Decline of Japan’
Japan’s Predominance in Asia
Hideki Yoshihara

1. Predominant Position of Japanese Business in Asia
Japanese companies long enjoyed unchallenged predominant position in
Asia. There were practically no local Asian companies that challenged
Japanese companies in such industries as electric home appliances, electricparts, semiconductors, automobiles and their parts, machines, precision
instruments, office machines, chemicals, iron and steel, ship building, andsynthetic fibers. In the industries of labor intensive and low technology
there were some local Asian companies that were competitive in theinternational market. However, in the high technology industries Japanesecompanies enjoyed monopolistic position in the Asian market.
At the macro economic level Japan still maintains predominant position in
Asia even at the present time. Japan’s GDP share in Asia has been rather
high through 1980s and 1990s as it is shown in Table 1. It was 63 percent in
1980, and was 66 percent in 1999. Japan has maintained rather high shareof between 63 percent to 71 percent for the last twenty years.

Table1

Japan’s GDP Share in Asia

But when we pay attention to micro level phenomena, that is, behavior andperformance of Japanese companies, we see the symptoms of weakening
Japan’s predominance in Asia.
Japanese companies have lost the number one position in many industries.
In the industries of iron and steel, shipbuilding, and synthetic fibers, Asian
local companies are now occupying the number one position. And there aresevere competitions between Japanese companies and Asian companies in1many industries such as electric home appliances, semiconductors, PC(personal computers), mobile phones and motorcycles. There are less andless industries where Japanese companies enjoy predominant positions.
Some of the examples may include the industries of automobiles and theirparts, sophisticated electric parts and semiconductors, manufacturing
equipment for semiconductors, industrial robots, engineering plastics andpharmaceuticals.
Why are Japanese companies loosing the competitive power in Asia? Is theJapanese way of management the cause for the declining predominance ofJapanese companies in Asia? How are Asian companies strengthening theircompetitive power? These are the questions that I want to explore in thepresent paper.

2. Asian Operations Managed by Japanese, in Japanese and for JapaneseManagement by Japanese Persons
There are thousands of Japanese companies operating in Asia. Most ofthem have Japanese CEOs who are dispatched from their Japanese parent
companies. According to the author’s questionnaire survey data, Japanesecompanies in Singapore and Taiwan that have Japanese CEOs amount to 80
percent in Taiwan and 92 percent in Singapore. (Yoshihara 1996, p.21)
Japanese companies in other Asian countries probably have more or lesssimilar percentage ratio.
Localization of management at Asian subsidiaries is a management
problem which Japanese companies have long tried to solve. I conducted
field research in Bangkok, Thailand in 1974 on personnel problems ofJapanese companies. One of the findings of my research was that Japanesecompanies had more expatriates than American and European firms. In
other words, localization of the management of Japanese firms was lagging
behind Western companies. (Yoshihara 1975)
Japanese companies have accomplished substantial achievement in thelocalization of management at lower and middle management levels.
Supervisors at factories and sales managers at offices are now mostly local
people. Even at the management level of functional department heads, the2

localization has made good progress.
However, the localization has made no progress at the CEOs. The
percentage ratio of the overseas subsidiaries that have CEOs of local
nationals is 38 percent in 1972, 47 percent in 1981, 35 percent in 1990 and
22 percent in 1994. (Yoshihara 1995) When we see important large Asiansubsidiaries, we will probably find that most of the CEOs are still Japanese
expatriates.
In 1989 I had a chance to make a speech at the managing directors
meeting of the subsidiaries in Asia (not including China) and Oceania of
Matsushita Electric Industrial. All managers were Japanese. Now, thecompany has nearly one hundred subsidiaries in the region. The
subsidiaries that have local CEOs are only two. The company has more than
thirty subsidiaries in China and all of them have Japanese CEOs. This
company is not exceptional. On the contrary, many Japanese multinationals
share the low rate of localization of CEOs at their foreign subsidiaries inAsia.
In addition to the CEOs and other senior managers at the top managementlevel, there are many Japanese expatriates who are not managers but areadvisory staff. However, it is not uncommon that these Japanese advisers
play the role of managers.
Here, let us pay attention to the localization of the management of foreigncompanies in Japan, that is, Japanese subsidiaries of American andEuropean multinationals, and compare it with the case of Japanesemultinationals. (Khan and Yoshihara 1994)
Nearly two thirds (63%) of foreign companies in Japan have local JapaneseCEOs. This is in sharp contrast to the case of the foreign subsidiaries ofJapanese multinationals. Only 22 percent subsidiaries have CEOs of local
nationality. Localization at the level of department head also is moreprogressed at foreign companies in Japan than at the foreign subsidiaries ofJapanese companies.
American and European multinationals have further promoted the
localization of management than Japanese multinationals in other countries,
too. According to a research that compares the localization of the
management of American, European and Japanese multinationals, thepercentage ratio of the foreign subsidiaries that have CEOs of local

3nationality is the highest at American companies (69%), followed by
European firms (52%) and lowest at Japanese companies (26%). (Kopp
1994b)
Another research that compares the localization of marketing managers in
China also shows that Japanese companies are behind Western companies.
Japanese companies have sixteen marketing managers who are Japanese
expatriates and only two Chinese managers. Western companies have only
three managers who are expatriates and thirteen Chinese managers. (Yachi
1999)
The characteristic of Japanese style international management explained
above, that is, the management by Japanese persons, is more evident at
non-manufacturing companies than manufacturing companies. Sogo shosha
is a good example.
Nearly all of the CEOs of overseas offices (presidents of overseas
subsidiaries or heads of overseas branches) are Japanese expatriates.
Non-Japanese CEOs are exceptions and they usually work at less importantbranches in smaller countries and cities. The only exception that the author
identifies is the case of Itochu. The CEO of U.S. and British subsidiary firms
is non-Japanese. The name of the person is J. W. Chai. He once worked inJapan before he joined Itochu and has no difficulty with the Japanese
language.
Nine sogo shosha have 1248 overseas branches and subsidiaries.
(Yoshihara 2001b) The total number of employees of these overseasorganizations is 24929, out of which Japanese expatriates are 4625. Thus,
nearly twenty percent (19%) of the total employees at overseas subsidiaries
and branches are Japanese expatriates. And they take top and middle
management positions, and play key roles in the management.
In the case of manufacturing multinationals, the number of Japanese
expatriates is much smaller than sogo shosha. The Japanese expatriates
amount to only 2.3 percent of the total employees at overseas subsidiaries.
(Yoshihara 2001a, p.205)

Management in the Japanese Language
The second characteristic of the Japanese style international management4

is the management in the Japanese language.
The three kinds of languages are used at Japanese multinationals asshown in Figure 1. (Yoshihara, 2001a, p.222)
At operation sites in Japan such as factories, sales branches, R&D
organizations and offices the Japanese language is used. In a similar way atoperation sites of foreign subsidiaries communication is done in the local
language. Either Japanese or English, or both of the Japanese and theEnglish languages are used in the international communication. We define
information exchange between the Japanese staff and the foreign staff asinternational communication. The international communication is typicallydone between the Japanese head offices and the foreign subsidiaries. It isalso done at Japanese parent companies when Japanese and foreigners
discuss and exchange information. We also see international communication
at foreign subsidiaries when local managers and Japanese expatriates meetto discuss and make decisions. It is noteworthy that the Japanese language
plays an important role in the international communication.

Figure 1

Languages in International Business

Let me elaborate on this point.
First, when Japanese people at the Japanese head offices send information
to foreign subsidiaries, they often send it in the Japanese language. For
example, when Japanese staff at the Japanese parent companies maketelephone calls to their subsidiaries in Taiwan and Singapore, they use theJapanese language to communicate with almost all subsidiaries in the twocountries ; 93 percent of all subsidiaries in Taiwan and 74 percent in
Singapore. They use English only with 8 percent of the subsidiaries in
Singapore. They never use English when they call to their Taiwanesesubsidiaries. Mixture of Japanese and English in telephone conversation isobserved at 18 percent (Singapore) and 7 percent (Taiwan) of thesubsidiaries. (Yoshihara 2001a, p.226)
Communication by FAX is the similar situation. When Japanese staff at

5

Japanese parent companies send information by FAX to their subsidiaries in
Taiwan and Singapore, they use the Japanese language to 87 percent(Taiwan) and 57 percent (Singapore) of all subsidiaries in the two countries.
FAX message in English is sent to only 2 percent (Taiwan) and 16 percent(Singapore) of the subsidiaries.
At foreign subsidiaries the Japanese language is not so frequently used. It
is used only in the communication among Japanese staff. In thecommunication among local staff, local language is used. And,
communication between local and Japanese staff is usually done in English.
According to the data from my questionnaire survey, at the meeting where
both Japanese and local persons attend, English is used at 64 percent of all
subsidiaries in Singapore. The Japanese language is used only at 3 percentof the subsidiaries. There are some subsidiaries (29%) that use both
Japanese and English. The situation of the use of language in Taiwanesesubsidiaries is quite different. There is no subsidiary that uses English at
the meeting where both Japanese and Taiwanese attend. Both Japanese andTaiwanese staff use the Japanese language.
I do not have the data for other Asian countries. Based on my field research
I estimate the language situation at Asian subsidiaries of Japanesecompanies in other Asian countries as the following. Singapore represents
the country where English is the common language. Taiwan, on the other
hand, is the country where the Japanese language is widely used. Other
Asian countries are somewhere between these two extreme cases. The
Philippines, Malaysia and Hong Kong are similar to Singapore and Korea islike Taiwan. Thailand, Indonesia and China are between these two groups.
As a characteristic of the language usage in the international
communication of Japanese companies, I would like to point out thatimportant information is usually exchanged in the Japanese language. In
exchanging information on routine operations between Japanese parent
companies and their foreign subsidiaries, English is usually used. But, when
Japanese managers at the Japanese parent companies talk on the telephone,write or FAX to foreign subsidiaries on rather important business matterssuch as personnel problems of top management, large scale investment,
introduction of new products, change of marketing strategy, they usuallycommunicate in the Japanese language. As their English language ability islimited, they have difficulties in communicating in English about these6

important matters.
The above examination reveals two points concerning the language in theinternational communication of Japanese companies. First, Japanese parent
companies send information to their foreign subsidiaries more often in theJapanese language than in English or other foreign languages. Second,
important information is usually exchanged in the Japanese language
between the Japanese parent companies and their foreign subsidiaries.
Considering these two points I would like to summarize that thecharacteristic of the Japanese style international management is the
management in the Japanese language.
Here, let me point that the above mentioned two characteristics, that is,
the management by Japanese persons and the management in the Japanese
language are closely related to each other.
When Japanese expatriates play important roles at foreign subsidiaries,
the Japanese language tends to be de facto common official language. It isnatural that Japanese expatriates use the Japanese language in theirinternational communication. And when the Japanese language is used,
local persons have difficulties in participating in the information exchange
and decision making process. Thus, capable local people do not want to workat Japanese companies. So, the Japanese head offices think that they needto send more Japanese people to their subsidiaries to supplement the
shortage of staff. As the number of Japanese expatriates increases at foreign
offices, the amount of Japanese language used at foreign subsidiaries willproportionately increase. Thus, there exists a kind of vicious circle between
the management by Japanese persons and the management in the Japanese
language.

Japanese Central Hub Model
The third characteristic of the Japanese style international management is
the Japanese central hub model.
In international business of Japanese multinationals the parent companies
in Japan are in the center of the multinational corporate system. The
foreign subsidiaries are peripheral organizations. The Japanese parent
companies transfer their resources such as technology, know-how and brand7

to their overseas subsidiaries. The transfer is one way from the Japaneseparent companies to their overseas subsidiaries. There is practically noreverse transfer from the foreign subsidiaries to their parent companies.
Foreign subsidiaries are dependent on the Japanese parent companies.
They do not stand on their own foot. They cannot survive without constanttransfer of resources from their Japanese parent companies. The foreignsubsidiaries are like Japanese students who live on the money sent fromtheir parents.
The Japanese parent companies dispatch Japanese managers, experts andengineers to their foreign subsidiaries. There is almost no reverse flow of
personnel from the overseas subsidiaries to their Japanese parent
companies.
The relationship between the Japanese parent companies and their foreignsubsidiaries is linear. Each foreign subsidiary has a close relationship with
the Japanese parent companies. On the other hand, the relationship among
overseas subsidiaries is not developed.
The central hub model of Japanese multinationals that was explained
above may be shown as Figure 2. (Yoshihara, Hayashi and Yasumuro 1988)

Figure 2

Japanese Central Hub Model

3. Bright and Dark Sides of Japanese Companies in Asia
Successful Japanese Production System
The Japanese production system has been developed and practiced inJapan. It is the basis of international competitiveness of Japanesemanufacturers. It is noteworthy that Japanese production system works not
only in Japan but also in foreign countries including Asian countries.
Manufacturing subsidiaries in Asia have practiced Japanese production
system and have been achieving good performance.
The Japanese production system is composed of such elements as 5s

8campaign, workers of multi-functions, information sharing among workers,
participation of workers in problem solving, egalitarian treatment ofworkers and managers. Japanese style personnel management is a
supportive factor of Japanese production system. Employment security,internal promotion, seniority-based wages and promotion, on-the-job
training (OJT), and company unions are closely related with Japanese
production system.
The Japanese production system is attractive to local workers andsupervisors at Asian factories of Japanese companies. Their employment ishighly secured. They are encouraged to use their brains and participate inproblem solving activities. They appreciate egalitarian treatment that isdesigned to minimize the difference of status between workers andmanagers. Workers and managers wear the same work uniforms, have thesame meals at factory canteens, use the same rest rooms, and work
according to the same time table (the start and the end of the daily works),etc.
Japanese factories in Asia are bright in the sense that they are doing wellwith motivated local supervisors and workers under their Japanese
production system.
More and more Asian local companies have tried to learn and practice theJapanese production system. The Japanese production system is now widelypracticed in Asia and contributes to production innovation in Asia.

Limits of Japanese Style International Management
Japanese companies in Asia are attractive to local workers as it isexplained above. On the contrary, they are not attractive to capable local
managerial, professional and engineering people. There may be several
reasons. Here I would like to pay attention to the three characteristics of theJapanese style international management that we saw in the last section ofthis paper.
The first characteristic is the management by Japanese persons. The
position of the CEOs and many of the other important positions are occupied
by Japanese expatriates. Promotion opportunities of the local persons,especially managerial persons are rather limited. Thus, it is natural that9

they abandon their aspiration for promotion to top positions in thecompanies. It is said that at foreign subsidiaries of Japanese companies
there exists glass ceiling or rice paper ceiling for the promotion of local
persons. (Kopp 1994a)
The second characteristic is the management in the Japanese language.
Unless local people do not understand the Japanese language, they havedifficulties in participating in the information exchange and decision
making process. At Japanese companies, information about importantmatters is often exchanged in the Japanese language and decisions on policy
matters are usually made in the Japanese language. There are not many
foreign people who understand the Japanese language. The Japanese
language is a minor language as a language for international business. The
de facto common language of the international business is English.
Japanese multinationals that use the Japanese language as the common
language have handicaps in conducting international business. One of thehandicaps is that they have difficulty in recruiting capable local managerial
and professional persons.
The third characteristic is the Japanese central hub model. At theJapanese multinationals the core employees are Japanese who work at theJapanese parent companies and their overseas subsidiaries. They
participate in the mainstream of information and decision making process.
On the other hand, local persons have difficulty in participating in theinformation sharing and decision making process because of the Japanese
language barrier and the closed nature of Japanese style management.
Local persons are peripheral employees.
Compared with domestic firms, multinational enterprises are in a position
to enjoy the advantage of utilizing local resources. Probably the mostimportant local resources are local human resources, especially high level
human resources such as managerial, professional and engineering people.
The Japanese multinationals do not enjoy that advantage because of their
Japanese style international management. At factories capable local
workers and supervisors work with high morale and achieve good
performance. On the other hand, at administrative offices and R&D
organizations there are not many first class talented local managerial,
professional and engineering persons. Those who are employed at Japanesecompanies generally work with low morale and complaints.

10

At Japanese companies in China employment security is maintained.
Workload is light and pace of work is rather slow. Wages are low and thepace of wage increase is slow. Age and education are important factors indetermining wages and posts. Competition among managers for wages andposts are restrained. Cooperation and teamwork are emphasized. Consensus
is sought in decision making and thus decision making takes time. Good
human relationship with Japanese expatriates is required. Work discipline
is emphasized. There are many Chinese managers who are critical about
Japanese companies with these characteristics. It is said that recently
Chinese people tend to consider Japanese companies as state-owned
Chinese enterprises. On the other hand, as we will see later in the present
paper, Chinese companies are becoming more like capitalistic enterprises.
And it should be noted that Japanese companies do not attract capable
Chinese persons.
I made an interviewing research in Taiwan last year with twoco-researchers. We visited three Taiwanese companies in the Science-based
Industrial Park. The names of the companies we visited are UMS, Winbond
Electronics and Macronix International. We also visited three European
companies, that is, Philips, BASF and Image. At the end of the fieldresearch I asked the following question to a Taiwanese interpreter who was
the employee of Taiwan Matsushita Electric. “What is your impression of
Taiwanese companies and European firms? “ He said, “I now think that I am
like a civil servant working at a public organization.”
Dr. Ren-Jye Liu. Professor at Tunghai University in Taiwan recently told
me the similar story about Japanese companies in Taiwan. (note 1) There
are many young Taiwanese people who regret that they chose Japanesecompanies to work for. Although employment security is rather high, wages
are not high and promotion opportunities are limited. Pace of wage increase
and promotion is slow. Organization culture is rigid. Young people andfemale employees have little opportunity for extending their capabilities. To
the eyes of Taiwanese young capable people Japanese companies are likepublic organizations.

114. China : a Key Factor
Chinese Management Geared to Free Market Competition
China’s share in world production is rapidly increasing. Main
manufacturers of high technology products such as electronics products andautomobiles are foreign companies in China. But Chinese local companies
are becoming important players in these industrial fields, also. An example
is Haier Group.
Haier is the largest Chinese company of electric home appliances. It is
ranked the ninth position in the world appliance manufacturers. (Appliance
Manufacturer, February 2001)
Our analysis shows that Haier has achieved rapid growth by two
reasons.(note 2) The first reason is latecomer advantage. Haier introduced
technology from foreign companies like German and Japanese companies. It
learns foreign technology, digests it, and adapts it to Chinese local market
conditions. These days Haier quickly develops new products day by day.
The second reason of Haier’s rapid growth is its management. The
characteristic of Haier’s management may be most evidently represented inits personnel management of “horse race” without horse judge (the word“horse race” is used in the company).
At Haier there is no advance evaluation of employees. Everyone is given an
equal opportunity to engage in job. Only after he or she finishes the job, heor she is evaluated for his or her results. Thus, at Haier an employee (horse)
is not evaluated as a good horse or a bad horse by personnel experts (horsejudge) before the race. Every horse is given the chance to run the race. Afterthe race the horse is evaluated on the record and given monetary reward or
penalty. This horse race is applied not only to workers but also to
managerial persons.
The personnel management of Haier has the following characteristics:
Individual evaluation (not group evaluation)
Instantaneous evaluation (not long term evaluation)
Monetary reward and penalty
Openness about the rules and the results of evaluation
Evaluation based on quantitative records

12Demotion of fixed rate of inferior employees
Let me make some remarks on these characteristics.
First, workers and managers are evaluated individually. Teamwork orgroup activities are not considered in the evaluation.
Second, evaluation is done without any delay after the job. Workers areevaluated everyday. They can know the result of their evaluation when theyfinish their jobs in the evening. They record their job performance and by
the record they can know the result of the evaluation (amount of daily
wages).
Third, reward and punishment is done in money terms. Their wages aredaily wages on a piece rate. When they do their jobs rightly, they are given
the wages on a piece rate. When they do jobs badly, they are given penalty.
When they find bad jobs of the workers who are just before them on the
production line, they are given reward.
Fourth, the rules of evaluation are open to employees. They know how they
are evaluated. And the results of the evaluation are shown on the noticeboard on the wall of the shop floor every evening after the job. The results(record of jobs and amount of daily wages with reward and penalty) are
shown individually with the names of workers.
Fifth, evaluation is made only on the performance record of the jobs. The
performance record is quantitative evaluation of their jobs. There is no roomfor discretionary evaluation by supervisors and managers.
Last, workers and managers of inferior records are automatically demoted.
In the case of managers the worst 5 percent of managers are demoted
annually. Workers are classified into three categories based on the records.
They are “excellent workers”, “good workers” and “trial workers”. The trial
workers will be fired unless they improve their evaluation.
The personnel management of Haier is almost opposite to the Japanesestyle management. In China, as I mentioned earlier in the paper Japanesecompanies are seen as state-owned enterprises. We may well say that Haieris more capitalistic than Japanese companies.
It is my understanding that Haier is not an exception in China. Among fast
growing Chinese local companies there must be many companies that are
more or less like Haier. The capitalistic and competitive management ofChinese companies well fit to Chinese people. Physical, psychological and13intellectual energy of Chinese people is fully utilized under the Chinese
capitalistic management.
The Chinese capitalistic management may be a reaction to the oldmanagement of socialism. Under the old socialistic management there wereno layoffs. Wages were guaranteed. Wages were determined on age,education, and other political factors. Wage increase and promotion weremuch influenced by human relationship with bosses and political party
organizations. There existed no incentives for motivating individuals towork harder and compete to one another.

Conflict between Socialism and Market Economy
Since the economic reform and open door policy in1978, China has beenachieving a high economic growth for more than twenty years. The averagerate of the growth is more than ten percent. This long and high economic
growth is beyond anticipation of most economists and other experts.
Let us look at the economic achievement of China comparing with othercountries which have been undergoing the transition from the centralizedplanning economy to the free market economy.
GDP of China doubled in eight years. If we take the GDP of China in 1989
as 100.0 point, the GDP point in 1997 is 210.2. Among the countries inCentral Europe, Eastern Europe, Russia and South Western Asia, Poland is
the only country that has been successful in increasing GDP. Its GDP pointin 1997 is 118.8 compared with 100.0 point in 1989. Other countries
decreased GDP in the last eight years. GDP of Russia decreased to almost
half size from 100.0 in 1989 to 52.2 in 1997. For information, the economic
performance of Vietnam is the second best just behind China. Its GDP in
1997 is 175.2. (Miura 2000)
China and Vietnam have promoted the same strategy of economic growth.
They maintain the politics of socialism with one party system. And under
this political system they have promoted market economy. Their strategy issometimes called gradual strategy. On the other hand, other countries havepursued the radical strategy or the so-called big ban strategy. They changed
their political system and economic system at the same time.
The good performance of the past twenty years or so shows us that the14

China’s economic reform and open door policy has been successful. Will
China continue its high economic growth in the future?
The answer depends on the understanding of the nature of China’s
economic policy. The policy of the socialist market economy has twoelements, that is, the politics of socialism and the market economy. In
principle the two elements seem to be incompatible.
As the market economy of China develops, the conflict between the politics
of socialism and the market economy will become large. When the conflict
becomes too strong, the development of market economy will be restrained
to within the limits of the politics of socialism. The growth of China’s
economy will slow down in the future. Or, the politics of socialism will bechanged to democratic political system that is compatible with the market
economy. In either case substantial political disturbance and economic
slow-down will be inevitable.

5. Problems at Japanese Parent Companies
Investment in Asia and Hollowing out in Japan
Export was most important in the international business strategy ofJapanese manufacturing companies until 1985. In 1985 the Plaza Accord
was reached and then the sharp appreciation of Japanese yen started. From1986 Japanese companies began to change their international strategy fromexport to local production. Since then overseas production has occupied
central position in the international business strategy.
As the site for production, Japan is no longer the best place. Japan has lostmuch of attractiveness for production. Wages are high. Wages of Japanese
workers are more than ten times higher than those of Malaysian and Thai
workers. Wages of Chinese young female workers in Cantonese area areabout one thirtieth of Japanese workers. Japanese people, especially young
people dislike working at factories. At Japanese factories there are many
middle-aged female workers. They cannot compete with Asian young
female workers who have good eyesight and are dexterous. Cost of lands isstill high. Costs of industrial infrastructures such as electricity, water,
telecommunication, domestic transportation may be the highest in the world.

15

There are many regulations that make Japanese managers consume lots oftime and energy.
Increasing number of Japanese companies shift their domestic production
to overseas. They decrease or stop domestic production and increase foreign
production. This kind of shift of production to overseas is most evident for
matured products. In addition even the production of newly developed andtechnologically sophisticated products are being shifted from domestic
factories to foreign factories, especially to Asian factories. Moreover, theproduction of some of newly developed products starts not at Japanese
factories but at overseas plants.
This kind of shift of production from Japan to Asia causes hollowing out ofJapanese production. We may classify the hollowing out of production into
three types as follows. (Yoshihara 2001a, p.117) The first type is the relative
decrease of production in Japan. Production in Japan increases, but
overseas production increases more than in Japan. This type of hollowing
out of production largely started after 1985. The second type of hollowing is
the absolute decrease of production in Japan. Japanese companies decreaseor stop production at their Japanese factories and shifted the production totheir foreign plants. This type of hollowing is not uncommon any more.
Examples are seen in the production of audio-visual products such as TV
and VCR.
The above two types of hollowing out of production is the decrease of
production in Japan in a quantitative sense. On the other hand, the third
type is related to the qualitative sense. Not only assembling or fabricating
final products, but also the production of parts, devices and materials is
shifted from Japanese factories to overseas plants. Production of
manufacturing equipment, molds, jigs and development of production
software are now being shifted to overseas factories. In short, coreproduction activities and capabilities are gradually being shifted fromJapanese parent companies to foreign subsidiaries. Will the Japaneseparent companies become empty at the center of the production activities?
The hollowing out of Japanese parent companies is not limited to
production. It is extending toward R&D activities. Although the scale is stillin small, even R&D activities have started to shift abroad. Nearly half (47%)
of the foreign manufacturing subsidiaries are engaged in some kind of R&D
activities. In Asia the subsidiaries which conduct R&D activities amount to16

37%. Even in China one third (32%) of the subsidiaries do R&D activities.
(Yoshihara, Methe and Iwata 1999)
The home ground of Japanese multinational enterprises is Japan. Theirmain business activities such as R&D, production, marketing andadministration are still done in Japan. And Japanese companies develop
their resources and capabilities based on these activities done in their homeground. The resources and capabilities developed at Japanese parent
companies are prime sources of their international competitiveness. As thehollowing out of Japanese home ground proceeds, Japanese companies willlose their core competitive capabilities.
Changes in nature of production in Japan also are weakening competitive
advantages of Japanese production system.
One of the strengths of Japanese production system is that it is good atincremental innovation. Many small improvements are made and practiced
at shop floors. And they lead to low production cost and low rate of rejected
products. But these days the incremental innovation is not so important as
before. First, the production situation has drastically changed. Products
change much more rapidly than before. In the case of personal computers,
one product model lasts only three to six months. The duration of production
is too short to realize the incremental innovation. Cost of production,
rejected rate of production in the factories and quality of products arebasically determined at the product development stages. There remains
little room for improvement on these points at the production stage.
Second, the incremental innovation is important at the final fabrication orassemble stages of production. Recently this stage of production is mostly
shifted to overseas factories. At Japanese factories production activities areconcentrated on parts, devices and materials. The incremental innovation
has little room in these production activities.

Resistance to Change
Japanese companies are plagued with resistance to change.
The so-called lifetime employment system is a major factor that resists
changes at Japanese companies. No Japanese company has ever publicly

17

declared the policy of lifetime employment. But many companies havepursued the goal of employment security alongside the goal of growth andprofitability. It is not uncommon that drastic reduction of employees isavoided even when that sort of action is necessary to realize recovery in
profitability and growth. It is more common that Japanese companies resort
to milder measure of gradual reduction of employees. They first reduce
temporary employees. And they reduce or stop new employment. They also
encourage early retirement. Thus, it takes time to reduce employees. Drasticchanges involving reduction of employees in a short period of time is rare at
Japanese companies.
Keiretsu is another factor that works against Japanese companies tochange. Keiretsu is a stable trade relationship between assemblingcompanies and their suppliers. It is most developed in the automobile
industry, but it exists widely in many industries in Japan. As it is a stabletrade relationship that is based on stable transaction over long period, thesystem cannot be easily changed. Both assembling companies and suppliers
develop specific tangible and non-tangible assets that are well fitted to thisspecial type of trade relationship. Suppliers are mostly small and medium
sized companies. Thus, big assembling companies hesitate to introducechanges in the trade relationship since they do not want to be blamed forbankruptcy of abandoned suppliers. Assembling companies may have toexperience real crisis to get rid of traditional keiretsu. Nissan Motor may be
a good case.

Management by Internally Promoted Old Men
At large Japanese companies new university graduates are hired every
year. They stay in the same companies for a long time. When they becomearound fifty years old, one or two of them are promoted to the post of
directors. And, they are promoted to the higher positions and one of them
becomes the president around the age of sixty. This pattern of promotion is
widely observed among Japanese companies.
Regarding the presidents of Japanese companies three characteristics arenoteworthy. The first is the internal promotion. It is a common practice thatpresidents are promoted internally from the existing board members. It is18rare that presidents are scouted from outside. The second characteristic isthat the existing presidents decide the next presidents. The third
characteristic is that presidents are rather old. Although there is no exact
data, we may assume that on average they become the presidents at the ageof around sixty at large Japanese companies. The presidents who areyounger than fifty years old are very rare in Japan.
Because of these three characteristics, the presidents of Japanesecompanies lack in strong power bases that are necessary to exercise
leadership.
First, the internal promotion restrains drastic changes in strategy andmanagement of companies. The internally promoted presidents areembedded in the existing organizations and are accustomed to the current
situations. They lack in novel ideas and outsider’s view about theircompanies.
Second, the presidents have difficulty in denying the strategy andmanagement of predecessors who appointed them the presidents. The newly
appointed presidents are under pressure to accept the existing practices.
What they can do is to make gradual and incremental changes. Radical
changes in a short period of time are almost impossible.
Third, the presidents of Japanese companies may be too old to work hard
and to exercise strong leadership.
Generally speaking, unless companies are in real crisis, it is difficult torealize drastic changes in strategy and management. Japanese companies
have been in troubles for more than ten years since the burst of the bubble
economy in 1990. Is the crisis serious enough so that Japanese companies
start to make drastic changes in their strategy and management?
Notes
1. Based on our conversation at the Annual Conference of the Association ofJapanese Business Studies (AJBS) in Seinajoki, Finland on June 11, 2001.
2. Based on my joint research with Ms. Taohua Ouyang. She is the AssistantProfessor of Management School, Zhongshan University in Guangzou,
China and is the graduate student of Business School, Kobe University in
Kobe, Japan.

19References
Khan, Sikander and Hideki Yoshihara (1944), Strategy and Performance ofForeign Companies in Japan, Quorum Books, Westport, Connecticut, USA
Kopp, Rochelle (1994a), The Rice-Paper Ceiling : Breaking ThroughJapanese Business Culture, Stone Bridge Press, USA
Kopp, Rochelle (1994b), “ International Human Resource Policies andPractices in Japanese, European, and United States Multinationals,”
Human Resource Management, Winter 1994, Vol.33 No.4
Miura, Yuji (2000), “Taisei Ikou ni okeru Kokuei Kigyo Kaikaku no Tokucho
to Kadai (Characteristics and Problems of Reform of State Enterprises inTransition Economies)”, RIM, Vol.4 No.51
Yachi, Hiroyasu (1999), Nihon Kigyo no Eigyo Kanri Taisei (Marketing
Organization of Japanese Companies), Working Paper Series, No. 142,
Faculty of Business Administration, Yokohama National University, April
1999
Yoshihara, Hideki (1975), Personnel Practices of Japanese Companies inThailand, Economic Cooperation Center for the Asian and Pacific Region,
Bangkok, Thailand
Yoshihara, Hideki, Kichiro Hayashi, and Kenichi Yasumuro (1988), Nihon
Kigyo no Gurobaru Keiei (Global Business of Japanese Companies), Toyo
Keizai Publishing Company, Tokyo
Yoshihara,
Hideki(1995),“Kokusaika
toNihonteki
Keiei(Internationalization and Japanese Management), Hidemasa Morikawa andSeiichiro Yonekura, eds., Kodo Seicho wo Koete (Beyond High Economic
Growth), Iwanami Publishing Company, Tokyo

20

Yoshihara, Hideki (1996), Mijuku na Kokusai Keiei (Immature International
Management), Hakuto Publishing Company, Tokyo
Yoshihara, Hideki, David Methe and Satoshi Iwata (1999), “ Kaigai
Kenkyukaihatsu no Shinten to Seika (Overseas R&D and its Performance),”
Kokumin Keizai Zassi, Vol.179, No.6, June 1999
Yoshihara, Hideki (2001a), Kokusai Keiei (International Business), newedition, Yuhikaku Publishing Company, Tokyo
Yoshihara, Hideki (2001b) “Global Operations Managed by Japanese and inJapanese”, Maureen Berry, Michael McDermott, and James H. Taggart, eds.,
Multinationals in a New Era, Palgrave Publishers, forthcoming.

21

Table 1

Japan’s GDP Share in Asia
[ US$ billions / (%)]

Japan

China

Far Eastern
three countries
ASEAN
five countries
Total

1980

1985

1990

1995

1999

1059

1343

2970

5137

4500

(63)

(66)

(71)

(70)

(66)

302

305

388

700

989

(18)

(15)

(9)

(10)

(14)

132

191

488

888

854

(8)

(9)

(12)

(12)

(12)

179

207

324

617

506

(11)

(10)

(8)

(8)

(7)

1672

2046

4170

7342

6849

(100)

(100)

(100)

(100)

(100)

Note
1. Far Eastern three countries are Korea, Taiwan and Hong Kong.
2. ASEAN five countries are Singapore, Malaysia, Thailand, Indonesia andPhilippines.
3. Sources: East Asian Economic Perspectives, Vol.12, Special Issue, February 2001,
the International Center for the Study of East Asian Development (ICSEAD).

22

Figure 1

Languages in International BusinessJapanese parent company
JapaneseJapanese and English (J and E)

J and EJ and EJ and EJ and EJ and E

EnglishGermanUSA

ThaiThailandGermany

Notes
1. white zone : operations sites (factories, sales branches, offices, R&D organizations)
2. gray zone : management3.
: international communication between Japanese parent companies
and foreign subsidiaries

23

Figure 2

Japanese Central Hub ModelNotes
1. center circle: Japanese parent companies
2. peripheral circles: foreign subsidiaries
3. lines with arrows: transfer of resources24