oflabor strikes in Japanese

57

58

HIDEKI YOSHIHARA
Table 5-2:

Labor Strikes in Thailand, Classified by Industry(in 1973)
Numberofstrikes

Industry(Manufacturingi

occurred

Weaving,knitting&animal
skinproducts

Wood&woodenproducts
includingfurniture

Paper&itsprintedproducts
Chemicalsincludingpetrocherniealsandrubber
products

Petroleumanditsproducts
Basicmetalindustry(Iron
andsteel)

Metalproducts,machinery
anditsparts
Note: Source:

Numberofworkers
involved

Numberof
dayslost

28

13,365

15,595

157

62,476112,829

17

5,832

14,247

11

2,941

3,380

56

9,224

19,532

24

7,499

13,67414

4,068

33,47982

12,625

1,938'

The Departrnent of Labor in the Ministry of Interior of Thailand.

companies were settled in less than three days. In the case of the American companies,
labor strikes seem to last much longer than in Japanese companies. The author identified
at least five cases of labor strikes which lasted more than one week.

Let us examine the causes which have produced this marked difference in the
duration of labor strikes in Japanese and American companies. We may point out thefollowing three factors as the main causes. The first and the most fundamental factor

seems to be a different way ofmanagement in Japanese and American companies. Fromthe viewpoint of communication between high ranking managerial personnel and ordinary

workers, the "management by direct contact" in Japanese companies seems to besuperior to "the management by indirect control" in American companies. In fact,
Japanese managers generally were much more familiar with the day-to-day operating andpersonnel problems of the ordinary Thai workers than foreign managprs in Americancompanies. TThe Japanese plant managers usually know the faces and names of their Thai
workers.
The second factor is a difference in the managers' attitudes toward labor, strikes. The

Japanese managers on the average take a weak-kneed attitude toward labor strikes andhave a tendency to make easy concessions to the strikers' demands. And they also are
extremely sensitive to the bad image of having a labor strike and thus attempt to doalmost anything to settle it quickly. On the contrary, the managers of Americancompanies seem to take a more resolute attitude in dealing with labor strikes.

59
PERSONNEL MANAGEMENT OF JAPANESE COMPANIES IN THAILAND

The third factor is a difference in the extent of the decentralization of authority
from the parent companies to the Thai subsidiaries. Japanese managers in Thai1and are
generally given the necessary authority to deal themselves with their labor problems. This

is not necessarily the case in American companies in Thailand. Some of the s"called
American multinational corporations have advanced standardization of procedures ofmanagement and operation throughout the world to such an extent that managers in Thai
subsidiaries are not given the necessary authority of independent bargaining with strikers.

VI Recommendations(1) Recommendations to Japanese Companiesin Thailand
Judging from what we have seen in the foregoing part of this paper, we rnay say thatmost of the popular criticism of Japanese companies operating in Thailand is not wellfounded on facts and figures. In other words, data and information collected through thefield research, although they are insufficient in amount and also in reliability, tell us thaton the whole the Japanese way of personnel management is not as bad as said by Thai
critics.

We can not deny the fact that there exist in Thailand at the present time strong andwide-spread critical views and accusations of the Japanese way ofpersonnel management.

Il[hus, there exists a gap between popular criticism and actual practices. In order tounderstand the nature and the reason of this gap, we need to recognize the fact that
popular criticism of Japanese companies in Thailand is much more deep-rooted than it
appears at first sight.

We may easily point out several factors which have indirectly but fundamentallycontributed to the generation and diffusion of the current critical views upon Japanesecompanies in Thailand. First, slnce the last drastic political change which occurred in

October 1973, the Thai Government has maintained a cautious attitude toward inward
foreign direct investments and the existing foreign subsidiaries.i5 This attitude has thebacking of the nationalism of the Thai people.

Second, we need to understand the asymmetrical relationship of the parent
companies as investors and Thailand as a host country.t6 Many of the parent companies

which have manufacturing subsidjaries in Thailand may be regarded as multinatjonalenterprises or the 1ike. Their distinctive feature, as compared with the usual national
enterprises which have business activities mostly within the boundary of a single country,
is found in their ability to formulate corporate plans and mobilize corporate resources in'5 At the 'time of writing this paper there occurred a coup-d'6tat in Thailand (October 1976).

'` Raymond Vernon, Sovereignty at Bay: The Multinational Spread of U. S. Enterprises, Basic

Books, 1971.

60

HIDEKI YOSHIHARA

terms that extend beyond the boundary of any single country. And the Thai subsidiaries
are integrated as part of a multinational system of enterprises and thus are under the
direction of their parent company, at least with respect to their basic corporate policy
problems. On the other hand, the jurisdiction of the Thai Government is restricted to asingle country, that is, Thailand. It rather naturally follows from this asymmetrical
relationship that foreign subsidiaries operating in Thailand appear in the eyes of the Thai

Government less controllable and thus more problematical than genuinely Thai
enterprises.

Third, we need to recognize the fact that the presence of foreign companies inThailand is sometimes seen as a threat to Thailand in terms that are not only economic
but also political, social and cultural.

Fourth, foreign companies are often made the scapegoats for the internal power
struggle in developing countries like Thailand.

These four factors seem to be helpfu1 in understanding why the Thai Government

and the Thai people show crjtjcal attitudes toward forejgn managed companies ingeneral. However, in order to understand why the Japanese managed companies are so
exceptionally notorious in Thailand, we need to add some more factors.

The fifth factor is the socalled over-presence ofJapanese companies in Thailand. As
seen at the beginning of this paper, the Japanese direct investments represent nearly forty

percent of all foreign direct investments in Ilhailand. And the Japanese companies arelargely producing consumer products. Thus, the activities of Japanese companies areclearly visible and easily attract the attention of government officials, academicians,
students,journalists, and ordinary people.
As a sixth factor, we may point out the features of Japanese-Thai t'rade relationship;(1) the trade with Japan occupies the largest share both in exports andimports, and (2)the trade balance has constantly been unfavorable to the 'Ihai side. A strong disconteRtwith the Japanese trade naturally contributes to fostering critical attitudes toward theJapanese business activities in Thailand.

In Thailand American and European culture seems to enjoy a higher evaluation andattract more attention than Japanese cuiture. Most Thai people are indifferent toJapanese culture and only asrnall number of Thai people speak Japanese. Many of theThai people who graduate from universities speak some English. Thus, for these Thai

people, working in American and European managed companies is easier and more
attractive than working in Japanese managed companies.

Lastly, we need to pay attention to the special position of the Japanese people
working in Thailand. In Thailand Americans and Europeans are regarded and treated as
foreigners, but the Japanese are not necessarily so. It is often said that the Thai people

and the Japanese people are both Asians. Thus, the Thai people expect that the Japanesebehave in the same way as they do. They are not tolerant with regard to the Japanese
way of life which appears extraordinarily luxurious in the eyes of many Thai people.

61
PERSONNEL MANAGEMENT OF JAPANESE COMPANIES IN THAILAND

Working under the direction of Japanese managerial personnel sometimes inducescomplex psychological reactions among the Thai people while working under the
direction of 2etmericans or Europeans rarely does so.

The above analysis leads us to the following two recommendations to the Japanesecompanies.
First, Japanese companies should make serious efforts to improve all the aspects of
their personnel management practices in a rnore energetic way than till now. Theirefforts wi11 surely improve the overall image of the Japanese companies and dispel someof the current critical views of the Japanese way of personnel management.

However, it would be evidently too optimistic to think that their efforts alone beenough to dispel all the anti-Japanese attitude and movements in Thailand. As we haveseen, critical attitudes and movements against Japanese companies have deep-rooted
causes and the solution of these causes is hardly wjthin the reach of the individual

Japanese companies. The Japanese staffs working there should be prepared to regard
some level of an unfriendly and unpleasant atmosphere as a normal condition for theiractivities. And they should learn how to live peacefully and productively within -it.

(2) Recommendations to the Japanese Government
There has been a rather close relationship between Thailand and Japan in terms oftrade and investment. This relationship is economic in nature. However, the relationships

between these two countries on the cultural level have never been close. Ordinary
Japanese people on the whole have little interest in Thailand and its people. And eventhose Japanese businessmen who have stayed in Thailand for several years have seldomshown in'terest in the cultural and social aspects of TThailand. On the other hand, theknowledge and interest of the average Thais concerning Japanese cultures are very limited

and superficial. They have never read Japanese novels, seen Japanese classic dramas andpaintings. Thus, the relationship between Thailand and Japan has been unbalanced in thesense that only economic aspects have been emphasized.

In order to change the present Thai-Japanese relationship toward a more balanced
relationship, it is evidently necessary to prornote cultural relationship between these twocountries. And the Japanese Government can best take the leadership in promoting
cultural relationships thanks to her financial strength and organizing power.

The realization of a more balanced relationship between Thailand and Japan would
hopefu11y reduce tensions between the Japanese companies on the one hand and the Thai
Government and the Thai people on the other hand.

(3) Recommendations to the Thai Government

Based upon the fmdings and arguments of the research, the following two
recommendations are presented to the Thai Government.
First, the Government should start serious efforts to collect reliable data concerning

HIDEKI YOSHIHARA

62

foreign direct investment in general and personnel management practices of the Japanesemanaged companies in particular. The efforts would doubtlessly contribute to theformulation and execution of proper policies and procedures by the Thai Government

conceming foreign companies. And it is also recommended that the Thai Government
make efforts toward wider circulation of its various data. This effort would hopefu11y

remedy to some extent the current unhappy situation of "many arguments but too few
data."

Second, the TThai Government should formulate and carry out its policy of foreign
direct investment on a principle of selectiveness. An equal application of one and thesarne policy to all the Japanese managed companies is not advisable from the standpointof promoting their contribution to the Thai economy. It seems very important for theThai Government to realize that there exists a kind of trade-off relationship between
promoting Thalization of Japanese companies and fostering their competitiveness on theinternational market. Promotion of Thaiization of foreign companies means thefollowing: (1) to increase the share of ownership of Thai investors, (2) to increase the useof materials and parts produced in Thailand, (3) to promote the replacement of foreign
employees by Thai employees, etc. With resPect to the subject ofpersonnel managementof Japanese companies as seen earlier, this means that promotion of the replacement ofJapanese employees by Thai employees may probably reduce the competitiveness of theexport-oriented Japanese cornpanies.

It follows from the above.argument that the Thai Government should first
distinguish between local-market-oriented Japanese companies and export-oriented

Japanese companies. And then the TThai Government should sagaciously limit theapplication of its policy of lhaiization to the former inward-looking Japanesecompanles.
Notes:

1.The field studies in Bangkpk were undertaken by the author with thecollaboration of Dr. Vichitvong Na Pombhejara of the Economic Cooperation
Center for the Asian and Pacific Region (ECOCEN) and were financed by theJapan International Cooperation Agency.
2. A part of the studies rnade in Japan was financed by the subsidy of the Ministryof Education of the Japanese Government (fiscal year 1974, Project No.
933010).
3. Exchange ratesin 1974:
1 US dollar = 20 baht
1 baht ij 15 yen

63

EVALUATION OF PERFORMANCE USINGMULTIPLE CRITERIA
Komayuki ITowI lntroduction
In a previous paper we introduced a model of budget simulatiofi relative to longrange planning, and whose aim was not the expected gain from a given project, but
management planning as a going concern.' There, financial balance was considered as afundamental issue 'associated with the choice of one among a set of projects. Financial
problems should be investigated in detail so as to hold a financial balance before a given

project is completed. Here, fmancial balance means fmancial structure preventing thecompany from going bankrupt. In order to take this balance into consideration,
management must not only evaluate various possibilities of financial conditions of a single
period but also those of ensuing periods.

Concretely speaking, when a given project is completed at a certain period,
management must not only investigate the existence or the availability of funds requiredby the project, the outlay and the return yielded by the investment behavior, theexpected profit (as total) evaluated by these outlay and return but also take into accountthe expected gain from the project and the availability of funds relative to the net cash
flow at ensuing periods. Several factors having effects on this cash flow are complicatedby production, sales, trade cycle, foreign currency (these two beyond the control ofmanagement) and so on.
Thus, there is no doubt that the selection of projects is associated with theconsideration of many factors. However, often only one among such criteria as the rate of
return requirement, net present value et al. is used for the analysis of projects. It does

not seem to us that this produces practical results satisfying the management in the
choice of projects.2 In spite of this fact, projects are seldom chosen on the basis ofmulticriterion. lhe reason is that as the number of criteria increases, the difficulty in the

choice becomes more and more aggravated.
Howgver, if the decision makers want to select projects from practical and wideviewpoints of management, multicriterion has to be taken into account even if this is noteasy. Thus, when indices are fixed• and when values of these indices are able to beevaluated, we are interested in the selection process of projects by which they are
aggregated.

' See [1012 We do not deny that the rate of return requirernent, net present value et al. are well worthof study.

64

KOMAYUKI ITOWII FormalizationoftheProblem

Let us assume that there are m projects Si, S2,..., Sm and that it is desired that themost reasonable one be selected. Also the action of selection is taken on the basis of ndifferent indicesai, a2, ..., a.. Project Si has a value Kii with concern of index ai. Then
our alternative Ki i's n-tuple consisting of Kii•, that is,

K'= IKiliEII,
Ki = (Kii, Ki2,''', Kin), iE I,
Ki,• =K (Si, aj), iEL iE1,

S= ISi liE A,
A= I ai liEJI,
I= ll,2,...,ml,
J= il, 2, ...,nl,
For convenience, assume that the increase of value Kii leads to the increase ofdesirability.

Our problem of choice is to make a choice of alternative Ki from the set K withsemiorder.

M PreferenceDiserimination
The previous described problem of choice appears to be logically solved by thetheory ofpreference. Suppose that for afiy two alternatives Ki and Ki, there exists thefollowing preference relation R, that is to say, either KiRKj (Ki is preferred to Ki), or
KiRKi (Ki is preferred to Ki) or, KiRKi and KiRKi (neither is preferred to the other). In
the last case, it is said that Ki is indifferent to Ki. The existence of preference relation isa strong assurnption, for it is uneasy fora decision rnaker to express alwayspreference on
alternatives. Provided that their attribute is simple, he may be able to have no difficulty

to evaluate them. However, it is not rare, in the case of the set of alternatives here
considered, that he cannot determine which of the three properties is adequate.
This strong assurnption, thatis,the existence of the preference relationR, induces thefollowing procedure. For some element K. (K. E K), the set G. is produced which
consists of elements indifferent to K.. Accordingly, this set G. is the subset of the set K

and the domain indifferent to Ka• Next, for a second alternative Kb (Kb EK and Kb GGa),the domain Gb produced is indifferent to Kb. After interations of this procedure thesetK is divided into the domains with indifference property, Ga, Gb, ••• •It is possible that a decision maker makes a choice of one among the projects if there

are not too many. But the greater the number of projects generated by computer
simulation is, the more difficult it is to clarify the preference of any element in the set of

EVALUATION OF PERFORMANCE USING MULTIPLE CRITERIA 65
projects. Our problem is what to select in the above situation.

There are works, of what is called the interactive approach, in the same vein as theabove described procedure.3 This approach consists in formulating, step by step, thepreference function for the decision maker.

Now, suppose that the implicit preference function U (Ki) for a decision makerexists. Then he has an improvement of choice action by using his local information.
Local inforrnation, that is to say, marginal substitution rate plays an important role in theinteractive approach. On the assumption of differentiability, the marginal substitution
rate isti]l = (aU(Ki)/ad(il)/(aU(Ki)lczKii),

l= 1, 2,...,n.
The gradient of a preference function U (Ki) is defined by a vector(1, M!2, W3,..., Wn).
Since the direction of the gradient is expected to increase the satisfaction of a decision
maker, he has to search along this direction in the domain.

This approach requires many responses by a decision maker. Roughly speaking, his
preference may contain a contradiction by aggregating his local information, and so we
suspect that he cannot introduce the sarne details of his consciousness as the level ofmarginal substitution rate into his preference function, even if approximately, there isespecially a doubt in the case of making a choice of projects. Consequently, the above

discussion shows that the interactive approach brings into the level of the marginal
substitution rate the difficulty that he must, at any time in the selection, hold one of thethree properties in the preference relation R. This choice method with ambiguity runs
the risk of losing the equivalence relation.4 There remains the possibility to make achoice contrary to dividing the set K into the domains with indifference.

IV MethodbyOrdering
The interactive approach aims at solving the multicriterion problem by making use of

the local information of a decision maker. On the other hand, the method by orderingobtains the local information necessary for the choice action by interpolating the given
global information.S

Assume that a decision maker provides global informatioh L. This information has
the sarne structure as the set K of alternatives. That is to say,

L = IL,, L,, . . . , Li},

Li = (Lii, Li2,•••,Lin), i= 1, 2,•••,L
Lii =L(', ai), i= 1, 2,...,l, i '-- 1, 2,...,n.
3 See [4], [6], [8]•" Equivalence relation:i) A "- A, li) A -- A'" A' '" A, iii) A -" A', A' 'v A" => A -' A",
where the symbol -j denotes a relation between the elements.
5 See [5]•

KOMAYUKI ITOW66

For understanding, L (Si, ai) is rather clearer than the expression L (.,ai) but it is notcertain that the argurnent Si inL (Si,ai)is always involved in the set S ofprojects, for theargument Si is an imaginary project to produce Li. We have no problem when we takethe above note into consideration even though the notation Lii is L (Si, ai).

Assume that Li an element within the global information L, has the ith priority
among l's elements. The cardinal numberlof the setL is required to be large enough torepresent the preference of a decision maker. Therefore, if the cardinal number is small,rough actions of choice are generated. On the other hand, if a decision maker needs

careful actions in some parts of the domain, he must provide such parts with more
information.

Speaking of the design of the global information L, the most desirable lementLi inthe set L may be a vector which consists of ideal values corresponding to indices or values
giving necessary and sufficient satisfaction to a decision maker. And the least desirable

element Li may consist of the least on each index among the values which are acceptable
to him.

After the construction of the global information the procedure of choice works inthe following manner. It is determined what preference order an alternative Ki takes.
That is to say, let a value Ki be betweenLt and L(t+ n,i , by linear interpolation,,

Ltl - Kilal =t+
Ltl -L(t+t),1
be evaluated. The first cornponent Kii of the alternative Ki takes the aith priority
within the global information. The iteration of the same procedure on the second index

results in the a2th order of preference. The procedure is continued until thecomputation on the nth index is completed.

Consequently the preference orders on each index in the global information
concerning Ki is determined. Then the preference order ai of Ki i'n the global

information is defmed as: ai =max {ai,a2,-••,an]This of assures us that no component of vector Ki takesa lower priority than the aithpriority.

The most preferred element in the set K of alternatives is specified on the basis of thepreference order a`. The procedure is notationally summarized as follows:

min max Åë(Ki)Ki ai
where Åë(Ki) = lai,a2,•••,anl
Owing to the structure of the global information, the procedure may not work. For
example, ifLti <L(t+ i),i, the preference order over the interval [Lti, L(t+i),i] has aninverse relation to values on the first index. Observe the two values Kii, Kii in theinterval [Lti, L(t+i),i]. Then, the preference orders, ori(i> and aiQ') on the first index
are evaluated from Kii and Kii. As a result, the order numbers, at (i) and ai Q'), have theEVALUATION OF PERFORMANCE USING MULTIPLE CRITERIA 67
relation aiQ') < ai(i). Both this consequence and the relation Kii >Kii are inconsistent
with the assumption that the increase ofvalue leads to the increase of satisfaction.

The relation, Lii < L(i+i),i, in the global information means that the indexi has noeffect on the preference order of alternatives over the interval [Lii, L(i+i),i]. One of thereasons why such an event happens may be that the value in this interval is far beyond thesatisfaction level of a decision maker. A second reason is that this index may not haveprimary importance to alternatives at the time of selection. In order to reduce thisdifficulty, the following technique is used.

Consider that Kii is between Lti and L(t+p),i, where Lti <L(t+p),i. Then thepreference order ai concerning Kii is evaluated as follows:i.PÅí, (t + i) + L(,.p),, - Ki,

al= p+1 L(t.p),1-Ltl
The resultant shows that actions of choice in this interval are not dependent on the index

concerned.

V Conclusion
The method to use local information, that is to say, the interactive approach requires

too many responses of a decision maker. These may lead him to illogical action,
especially, actions breaking the transition law while the method to use global
information, that is to say, the method by ordering needs interpolation concerning
preference order. Linear interpolation is used in this paper, but another interpolation
may be adequate in other case.

HoweVer, the method by ordering is considered to work more easily than thepreviously proposed method by relative value.6 Relative value depends on so manyfactors, such as the set of objective, the set of outcomes, environment and so on. For the

purpose of condensing these factors into a relative value a too big job is required.
Moreover, when a relative value is appl.jed to a maximim criterion, it is suggested that arigid check on indices is taken into consideration. This rigid check intends eliminating
indices which do not defme proference relation intrinsically.

But, in some cases an index which is considered as less important may have greater
power of discrimination than the most important index. As previously described, when
there exist values on the most important index which is beyond satisfaction, the choiceeffect of these values becomes negligible. Tlhen, if a index which is evaluated as ofsecondary importance has values being under the satisfaction level, this index must be
taken care of with great attention.

` See [11]•KOMAYUKI ITOW

68

Therefore, even if the importance of indices is carefu11y inspected before a choiceaction is taken, there remains the possjbility that the outcome from the above inspection

is worth nothing for the selection process. This situation of choice complicatesqualitative problems minutely.
In the case of dealing with the indices which have lost effect on the choice action, in
respect to practice the method by ordering is of great advantage to that by using relativevalue.

REFERENCE[1 ] Belenson, S. M. and Kapur,K. G., "An Algorithm for Solving Multicriterion Linear Programming

Problems with Examples;' OperationsResearch euarterly, VoL 24, No. 1, 1973.
[2] Charnes, A., Cooper, W. W., Niehaus, R. J. and Stedry, A., "Static and Dynamic Assignment

Models with Multiple Objective and Some Remarks on Organization Destgn;' Management
Science, VoL 15, No. 8, 1969.
[3] Charchmen, C. W., Prediction and Optimal Desicion, Prentice-Hall, 1964.
[4] Dyer, J. S., "Interactjve Goal Programmjng;` Management Science, Vol. 19, No. 1, 1972.
[5 ] Gall, D. A., "A Practical Multifactor Optimization Criterion," in RecentAdvances in Optimization Techniques, Ed. Lavi, A. and Vogl, T. P., Wiley, 1967.
{61 Geoffrion, A. M., Dyer, J. S. and Feinberg, A., "An Interactive Approach for Multi-Criterion

Optimization," Management Science, VoL 19, No. 4, 1972.
[7] Philip, J. "Algorithms for the Vector Maximization Problem," Mathematical Programming,

VoL 1, No. 2, 1972.
[8] Roy, B., "Problems and Methods with Multiple Objective Functions;' Mathematical ftogramming, Vol. 2, No. 2, 1971.

[9] Terry, H., `Åéomparative Evaluation of Performarice Using Multiple Criteria," Management
Science, VoL 9, No. 3, 1963.
IlO} Itow, K., "Budget Simulation" the Yamaguchi Journal of Economics. Business Administration& Laws, VoL 20, No. 4, 1971.
[11] Itow, K., "On the Selection of Projects" The Yamaguchi Joumal of Economics, Business
Administration di Laws, Vol. 20, No. 5, 1971.

69

SOME BARGAINING PROCESS MODELSIN THE SHIPPING EXCHANGE
Tetsuji SHIMoJo

I WhyRatesDiffer?
Many charter contracts are reported from the Shipping Exchanges everyday. They
are of many kinds, and it is natural that they differ from each other, because of theirdifferences in cargo, route, form of contract etc. However, we find that two
undistinguishable contracts very often have different rates at almost the same time inspite of their similarity ofcargo, route, and form of contract. Many explanations havebeen attempted as to the causes of such differences using every information obtained, butthere stil1 remain things that can not be explained otherwise than as caprice ormisestirnation of shipowners and charterers.
In this paper, we wil1 propose a way of explanation for the causes of such differences

between rates of similar contracts. Differences of cargo, route and form ofcontract are

to be fieglected for our purpose. Also, if needed, we wil1 observe the rates afterconverting them into the Time Charter Equivalent in order to eliminate the effects ofparticular conditions of the contracts.i

The conversion of the various rates into the time charter hire rates can be done by asimple calculation. The earnings of a shipowner during a voyage with a certain cargo isexpressed as

Rx T,
where R is the freight rates in the voyage charter contract, and T the quantity of cargo in

tons. If the expenditure for the above voyage is denoted by V, then the net revenue
during the voyage is expressed as

RxT- V.
The expenditure mainly depends upon the particular contract, the nature of the
cargo, the distance of the route, the conditions of the loadmg and unloading ports, and soon. Most of the differences of the rates depend on this expenditure, and by eliminatingsuch expenditure we can get new rates of almost the same basis. The only peculiarity
remaining is the length of the voyage, or the period taken for the earning.

The net revenue during the voyage can be converted into a rate per month per ton
dead weight of the ship, namely,.D.3o r M'f,
(R xT- V)Ti In Japan this formula is well known asCharterBase. See Shimojo [1] .

70

TETSUJI SHIMOJO

where D denotes the days taken for the voyage, and W denotes the tonnage dead weightof the ship. This rate is equivalent to a charter hire rate per month per ton dead weight
during the period as long as the contact lasts. In the following discussion, we assume that
all rates are of the same kind without any peculiarity in the differences of cargo, route,and condition of contract.

ll When to Conclude a Contract?
We are at the stage of discussing the behavior of shipowners and charterers who aregoing to conclude a contract. It is not only convenient but also realistic to assume thatthe shipowners and the charterers wil1 not change their stands with each other. The
shipowners have only ships by which they can supply shipping services, and the charterers

have only cargo which they must ship before a certain time in the future. The charterers

wi11 not resell anything they have already bought.2 In this point transactions in the
shipping market differ from those in the markets of merchandise, real estate, money, etc.

It is needless to say that shipowners and charterers always behave to maximize their

expected profits. Our present purpose is to observe their behavior in the bargaining
process of chartering. This can be done from two sides. One concerns the time when theydecide to conclude a contract with the conditions they have reached by that time; andthe other concerns the period of contract, that is when it is to commence and how !ong it
is to last.

Ships are not always ready to sail. In general and norrnal conditions, ships work inaccordance with their present contracts. The shipowners, however, must have othercontracts in advance, in order to fix the next voyage as soon as the present contract isterminated. If there is an `idle' period after completion of the present contract due to theabsence of a new contract, the shipowners incur considerable losses. For the shipowners,

therefore, the commencement of the new contract must coincide with the date ofcompletion of the present contract, and the agreement must be made by that time.
If the new contract is not concluded when a ship is freed from the previous contract,
there will be an idle time for the ship. Such a situation rather often occur during adverse

conditions of markets, and the shipowners may adopt the fo11owing measures;3 '(a) undertake a voyage in ballast to better their position(b) wait, fully prepared for operation, for a favourable offer of freight(c) have the ship classified forlater operation(d) lay the ship up without crew(e) scrap the ship
Among the above, (a) and (b) are rather optimistic measures, while in the case (c)2 This assumption is to avoid the possibility of speculation to resell the charter cbntracts.

3 Svendsen [3] p.231.

71
SOME BARGAINING PROCESS MODELS IN THE SHIPPING EXCHANGE

there must be some probability that a new contract can be expected before thecompletion of classification, and that such an adverse condition is not expected again
during the following year. The case (d) is the real laying-up, but, it is an important
problem what ships' costs can be saved by this measure.4 The most drastic measure is thecase (e), which means the withdrawal of the ship from shipping operation.

In a depressed market, in which offers for cargo movement are very scarce and very
low rates are prevailing, the shipowners of comparatively high cost ships will consider
taking measures like the above. Even in this case, however, their behavior wil1 differ fromeach other, according to their individual thoughts or feelings about the future trend of
the market.
If the freight rates are expected to be higher than the laying-up point rate of their
ship it is the most reasonable to consider that the shipowners make the greatest efforts toconclude a new contract before the ship is freed. Unless the markets go up, shipowners
wi11 prefer to conclude new contracts as soon as possible. Because the nearer the timeships are to be freed, the more difficult it wM be for them to get advantageous contracts,

Meanwhile, if the markets are clearly going up, they wil1 prefer to defer their contacts.
conclusion in order to take the opportunity to get better contracts. These facts lead tothe conclusion that the time when they are wi11ing to conclude contracts depends upon
their expectations of the future of the markets.

The same applies to the behavior of the charterers, partly in reverse way. The
charterers, standing on opposite side to the shipowners, prefer to defer their contractconclusions when the markets are going down, and otherwise they try to get the quickest
possible contracts. If they fail to conclude a contract before their cargo is ready, there

arise many difficulties, payment of compensation for the delay of arrival, expiration of
usance, at worst, risks of cancellation in addition to storing costs. So they are sometimes
obliged to pay considerably high freight rates to ship their cargo.

The charterers can begin their bargaining for chartering when their trade transactions

are completed. If their trade transactions are permanent, they may have contracts inadvance for their future shipments. Otherwise, it may be impossible to bargain as theprices and quantities may change from time to time. Anyway, they must have concluded
their charter contracts before the time of shipment of their exporting contracts of the
cargo, reserving enough time for the ship tojoin the loading port. The possibility to findappropriate ships wM be smaller, the nearer the time of shipment comes. To get better
contracts, therefore, they must fmish their bargaining as early as they can.

Concluding the above discussion, we wru assume for the time being that the future of
the market is stable and that offers ofboth ships and cargo are readily available. In sucha situation, shipowners and charterers can expect almost equal profits through their

4 Laying-up is said in Japan not always to save ships costs in these days, as laying-up cost is very
expensive due to compensation for fishery and impossibility to fire the crew.

72

TETSUJI SHIMOJO

contracts at whatever time they conclude them. Meanwhile, the closer the time of a ship
to be freed or the time of cargo to be shipped, the severer the conditions for the cargo
and ships, and the more difficult to reach their objects satisfactorily. And at last when
the critical time has come, it may become impossible for them to expect a similar level ofprofit, and thereafter, it is clear that the profit wjll become smaller day by day.

The Mustration of this relation is shown in Fig. 1, which gives the curve of possibility

in concluding contracts. The vertical axis denotes "possibility" and the horizontal axis

denotes "time" measured from the present to the future. The curve in Fig. 1 means thatthe men in the market, both shipowners and charterers, have the opportunity to conclude
a chartering contract for a certain time. The closer the `Time' of the ship's freeing or the

cargo shipment, the smaller the possibility of an advantageous contract will become, andfinally the possibility wil1 be entirely ni1. A smal1 possibility to make an ordinary
contract means that they will be unable to get appropriate cargo or ships in time, unlessthey make much more concessions to the demand of another party.
This discussion can be appiied to various market situations as shown in Fig. 2, in
which a line a represents the case where the future of makrets is stable. It is easily

understandable that the other cases b and c represent the market tending upward anddownward respectively.

t

100%

1

1
,

M

s

,

s'i

'

Åí

1

1

.o

N

at

--.-.-.- ---.. -. --

.."b

...

a

-. --

-. -..
-. ...
'-b .-.

- --.
-. --

'- tbCto

Present Future
Fig. 1. Possibility ofOrdinary Fixture

Present Future
Fig. 2. Expected Freight Rate

For example, if a Shipowner •expects the freight market to be stable, then he can
expect almost identical profits from his contract whenever he may conclude it.

The profit he can expect, however, will decrease when the time of his contractconclusion is close to the time his ship becomes free. The expected profit must be

deflated by the smaller possibility of obtaining an ordinary contract and by theconcession he must make in the bargaining process. Smaller profit is equivalent for him
to cheaper freight rate.

We may, therefore, call the rates discounted by the smaller possibility as thecertainty equivalent of freight rates. The three curves in Fig. 3 are of the certainty
equivalents for the shipowner in the various market situations corresponding to those in
Fig. 2 respectively.

73
SOME BARGAINING PRocESS MODELS IN THE SHIPPING EXCHANGE

e
es

ec

-b
t-1

'
1

--.---"-'-s t..--.'-'XÅ~
1Å~
NNb
.- -

g
es

ac

Nl
Ns a
INc
1
1

Present Future

Fig. 3. Certainty Equivalent for Shipowner-t1.. .. -' 1-.-.- tatet- -"' .. .. .. t-1--- -p 1'
1t
Present

FutureFig. 4.

Certainty Equivalent for Charterer

Fig. 4 represents the corresponding connection for the charterer. Even in the case ofa stable future a, the nearer the time of the contract conclusion wil1 be to the time of theshipment of his cargo, the more difficult it will be for him to obtain an ordinary contract
as his stand becomes less favorable. The favorableness of the charterer expressed in termsof freight rates, therefore, wil1 swing upward, in contrast to the case of the shipowner, atthe time around the shipment of the cargo. When the market is expected to be steady inthe future b, it would be more profitable for the charterer if he concluded a contract asearly as he can, or otherwise, he should defer contracts to the last moment before his
certainty equivalent curve turns to the upswing.

III BargainingProcessModelNo. 1
Now we will discuss the process in Which a shipowner and a charterer behave likedescribed above and bargain for a contract at the shipping exchange through a ship broker

or a chartering agent. The minimum conditions for the commencement of bargaining forthem are that the kind and size of the ship owned by the shipowner is appropriate to thecargo to be Shipped by the charterer, and that the time and place the ship is free is
acceptable to the time and place the cargo is to be shipped. Coincidence is not always
needed, but must be near enough to be minimized by a little concession of either party.
In all chartering bargaining, concessions must be made in advance at the beginning, oroffers must contain ailowances from the beginning so that no more concessions will beneeded in quantity and tirne of slupment. However, there may be situations where thebargaining can not be commenced without a rather big concession of either party becauseof the scarcity of ships or of cargo. In such a case the party making the concession may

demand compensation for his concession in the rate or other contract conditions. We wM
discuss this connection in a later part of this paper.

Now suppose that both parties have commenced their bargaining without any
concession in advance. They are assumed to be •satisfied regarding the ship and cargo.

They are now at the stage of negotiating the rate, most important for them and mostinteresting for us. There is stil1 a probability, however, that the negotiation produces no

TETSUJI SHIMOJO

74

fruit as both may insist upon their own profit. Estimating the thinking of the opposite
party, and anticipating own profit, both the shipowner and the charterer wil1 propose a
rate which they consider appropriate. This rate is called their "idea."

The shipowner has a rate per ton dead weight his ship must earn during the voyage
now in question, and the charterer has a rate he can afford to pay for the shipment under
his contract. But neither rate will be the "idea" as it is. Both parties know the rates mostrecently fxxed at the exchange for the same kind of cargo and for the same route.
Moreover, they have calculated in their mind the level of a rate which they are likely get
successfully in the present bargaining. That is the reason why the rates they are going toquote will not be the same as minimum rates the shipowner must earn and the maximum
rates the charterer can afford to pay. In any way, the rates in their minds are no morethan vague rates with considerable spread.

An approximative set of the rates can be considered being a distribution of the rateideas. Let us consider the process in which a rate wil1 be reduced from the distributionsof rate ideas borne by both parties. It is convenient to assume that both parties have thesame distribution, a normal distribution with a mean $15 and a standard deviation of
about $1. Their distribution is like shown in the first two columns of Tab. 1. If we
suppose that the shipowner must earn $14 at least and that the charterer can afford to
pay $16 at most, we can calculate the expected payoffs of each party as shown in therest of the columns of Tab. 1. As either of the expected pay-offs is positive, both parties
wi11 desire to conclude this bargaining successfully.

Tab. 1. Distribution and Expected Pay-offs of Shipowner and Charterer
Charterer

Shipowner

Distribution

Rate

Probability

Pay-off

ExpectedPay-off

Pay-off

ExpectedPay-off

13.50

O.02

-O.50

-O.Ol

2.50

O.05

14.00

O.08

o

o

2.00

O.16

14.50

O.20

O.50

O.10

1.50

O.30

15.00

O.40

1.00

O.40

1:OO

O.40

15.50

O.20

150

O.30

O.50

O.10

16.00

O.08

2.00

O.16

o

o

16.50

O.02

2.50

O.05

-O.50

-O.Ol

1.00

1.00

Each party, estirnating its opponents' thinking, proposes its own idea, or decides
strategically a level of rate. Let us observe how a shipowner reduceshis own idea under

the situation mentioned above. This is shown in Tab. 2. The first column regarding the
shipowner's expectation shows various rate levels, the second shows the probability ofeach rate, and the third the accumulated sums of probabilities from the lower level ofrates. The first two of the three rows of the charterer's expectation are the same as the

shipowner's two columns, while the third row is accumulated from the higher level of

75
SOME BARGAINING PROCESS MODELS IN THE SHIPPING EXCHANGE

rates. For, it is more probable that the shipowner strategically proposes a higher rate, as

the higher rate is more favorable forhim. The charterer stands on the opposite side. But
the reason why figure of rates and probability of the charterer are the same as those of

the shipowner is not that both parties have the same expectations, but that the
shipowner, without knowing his opponent's expectations, wM naturally think that his
opponent also have similar expectations under the same situation of the market.

The part of Tab. 2 filled with O and 1 means, for example, the shipowner quotes$14.50 in the probability ofO.30 as seen from the accumulated sum ofprobability, and if
the charterer accepts $14.50 immediately it is O.90, therefore the probability that thecontract wil1 be concluded successfully at $14.50 is O.30 x O.90 = O.27. In thecorrespondence of the shipowner's idea and the charterer's idea, similarly, thecombination of both ideas shows 1 in Tab. 2 means immediate agreement, and the
combination showing O means necessity of bargaining as immediate aggreement between
both parties can not be obtained. Tab. 2 includes additionally the probability of contract

agreement and the expected pay-offs in view of the shipowner. The shipowner's idea
maximizing the expected payoff is somewhat above the level of $15.00, so that he canquote at the beginning, say $15.20.

Under our present assumption that both parties have the same expectations, thecharterer's behavior can be explained in a similar manner. In conclusion, we can say• inthis case that the charterer wil1 quote about $14.80. Needless to say, this refers to thecase in which immediate agreement can not be rnade. Bargaining for concession of the
opponent party must be commenced in this case.
Tab.2. ReductionPrecessofShipowner'sIdea
Charterer's

Expectation
Shipowner's
Expectation

13.5014.0014.5015.0015.5016.0016.50

O.02O.08O.20O.40O.20O.08O.02
1.00O.98O.90O.70O.30O.10O.02

ProbabilityofSuccess

13.50O.02O.02
14.00O.08O.10
14.50O.20O.30
15.00O.40O.70

O.020

Expected
Pay-off-O.OOI

O.098

o

O.270

O.135

O.490

O.490

15.50020O.90

O.270

O.405

16.00O.08O.98
16.50O.021.00

O.098
O.020

O.050

In the stage of proposing the `idea; it is reasonable that each party quotes a morefavorable rate, namely, the shipowner's idea wi11 be higher than the charterer's. That is

the reason why a bargaining process between the parties wil1 always be needed. If the

shipowner quotes a lower rate than the charterer, then the charterer wil1 accept it
immediately without quoting his own ideas, and vice versa. It is not rare in such asituation that considerable differences exist between the expectations of the two parties.

O.196

76

TETSUJI SHIMOJO

But we observe only the case where there is enough distance between their ideas, torequire that the bargaining process be commenced.
At the beginning of the bargaining, there is stil1 a distance between their ideas namely

their demand and supply curves have no point of intersection except on the vertical axis

which means `no' answer. Fig. 5 shows the supply curve of the shipowner and the
g

g

D

es

nc

i

s'

D"

D'

SD

NoAcceptanceYes

Fig. 5. Demand and Supply Curves
demand curve of the charterer, both of whjch are drawn as lines separated into two parts,

SS' and S"S, DD' and D"D. The horizontal axis represents their answers to accept thecontract at the given rate, `no' = O, and `yes' = 1, instead of the quantity supplied anddemanded.
Negotiations between the parties may shorten the distance between thejr jdeas, andat last they may reach a point of coincidence. The process to find the point, however,may vary considerably; acceptance at the center of the distance, or agreement to either

idea with the opponent making a considerable concession. Any way, we would likerathgr to discuss the process taking a limit of tirne into consideration.

As we have seen in Figs. 3 and 4, the time the ship becomes available and the time ofthe shipment of the cargo tend to shorten the distance between their "ideas." When thelimit of time is still in the far future the conclusion will only be `no.' But the nearer thetime approaches, the lower S" and the higher D" wil1 be. These phenomena may be
drawn as in the graph, Fig. 6, in which the two intercepts on the vertical axis correspondto the two points S" and D"in Fig. 5 respectively. These points will run along the curves
as the time gets nearer to the limit of time, and at last they will intersect. This meansE• l.- :'llDb

1 .Dc .- d-1 SSb

.-

....-

-•--'--".- ='..'.-.dt.

1 S"
l
1

--t--

..d.-'X-..--ts-------

Present -Time Timelimit Present -Time Timelimit
Fig. 6. Locus of two ideas Fig. 7. Time and Rate to aecept.1DatlNt

N...-d.'ei

FSa
1NSc

77
SOME BARGAINING PR ocESS MODELS IN THE SHIPPING EXCHANGE

that their greatly opposite ideas gradually come closer to an acceptable point. Putting
Fig. 3 over Fig. 4 we can observe similar cases in various market situations, see Fig. 7.

A similar observation can be made in the case where their 1imit of time is not thesame, but it will be needless to draw this case. When the shipowner or the charterer israther bu-ish or bearish independently of the markets, the curves in Fig. 7 will only varyin shape and we can easily observe their relations.

The only matter to be borne in mind is that the rates drawn in these figures are notreal freight rates but the certainty equivalents of freight rates. In sliort, the certainty
equivalents of rates are the rates that wi11 bring their final profits, taking into calculation

the losses they may bear in case of failure of contract agreement and its probability.

IV What to Expect and with What Confidence?
In this discussion we have put the emphasis on the time when the shipowner and thecharterer make a new contract and before that we were dealing only with cases where a
shipowner negotiates with a charterer the chartering of a ship. We now have to take up
another frequent case involving the great differences in expectation of the two parties,
and where either ships or cargo are so scarce that there is a keen competition.

To observe the bargaining processes in view of longer terms, we must suppose not
only the marginal bargaining of one party with another, but also the selective bargainingof one with several others, where not merely the levels of freight rates but also contract
conditions and the length of contracts as well as risk attitudes and favorableness of themen in the markets must be considered as very important elements. We wil1, therefore,make some preparations for these concepts in this chapter.

In the actual state of the markets, for example, charterers may have to run about inthe exchange looking for shipowners who have ships without any contract. As we haveseen, the shipowners will prefer in such a situation to keep their ships unfixed to the last

moment of the expiration of their previous contract. Inversely, the charterers should
conclude their new contract as soon as possible in such a situation. TIhis difference inbehavior may change their position more extremely as the time passes, and become morefavorable for the shipowner and more adverse for the charterer.
While the price elasticity of the ship's tonnage supplied is rather smal1, that of theshipping services demanded is said to be large. Therefore, in the situation where contracts

of immediate commencement or spot contracts are hardly available, the postponement ofshipment will often arise. Such a tendency of future contracts are always linked with thetendency of longer contracts. To prospect the future of the market is not easy for either

shipowner or charterer, and in order to avoid the risks caused by the uncertainty of
future contracts they will be obliged to make their contracts last longer. And only by
this measure charterers stand on more favorable ground in the course of the bargaining.

In inactive markets, when the shipowner must run about in the exchange for cargoes,

78

TETSUJI SHIMOJO

almost contrastive statements are possible. In this situation, however, the shipowner can
not defer supply without losses due to the srnal1 elasticity of his commodity. As we haveseen there are measure to compensate the small elasticity, but the shipowner must behave
very actively to save losses caused by such measures, for example, to give the charterer

considerable convenience in the contract conditions in order to get as high rates as
possible.

In the charter bargaining, there are two convenient ways of approach namely thetime charter hire rate and the length of time charter. Furthermore, in the length of time

charter not only the duration of contract but also the time distance between the time ofagreement and the time ofcomrnencementmust be consjdered. Though the capability ofthe ship is the most important element of the charter, let us suppose in the following
discussion that all ships are ofequal capabiljty.

In facing the bargaining, both parties have their own expectation as to the time
charter hire rates in the future. Evaluating the present levels, and prospecting thejr future
trend, they can estimate the rates at any point in the future., Or inversely, we can imagine

their own `expectation curve,' consisting of several rates which they estimated for points
in the future. The `expectation curve' is a line as drawn in Fig. 8, in which the verticalaxis denotes the rates and the horizontal axis denotes the time originating at the present.
The curve is continuous no matter whether it is straight or not.S

Suppose for a while that either of the expectation curves is declining in the future as

in Fig. 8. Then he can estimate RC for the rate of the pending contract which
commences at A and continues by the time B, as the estimates are PA atA and eB at B,

and RC is the average of all rates during the period betweenA and B. Supposing the
curve is straight and expressed by the formulay= b + nu (m<O in Fig. 8), the estimateof rate y for the ,contract with a term fromA to B is expressed as a linear function of thetime distance x from O to C. We cali the time distance x the prepositive time. This isdefined by the formula,

Prepositive Time = Le ad Time + DU ratiOn 20f COntraCt . oA + A2B

'
s

s

N

ot

P

N

R

et

c

1
t

'
1

l

t

l

o

Present A C B Future
Fig. 8. An Expectation Curve

S ExpectationCurve isdiscussed theoretically in Shimojo

Fig. 9.

[2].

Realistic Expectation Curves

SOME BARGAINING PROCESS MODELS IN THE SHIPPING EXCHANGE
79
We also call m expectation coefficient and b real time rate. The economical meaning ofreal time rate is the rate for the contract of zero prepositive time, or a contractcommencing right now and expiring right now.
The expectatio.n curve must be a curve, nota straight line. In the far future it will
converge to a level as in Fig. 9. No matter how high or low the rate at the present may
be, this state will not continue as it is for a long time, but will approach limitlessly a levelin the length of time. These are the expectation curves held by the men in the markets.

For the time being let us consider the expectation curve separated into two parts,

one part related to the near future and the other to the distant future. As for thecontracts of short prepositive time, the level of rate a man in the market sees appropriate,

is considered to be on an expectation half straight line, which may be an extension of thepresent market inertia. But it will not always be long. According to a measurement,6 theeffect wil1 last for only a few months and most expectations of four or more months in
the future will rapidly converge to a norrnal level. The latter part of the expectation
curve shall be called the converging expectation curve. A remaining problem is how many
months in the future the expectation curve is to be separated into two parts.

A'
Half lineA-s.....-..----,)iA"

Normal Leyel /B,,B

Converging Line

B'

Time

Present

Fig. 10.

Short and Long Expectations

As to the present level of the rate, there is the most recent conclusion of shortcontracts, and the men in the markets can easily estimate the real time rate, A andB in

Fig. 10. They may expect the rate for new contracts that appear in the near future bytaking the changes of the markets thereafter into their consideration. Due to the inverse

interests of the shipowner and the charterer, the ideas they wil1 quote respectively may

differ considerably from each other, even if they have obtained the same expectation
curve. Is the reason their strategy or confidence in their own expectation?

The expectations of shipowners and charterers in the bargaining process are separated
into two parts, that of the nearer future and that of the longer future. Anda shift from
one to the other takes gradually place. In general the shift is accomplislied before eightmonths in the future. The length of the nearerhalfline can perhapsbe explained by the
6 Yoshida [4] which isquoted in Shimojo (2] p. 71.

80

TETSUJI SHIMOJO

confidence on their own expectation or by the proneness in their risk attitude. A bullish
party would have a long half line with inertia of high rate, but a bearish party would havea short one even in an active situation. It wil1 be now clear that the shapes ofexpectation
curves are a very convenient tool to explain the behavior in bargaining processes.

V BargainingProcessModelNo.2
Tlhere can not exist a charter contract with zero prepositive time. A charter
contract of only a single voyage cornmencing immediately is the shortest case in
the prepositive time. Though the length ofa charter contract is sometime as long as thewhole life of the stiip, let us limit the length by say 12 months at the longest in our

discussion, as our main purpose is to compare the behavior in relation to shorter andlonger contracts.

Shipowners wi11 prefer longer contracts as far as the rate may be high enough tocover their basjc costs, and thence they can accept any length of contracts. Meanwhilecharterers wi11 have a limit as regards to the length of contracts unless they have longrange projects of shipments even if the rates are low enough. But here in our following
discussion we will assume that either of them is willing to accept any length of contract aslong as the rates are considered reasonable by them. That means, neither the shipownernor the charterer will have afiy restriction as regards to the length of the contract, so thatthey can obtain their own advantage by means of adjustment of the length of thecontract when the rates are not satisfactory.

We can now consider under the above assumption that the shipowner in the active
market and the charterer in the depressed market are on symmetric stands. Hence wemay be allowed to observe only the case ofthe shipowner in the active market.
In long term observation we can assume a stable level of the rates. The rates for thecontracts of the very distant future satisfy both parties at that level. We can call it
Normal Level. An active market means that the recent rates for contracts with very short
prepositive time are well above this level. The recent level of such rates shall be called
Actual Level.

We are dealing with the case in which the Actual Level is above the Normal Level.
The shipowner wjll propose the rate nearer to the Actual Level for contracts with a short

prepositive time. As the length of the prepositive time in pending contracts becomes
longer, he may hardly propose his idea according to his own expectation half straightline. And for contracts of a very long prepositive time he can no more refer to the halfline but only to the converging expectation curve.

Hence we can state the following: the shipowner's ideas must be the average of therates for all voyages included in the contract, and the rate for each voyage is decided by acorresponding point on the expectation curves. The rate he sees appropriate for the
prepositive time can be defined at every point of the prepositive time, so that his

81
SOME BARGAINING PRocESS MODELS IN THE SHIPPING EXCHANGE

expectation curve must be considered continuous in spite of our previous discussion. If
so we can explain his ideas for any length of the prepositive time in Fig. 1 1, in whichA is

the Actual Level and IV is the Normal Level. Suppose a shipowner having an expectation
curve AE in Fig. 1 1, he has ideas in mind corresponding to every prepositive time fromthe present to to the future ti, t2 , ...,etc. Fora single voyage commencingat to andendingat ti he has the idea li very near to the level A. A segment of the line between thevertical lines denotes the average level during the period. For the second single voyage his

idea is at the level l2, and the rate for the two consecutive voyages is the average of li,
and l2,the level of the first dotted line r2. Needless to say ri coincides with li.

A

lir2

----------- -- i5i------------"----

l2-----

r3

----

r4

---- ------ ------- ----

l4--"

---

---

---

rs

----

---- ----- ig--

r6-------

r7-;rs

l6
l7

lsE

Nto

tl t2 t3 t4 t5 t6 t7 t8
Fig. 1 1. Rate of Single Voyages and Oonsecutive Contracts

Other levels for subsequent single voyages, l's and other rates r's can be similarly
explained. The prepositive times we previously defined are the distance from the verticalaxis to the central points on the dotted lines, so the real expectation curve of the

shipowner must be redefined as the curve drawn from the point A to the central
points of the dotted lines, which almost coincide with the original expectation curveAE.

For example it will be equivalent for the shipowner to conclude a contract with alength of two voyages at the rate r2 or to conclude two contracts of single voyages at thelevels li and l2 respectively. In general to conclude a contract at the rate r. or to conclude n single voyage contracts at the levels li to l. respectively is indifferent to then r. = Z li/n. We now have a new concept of the expectation curve toshipowner, namely

i=1 .

be named the transient expectation curve or the indifferent expectation curve.7

It may not be needed for our present purpose to distinguish the two expectation
curves, the transient and the indifferent, the characteristics of which we can state as
follows:' Shimojo [2] p.70.

TETSUJI SHIMOJO

82(a) On a very short segrnent in the prepositive time, the curve coincides with theshort-term expectation half straight line. And if the prepositive time is O then the curve isat the Actual Level.

(b) On a very long segment in the prepositive time, the curve is converging limitlessly
to the Normal Level or consists of a converging expectation curve.

(c) Between avery short segment in theprepositive time andavery long segment, thecurve must be continuous so that a real rate wil1 always be defined corresponding to every
value in the prepositive time.

As to the indifferent curve we can add the following:(d) Every point on the curve has a correspondence in the rate and the prepositive timeof the contract. And all of the pairs wi11 give the same advantage to the shipowner as far
as his expectation is effective.

(e) In every point farther away from the point N, it will give more advantage to theshipowner and less advantage to the charterer.

Similarly we can discuss the case of the depressed market, also from the view pointof the charterer. In Fig. 12 two curves are drawn for the.active markets and for the
depressed markets. The present level of rates or the Actual Level is objective and not

negligible for either the shipowner or the charterer. A new agreement at the next
moment and informations about the changes thereafter, all must be known by them, sothat there will not be a great difference between the expectations of the two parties.

Nevertheless there wi11 be considerable differences in the shapes of their effective
expectatjon curves, which include strategjcal or personal variations. The two curves inFig. 13 are rather typical, that of the shipowner S is more optimistic and that of thecharterer C is pessjmistjc. Any way it must be borne jn mind that the further from IV apoint may be, the more advantageous it wi11 be for the shipowner, and that the closer to

5>
o
A

A
ActivealN-or- m-s

Lgv5i--"------C
Depressed

NoFig. 12. Indifferent Curves in Activeand Depressed Markets

Fig. 13. Indifferent Curyes of Shipowner

and Charterer

N a point may be, the more advantageous it wi11 be for the charterer.

If the indifferent expectation curves have the characteristics mentioned above, at the
beginning of the bargaining process between the shipowner and charterer two curves wi11
be supposed like in Fig. 13. For the offers ofvery short contracts in prepositive time or

83
SOME BARGAINING PROCESS MODELS IN THE SHIPPING EXCHANGE

very long contracts both parties can be satisfied with a smal1 concession, but it will berather difficult in the case of medium length contracts in prepositive time to be satisfied
through easy negotiation, as the distance between the two curves is rather large.

Fig. 13 represents a standard case. Generally we can image much more variations ofcurves. Afterwards both parties will approach each other through negotiations andconcessions. We consider the bargaining process to bring the curves nearer by means ofchanging the shapes or shifting their position through debate and exchange of
informations.

VI Epilogue
We have discussed mainly two phases of the bargaining process between the shipowner and the charterer in the shipping exchange. One concerned the time to conclude

a contract, and the other the length of the contract duration. Reality is much more

complex than our models of very simple form, in which we may have neglected
something important for the sake of symmetry.

Here we should add a matter to our discussion. Based on our computation from thetanker market reports during the years from 1970 to 1975, some interesting results havebeen observed. We have dealt with more than 10,OOO contracts which mention the dateof the agreement, the loading and unloading ports, the types and quantities of cargo, thedate of commencement, the number of consecutive voyages and rates in the World Scale.
Classlfied and summarized, we got a series of monthly tables and graphs, the graphs which

are drawn in the form of Fig. 12. We are now further computing our concepts ofparameters, in the course of which we found that the size of sliips was the second mostimportant element to draw expectation curves.

In the tanker market reports most rates are converted into the World Scale or
standard rate for each route so that our computation needs only a little conversion to
standardize routes. In the tramp contracts, however, it is very difficult for us to level thedata because of the differences of routes and cargo. Conversion into the time charterequivalent is one of the possible methods, but that needs very much up to date
informations.
It is to be borne in mind that the expectation curve we have defined in this paper wasthat of individuals in the markets. Ifi contrast the one we got from computation was no

more than a locus of points, each of which had been reached by two partners in themarket. These points 'wil1 not always appear on the curve, but are scattered widelyaround the curve. They are a very cluster of points. What curve the cluster should
theoretically represent is merely our assumption.

The purpose of our empirical studies is to observe this cluster and to reduce some

informations regarding the changes in time and situation. Many problems must be
resolved before this purpose can be achieved. Producing data from daily market reports,

84

TETSUJI SHIMOJO

leveling the data by adding the up to date informations as to the routes and stowage
factors, standardizing the agreements by eliminating the characteristics of ships andcargo, and other conversions are needed. The classification of the data at the date ofagreement and at the prepositive time and the plotting the cluster is a rather easy task,
but extracting the usefu1 informations out of the cluster will be a difficult and important
task.

REFERENCE{1]

Shimojo, Tetsuji, "A Proposal of a Measure for the Shipping Services," Review ofKobe University ofMereantile Marine, 1974.

[2]

Shimojo, Tetsuji, "Expectations in the Shipping Exchange;' Kobe Economic and Business
Review, No. 22, 1976.

[3]

Svendsen, A. S., Sea 1}ansport and Shipping Economics, Bremen, 1958.
Yoshida, Shigeru, "Risk Preference in Shipping Market" (in Japanese, unpublished), 1973.

[4]

85

ASSET DIVERSIFICATION UNDER

THE FLEXIBLE EXCHANGE RATE SYSTEM
Kazuhiro IGAwA
I Introduction
The objects of my research are, generally speaking, to explain whether or not an
investor diversifies his asset portfolio, with an increase of foreign exchange flexibility andrisks. The needs for this type of studies are evident from the increase in international

capital flows, the growth of multi-national companies and the development of international financial markets.

'

After the world shifted from the fixed (adjustable peg) exchange rate system to theflexible (managed float) exchange rate system, the degree of international asset
diversificatiofi seems to be increased. However, it is an open problem whether an increasein foreign exchange flexibility (or risk) increases or decreases the degree of portfolio
diversification. My research provides some arguments for an increase in asset diversification, in the sense that asset portfolio is determined considering "pure hedging", which is
explained in the later section.

In this paper, using a consumption oriented portfolio analysis, we want to investigate

the problem: "How an investor determines his portfolio c6mposition under flexible
rates." Our main interests are to analyse and to explain this problem rather intuitively,

using simple examples .or diagrams and few equations. However, we will show, in
appendix, that the basic relations obtained from the simple exampleshold also formore
rigorous treatments in general cases.

ll Positions of Other Scholars
As done by Grubel [1968] , a direct application of the models of portfolio selection

developed by Tobin and Markowitz may explain the real world phenomenon ofinternational diversification of asset holdings. In those models, an investor determines his

portfolio composition taking into account its expected rate of returns and its variances,more generally, taking into account the value of wealth at the end of the period in termsof domestic (or foreign) currency. If he invests al1 hiswealth into the assets which yieldhigher returns, he may suffer larger risks. Therefore, a risk averse investor will chose
diversified asset holdings as an optimum portfolio, evaluated from the utility function,
which depends on the value of wealth.

We will fmd, however, some difficulties in the direct application of the TobinMarkowitz type of analysis in the case of international portfolio selection. This isbecause, it is not indifferent for an investor what currency is used to evaluate his value of

KAZUHIRO IGAWA

86

wealth. If an investor restricts his consumption to exportable goods (importable goods)
and if hjs wealth is evaluated jn terms of the home (foreign) cinrrency, then the direct

application wil1 explain properly the phenomena of international portfolio investment.

However, if he consumes both exportable and importable goods, it js not rational toevaluate his wealth only in terms ofhome or foreign currency.

Heckerman [1972-2] pointed out the above facts and explained them as follows: lheassets denominated in home (foreign) currency guarantee the purchasing power only interms of exportable (importable) goods. Therefore, a wealth evaluated in home currency

does not properly reflect the value and risks of purchasing power of the wealth, if

importable goods are aiso consumed. 'Ihe reason for this is, if the home currency
appreciats (depreciats) then one unite of the domestic currency can control more (less)importable goods and he will face foreign exchange risks by consuming importable goods,
the risks are zero for exportable goods.

In his paper, Heckerman [1972-1] developed a technique for specifying a real valueof wealth (real purchasing power) when relative prices of consumption goods change.
Then, he applied the Tobin-Markowitz type analysis with the real value ofwealth to theinternational financial assets portfolio selection. There, he has introduced many
assumptions for an investor's utility function to get the approximated real value ofwealth. Among them, the assumption of homothetic indifference curves seems to be thestrongest one. However, we can avoid this assumption and stil1 be able to analyse thesame problems, if we adopt the consumption oriented theory of portfolio selection,
instead of the Tobin-Markowitz type analysis.

Thus, in the following sections we reexamine and clarify Heckerman's [1972-2]
intention with a consumption oriented portfolio analysis. That is, we explain the effects
of foreign exchange risks on asset holdings, taking into account the special relations thatholding a certain asset is risk free for specific goods and hedging has a basic role for
portfolio diversifications in this case.

IH Consumption Oriented Portfolio Analysis
The consumption oriented portfolio model which we use in this paper is analogous tothe one by Stiglitz [1970] . Stiglitz analysed the case ofportfolio selection in two kindsof financial assets; a long term (2 period) bond which is a perfectly safe asset in terms of

consumption in the future (second period), but is a risky asset in terms of consumption in

the first period, and a short term (one period) bond which is safe in terms of
consumption in the first period, but is risky in terms of consumption in the following
periods. It has been shown that an investor normally diversifies his asset holdings, ifhe

wishes to avoid uncertainty in his comsumption stream. Of course, he may partly orcompletely specialize in an asset of higher rate of return, by speculation.

The price of the long term bond at the end of this period, which is the price of the

87
ASSET DIVERSIFICATION UNDER THE FLEXIBLE EXCHANGE RATE SYSTEM

short term bond of the second period, is unknown to the investor at the time he has tomake his original asset allocation. Thus his net wealth at the end of this period is
unknown. His consumption of the first and the one of the second period are determined
after the price of the sliort term bond of the second period is determined. However, therelative price of consumption goods of the second period to that of the first period,
which is equal to the price of the short term bond of the second period, is also unknown
to him at the time of portfolio allocation. He makes his decision considering the distribu-

tion of unkown variables.

If we consider the present consumption and the future consumption in Stiglitz's
model as the consumption of the exportable (home) goods and the importable (foreign)

goods, and consider the short term bond and the long term bond in his model as thehome currency and the foreign currency respectively, we wil1 get fundamentally the samemodel as in Heckerman's paper [1972-2] . The unknown variable in this case is the foreignexchange rate. With this model, we can properly explain the phenomena of diversified
asset holdings under the flexible exchange rate system.

IV The Basic Model
It is usual that an income stream does not coincide exactly with an expenditure(consumption) stream. To bridge the gap of the two streams, each individual holds someassets. Taking into account the real purchasing power of these assets, he may not be
indifferent to the different types of assets. If every thing is certain, his portfolio behavior

wi11 be simple. However, when he decides his portfolio, it is usual that there exist someuncertainties for the future consumption stream. The above general phenomenum can bemade more specific to clarify the main aspects of international portfolio diversification
under flexible rates, where future foreign exchange rates are not certain.

Let us consider the following very simple case. The individual can consume either
home goods C or foreign goods OF. He seeks to maximize the utility of Cand C*, interms of a concave utility function. Income Wo is paid out in home currency at time O.

Purchases of consumption goods can only be made at time 1. In the meantime, his
income is held in the form of financial assets. These assets take the form of homecurrency L and foreign currency L*.
The portfolio choice is subject to the wealth (incom,e) constraint

M7o " L + roL*
where,ro is the current exchange rate. Wealth at time 1 in terms ofhome currency is

M!i = L + riL*
where ri is the expected exchange rate, arandom variable. At time 1, the individual isagain free to engage in foreign exchange transactions. His consumption plan is thus

KAZUHIRO IGAWA

88

subject to the budget constraint

Wl = PC + rlP"C"
where, P and P* are, respectively, the prjces of home and foreign goods at time 1,
assumed to be known with certainty.

If ri were also known with certainty, the problem would have a trivial two-stage
solution. In the firststage,L* orL is chosen to maximize "1i , given "io, ro and ri . If theexchange rate is expected to depreciate, i. e. ri > ro, the maximum is achieved by holdjng

all assets in the form of the foreign currency. In the opposite case of expected
appreciation all assets would be held in the form of domestic currency. In the second
stage, utility is maximized subject to given Mli, P, P* and ri, which is an elementary

utility maximization problem. It is the uncertainty of ri which makes the problem
non-trivial.

Uncertainty can always be eliminated by avoiding foreign exchange transaction attime 1 at the uncertain rate ri. In this case of what may be called "pure hedging" theindividual buys at time O any foreign exchange he desires to spend at time 1. In this case,the problem is,

maximize U(C,C")
subject to PC = L

P*C* = L*
L+ roL"= Wo
which is again trivial. The individual will rather find it advantageous to assume someexchange risk for the sake of speculative gains from exchange rate variations.

Non-rigorously, an increase in mean ofri relative to ro will make it profitable to buy

at time O more foreign exchange than is needed at time 1, the excess to be sold in theforeign exchange market fora profu. An expected appreciation of the home currency,
on the other hand, wil1 make it profitable to buy less foreign exchange at time O than willbe spent to foreign goods at time 1, the sliortfall to be covered through the exchange
market, again at a profit. As a consequence, the problem ceases to be trivial.

It wil1 now be developed more rigorously. Our problem is maximizing the mean ofutility, with respect to L (or L*){EU(C, C*)} (1)subject to L+ roL"=Wo (2)L+ riL"= Mii (3)Wi =PC +riP"C" (4)and Ui=U2PlriP* (5)89
ASSET DIVERSIFICATION UNDER THE FLEXIBLE EXCHANGE RATE SYSTEM

where E is used for taking the statistical expectation. Equation (5) is derived from the

maximization of U( C, Cb subject to equation (4) (see, appendix [3] (1)). It wil1 help
us to use a very simple example which shows the fundamental properties of the optimum
solutions of this problem. The corresponding relations in the case of the above generalframework, wil1 be shown in the appendix.

V An Example
Let us specify the utility function and probability density function of ri ,F (ri), as
foilows:

U{min (C, C"/k)}(1-1)

ut >o, u"<oF(r,)-I:lggl [;l:5121. :,Y2 ,,,and without loss of generality, we assume

P= P"= 1,ro = 1, Wo =1
Where, utility function (1-1) means that home goods and foreign goods are perfectcomplements. The probability density function (6) and initial condition ro = 1 meansthat there are two possibilities that the foreign exchange rate depreciates half andappreciates twice. It should be noted here that Eri t ro•

Now, we can solve the problem graphically as follows: see, Fig. 1. From the utility
function (1-1), an indifferefice curve is L shaped and kinked on the ray of45 degree line
(OR) through the origin, in the case k = 1.

Thus, an optimum consumption is on the ray for any given Wi , andC = Wi /(1 +ri) = (Wi lri)/(11ri + 1) = C"
The constraint (2) is aline ("IW") which runs from the point (L " 1,L"= O) to the point(L = O, L"= 1). Of course, the pure hedging point is H, (L = 1/2, L"= 1/2) or(C = 1/2, C" = 1/2), where the line (MIW") intersects the line (OR).

Now, corresponding to a point (say A) on the line (ww*) we will get a portfolio
combination of L and L* (La and L*a). La and L*a also express the proportion of Mlo
distributed into L and L*, from the assumption of Wo = 1. Passing through the point A,
we will get two constraint lines of JSIi, i.e. Yi Yi (in the case ri = 1/2) and Y2 Y2 (in thecase ri = 2), and these lines reflect the constraint (3) and (4). If the case of (ri = 112)

occurs then Mli is determined by equation (3), given L and L", and the optimum
consumption point, on the line Yi Yi, is Ci. On the other hand, if the case of(ri=2)
occurs then the optimum consumption point, on the line Y2 Y2 , is C2 .

IGAWA
KAZUHIRO

90
*C*'

Yl

R

W*
Y2
C2

H

La* --- ---------

Cl

A
1

l
,

o

L,C
WY2L,

La Yl
Fig.1

If pointA moves toward PV (i.e., the asset holding of L is increased and that of L*

decreases) then point Ci moves toward R and the point C2 moves toward O. If, in the
opposite case, point A moves toward W*, then both points Ci and C2 move toward H, atfirst, and when A is on point H, both Ci and C2 are on H, and after that, Cimoves
toward the origin and C2 moves toward R We are now in the position to determine theoptimum point ofA, i.e. the optimum portfolio ofL and L ".
Without using the utility function explicitly, we can guess the optimum point ofA ison H, from the above arguments about the movements of Ci and C2 corresponding to the
movements ofA. This is because, a mean consumption level which is the middle point of
Ci and C2 js always at H regardless of the position of A, from equation (6), and thevariability of consumption is smallest (zero) when A is at H: We can verify this by using
the utility function: see, Fig. 2.

U
Ul

-

-------------------

EUh .
EUa
------------

.'

U

;-1'

U2

C2HCI

o
Corresponding topoints Ci and C2 in

Ftg.2

C=C*

the ray OR, we can write the concave utility function (UU).
Fig.

2 are corresponding to the consumption points Ciand C2

The
in

91
ASSET DIVERSIFICATION UNDER THE FLEXIBLE EXCHANGE RATE SYSTEM

Fig. 1, where those points are determined for a certain point ofA Ui and U2 are theutility levels which correspond to the points Ci and C2, respectively.

Thus, the mean utility level,EUa, is the rniddle point of Ui and U2 from equation (6).

If pointA moves toward H, both points Ci and C2 move towardHand whenA is onH,
the points Ci and C2 are both on H, and we wi11 get the mean utility levelEUh. We caneasily find EUt > EUa from the strict concavity of the utility function, the line U(ZTThus, the optimum point of A is on H as we have expected. This is not a strange

conclusion asPC=riP*C*, evenifEri : ro.

VI Changesin k
We should note that pure hedging gives us the same portfolio as the above optimum
point, and thus the example used there is a critical case. If the utility function orprobability density function is different from equation (1-l) and k = 1 or (6), a pure
hedging may not be an optimum. To see this, if k in the utility function (1-1) is not one
but two, i.e. indifference curves are kinked on the ray OR " which pathes the point H* (C =1/3, C* = 2/3) and origin, then an optimum point differs from a pure hedging point, seeFig. 3. The ray OR" is biased toward the vertical axis (consumption of foreign goods)

and the pure hedging point is H*, where consumption of foreign goods is larger andcunsumptin ofhome goods is smaller than those obtained atH(in the case k= 1). Now,
we can expect an optimum portfolio point to be to the right of H", the pure hedging
point in the case k= 2. We can see this as follows. Let us use necessary conditions for
maximization, (see appendix [1],equations (7-1) and (7-2)),*C*'Y3

R*

W*
C3

Y4

H*
C4-----

L*b

o

B

--

Ftg.3

LbY3 W

EU' (C) (1 -- ri /ro)/(1 +ri k) =D

where C= "ii / (1 +ri k) = C"/k

Wi =L + (Wo -L) ri lro

Y4

L,

(7)
(8)

92 KAZUHIRO IGAWA
At pure hedging portfolio, L = C = 1/3 and the left hand side of equation (7) becomes
positive, i.e.

U' (1/3)(1/4 - 1/5)/2 > O
Therefore, the optirnum L (L ") should be greater (smaller) than L (L ") of pure hedging
and an investor wil1 speculate in home currency. If at point B on Mi"i", where L = Lb andL " =L "b, equation (7) holds, i.e.

[U' {(1 +Lb)/4} 14 - U' {(2 -Lb) 15} 15] 12 = O
then the point B gives us an optimum portfolio. With this portfolio, we will attainconsumption C3 (whenri = ll2) and C4 (whenri = 2).
It should be noted that an expected consumption becomes larger as a portfolio point
moves from W* toward W and a fluctuation of consumption becomes larger as a portfolio

point moves from H* (where there is no fluctuation) toward Ml or "1". The optimum
point B is determined by evaluating a mean and a fluctuation of consumption with anutility function.

VII Criteria for Speculation'

It wil1 be interesting to find the criteria which a portfolio investor uses to speculate

in the home currency or in the foreign currency. 'The criteria for the case of utility function (1-1), with any kind of probability
distribution ofri is: (see appendix [2]),(i) If E'{(ri -ro)1(1+rik)} >O (g)then an investor speculates in foreign currency from pure hedging.

(ii) If -E {(ri - ro)l(1+rik)}(1O)=roE {(11ri - 11ro)1(1/ri+k)} >O
then he wil1 speculate in home currency.

(iii) If E{(ri-ro)1(1+r,k)}=O (11)then pure hedging is the optimum.
We can explain the criteria (i) as foilows. A capital gain by speculating in foreign
currency in terms ofhome currency is (ri - ro). TIhen an increase in consumption will be(ri - ro)1 (1 + rik), from equation (8). Trhus an expected capital gain in terms of
consumption - which is relevant in our analysis - by speculating in foreign currency is
E{(ri - ro)1 (1+ rik)}, and this is the left hand side of criterion (9). Therefore, if thecriterion (9) is satisfied, the individual speculates in foreign currency. Similarly, theASSET DIVERSIFICATION UNDER THE FLEXIBLE EXCHANGE RATE 93
SYSTEM
criterion (ii) means that a capital gain by speculating in home currency, in terms offoreign currency, is (1/ri - 1/ro) and an increase in consumption wil1 be (1/ri - 11ro) /(1/ri + k), from equation (8). Thus, an expected capital gain in terms ofconsumption is

E {(1/ri - 1/ro)/(1/ri +k)}, which has the same sign as the left hand side ofequation(1O). And if this is positive, the inyestor speculates in home currency.

In the above arguments about criteria (i) and (ii), we are just concerned with the
expectations of consumptions and do not consider their fluctuations. This is because, ina pure hedging portfolio, a fluctuation of consumption is zero and negative effects
through fluctuation are negligible if the portfolio is very close to that of pure hedging.

11ius, it should be noted that whether one speculates in foreign or home currency does
not depend on the attitude toward risk and it depends only on the expectation ofri . Of
course, the extent of the specialization clearly will depend on the utility function.

VIII Shifts in the Distribution of ri
In the case of the above example with probability distribution (6), we will find

E {(ri - ro)1 (ri + 1)} = O (when k= 1)
and pure hedging is the optimum. On the other hand, when k = 2

E { (ri -ro)/ (1 + rik)} = -1140 < O
and the investor speculates in home currency as we have already found.

Now, it is easy to see that with the utility function (1-l) and k = 1, an investor
speculates in foreign currency if the probability distribution isF(,,).IProb• (ri = 112) = 1/2 -E . (6.1)
tProb. (ri = 2) = 1/2 +E
and e is positive. One will speculate in home currency if e is negative (see appendix[7]). Let us consider the case of speculation in foreign currency when k = 1 and E ispositive in equation (6-1). If e. increases further, one may invest all his wealth into
foreign currency (complete specialization in foreign currency). This will occur ifan L =O, the expected utility is non-increasing with respect to an increase in L (see appendix[4] ).

Now, we will focus on this case. IfpointA is on Ml" in Fig. 1, then Ci = 113 and C2= 2/3 and ifA moves from M!* toward W by a unit increase inL (thus a unit decrease inL") then C2 decreases by 113 and Ci increasesby 1/3. Therefore,a change in the
expected utility is, from the left hand side of equation (7),{Prob. (ri = 112) U' (1/3)- Prob. (ri = 2) U' (213)} /3
Thus the investor does not move from W*, i.e. specializes in foreign currency, if

KAZUHIRO IGAWA

94

Prob. (ri = 1/2) x< U' (2/3)/ (U' (1/3) +U' (213)}

(12)

U,

T
U•(114)-U'(1/3)

-

. ---

. --d

t

-1•--..,

111l1tlCl

tC21t

C-,1

-U,(314)-Ut(2/3).
.

ll--pt-- -?M-- - ----d----- ---- -- "-"-----s

1'

l-1-

C=C*

-

-

s

-U,

Fig.4

In Fig. 4, the probability, e, which satisfies equation (12) with equality can be found as

2 = (length ofCiS)1(Length of TS)= 1/ {1 + (length of TCi) ! (length of CiS)}IX Changes in Risks of ri
Now, suppose that possible values of ri are not (ri = 1/2 and ri = 2) but (ri = 113,
ri = 3) and the probability density function isF(r,) -(:iO.g: f,"; -; gl31 =,,Y2 (6.2)
This means that there are two equal possibilities in outcomes of foreign exchange rates,

C2

ASSET DIVERSIFICATION UNDER THE FLEXIBLE EXCHANGE RATE95
SYSTEM
one is a three fold appreciation and the other is a one third depreciation. In this case, ri
is •more risky than in the case of density function (6), because of the large fluctuation ofri with the same probability. However, Eri is not the same value as before.

With this kind of,increase in risk of ri, the criterion for specialization in foreign
currency becomes, corresponding to equation (12),Prob. (ri = 1/3) S U' (3/4) 1{U' (l/4)+ U' (3/4)} (13)The probability which corresponds to e is O and the latter is smailer than theformer. This is because, U'(1/4)/ U'(314) is larger than U'(113)/ U'(2/3) by theassumption of decreasing marginal utility. 'Ihis fact can easily be seen in Fig. 4. There

Ci = 1/4 and C2 = 3/4 and these are consumption points when (ri = 1/3) and (ri = 3),
respectively, at the complete specialization in foreign currency. e is

e = (length ofi,SM)/ (length of iS-)

= 11 {1 + (length of TCi)1(length of CiS)}As easly seen, (length of TCi) / (length of CiS) is smaller than (length of TCi)/(lengthof CiS). Thus C is smaller than e. This implies that if Prob. (ri = 113) is e then theinvestor does not completely specialize in foreign currency, that is, with a smal1 risk ofri ,he completely specializes in foreign currency and with a larger risk of ri he does notcompletely specialize in it.

The above analysis where the point A is on ta1", can be applied to any point ofA on
M,'Mi*. Thus, we can say that an increase in the variability of (or increase in risks oDri
will decrease a speculation (see appendix [5] and [6] ).

X Concluding Rematks
We wil1 get the following demand functions, in general form, for assets

and goods.

L = L (P, P", Wo, ro,F(ri))

L"= L"(P, P", "io, re,F(ri))
C = C(P, P", Wi, ro, ri)
C" -- C" (P, P", Wi, ro, ri)

where, L and L* are determined definitely if the density distribution of ri is given anddoes not depend on a realized value of ri. On the other hand, C and C" depend on arealized value of ri and thus it may be useful to define a mean demand for goods asfollows:

KAZUHIRO IGAWA96

D =EC =D (P, P", Wo, ro,F(ri))
D" =EC* =D* (P, P*, Wo, ro, F(ri))
Here, D and D* are mean demands for home and foreign goods, at the time an investor
determines his financial asset holdings.

We can derive the properties of these demand functions by the comparative statics
analysis, as in appendix [7] . From the above arguments, using simple examples, however,
it is not difficult to see intuitively that:(i) if an expected capital gain by holding some currency increases by a shift of theposition of the probability djstributjon of ri without changjng its form of distribution,
the speculative demand for the currency increases. On the other hand, if we assurne grosssubstitutes in the consumption ofhome and foreign goods, - this assumption seems to bereasonable in the aggregated two goods case -, then an increase in ri decreases C* andincreases C And thus, a shift ofR[ri) which increases a mean ofri decreases D* andincreases D.

(ii) A rise in ro without affecting F (ri) reduces L* and increases L, by substitutjon

between the financial assets. The effects of a change in ro to C, C* or D, D* areambiguous and may be very small in absolute value.
(ili) An increase in risk of ri, i.e. Rri) has more weight on tails, reduces the speculative

demand for currency (toward pure hedging). D and D" may not be very sensitive to therisk of ri •(iv) Income (or wealth) effects wil1 normally be positive and increase in PVo will increase

L, L"and C, C" or D, D".

In this paper, we have presented the theory of a portfolio selection based on
consumption valuations rather than on wealth valuations. We set up some assumptions

which may seem unrealistic and make things too simple. To make the model more
realistic, we should increase the number of countrjes, the number of commodities andfmancial assets. It may be necessary to introduce other sources of uncertainty, forexample, that of income stream, of production of goods and of demand paterns. Aninter-temporal analysis, in the sence that a model treates consumptions of different time
periods, wil1 be necessary for long-run problems. In this case, the portfolio selection offinancial assets with different time periods, as in Stiglitz [1970] , will become important.

If we introduce transaction costs for exchanges between goods and financial assets oramong fmancial assets, we wil1 get a much more realistic model. In this case, some partsof risks wil1 be reflected in the transaction costs or information costs and we will come toconclusions which reflect some properties of the analysis of transaction costs asinvestigated by Niehans [1969]. However, the main idea - speculation from pure
hedging- ofour analysis wil1 stil1 have an important role in those generalized cases.

ASSET DIVERSIFICATION UNDERTHE FLEXIBLE EXCHANGE RATE SYSTEM 97[Appendix] ,[ll In this appendix, we investigate the case with a more general concave utility

function where C and C* are smoothly substitutable for one another and generalprobability distribution functions ofri. Our problem ismaximize EU (C, C") (1)subject to L+roL"= VVo (2)'L+riL"= 'Mii (3)Wi =PC+riP"C" (4)Ui=U2PlriP" (5)Necessary conditions for maximization are

EU2 (rolri-1)=O (7-1)

or EUi (ri!ro-1)=O (7-2)
Equation (5) means the marginal rate of substitution is equal to the commodity priceratio. Equation (7-1) implies that with one unit increase of foreign currency,
expectations of direct and indirect increases in utility by an increase in foreign goods areequal. Similarly, equation (7-2) implies one unit home currency produces the same meanvalue of direct and indirect increases in utility by an increase in home goods. Here,indirect means shift from home (or foreign) currency to foreign (or home) currency attime O and again shift to home (or foreign) currency at' time 1 to buy home (or foreign)
goods.

It is worth while to make clear a pure hedging case. Let us use notations withcircumflex "A" on the corresponding variables, and thus

AA=L
PC
p"c""= Åí"-(wo -L")1ro
We wil1 get the same consumption point if realized ri is equal to ro, regardless of the
distribution ofri and we use r"

i for that ri. Thus, we wil1 get

U, ((el, e*) = U, (C", e*)Plp*r",
Therefore, we obtain the relations as follows:(") ifri ?2i then c>< c" and c* >< e*[2] In the case of a smoothly substitutable utility function and any kind of
probability distribution functions, the criteria for speculation from pure hedging are as
follows:

98 KAZUHIRO IGAWA(i) ifErolriS 1 then 4A
L">L", L<L(ii) if Erilro 5 1 then L >AA
L, L" < L"(iii) if 1/Eri < 1/ro < E(1/ri) then ways for speculation are ambiguous
and there may be no speculation. Here, the relation ofE(11ri)> 11Eri is obtained by
the convexity ofg function,g (ri) = 11ri

Proof of criterion (i) is as follows:(a) When Ui2 )-O andif Erolri-l5Othen at L =AA'
L, L" = L"
EU, (r,lr, - 1) = E [U, (C, C")' - U2 (a, e")] (r,lr, - 1)+ U, (e, e")•'E(rofri-1)50 (14)This is because, from Ui2 l O and relations (") in appendix [1]u, (c, c*)- u2 (e, e") ?o as ri >< r"i =ro
Thus, the first product in the middle of equation (14) is negative. Therefore, L"AA

is larger than L" (orL is smaller than L ).

(b) When Ui2 <O and variance of(11ri)is small and if Erolri - 1 S O
thenEU2 (rolri - 1) can be approximated as follows, by the Taylor Series expansion

around r"i ; •EU2 (ro!ri - 1) -`. E [{U2idCld(11ri)+ U22dC"/d(11ri)}ro (11ri - 11ro)+u2 (6, 6")ro] (11ri - 11r"i).. u2 (e, e*)E(rolri - 1)so (ls)Therefore,L" (L) is iarger (smaller) than L" (L).
We can prove the criterion (ii), similarly to the case of criterion (i).

[3] As a preliminary consideration let us look at the Slutzky decomposition and thedefinition of relative risk aversion in our general model.

(i) For given "ii andri, from maximization ofutility

U (C, C*)subject to budget constraint

PC+riP"C"= Wi (4)we wil1 get first order conditions, which is equation (5):Ui=U2PlriP" (5)From equations (4) and (5), we wru get price effects as:

99
ASSET DIVERSIFICATION UNDER THE FLEXIBLE EXCHANGE RATE SYSTEM

dC/d(PlriP) ={U2 - Ui2 - U22PlriP") (LIP- C)} !A (16)dC"ld(PlriP") ={-U2PlriP"+(Uii - U2iP/riP") (LIP- C)} IA (17)Where A ii Un - 2U2iP/riP" + (PlriP")2 U22
and this is negative from second order conditions. Income effects are as follows:

dCldWi ={U22PlriP"- Ui2}IA (18)dC"ldWi={Uii-U2iPlriP"}IA (19)(ii) Assuming that an individual faces the uncertain wealth Wi, with mean -Ml andvariance o2 , the certainty equivalent of Wi is determined by 6 which satisfies

EV("ii, 1/ri)= V(6W, 11ri)
where V("1i , 1lri) is the maximum value ofutility attainable with wealth Wi and foreignexchange rate ri . From the Taylor Series expansion around W, we wil1 find

6 = 1 - p(ol M,)2 /2
where, p = Vn W/ Vi
and this can be used as the measure of relative (wealth) risk aversion in a sense of theArrow - Pratt measure of relative risk aversion. It is not difficult to see,Vl = UlVii = UiidC!dWi + UndC"ldWi[4] Using the results in the above section, we find the conditions for complete
specialization in a certain currency, We know the relations that at L = O, L* = Mlolro

if EU2 (ro /ri - 1) f;O then L i;i O
and that at L"= O, L = Mlo

if EUi (ri /ro - 1) i;;O then L" ;Ks oNow, the conditions for EU2 (ro /ri - 1) :::Ss O and for EUi (ri /ro - 1) ;Ss< O are as follows;(i) If E(ro /ri - 1) gO and pS ni where, ni =dl. Cldl. Wi
then EU2 (ro lri - 1) SO and thus L E{ O

If E(rolri-1))O and p)nithen• EU2 (ro/ri-1))O andthus L)O(i i) If E(r, lro - 1) gO and pg n2 whe re, n2 =dl. C"/dl. Miithen EUi (ri lro - 1) gO and thus L" :gO

If E(ri/ro-1)20 and p)n2

KAZUHIRO IGAWA

1OO

then EUi (ri/ro-1);llO andthus L";l:O
We can prove the cofiditions (i) as follows. From equations (16) - (19), we wil1 get+ U22 {dC"ld (1lri)}{dU2 /d (1/ri)}= U2i {dCld (1/ri)}

L=O

L=O

L=O

= -U2riPdCldWi +{(Ui22 - Un U22) PCIP" } IA
= -U2riP (dC/dWi ) (1 - p/ni)
Thus {dU, ld (1 /r,)} L .o :<;tr O aS Pfi ni
Therefore, from equation (14) and these relations we wil1 get conditions (i).
The proof of conditions (li) is sirnilar to that of conditions (i).

[5] There are some relations between the volume of speculation and the degree ofrisk aversion. We can prove the fo"owing propositions:"The less risk averse the individual the more he speculates."
Proof: If UA (C, C") is the utility function ofthe first individual and if uB (uA (C, C;"))is the one of the second individual, the latter is less (more) risk averse if UB"> O (< O).
This is because, the measures of relative risk aversion are:pA = UnA MiilUiA (forthe first person)

pB =(UB"uiA + uB'UnA) VVi/UB'UiA (for the second person)and pB>pA as UB">OLet us define 7i byV(Wo + (r-i - ro)Ll,11ii)= V(Wo,1/r",)i•e•, minimum level ofri at which L"A attains a level of utility of c= c"
Assuming that ri > r-i and L "A > L"" and at L "A.

EU,A (rolri - 1)=O
it is no difficult to see the relations that

A as ro/ri-1><O
U><Uand dU" ld (1/ri)<O
A

where, Ujs the level of utjlity attained vvhen ri = ro . Therefore, we will get

dUB '/d (1 fr,) - UB "d Vi ld (1 /ri)<O as UB "> O
and thus, at L IZ

' U2A (rolri-1)<O as UB">OEUB
It follows that

L"B>L"A>L"" when uB">oand c" = c"".

ASSET DIVERSIFICATION UNDER THE FLEXIBLE EXCHANGE RATE SYSTEM 101
IfL" A <Åí" andri <r"-i, where 7i is a maximum level or ri which satisfies
V(Wo + (r=i - ro)L"A , 1/r-'i)= V(Mio, 1/r",)then, by a similar way of proof as above, we will get

L"B<L",4<L"" when uB">oIt should be noted that utility is no longer monotonic in ri andthe range ofri must be
suitably restricted, using r-`i or r-'i.

[6] Let us clarify the effects of a change in uncertainty (or risk) of the foreignexchange rate. First, we will define UL ,UL =aUIOL =-Ui (ri /ro-1)/p (2o)From the theorem of Rothschild & Stiglitz [1971] we can say as follows: If UL is aconcave (convex) function ofri then an increase in riskiness will decrease (increase) L.

This is so because, if UL is a concave (convex) function ofri then the increasing risk
decreases (increases) EUL and lowering (increasing) L restores the first order conditions
that EUL is equal to zero.
Now, the double differentiating equation (20), we will get:e2 uLlar,2 = - {(a2UilaWi2)L"2 (rilro - 1)+ 2(aUilOWi)L"lro} /P. .[(a2 u,/oMli2) Wi +2(OUilb"ii) MiilroL"(rilro - 1)] L"2 (rilro - 1)IMii (21)Apriori, we cannot determine the sign of a2 ULIOri2, which will depend on the utility
function and the probability distribution ofri . However, with the following assumptions
thatp' f;{ O and 1 +p<2Mii /roL" (ri /ro - 1)
where, p' = Op /a Mli= [{(a2 u,lowi2) wi +(ouilo"1i)} ui - (aui/awi)2 wi]/u,2= [(a2 U, 10W,2) W, +(b U, /aW,)(1 +p)]IU, (22)we will get, from equations (21) and (22), the following relations:(i) if (rilro - 1) >O then a2 ULIari2 >O(ii) if (rilro-1)<O then a2ULIOri2<O
It follows that if the relative risk aversion increases and if p (which is negative) is
sufficiently large in its absolute value then UL is convex when ri is larger thanro and isconcave when ri is smaller than ro. It• is more probable, when the expectation ofri isAAlarger than ro, that L is smaller than L (L* is Iarger than L*) and an increase in thevariability of ri increases L. On the other hand, if the expectation of ri is smaller thanA .,.Aro then L >L
(L* <L"), and thus, more probably, an increase in the variability ofri

102 KAZUHIRO IGAWA
decreases L. Therefore, it is more likely to be the case that with an increase in thevariability of ri, an investor will decrease his speculation, if the'relative risk aversion islarge in absolute value and non decreasing.

[7] From the necessary conditions (7-2) and (5) and budget constraints (2),(3), (4),we will get comparative statics results as follows;

A*dL = -[E {U"dCldro + Ui2dC"ldro} (rilro - 1)-EUiri lro2] dro-[E {UndCldri + UndC"ldri} (rilro - 1) + EUilro] dri-[E {UiidC/dWo + Ui2dC"ldMio} (ri/ro - 1)] dWo(23)

where, A" =E {UiidC/dL + Ui2dC"ldL}>O
from the second order conditions for expected utility maximization and;dC!dWo = (dC!dWi)rilro
dC*ldWo= (dC"/dWi)rilro

dCldro =(dC/dWi)(-L")
dC"!dro = (dCldWi)(-L")
dC/dri = (dC!d"ii)L"+{dCld (PlriP")} (-P/P"ri2)dC"/dri = (dC"!dWi)L"+ {dC"ld (PlriP")} (-PIP"r,2)Here, dCld "ii,dC"ld Wi,

dCld (PlriP"), dC"ld (PlriP5 are the same for equations (16)

- (19). From equation (23), we will get dLld"io (dL"ldJVo),dLldro and(dL"ldro)dLldri (dL"ldri). The income effects (dLld"io and willdL"ldWo)
be both normally
positive. If the financial assets substitution effect, i.e.

(dLldro)s = EUiri lro2 A"
is dominant then dLldro is positive and dL"ldro is negative. If otherfinancialassetssubstitution effect i.e.

'(dLldri )s - -EUi !ro A"
is dominant, dLldri is negative and dL"ldri is positive. It will be

the dominance of financial assets substitution effects

reasonable to assume
to determine the assets portfoliowith two financial assets.

REFERENCES[1][2]

Grubel, H. G., "Internationaliy diversified portfolios: Welfare gains and capital flows," 71heAmerican Economie Review, Vol. S8, No. 5, Part 1, Dec. 1968.
Heckerman, D. G., "Portfolio selection and the structure of capital asset prices when relativeASSET DIVERSIFICATION UNDER THE FLEXIBLE EXCHANGE RATE SYSTEM 103
prices of consumption goods may change," ne Journal of Finance, VoL 27, No. 1, Mar.
[3]
[4]
[5]

1972 (1), "On the effects of exchange risk, Journal of International Economics, Vol. 3,
1972 (2)
Niehans, J., "Money in a static theory of optimal payment arrangements;' Journal ofMoney
Credit and Banking, Vol. 1, No.'
4, Nov. 1969.
Rothschild, M & J. E. Stiglitz, "Increasing risk II: Its economic consequences;' Journal of

Economic Theory, VoL 3, 1971.
[6]

Stiglitz, J. E., "A consumption oriented theory of the demand for financial assets and the term
structure of interest rates,"Review ofEconomic Studies, Vol. 37 (3), No. 111, July 1970.

104

KOBE ECONOMIC & BUSINESSREVIEW

105

CONTENTS
NO. 18(1971)
Environmental Pollution Problems from the

ViewPointofBusinessManagement .............. ..
PatternsoftheJapanese EngineeringTrade(1951-1970) ...... .....
OptimalProcess ofEconomic Development .......................
Wage and Behaviour Difference in Collective

Wage Bargainings of Japanese Shipping Cornpanies-A Case Sttidy of the Japanese Shipping Industry- ......

OnAccountingCommunication ................................

---t----------. Minoni Beiko

Fukuo Kawata
Hikoji Katano

Hiromasa Yamamoto...... Isao Nakano

NO. 19 (1972)
Patterns of Export Trade of Argentina and Brazil:

AComparativeStudy ........... .... ... . ...... ..FukuoKawata
EntrepreneurshipinAmerica ..................... .. ..... .. TadakotsuInoue
GeneralizationofTwo-GapTheory ............ .... ..... ..... .. HrikoiiKatano
Accounting Measurement and Homomorphism ........ . ... . ......... Isao Nakano
An Interpretation of Two Stage Least Squares
Estimators as Indirect Least Squares

Estimators in the Overidentified Case ................... HiroshiSadamichi

A Note on the One-dimensional Random Search ....................... Komayukiltow
Exchange Rate Systems and Distribution of

Seigniorage ......................................... Kazuhiro Igawa

NO. 20 (1973)
An Analysis of the Brazilian

Balance ofPayments: 1960-1972 .........................Fukuo Kawata
International Money Flow and
the MultinationalCorporations .......................... Masahiro Fuiita
Estimation of Investment Allocation

RatiosofJapaneseEconomy: 1960-1969 .................. HikoiiKatano
Available Jobs and Employment inJapanese Foreign-going Shipping ........ . .... . ...Hiromasa Yamamoto

Homomorphisrn and BusinessIncome Measurement ..... .... ....... Isao Arakano
AssetsChoiceand OptimalInternational Reserves .... . ..... ........ Kazuhiro Igawa

NO. 21 (1975)
Regional Development Policies of Japan in Recent Quarterof the Twentieth Century ................................Minont Beiko
National Income and Expenditure
at Factor Cost in Japan 1955-1970:

A Macro-Accounting for Growing Economy .................Nobuko Nosse
Efficiency and Acceptability in Optiinal Growth Path ..... .'.............. Hikoii Katano
An Equitable Distribution of the Costs and Benefits of Economic

Integration ..................................... YoshiakiIVishimukai
Japanese Business Abroad: Past, Present and Future ...................Hideki Yoshihara

106

NO. 22 (1976)
Pioneering in Australian Direct Trade

Life ofF. Kanematsu, 1845-1913 ....................... Tadakatsu Inoue
Productivity Bargaining and the Change of Labour
Management Relations in the Japanese Foreign-going

Shipping; 1965-1973 ..............................Hiromasa Yantamoto
On an Interpretable Depreciation Method ............................... Isao IVakano
A New Type of Data Banking System-BEICA System- .................................. HiroshiSadamichi
Expectation in the Shipping Exchange ............................... Tetsuii Shimoio
International Capital Movements andReal Capital Accumulation ............................. Kazuhiro Igawa
Legal System of the Free Movement of Workers and Migration

Trends in the European Economic Community .................. Kunio Soh21, 1975
KOBE UNIVERSITY ECONOMIC REVIEW

107

Edited by Faculty of Economics,
Kobe University, Kobe, JapanCONTENTS.... Kojiro ?Viino

Dilemmas of Anti-Monopoly Policy in Japan ..........................•
Fixed Capital and Extended Reproduction ............................

. . Nobuo Okishio

Direct Foreign Investments and. Kiyoshi lkemoto

the Specific Factors Model ..............................
The Output Adjustment Mechanism.. Watani Fukuda

inaMulti-SectoralEconomy ............................
On the Long Run Path ofConsumption and
Pollution: Paths of Rolling Plans .........................

Tetsuya Kishimoto

Recent Fertility Patterns in Metropolitan

RegionsofJapan ....................................

Shinichi Takahashit.nytltlllllP,dt,,,i,,illtlllSi,.",".,illltllei,•",,tt-tltSlll).ii,,,eqtllllllt,•J,,,,,-iilltllP-",,,r,ilglltlt,,,"-,illllllb..h,-,qllllll,.",i,r,qlllllli,J,i,,i,,ttlllllli,-"-,-,ttlH"pt,

THE ANNALS OF THE SCHOOL OF
BUSINESS ADMINISTRATIONKOBE UNIVERSITY 1976
Edited by the School of Business Administration,

Kobe University, Kobe, JapanCONTENTS
Establishment of Accounting Standards in the U.S. anda Review of Some Current Problerns ........................

Thomas E Keller

BusinessAdminiStrationofIndustry ...........................................

.. Nobora Inaba

Export Price Behavior in Selected

IndustrialCountries ....................................

. Akihiro Amano

Flow of Funds Accounts and CapitalMarket Structure in Japan (3) .............................

...... Jiro Ono

Theories of Personnel Managementin the 1920's ..........................................

Kofi Okubayashi

Managerial Objectives and Corporate

Behavior: AnErnpirical Analysis ..........................
"',tlSlllle,'t",wrlSttltP,'--,t-11NUP,-"-w,tlllMb",,,,',11Mlle,•"-w"lll"IP,•i"."•,ilellllee.J",,i',11111Ile,-",b,,',tllllUI)""-e'.tlllSllSP'J'",r-tlt:ltPP'h,,r`tltlMtt'

KOBE UNIVERSITY LAW REVIEWInternational Edition No. 10, 1974
Edited by Faculty of Law,
Kobe University, Kobe, JapanCONTENTS
Research on Labor Co-Determination in West Germany ........................KeiJ'i Kubo
La gardeavue et son contr61e en droit compare (1) ...................... Kuni7i Shibahara.. Tadao Kagono

108

THE RESEARCH INSTITUTE FOR ECONOMICS AND
BUSINESS ADMINISTRATION, KOBE UNIVERSITYHISTORICAL SKETCH
In 1919, a research organization named the Institute for Commerce was foundedin Kobe Higher Commercial School, one of the chief predecessors of Kobe
University, with a gift made by F. Kanematsu & Company, a leading mercantile firmin Kobe. The organization was designed to carry on and facilitate integrated researchon business and commerce and to formulate and publish the results of these studies

and investigations in such form as to make them available to the business

communlty.
With the founding of Kobe University of Commerce, successor of Kobe Higher
Commercial School, in 1929, the Institute extended its research activities by adding

several divisions. One was the famous Latin-American Library, which soon became
the center of research in this field in Japan. A room for statistics equipped withvarious computing machines was established and began publication of Ju-

yo- To-kei

Keizai monthly and Sekai Bo-'ela' To"-kei annually. A filing room was prepared todeposit press clipping files systematically arranged by topics and dates. Anotherroom was designed to become the center of al1 possible original records and data
having to do with the beginning and progress of Japanese business.

On the campus of Kobe University of Commerce, another organization named
the Institute for Business Mechanization was founded in 1941 utilizing businessmachines donated by the IBM Corporation and others. With Professor Yasutaro
Hirai as its head a broad and forward-looking plan for business mechanization in
Japan was developed.

In 1944, Kobe University of Commerce changed its name to Kobe University of
Economics. After theWar, however,the University was consolidated with three othercolleges in Hy6go Prefecture to become Kobe University. With this development, thetwo Institutes were also amalgamated into the Research Institute for Economics andBusiness Administration, Kobe University. At present, the Institute, with its twenty

four full-time professional staff members, carries on studies and investigations ininternational economy, business administration, and information systems in Japan.

LocATION AND BUILDINGSThe Research Institute for Economics and Business Administration is located on

the campus of Kobe University, Roklco, Kobe. It consists of two three-storiedbuildings. One is named the Kanematsu Kinenkan and hasa floor space of about
2,900 square meters, which includes a president's room, forty-one offices, six rooms
used as a library, a room for statistics, etc. Another is built iq 1964. It has a floor

space of about 1,900 equare meters, which is chiefiy used as the Documentation
Center for Business Analysis, a library and a conference room.

ORGANIZATION
Under the directorship of the president, the Institute operates with two researchgroups. Each research group and its sections ate as follows:

A GroupofInternationalEconomy(1) InternationalTrade(2) International Finance(3) Maritime Economics(4) Latin-AmericanEconomy(5) International Labour Relations

B GroupofBusinessAdministration(1) InternationalManagement(2) Business Administration and Information Systems(3) Accounting(4) BusinessStatistics
Besides the regular work of the Institute, research committees may be created tocarry on any special work requiring the joint study of academic and business circles.

At present, there are five standing research committees, that is, Experts Group on

Structural Change in World Economy, Committee of International Finance,
Comrnittee of Information Systerrts, Research Group for the Domestic Water
Transportation and Committee of maritime Labour.
For convenience and greater efficiency in carrying out its research activities, theInstitute has a general office which is responsible for 1) the collection andpreservation of a comprehensive collection of books, periodicals, pamphlets, andoriginal records and data of finance, trade, commerce, industry and businessgenerally; 2) the classification, cataloguing, indexing arranglng, annotation andcompilation of these research materials; and 3) the formulation and publication of
the results of the investigations and studjes accomplished by the professionaJ staff
members of the Institute.

As an affiliated institute, the Documentation Center for Business Analysis has
been established in 1964. It is the first systematic information facility in the field of

business administration in Japan that has been recognized and authorized by the

109

110

Ministry of Education. The purpose is to collect and to make intensive control of al1
kinds of materials on business administration and to make them available tQ scholars,

universities, governments, and business world with the aid of modern documentation techniques.

l

T

RESEARCH INSTITUTE
FOR 1il

I

EaONOMICS&BUSINE5S ADMINISTRATION :'l

KOBE UNIVERSITYl'i

Directer: Tadakatsu
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Secretary: Keiichi
I lKEDA [tttttttt..ttt.tt.tttttttt-l/:

GROUP OFINTERNATIONAL i GROUPOFBUSINESS l'
ECONOMIC RESEARCH: ADMINISTRATIONRESEARCH :Seiji SAsAK[

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Jlro yAo

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Dr. of Ecenornics i Tadakatsu lNouE Professor of lntcrnational i
Toru KANoI
Masahiro FuJITA]iiii Hikojl KATANo
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, Nubuke NossE

Professor of lnternational iDr. of Economics li

tistics i

i Isao NAKANOProfessor of fnternational :Hiromasa YAMAMOTO

study on Latin l
AmeTica I Hiroshi SADAM]cHl

Associate Professor of i

Maritimc Economy l
Associate Prefessor of :lntcrnational Trade il/Rescarch Associate oflnter- I Yukio ucHIDA
national Labour Relation$ l:
Office : The Kanematsu Memorial Hall

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Associate Professer ofInternational Managcment

I Komayuki ITow

Kunio SoH

Dr. of Bus{ntss Adminis-

tratlenAccountingiKazuhiro IGAwA

Professor of Busincss

Statistics

Labour Relations i
1,: Hideki YosHiHARA

NlsH[MuKAr Professor of Rcgional i

Tetsuji SHIMoJo
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professor of lntcrnationai I Dr, of Busincss Adminis- Ii

Ph. D. in Sta'

Yoshiaki
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Economyi
Administration
and i//
Dr. of Economics i lnforrnation
Systcms l/i 1)r, of Business1P
Ad!ninis- i
Professor of Tlnternational
tratlon l [ . j1tiManagementi[ !
1/ of Business
Professor of lnternatienal
Law ] Akio MoRI Professor
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: Financel/ 1: tratlon i1 . :l i
FinanceDnof Ecenomics/1//
Trade i

Professor ofMaritime Minor [ Minoru BEIKA Professor of Business i

KOBE UNIVERSITYROKKO, KOBE JAPAN

Associate Profssor of

Associate Professor ofBus{ness Statistics

Ph. D. in Econometrics
Associate Professor ofBuslness Administration

and Information Systems

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Rcsearch Assoclate of

Econometricsill1l