George Mastorakis Dissertation. MSc International Business. 30/9/2005 Title:US and Japanese capitalisms’ comparison revisited. Broadening the field Table of Contents Chapter 1. Institutions and institutional theorizing as the basis of comparative studies 1.1 The different schools of thought of economic institutionalism p.4 1.2 Sociological approaches to institutions in organizational theorizing p.5 1.3 The dichotomic road to the new theories of institutionalism. Can we define institutions? p.5 1.4 Institutionalism as the basis of comparative studies: The comparative capitalism movement. p.6 Chapter 2. A brief American and Japanese economic history 2.1. 1930-1960 p.7 2.1.1 The Japanese development trajectory till the thirties and the dominant organization forms p.7 2.1.2 US economic conditions after the Depression and the pre-war and post war Japanese economic reality. p.7 2.2. 1960-1970: The Decade of Managers. p.10 2.3 1970-1980 p.9 2.3.1 The end of Keynesian economics in the Western World p.9 2.3.2 The rise of the Post-Fordist era p.10 2.3.3 Japan’s unprecedented prosperity p.10 2.4 1980-2000 p.11 2.4.1 The US hi-tech revolution and the reinvention of the Shareholder Value p.11 2.4.2 The partial Japanese hi-tech catch-up, the financial crises of the nineties and the opening to “Anglosaxonization” p.11 2.5 The economic history as an impetus for comparative studies p.13 2.5.1 US and Japanese different “camps” p.13 2.5.2 Japan as an exemplar of the importance of informal institutions. p.13 Chapter 3: The US and Japanese Labour Market Comparison 3.1 Managerial and Collective Capitalisms p.14 3.2 The Managerial Capitalism’s disintegrated work structures: The US case p.14 3.3 The Collective Capitalism’s integrated work structure and its effects: The case of Japan p.15 3.4 The Japanese lifetime employment system as a constituent factor of a divergent capitalism. p.16 3.5 Work structures as determinants of income inequality and the role of labour unions. p.16 3.6 Labour market function and transaction costs. p.17 3.7 Organizational learning models and US-Japan work structures p.18 Chapter 4: Corporate Governance and Corporate Funding practices in US and Japan 4.1 National Corporate Governance Systems classification p.19 4.1.1 The US-Japan CGS’ prevailing concept of the firm, the board system and the stakeholders’ access to decision-making. p.19 4.1.2 The Stock Market Importance, the ownership structure and the external corporate control as parts of the US-Japanese CGS comparison. p.20

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4.1.3 Corporate Performance and Executive compensation in US and Japan. p.21 4.1.4 The time horizon of economic relationships in US and Japan CGS. p.22 4.2 US-Japanese Corporate Governance Systems’ responses to crises. p.22 4.3 Institutionalized CGSs and international/domestic production performance. p.23 Chapter 5: US and Japan’s National Innovation Systems 5.1 Innovation systems, institutions and their matching political economies: Radical and incremental innovation strategies. p.25 5.2 The recent Japanese technology creation practices and their source. p.26 5.3 The current US innovation system as a global model for technology creation. p.26 5.3.1 The challenges for the Japanese innovation system p.27 5.4 Universities as elements of National Innovation Systems. p.28 5.5 Innovation creation as part of state policies p.28 Chapter 6: Corporate Strategy in the US and Japan 6.1 Culture, Institutions and Corporate Strategy p.30 6.1.1 Hofstede’s national cultural elements categorization p.30 6.1.2 Japan and USA scores p.30 6.1.2.1 Masculinity Index Scores and their meaning p.30 6.1.2.2 Individualism Index Scores p.31 6.1.2.3 The Uncertainty Avoidance Index(UAI) scores of US and Japan. p.31 6.1.2.4 The Power Distance Index(PDI) scores of the two countries p.31 6.1.3 The Strategic implications of Hofstede’s cultural factors p.31 6.1.3.1 The Uncertainty Avoidance as a strategic behaviour regulator and the US-Japanese firms different strategic internationalization triggers p.32 6.1.3.2 Uncertainty avoidance as a determinant of MNEs’ strategies p.32 6.1.3.3 The Power Distance effect on entry mode MNE strategies p.33 6.2 Comparing US-Japan institutional characteristics in a strategic process, content and context perspective. p.34 6.3 The Japanese networks’ strategic implications p.35 6.4 US-Japan’s institutional environment effects on firms’ strategic choices. p.35 6.5 US and Japanese outward FDI direction as a result of MNE strategies. The importance of the source of FDI. p.36 6.5.1 The importance of the source of FDI. Japan and US outward FDI p.37 Chapter 7: International Relations paradigms and political economy 7.1 The Neorealist IR school of thought and the political position of USA and Japan p.38 7.1.1 Institutionally-based “State” business theories in parallelization with the Neorealists of IR. p.38 7.1.1.1 The Hegemonic State and the international trading structure p.38 7.1.1.2 The States’ role in economic development p.39 7.2 The IR Liberal Institutionalist school of thought conceived as a pro-globalization trend p.40 7.2.1 Liberal Institutionalists and their business theories counterparts. p.41 7.2.2 The Region State as a product of global structural changes. p.41 7.3 Convergence to a single model: The synthesis of IR and the fragments of Business Comparative Studies p.42

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Introduction In the present paper I will attempt a comparative study of the US and Japanese Socioeconomic reality as it is mirrored in the diverse players of their national economies and international activity. Through the collation of different recent theses about the US and Japanese subsystems of capitalism, this paper brings together two different spheres: sociocultural and economic life. The cohesive substances of the comparison are the dissimilar institutional structures affecting labour market relations, corporate governance systems, technology creation(national innovation systems), strategic choices and political relations. This paper does not serve new illuminating starting points for thinking as it is not reproducing paradigmatic or methodological battles. The purpose of this paper is the resurfacing and resurgence of US-Japan diversity on the above five grounds and the set off of profound institutional causation in the face of the pressing convergent forces of globalization performance models, that end up to simplistic Anglo-Saxon hegemonic panaceas. By equally allowing macro (states, public institutions), meso (industries) and micro(firms, individuals) factors to act as descriptive comparative parameters, this broader scope of analysis will not incorporate a dominant economic actor for each system but will rather shed light to the multiple lines that link institutions and the US-Japan economic interface.

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1. Institutions and institutional theorizing as the basis of comparative studies The renaissance of institutional theorizing(of the last 25 years) divided the institutional theorists into different strands of thought. All the authors referring to the institutions are interested in recognizing standard behaviour patterns. Some of them are interested only in recognizing the existence of such patterns and others care about the generative (norms, belief systems) or constraining forces (rules of the game, governing structures) of these customary behavioural systems. Latterly, some go beyond the phenomenal view of the forces or constraints, to see the shaping of institutions (formal or informal)1 in the broader sociocultural context. It is thus understandable that every institutionally-related school of thought produces a different definition of institutions (Nelson and Sampat,2001). 1.1 The different schools of thought of economic institutionalism Many strands of institutional theorizing have been identified: The “neoclassical institutionalists” who see that human action is a product of total consciousness and full informative understanding of the context they operate in. In this context, choices are following only people’s interests. This theoretical approach sees the institutions as phenomena and does not recognize any complex characteristics to their nature. Other schools reckon that the institutions have deeper characteristics constituted by cultural and social stimuli. Hence, “Rational Choice” institutionalism and “historical institutionalism” have been the first divide in political science(similar in vein to “formal”-“informal” institutions divide, that we call duality of institutions). Close to the “Rational Choice Institutions” is the Austrian School which identifies the duality of institutions. Most of the writers with later Coasian influences are enfolded into the notion of the institutional duality and understand institutions as the “rules of the game”2. Furthermore, writers on firm organization and governance accept the duality of institutions in explaining ownership patterns and the boundaries of the firm, as deriving from internal agency problems and corporate culture issues. They belong to the earlier camp of Coase(1937) and are mostly influenced by Williamson’s(1985) acceptance of the “governance structures”3 definition of institutions(as opposed to the “rules of the game” definition) (Rutherford,1994) (Nelson and Sampat,2001). The later attempt to formulate an institutional theory was made by the Neoinstitutionalist group and Powell and DiMaggio(1991), who find that institutions are rooted deep in society. Institutional influence to business activities is only one extension of their multiple effect. The Neoinstitutionalists believe that social behaviour and 1 Formal institutions are defined “as the regulatory structures, governmental agencies, laws, courts and professions”(Scott,1987,p.498). Formal constraints are the political (and judicial) rules, economic rules and contracts. Informal constraints(informal institutions) include the norms and value systems of a society: its culture and ideology. North(1981) argues that institutions provide a structure to economic exchange by defining the rules of the game as it were, and the sanctions, both legal and social that will be applied to those that break the rules”(Hill,1995,p.120). 2 The “rules of the game” perception of institutions sees institutions as the basic rules governing human interaction. Thus human interaction becomes predictable so that we can almost foresee reactions of the parties in a particular context, aspects of decision making, the level of coordination between individuals and how to proceed in order to achieve efficient transactions. Apart from the individual level in a more wide sphere when we are aware of the rules the game we know what actions match to the context we focus on in order to avoid costly broader organization of actions and permit the most productive ones(Nelson and Sampat,2001). 3 Institutions are defined as “Governing Structures” that operate influentially at the sub layers of the main actor, which is the firm. An example of a governing structure is the labour market and its institutions that define employer-employee relations, the remuneration system, work structures and possibly, labour productivity and firm structure issues. In the same categorization we can include the financial system and its institutions(Nelson and Sampat,2001).

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organization models are entering into the business world but the entry process is not a auspicious one. The economic organization must be “locked in” or legitimized by the social institutions, and thus imitate their characteristics to become isomorphic with them. Coercive, mimetic and normative processes constitute an institutionalized conformity. North(1981) adds that institutions can be placed into a kind of locational advantage logic. Societies can not control their institutions’ efficiency because of the strong effect of the informal institutions in their generation. A country’s history, norms and culture produce its institutional types, in an abstract and inevitable diachronic manner and not in a rational choice way. Once the institutions of a country are recognized as efficient, then their positive effects on the economic life would be multiplied and adopted by the country’s economic actors(Nelson and Sampat,2001). 1.2 Sociological approaches to institutions in organizational theorizing Scott(1987) reviews the four sociological approaches to institutions in organization studies: first, institutionalization as a process of instilling value. It is a process that is developed over time instilling historical and cultural values to institutionalized1 organizations (as distinctive from technical-mechanical organizations). Second, institutionalization as a process of creating reality. Reality is thus enfolded into social order schemes and unique historical creations of human activity. “Institutionalization occurs whenever there is a reciprocal typification of habitualised actions by types of actors”(p.495). In this context, individuals find it difficult to understand that this social order(social rules) is created by them -or their ancestors- but they follow them. Third, through institutional systems as a class of elements the attention is turned to the nature of the institutionalized belief systems(not to the process of the creation of institutions) that synthesize a number of elements which -in turn-formulate a number of institutional environments(instead of a single one) that constitute the prevailing organizational structure2. The emphasis then is placed among the multiple environmental factors(the state, trade unions, the law system) that construct different organizational behaviours. And finally, institutions as distinct societal spheres is the strand of institutional theory that cultivates the idea of stable and diachronic social institutions/social structures(the family, religion, work, politics) which contain different cognitive schemas or logics that form different antagonistic institutional poles in a society. Organizations should adopt one or more of the prevailing schemas of the social institutions that fit to their objectives, putting special emphasis on the institutional content(Scott,1987). 1.3 The dichotomic road to the new theories of institutionalism. Can we define institutions? The ultimate essence stands between the materialistic proposition of reality and the epiphenomenal level of institutional realm. Value-free realism and institutions coexist, with the latter giving a ceremonial value to economic life. When Menger(1963) was making the distinction between “organic” and “pragmatic” institutions, he underlined that: the pragmatic social institutions were products of conscious acts and legislative fiat, and the organic were self-sown out of any conscious plans or deliberate human intervention. The theory had many Darwinian naturalistic elements of evolution, something that today is 1 National communities instil their values within them and turn them into institutionalized organizations (Scott,1987). 2 As we have seen above in this paper, this is the basis of new institutionalism and the isomorphic perception of organizational environment, the view that societal symbols and belief systems are more rationalized(with coercive, normative and mimetic mechanisms)(Scott,1987)(Powell and DiMaggio,1991).

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widened to more systemic invincible interactions. The modern social institutional analysis do not involve rationality alone but also the logic of the agent’s psychologism and the compositional principles imposed from the social institutions as a set of constraints, or what Langlois(1989) calls system constraints. A number of linkages between institutions and culture are now recognized, dictated by tastes and habits, which sometimes contradict rational imperatives. Furthermore the new institutional logic is driven by methodological holism, which recognizes that the individual is not isolated but influenced by his sociopolitical and economic environment as a whole (Langlois,1989). “However, there is something of a problem when these different conceptions of institutions are lumped together. To call the smooth customary low transaction cost way customers and suppliers interact on a certain product market, the particular body of law and the organizational structures that support that interaction pattern, and the broad belief systems and political processes in the society that enabled those particular structures to develop all “institutions”, is a recipe that makes coherent analysis very difficult. (Nelson and Sampat,2001,p.39). In this paper we will use the term “institution” to refer to all the above plexus and web of analysis. We will also make use of institutions as a tool to synthesize the different comparative studies’ perceptions in the Japan-US comparison. 1.4 Institutionalism as the basis of comparative studies: The comparative capitalism movement. One of the academic disciplines that use the institutions as its basis, is the comparative capitalism movement1. The above institutional theories supported modernization, state power, neocorporatist and business systems comparative frameworks, which have emerged to examine the distinct national identity and socioecomomic structure of different countries. Naturally the focus was on the developed countries, where two different ‘divergent but similar’ strands are consequentially developed to feed a debate about two biosophies, philosophies and idiosyncratic features of capitalism: the Anglo Saxon capitalism and the German-Japanese Capitalism. Along with this perception of the evolution of the developed world comes a Heraclitian(a dilemmatic) question for the future: is one of these systems going to prevail? Or more informatively: is the Anglo-Saxon system going to prevail? If the quest for dominance of a single system is relevant, which would be the supporting forces? 1 Hall and Soskice(2001) categorize four sets of comparative capitalism analyses: The first is the modernization approach which sought to find actors with the strategic capacity to plan the appropriate modernized modes of production in this set of industries that lead to high rates of national growth. It is a post war school of thought that followed the logic that the institutional structures in the developed economies were pushing to national economy expansion with the public sector able to act as the compass in planning and controlling the financial flows in the economy. The second approach focused on the strength of the state(weak-strong states), with the state as the ultimate institutional structure) to compare capitalisms and draw economic models. The third approach is the neocorporatism, based on the state’s efficiency to bargain with the social actors(trade unions, associations and labour unions) on wages, work conditions and generally on the economic policy or social policy. The government structure and factors as centralization/decentralization of the trade unions were the key distinguishing factors between political economies, with the economies of Northern Europe to be the main neocorporatist economies. The focal idea of social systems of production, the fourth wave of comparative capitalism movement, was the dependency of organization of production on technological change. The central actor was the firm and its adjustment to new types of production at the time of the demise of mass production. Corporate Governance, innovation systems, market regulation flexible production modes were at the heart of the cross country distinctions evident on socially–sensitive(with emphasis on trust, cooperation and learning) collective institutions at the regional, sectoral and national level.

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2. A brief American and Japanese economic history 2.1. 1930-1960 2.1.1 The Japanese development trajectory till the thirties and the dominant organization forms The economic history of Japan is full of consecutive catch-ups based on systematized employee training and research. According to Dore et al.(1999,p.105-106), in the beginning of 20th century Japan was only able to borrow and to improve western technology. The state and the related private sector in order to achieve it, have given a dedicated priority to the quality of higher education and training. So, by that time Japan was able to catch up with Germany, Great Britain and the USA in critical metalworking sectors. In the meantime, Japan was catching up with Britain in textiles and textile machinery manufacturing of and by the 1930s it was becoming an Asian export power. In the era of gas and electricity, Japan was a flatware, ceramics, weaving and engineering parts’ export supplier based on small family businesses. Apart from the small family businesses, Japan is mostly known for the large historic zaibatsu1 companies. Large state enterprises of the late 19th century in steel, shipbuilding, mining, railways were bequeathed to the zaibatsus. The zaibatsus, protoplasm of today’s advanced networks, were the powerful conglomerates that acted as a binding tie for joined-stock companies in different industrial sectors. Operating in textiles, paper, engineering(mechanical, electrical and chemical) and governed and owned by certain families, they were states-in-a-state operating with pioneering corporate governance modes that crucially shaped the Japanese economic institutions (Dore et al,1999). 2.1.2 US economic conditions after the Depression and the pre-war and post war Japanese economic reality The 1930s is the New Deal period for the US. The years after the NYSE2 Crack were driven by unemployment, inflation and lack of productivity. US corporations responded to stagnation with more efficient-friendly schemes(more discretion to managers, more financial injections and planning collaboration from and with the state, more need for R&D3) in the direction of the economic revitalization of the country. In the post war era everything was different for the USA. With 40% of the World’s GDP in 1950, emphasis on business multinationalization(new opportunities in Europe) and high technology R&D support(Cold War period needs for advanced military technology), USA played a new global hegemonic role(Dore et al.,1999) (Chandler,1980) (Krasner,1976).

1 Mitsui, Yamada, Mitsubishi and Sumitomo Groups are the Zaibatsu companies(Dore et al.,1999) The six largest post-war Keiretsu groupings(considered to be zaibatsu successors) are Mitsubishi, Mitsui, Sumitomo, Fuyo, Dai-ichi Kangyo, and Sanwa.(Weimer and Pape,1999,p.160) 2 The New York Stock Exchange. 3 During the 1930s and 1940s it is noted that several systems were undergoing a “regulatory divide”(Forsyth and Notermans,1997), during which the US became considerably more market-based(to overcome the Depression) and Japan more bank-based(to promote industrialization plans). The US state, was moving toward financial regulation to restructure the financial system.

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Japan of the 30s was moving in the exact opposite way. The country’s autarkic regime put forward all its bureaucratic and military means for war mobilization at the side of the other two Axis powers. The difference was that the administration was more overtly socialistic than the Nazi or Mussolini’s regime. The state’s handling of affairs could justify extreme actions, like the assassinations of zaibatsu managers with the accusations that they were profit maximizers for their own or a minority’s interest and, thus, undermining the national interest(Dore et al.,1999,p.108). The average annual rate of Japanese GNP growth for 1903-1937 was 3,5%(MacPherson,1995,p.3). Japan’s economic reality was in the hands of business networks. Small firms supply networks and zaibatsu networks were fuelled with envisaging targets, set mostly by lifetime employed middle managers who were distant from any sense of shareholder value. Together with Industry Control Associations, legislation that formalized the state’s intervention to large business affairs and the appearance of large banks that could finance anti-shareholder value minds, it was a period that paved the path for future developments(Dore et al.,1999). The post war era and the American occupation brought important changes. Under American guidance the Japanese institutions were taking the supporting shape of an Anglo-Saxon type of capitalism. But there were only the formal institutions that were changing, not the informal. After 1949 the dissolution of the zaibatsu was a fact, only to give the baton to the keiretsu(the modernized form of the zaibatsu) and some middle-sized companies interlinked with cross-shareholding bonds1. Another crucial element of the time that shaped Japan’s future was that after the war and during the 50s the traditional centralized labour unions(covering a whole industry and bargaining for collective work contracts) were replaced by decentralized enterprise work councils(enterprise unions). This is believed to be a huge transformational step for the Japanese work structure that brought all types of employees together in stable, harmonic and reciprocal relationships. Lifetime employment, management practices and production systems like TQM2, Kaizen (Continuous improvement) and JIT3, wouldn’t have been plausible without the above transformations(MacPherson,1995)(Dore et al,1999). 2.2. 1960-1970: The Decade of Managers The 1960s was the decade of managers. Firms’ Owners, shareholders and other legitimate stakeholders were pushed out of the manager’s nest, which is the firm. Those were the days of Managerial Capitalism with the Americans to be its aspirators(Dore et al.,1999)(Chandler,1980)(Lazonick,1991). The manager’s routine and strategic decisions -the “visible hand”- were setting the rules of the game. Managers were also given a supreme role by the organization studies. John Child’s(1972) “strategic choice” theory is one of the most characteristics of the time, recognizing managers as powerful, autonomous “satisfizers” and adjusters of the organization structure above all other known factors that determine structure(environment, technology, size, strategy). In the United States the golden post-war years were ending and the setting was clearer for distinctions in the firm[much more separation and alienation between the blue collar workers and the Galbraith’s(1967) “ties”4] and at the macro level (the creation of a new stronger more bourgeois middle class, more vertical industrial differentiation as the technological improvements of the time were significant enough to create new market sectors)(Dore et al,1999)(Lazonick,1991). This created more tension in the employers-employees 1 The cross-shareholding system is one crucial element of the Japanese firms’ strategy and will be analyzed in detail in this paper. 2 Total Quality Management. 3 Just In Time Production System. 4 The managers

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relationship mostly deriving from the economically and socially marginalized blue collar workers. The sixties were also times of high tension in the bipolar spectrum of international relations(US-USSR). At this time the state had to play a central role in demand allocation in the economy(Keynesian economics) to prevent any unnecessary ups and downs that would have exposed the US establishment to the eyes of their Cold War antagonists(Dore et al,1999). Meanwhile the Japanese lived the dream of an unprecedented world record of continuous economic growth(10.7 per annum average for 1960-69) combined with very low rates of unemployment(1,3 per annum for the same period). Influenced by the worldwide wave of managerial capitalism’s heyday, more discretion fell into the hands of the Japanese managers. But the income distribution level remained equal and the labour relations were peaceful and calm (Dore et al.,1999). Furthermore, one could not disregard the prominent intervention of the Japanese state to business affairs. In 1955 LDP (the conservatives’ ruling political coalition) formulated the “Plan to Double National Income” that involved the achievement of high GDP growth aims via state-planned industrial restructuring, and called for public organizations’ overbalanced budgets and tax cuts to the general public (Pempel,1987,p.276). This plan made overt the forthcoming, long lasting involvement of the highest political institutions to the Japanese economic reality through administrative guidance and protection(the targeting of the domestic industry in need and its protection from foreign competition). At the same time, in the shadow of the Soviet and Chinese threats, US foreign policy embraced Japan as a strategic pro-capitalist promising ally in Asia(Pempel,1987). This latter fact opened widely the US markets to Japanese companies and made Japan the core Asian western observatory (Huntington,1993). US and Japan officials’ coordination in defense policy planning empowered the role of the state and the executive branch in the Japanese institutions. These conditions apply for the 1955-1970 period, a period that was called the “Japan Inc.” period(Pempel,1987). 2.3 1970-1980 2.3.1 The end of Keynesian economics in the Western World In the period of 1970-1980 came the end of the Keynesian economic policies. The raising inflation in Japan (25%) and in the US (11%) in 1974-75, was an indicator of a set of complex problems that the concurrent economic science axioms could not predict. The period is therefore considered as a transitional period from the Keynesian era to the Neoliberal policies of the beginning of the 80s. Undoubtedly, the priority of the 70s was how the inflation had to be fought. US President Nixon tried a wage and a price freeze in 1971 and 1973 that was shadowed from the oil crisis and brought no significant results. So the attention turned to monetary policy and the financial market. That is when the first steps of the deregulation movement were made. The rapid movement of the stock market needs high return rates, and has further needs for pension funds and riskier financial investments. The wind of the Deregulation Movement1 took the attention away from the cost inflation and labour relations, labour unions and production(Dore et al.,1999).

1 The deregulation movement of the late 70s has its roots to the Chicago economists(like Stigler) and it is directly connected to liberal economic theories(Vietor,1994)

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2.3.2 The rise of the Post-Fordist era Amin(1994) asserts that in the mid-seventies a milestone structural and organizational change between two industrial paradigms (from Fordism to post-Fordism) occurred. Technological, market, social and institutional powers led the structures of Fordism1 and the Keynesian economics to exhaustion. Historically, from the turn of the century to the late sixties, the first industrial divide was marked by the prevalence of the mass production industrial paradigm. During the seventies the stagnation of demand with the parallel increase in demand for non standardized goods, brought a crisis to the structures of mass production in the US and paved the way for the second industrial divide. The second era has made possible the open choice(also known as dualism) between mass production and flexible specialization, with the aid of new technologies, flexible work practices and batch production, that resulted in unprecedented large scale returns for the craft-industrial paradigm. While the transitional waves covered the western world reality, Japan stayed somewhat intact constituting a unique industrial paradigm. The Japanese model goes beyond the above dualism, by means of the flexible use of scale and scope economies along with the institutional advantages of mass production which coexisted with corporatist regulations(Amin,1994). 2.3.3 Japan’s unprecedented prosperity Japan of the 70s had evolved to a powerful and spurious international economy with a new massive middle class and many competitive advantages. ”Japan was no longer an economy the size of Sweden’s or Netherlands’ easily ignored in high politics of international trade and finance. Economic developments in Japan suddenly mattered in boardrooms and economic ministries throughout the world”(Pempel,1987,p.280). At the same time, President Nixon made an opening to China and changed political stance towards Japan. The first trade barriers(even the most extreme, such as boycotts) were raised between Japan and USA. The resource market2, Japan’s oxygen, was turning more expensive and less bounty. With the accretion of the international oil crisis Japan was facing serious impediments to its ongoing GNP growth policy. In 1974 the first negative percentage of Japanese GDP Growth rate is recorded, coupled with by a 25% inflation rate. To these inauspicious conditions, we must be add that the Japanese ruling party(the LDP) was facing esoteric and transitional problems, finding it hard to balance its downfallen appeal to the public(Pempel,1987). Inflation was nevertheless handled and decreased to single figures in a year!3

1 Fordism marks the post war era of intensive accumulation, of virtuous cycles of growth. It is the age of mass production, of rising productivity based on economies of scale(standardizaed goods), reliant on intensification of work and the monopolistic regulation of the economies. It was supported by a continuous increase of mass demand, increase of investments on mass production equipment and is also seen as a social and economic regulation mode or a pattern of social organization(seperationof ownership and control, the multidivisional decentralized organization, union recognition and collective bargaining) 2 Japan is a resource scarce country. From the late 19th century the Japanese colonial forces were occupying and exploiting neighbouring countries (Korea, Taiwan) for resource extraction purposes (Cumings,1984). After the WWII the Japanese multinational activity was firstly expanding to neighbouring countries with export oriented priorities deriving from the same need. This behaviour lasted till the mid-1970s. 3 The Japanese inflation rate was dramatically decreased in a year. with three simultaneous and orchestrated hits: A. From the labour market mechanisms and the annual pay bargaining system. Uncommon to the West, the consensual employer-employee process of bargaining was militant for a year and achieved simultaneous hits to the inflation rate. In front of a critical problem of inflation, the firms’ work councils got in a series of discussions in communication with a series of other firms to reach a national security serving rate of wages.

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We can see that the “Japanese way” sought for solutions to the supply side of production, while the US embraced the stock market and other monetary policy issues to serve its economy. Thus the 70s for the US was a decade of gradual reinvention of the shareholder value and a full US attachment to it was about to come at the beginning of the 80s. 2.4 1980-2000 2.4.1 The US hi-tech revolution and the reinvention of the Shareholder Value The 80s and the 90s were the paradigm shift period for the international economies, having its core in the Anglo-Saxon world. It started with a full scale regulation adjustment to the supply side, leaving labour unions and managers outside of the plan. The gates were opened to greater labour mobility, more privatizations, stock-market and financial institutions’ liberalization. At this time, it was as if the Reagan and Thatcher administrations were synchronized to use regulations-for-deregulation to support the upraising stockholder value ideology. This upheaval of the stockholder value was also adopted by the managers, who had little resistance in cost-cutting strategies in exchange for higher dividends, share buy-backs and stock options that could provide them with higher but potentially temporary income(Porter,1992) (Dore et al.,1999). The whole picture of the US economy was stock-wise with its actors acting as content satellites to a widening income inequality gap. But this turbulent environment created the ground for the advancement of personal computers’ industry and the Silicon Valley phenomenon. With Route 128 and Silicon valley of the eighties and intra-Silicon Valley firms of the nineties in extreme competition, the microcomputers industry became a symbol of the American creativity and economic activity(Saxenian,1994). High tech industry became the edge of the American economy during the 80s and the 90s. As the historical inevitable has showed us till now, it would not be long till the Japanese latecomers would catch up(Dore et al,1999). 2.4.2 The partial Japanese hi-tech catch-up, the financial crises of the nineties and the opening to “Anglosaxonization” The Japanese response to the US pioneering advancement of high technology was so quick that eclipsed even the Europeans (especially the Germans and the British). The Japanese were able to capture the semiconductor industry, and at the same time were progressing to grab larger market shares in many other hi-tech sectors(Dore et al,1999). In parallel, they got a number of subcontracting deals with Silicon Valley, a situation that is said to emanate from the SV1 horizontal and vertical fragmentation (Florida and Kenney,1990). Japan was touted in the US as a paradigmatic model of growth, in both the business world (especially in corporate governance practices) and the academia. Japan was a general model of Economic Nationalization, an economy with powerful centripedal forces serving the national economic interest and acting as the alternative of westernization(Hall,2004).

B. From a parallel 24% miraculous increase of real GDP, which would not have been possible without the simultaneous productivity rate increase and the consequential increase of exports, C. From the government expenditures that were supported to 25%-35% by bond issues which resulted in sustaining the demand by deficit spending.(Dore et al.,1999) . 1 Silicon Valley.

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Nevertheless, The adherence of the Japanese to an “alligator” model that adjusts to any given condition and does not totally change or revitalize itself, was believed that it would not have lasted till the beginning of the last decade of the 20th century. The organizational learning models, the close cooperation long-lasting bonds inside(company’s structure) and outside the firm(stakeholders), the shun stance towards profit maximization in favor of larger market shares and capital productivity, were superannuated in the Magnus competition of globalization-high technology era (Dore et.al.,1999) (Hall,2004). Okumura(2004) emphatically notes that by the middle of the 80s the Japanese traditional system corporate governance has closed its circle, because of the capital accumulation macroeconomic accomplishment(and the creation of surplus capital). A consequence of that was the gradual exodus of banks from the traditional corporate governance system, that created a systemic transformation and a “corporate governance vacuum” that led to crisis(Okumura,2004,p.4). The wound for Japanese economy is its financial side which has suffered from subsequent hits since 1989 that lasted over the 90s and generated a new epithet for the Japanese economy: “the bubble economy”(Cargill et al.,1996). It is believed that the “bubbles” had their roots to the first Japanese efforts for Deregulation in the financial sector during the 80s, when the direct loans from Japanese banks to firms were substituted by bonds in a Ginko Banare1 fashion. This created a funding vacuum for small companies and a bank crisis such as the Non Performing Loans Crisis, both leading to stagnation and to the unmasking of past bubbles(Jackson and Moerke,2005). The Post-Bubble stagnation and economic vulnerability hurt the Japanese pride -that was historically and effortly constructed- and have created national identity syndromes. Some analysts isolate the implosive effects of the financial sector and focus on the “real economy” and some others don’t. The important thing was that the concerns of the Japanese public, the politicians, the public organizations(especially the MITI2) and the business world were directed to modernization. Their fingers were pointing to gradual reformation solutions starting from the roots of “Japan Inc.”: the labour market. The Japanese Modernizers were promoting reforms in the direction of: dynamic competition, more opportunities, more explicit contracts, the turn of attention from producers to consumers and a full-functioning liberal stock market. The product of their influence was only the creation of a number of liberalized laws(Modernization laws) that were created to propel the Japanese stock market by allowing: holding companies, share buy-backs, the unwinding of cross shareholding and stock options(Dore et.al,1999,p.116)(Dore 2000a)(Dore 2000b) (Hall,2004).The aftermath of the modernization wave in Japan is restricted to some circumstantial and increased macroeconomic rates: 18,3% foreign investors ownership of TSE3 shares compared to a 4% in 1990, more inward FDI4 rates with the uncommon foreign acquisitions of companies like Nissan, Mitsubishi and banks like the whilom nationalized Japan Credit Bank(now under the name Shinsei Bank) (Jackson and Moerke,2005). But the modernization laws’ de facto effectiveness was of no substantial importance given the fact 1 Ginko Banare: literally means literally “increasing distance to the banks” or even “leaving the banks”. A tendency of the time(the eighties) that wanted the companies to keep their distance from interlocking with banks(Jackson and Moerke,2005,p.359).. 2 The Ministry of International Trade and Industry is head ministry in the Japanese political map with renowned administrative guidance and planning capacities and influence to the business world. It has been said that it has been symbolic of the state intervention and aid to individual firms and industries. The Ministry is said to have designed during the 70s-80s a maturational pioneering industrial policy that promoted the technological sophistication of Japanese industry and contributed to the formation of new competitive advantages. But from the late 70s as yet the business world has moved forward without the MITI’s central plans as manifested by the keidanren’s opposing stance to the agency and the several independent from the MITI leading industries(Pempel,1987)(Gilpin,1996). 3 Tokyo Stock Exchange. 4 Foreign Direct Investment.

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that no Japanese political party has strongly supported the liberalization-modernization program (Vogel,1999). A first explanation for this could well include the socially embedded ties of the Japanese economic institutions. The Japanese needed the reforms but they had wanted them to be based on a Japanese-like liberalization(not Anglo Saxon), so they faced obvious difficulties in finding where, when and how to implement them(Hall,2004,p.94). 2.5 The economic history as an impetus for comparative studies 2.5.1 US and Japanese different “camps” We believe that the economic history of the two countries, justifies Hall and Soskice’s(2001) framework and other similar comparative analyses. Hall and Soskice(2001) were based on the institutional characteristics to recognize two main types of political economies: The Liberal Market Economies(LMEs) and the Coordinated Market Economies(CMEs). USA as an LME and Japan as a CME are the two sides of a continuum. In LMEs, firms in the form of hierarchies coordinate in competitive market arrangements(mostly with formal contracts and with supply-demand or price sensitive criteria). In CMEs, firms are taking more complex forms(such as networks) and their coordination can not exclude non-market trustful and cooperative relationships between multiple actors, in order to increase their competence or market share(not just profit maximization). The latter, overtly presents a strategic interaction mode with the institutions playing an important role in the exchange of information between the actors, their monitoring behaviour and sanctioning practices. Thus in the two types of capitalism recognized, the authors bring the firm to the center of the analysis as the most important actor of an economy(micro perspective), and by inductively examining the coordination of the firm with the other economic actors they reach to patterned conclusions at the macro level concerning: the industrial relations, corporate governance, inter-firm relations and firms-employers coordination (Hall and Soskice,2001). 2.5.2 Japan as an exemplar of the importance of informal institutions As defined above, the formal institutions set the rules of the game of firms’ coordination and constitute the basic layer on which the equilibrium of cooperation and coordination is set. As such, the general distinction of capitalism to CMEs and LMEs must allow for deeper distinctions that include systems of common expectations for effective cooperation, common knowledge that drives different actors to certain choices, and shared understandings about cooperation, interaction, effectiveness and competition. In a more compact way, those phenomena derive from history and culture and affect not only the firms as separate actors of the economy but also the intra-firm subcategories of actors and the inter-firm conditions such as groups of firms joined for strategic purpose or the public institutions functionality, tolerance and formality(Hall and Soskice,2001). Especially in the case of Japan, an analysis of the country’s formal institutions would not lead to significant differences with a respective US analysis because the state, the laws, the judicial system have more similarities than differences. Nevertheless, the “Japanese way”, from the single organization to the economic society not only functions as a CME but differs fundamentally from other CMEs(like Germany). And the difference can be spotted in the general sense that the Japanese “disregard” the formal institutions while at the same time are embracing them to legitimize themselves in the face of the Westerners(Hall and Soskice,2001). Their compass is their cultural values: their Confucian past, cooperative harmonic ethos, attachment to stability and risk avoidance and their pride. If we can

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change one Japanese, we can change them all perception may be simplistic (Pempel,1987) but it is based on their “holy unity” that has a nationalistic and collective flavour. The epigram should be that the Japanese are “culturally-bound” and an example that justifies the view that no institutional analysis is valid without the inclusion of the informal constraints/institutions. 3. The US and Japanese Labour Market Comparison 3.1 Managerial and Collective Capitalisms Lazonick(1991) like Hall and Soskice(2001) adopted a micro-to-macro inductive level of analysis, by looking at the firm as the dominant actor in economic activities and the genitor of systemic national patterns of organization. The author(Lazonick,1991) has made the distinction between three types of capitalism : Proprietary , Managerial and Collective capitalism1. These types of business organizations have been the dominant types of capitalism in distinct historical periods. They emerged and evolved over time at the above sequence(proprietary to managerial and finally to collective). In the last half of the 19th century, the emergence and dominance of Proprietary Capitalism was succeeded by the Managerial Capitalism in the first decades of the 20th century. In the past three decades the dominant form of capitalism has been the collective capitalism. The three capitalisms have been powerfully institutionalized and therefore created legacies that still characterize their originating nations’ institutions (Lazonick,1991). From this analysis we focus on the US and Japan’s systems (managerial and collective capitalism). 3.2 The Managerial Capitalism’s disintegrated work structures: The US case The US domination in the era of Managerial Capitalism2, was based on the deliberate focalization of the work organization off the shop floor(blue collar workers, operatives, craftsmen), that came as a result of the invention of skill-displacing technologies and the parallel weakening of craft-unionship. This system brought in line more capital-intensive 1 According to the author(Lazonick,1991) each type of capitalism was representative of a dominant system linked with particular countries: Great Britain is attached to proprietary capitalism, United States to managerial capitalism and Japan for collective capitalism. 2 The Managerial Capitalism was based on the creation of managerial structures that could plan and coordinate the firm’s strategy towards more productive schemes of composite and divisionalised labour, overcoming the older British industrial organization forms of high ownership control and horizontally fragmented work structures. Managers’ “visible hands”2 were at the spotlight as integral parts of a business organization and -by extension- of the national economy; with great authority deriving from the multiple and inactive shareholders, managers were let to drive their companies to consecutive output records at the peak of mass production era. The education system supported this effort, with the constant creation of new managers and technical personnel to cater the business world needs. The dominant organizational structure of the time was the multidivisional structure(1920s,1930s); a structure with several divisions(operational, research and development, strategic) serving distinct parts of the product chain and guided by equal in number middle managers with delegated authority exercised with formalization controls over the line personnel. The multidivisional organization was designed to provide innovational capabilities to companies that constantly move into new product lines and markets. The strategic and operational decision making were separated and thus animated by the philosophy of the deep division of responsibilities. The organization’s goals though had to be transferred and accepted to the lower layers of the organization, so that the top, middle and lower layers constitute an the integrated corpse. On the job training programs(in-job rotation) were actually transforming employers(even specialized middle managers) into carriers of general skills(Lazonick,1991)

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industries of production and pushed aside the workers with specialized skills(Piore and Sabel,1983) (Lazonick,1991)(Amin,1994). The focus of attention was then put on the efforts of workers and the quality of work effort; not their technical expertise. An organization’s work structure is divided to three layers of employees: the senior management(generalists) , the middle managers (specialists) and the operatives(blue collar workers and unspecialized workforce). The Operatives in US corporations seemed to be in an alienating position because they were kept in distance from the management’s “visible hands”1. Moreover without the support of strong and decentralized labour unions and with great labour mobility, the operatives experienced high levels of job insecurity. Job security was better to large wealthy and expanding US corporations which could indirectly guarantee more rewards and stable employment policies. In general the US Managerial capitalism was not putting emphasis on the HRM practices(Lazonick,1991). 3.3 The Collective Capitalism’s integrated work structure and its effects: The case of Japan In contrast, Japan’s Collective Capitalism main characteristics are the organizational integration in industrial relations and -at the micro level- the integration in the organization. In terms of industrial relations, as we will see below, we have vertically integrated corporations with uncommon informal linkages. But at this sector, we are looking at the inside of the organization. Blue collar workers/operatives in Japan are part of the intra-firm organizational integration (Lazonick,1991). The Managers (middle or senior, specialists or generalists) participate in effective task performance in collaboration with the workforce, which is not distant and unknown to them. “They both share the sense of being in the same boat” (Song,1990,p.197). There is a mutual sense of obligation between the ‘oyabun’(boss) and the ‘kobun’(subordinate) in the name of their common obligations to the organization(Song,1990). Decision making in the organization, whether it is a keiretsu or a private large or small enterprise, is build up on the notion of consensus decision making, or the ringi system. This system is based on a top down and down up flow of information. In that vein, the ringi provides the top management with a plethora of vital and truthful information from the different departments of the organization and spreads responsibility and authority to lower hierarchical positions. In addition to this, it helps the executives of the company to have a clear view of their company’s flows and capabilities. This type of organizational integration supports vigilant planning schemes in strategic decision making, and helps the executives to foresee possible future impediments before the implementation of the strategic plans(Lazonick,1991)(Whitley,1992). Group morale is important for the organizational effectiveness, managers also contribute to it, in the everyday operational activities(Kosai,1997). In general, Japanese firms’ workforce constitutes a closed, intra-firm circle with great power. Trust and dependence ties between employees are internationally uncommonly high. This has a reflection on the recruitment procedure that is more selective in Japan for all the employment ranks (Whitley,1992) (Kosai,1997). Seniority is a criterion for rewards and the promotion system is standardized, offering a better mix of non-monetary rewards (titles, citations, honorary treatment) (Song,1990,pp.196-200).We will see below that the Japanese, due to their uncertainty avoidant nature, follow cautious and preventive steps in order to implement strategic plans. The Japanese work structures feature the minimum possible amount of segmentation inside the organization(high level of organizational integration) with a harmonic web of relationships between the operatives of the shopfloor, the specialists and the senior managers. On the contrary in the US, generalists and specialists are not accepting that the 1 Chandler’s(1980) popular expression the “Visible Hand” describes the wave of managerial capitalism in the US. He was paraphrasing Adam Smith’s expression “the invisible hand”, which described the supply and demand natural equilibrium mechanisms of the economy. For further analysis see Chandler(1980)

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operatives are members of the organization; this is a perception that has its roots to the historic fordist struggle to diminish the role of the blue collar workers and pass them over the successful managerial organization. The US internal organizational segmentation is clear and sound, and the only thing that glues the employees together is the bureaucratic centralization of authority and the formalized lines of communication(Lazonick,1991). 3.4 The Japanese lifetime employment system as a constituent factor of a divergent capitalism. The most characteristic institution, and possibly the basis of the whole unique “Japanese way” of economic interaction, is the lifetime employment system. It was created at the beginning of the 20th century to attract white collar workers from public institutions to private enterprises, and was further expanded to secure key shop-floor blue collar workers’(oyakata) positions in one company. By the 1950s when the company-based labour unions became strong and cooperative with their firms’ the system was extended to include all blue-collar workers, and thus it was institutionalized. Today the employees under lifetime employment are the 30% of the total workforce1. The lifetime employment reality of Japan acts both as incentive for quality management provisions and as a constant employee training incentive. Building to these foundations the Japanese were able to advance leading production systems like Just In Time(JIT) inventory control, Statistical Quality Control and flexible manufacturing(Lazonick, 1991)(Gilson and Roe,1999) (Hashimoto,1979). 3.5 Work structures as determinants of income inequality and the role of labour unions. An attempt to examine work structures as genitors of income distribution inequalities from the deep foundations of the social institutions, was made by Kalleberg and Lincoln(1988). In this context, the authors find the US and Japanese labour market to be the basis of a more general systemic contradiction. The US labour market makes “job characteristics” and the “hierarchical position” central criteria for the remuneration system. It is evidently a free market system based on the individual’s choice over labour demand opportunities, with the unions having a flagging role in setting the rules of the game(Kalleberg and Lincoln,1988)(Dore,2000). In the USA the fact that firms are not obligated to set up labour representative councils and the individualistic employer stance, result in industry-centralized and incohesive trade unions that can only be powerful(and some are) out of coincidence. It is true that the wage level is determined by the same economic mechanism as the inflation, that is the macroeconomic policy and market competition and not the employer-employee negotiations(Hall and Soskice,2001). On the other hand, the Japanese labour market operates in an “exotic” fashion(Kalleberg and Lincoln,1988,p.121).The elements of lifetime employment, seniority promotion2 and the proverbial welfare provisions are supported by strong, decentralized labour unions(one for each company). In Japan the above terms are exceeding the western respective definitions. They are flavoured with the harmonic nature

1 Although this figure is misleading because it includes women(in general they are not enjoying the merits of the lifetime employment!), or male industrial workers of smaller corporations(subcontractors of the Kaishas or Keiretsus, or retailers, agricultural sector) who are not de facto included to permanent employment rates but they enjoy analogous employment security often protected by the government(Dore 2000b)(Lazonick,1991). 2 The “nenko system” is the system that operates mostly in large manufacturing firms offering promotions according to seniority, age and other social criteria(Kalleberg and Lincoln,1988).

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of the Confucian values, a reality that allows the Unions to cooperate with the company’s managers and at the same time fulfill their members’ expectations. The overall effect of the above factors leads to less earnings inequalities in Japan than in the USA. 3.6 Labour market function and transaction costs. According to Charles Hill(1995) the Japanese institutional structure has strong effects on Japanese firms’ performance, by reducing the transaction costs of achieving cooperation and specialization. Nowadays, cooperation and investment in specialization are unavoidable practices to achieve flexible production. The advanced production practices, though, increase the transaction costs. Japan’s institutional structure poses informal constraints to actors that raise transaction costs1(Hill,1995). The pressure from the Japanese norms and values has catalytically minimized transaction costs in critical exchanges by building a hostile mechanism to atomism and harsh speculation(Hill,1995) (Murtha and Lenway,1999)(Whitley,1992). The roots of the transaction cost minimizing institutions can be traced back in 1603, to the Tokugawa Sogunate Value System(Hill,1995). The Japanese ethical code favours cooperation and specialization. In specific, cooperation is promoted with group oriented mechanisms based on self-control2 and peer group control3 that naturally result to informal cooperation as well as to flexible decentralized organizations. Specialization in industrial relations (through cross-shareholding long term subcontracting relationships with smaller specialized firms) and in intra-firm relations are also parts of the Japanese institutional environment (Hill,1995). As we have seen above, the Japanese firms prioritize their employees’ training in a context-specific manner that leads to their further specialization(firm specific skills and apprenticeship)(Hall and Soskice,2001). The in-house trained reasonable personnel usually finds in its best interest to stay in the firm4(Hill,1995). It is understandable that the Japanese informal institutional constraints address admirable levels of “cheap” cooperation and specialization in production. The Increased low-cost productivity of the Japanese firms constitutes an international competitive advantage. On the other hand employee-training in the US is of high risk because of the high level of mobility of labour5. That is why US firms are based on general skills or formal education provided by external

1 Transaction costs are increased due to the bounded rationality and the opportunistic behaviour of the multiple agents involved in contractual relationships with the firm. Opportunistic behaviour in exchanges is considered as an unacceptable behaviour and, therefore, it is minimized by a set of informal constraints. Shirking in cooperation between the different actors and hold-up of the provider of specialized resources are the two main reasons for the existence of costs in related transactions(Williamson,1979) 2 In the firm the individuals belong to work groups that seek recognition for their group, which is ranked by others in the organization. At the macro level the employees of a firm strive to gain a certain status by the ranking of the firm in the Japanese economic society. Self control is tied to the individual status which is deriving from his group’s(within the firm) status and the firm’s status to society. As a result of this, the individual is working hard with non monetary incentives and is loyal to his superiors not as individuals but as representatives of higher positions in the hierarchy of his organization. (Hill,1995). 3 Peer group control is deriving from the collective responsibility of the members of the different groups towards their group members and towards the firm as a whole An individual is a member of a group within the firm. In order for his group(subunit of a firm) to gain a respectable status he has to control the other members of his group. The higher positioned groups in the firm have to monitor the subordinate groups for the same reason(Hill,1995). 4 The Japanese promotion is based on seniority. Furthermore there are great bonuses for skilled workers that achieve high levels of productivity in the firm(Whitley,1992)(Kosai,1997)(Hill,1995) 5 This means that a costly program of employee training can be fruitless as the employee leaves the firm easily by using his bargaining position in a fluid labor market(Hill,1995)(Whitley,1992).

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institutions(secondary education and university education) and not on apprenticeship(Hall and Soskice,2001)(Hill,1995)(Lorenz,1999). 3.7 Organizational learning models and US-Japan work structures Unlike the US firms, the relationships between managers and employees in Japan are well described by certain organizational learning models(Sullivan and Nonaka,1986), especially these developed by Argyris(1965) and Argyris and Schon(1978). Each employee regardless of his hierarchical position is an individual with personal values and distinctive behaviour. Employees in long US-like vertical hierarchical structures are victimized by the high centralization1 and formalization2 found in such structures. Furthermore there is a clear antagonistic relationship between US managers and employees, with the managers trying to empower their authority position by developing defensive routines against their employees and opposing to any signs of organizational change. Therefore the managers can not foresee any organizational change pressures and -in any case- do not encourage organizational change(the bias towards stability, or Porter’s(1992) “myopic view” for US managers). Argyris and Schon(1978) believe that managers have to live through the suppressing values and defensive routines(such as excluding lower hierarchy members from the rules design, maximizing their own earnings, being rational and objective in decision making). All the employees are distinctive personalities that can take initiatives, see the organization holistically, think beyond the present and perfectly cooperate(contrary to the competitive stance of managers) with others. This organizational learning model fits to the Japanese institutions and it is more plausible nowadays as it is more open to the dynamics of change and more democratic than the multidivisional US firm structure. 1 Centralization is the degree to which decision making is concentrated in one point in the organization. It is one of the four key constituent factors of organization structure.(Robbins and Barnwell,2002,p.105) 2 Formalization is the degree that organizational operation is formalized through laws, procedures and policies. Higher formalization leads to lower discretion. Formalization is is one of the four key constituent factors of organization structure (Robbins and Barnwell,2002)

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4. Corporate Governance and Corporate Funding Practices in US and Japan 4.1 National Corporate Governance Systems’ classification During the 90s we spot a considerable increase of attention on national corporate governance systems not only in theoretical terms, but with the assessments and recommendations of independent committees1. Those in-depth reports have firmly “legitimized” the corporate governance systems’(CGS) country-specific character. As it is noticeable, the reports overcome the firm-specific logic of corporate governance and thus provide a useful ground for the comparative studies. As far as the rich industrialized countries are concerned, there are four groups of countries, with 4 distinctive CGSs: the Anglo-Saxon countries2, the Germanic countries3, the Latin Countries4 and Japan(Weimer and Pape,1999,p.153). The authors(Weimer and Pape,1999) taxonomize the characteristics of National CGSs into eight categories based on the essence of the previous theoretical attempts in the related literature : a. The prevailing concept of the firm; b. The board system; c. The salient stakeholders able to exert influence on managerial decision-making; d. The importance of stock markets in the national economy; e. The presence or absence of an external market for corporate control; f. The ownership structure; g. The extent to which executive compensation is dependent on corporate performance; h. The time horizon of economic relationships. (Weimer and Pape,1999,p.153). 4.1.1 The US-Japan CGS’ prevailing concept of the firm, the board system and the stakeholders’ access to decision-making. There is one basic distinction between the different CGSs: Market-oriented and Network-oriented CGS. The Anglo-Saxon countries have a market-oriented CGS with the seven characteristics of the CGS to institutionalise the shareholders’ active influence on decision making and the existence of external systems of corporate control. On the other hand, the network-based CGS of Japan is placing the firm in a stable system of horizontal and vertical cross-shareholding ties, with a number of similar in structure firms that operate in mutuality(Weimer and Pape,1999). In the Anglo-Saxon CGS the individual shareholders’ influence is highly institutionalized both formally5 (in the legal system) and informally(values and norms)6. The board of directors in US corporations is one legal entity, although it is constituted by two member corpses: The executive and the non-executive members. The executive 1 The council of Competitiveness Report in the United states in 1992, the Cadbury Report in the UK in 1993, the Vienot Report in France in 1996 and the Peters Report for the Netherlands in 1998(Weimer and Pape,1999). 2 USA, the UK, Canada and Australia. 3 Germany, the Netherlands, Switzerland, Sweden and Austria. 4 France, Italy, Spain and Belgium. 5 The Securities Exchange Act (1934), the Securities Investor Protection Act (1970), the Insider Trading Sanctions Act (1984) and the Private Securities Litigation Act (1995)(Weimer and Pape,1999). 6 See above the theoretical distinction between Formal and informal Constraints in the Institutional Theory.

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members are the insiders. The outside members are considered to be the representatives of the shareholders’ interests and bearers of linkages with the firm’s outside environment(Weimer and Pape,1999)(Dore,2000a). Compared to the US, the board system of the Japanese CGS is rather different. It is formally comprised of a board of directors, a board of representative directors and a board of auditors. It has been reported though, that the Japanese firms tend to informally overcome the inflexibility of their de jure triangular-board scheme towards one centralised US-type board. Each firm has a labour union that participates in annual wage bargaining rounds and -in projection- each individual employee has(or feels so)the power to influence his/her superordinate at the firm structure. As for the shareholders in Japan they do not resemble to the US shareholders because of the de facto superseding Japanese attitude that pushes shareholders to long term commitments and the use of shares as a key to enter in a business relationship or a network. The shares are available, although the Japanese stance towards shareholder value is proverbially distant. Shareholders and employees in combination with the managers influence the decision making process in the Japanese CGS. But there is one more Japanese decision making factor: the banks. Banks are important parts of the Japanese industrial system1. They are presupposed to have a bonding, a supportive and policing role in the Japanese economic institutional reality. The large banks are usually members of keiretsus, hold the records of inward-outward network exchanges, lend money to members and participate in corporate boards(as they usually hold 4% equity of the borrowers)(Weimer and Pape,1999) (Okumura,2004) (Jackson and Moerke,2005). 4.1.2 The Stock Market Importance, the ownership structure and the external corporate control as parts of the US-Japanese CGS comparison. How can we measure the stock market importance for a particular national CGS? We can use two particular indicators that are already in use insofar as firms evaluators by the Federation of International Stock Markets: a) the market capitalization (market value) as a percentage of the GDP, that is an indicator for the stock market’s importance to the national economy and

1 Banks were the basic players of Japan’s first systematic efforts to catch up to the more developed countries for the first hundred years after the Meiji Restoration. The Japanese economic growth could be characterised bank-led, as the banks were holding equity shares of firms to accumulate capital for national economic interest purposes. At the time, the center of development was the Japanese Ministry of Finance which orchestrated and administered this well-thought bank-led growth plan with long-lasting effects(it begun to outdate 30 to 40 years after the WWII)(Okumura,2004). Japan is a case of relational banking and also a pathological case of a latter financial bubble crisis. Banks’ involvement in industrial firms’ affairs has been as close as the afore mentioned strong, networked interfirm bonds. As players of the network, banks improved long-term and vertical and horizontal relationships with firms by offering credit, holding equity shares , offering financial advice and services, rescuing endangered firms and taking part on the decision making process. But after the deregulation-liberalization movement the large firms entered a ginko banare independent path strategy, financed with bonds and by their overvalued shares. On the other hand, the smaller firms were still in need for bank credit. This situation implies a bank customer essential change, which is more insecure as the fear that smaller firms would have been incompetent to cover their debts became truth. The bank customers and the legal environment had changed, but the bankers were finding difficulties in adjusting to the transition as they were still trying to get the big industrial firms to their side. At the same time, the kaishas’ finance fountain the overvalued stocks, was about to dehydrate leading the country to a series of crises during the 90s. Despite the alarming conditions for the economy(the bank of Japan was at a zero interest rate policy), the banks responded by cutting on the bad loans number( and thus reducing lending) and by selling their industrial firms’ equity holdings; a reaction that led the country to an even deeper crisis(Jackson and Moerke,2005).

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b) the new equity capital raised as a percentage of Gross Fixed Capital Formation(GFCF), as an indicator of national companies’ use of stock markets to raise new capital(Weimer and Pape,1999). According to the first indicator Japan and USA are approximately at the same level (78% for the US and 83,5% for Japan), but there is a significant differentiation on the second indicator(9,4% for the US companies and 0,5% for Japanese). It is a clear conclusion that the Japanese are distant to the stock market functions and opportunities to raise capital, although the stock market mirrors their companies’ value. In the US the stock market is both a performance mirror and a tool for the companies, which stay equally active in this market as they are to others(product market etc). So, it is understandable that the external corporate control in the US is well presided at the stock market. Mergers, tender offers, proxy fights and leveraged buyouts are the most familiar takeover techniques that pose a very liquid and continuous disciplinary control to the managerial team of the US firms. 41,1% of the US total market capitalization is moving annually through takeovers(1985-1989 period), while in Japan the percentage is 3,1%. A markedly feature of the takeover fashion are the hostile takeovers(when the management team of the firm rationally opposes to the takeover possibility). Eventhough this type of takeovers is considered to be an unethical and expensive practice in the Anglo-Saxon world it occurs at a 17,8%(percentage of the takeovers attempted in the period 1985-1989) while in Japan it has not been even recorded(Weimer and Pape,1999). Robert Monks(2005) notes that “the equity culture” in the US wounded nowadays, with consecutive booming results in the US CGS. The signs of a new polarization between ownership and management (with the managers holding the primacy and being the “modern Monarchs”(p.110) and the owners pending, unrecognizable and powerless) combined with blind biases in favour of the “free transferability of shares” or “brokerage ethics”(p.111) constitute the parts of the lost shareholder responsibility value. The author(Monks,2005) underlines that any CGS needs a structure to operate on. He -inter alia- sees that an encouragement of long term holding, the creation of independent boards elected by the shareholders, the split of common equity into “Trading” and “ownership” shares to increase shareholders’ responsibility and raise participation in the companies goals, the need for having more independent auditors and the retrospection of “pay for performance” compensation for senior executives and CEOs would lead towards more reasonable and “justified” controlled salaries and would provide the US CGS with a solid structure. The ownership structure, the concentration of ownership and the identity of the shareholders, also constitutes a distinctive feature of the national CGSs. While in the US 51,4% and 44,4% of the shareholders are respectively individuals and other financial institutions, in Japan the ownership is allocated almost equally between Individuals(22,4%), banks(18,9%), other financial institutions(29,1%) and non-financial corporations(24,9%)(Weimer and Pape,1999). In Japan the active market for corporate control is absent. The plexus of the Japanese CGS from its foundations is avoiding the growth of such a market(Weimer and Pape,1999)(Jackson and Moerke,2005). The stock market has a diachronic-symbolic role, as a record map of strategic movements of particular corporations. The ownership structure in Japan is widely dispersed but more concentrated than in the USA, operating under the function of the cross-shareholding system(Weimer and Pape,1999). 4.1.3 Corporate Performance and Executive compensation in US and Japan. From the study of CGSs it could not be excluded that in the US the raising trend for executive and senior managers’ payment is performance-related. This is enfolded in share-

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option or stock option plans and other rewards, that tie the remuneration system to the company’s net earnings or stock price(Weimer and Pape,1999)(Hall and Soskice,2001). Performance related payment schemes are very important regulating feature of the Anglo-Saxon world the labour-centric institutional analyses of Ronald Dore (2000a) (2000b) and William Lazonick(1991) (Dore et al,1999) (Whitley,1999). Closed-knit networks are absent in the Anglo-Saxon LMEs along with the feature of inside information that would have supplied the investors with a clearer picture than the one found on publicly accessed balance seats(Hall and Soskice,2001). The Japanese CGS practice pushes shareholder value to a passive role and inevitably forms its reward system according to seniority and productivity contribution criteria and, without generous financial incentives such as stock options(Weimer and Pape,1999) (Jackson and Moerke,2005)(Whitley,1992)(Hebner and Kato,1997). 4.1.4 The time horizon of economic relationships in US and Japan CGS. The last feature of the US CGS is the relatively short-term economic relationships between firms in capital markets, labour goods and services. In Japan the existence of long term relationship bonds have hitherto been drawn in this paper, through the activities of the keiretsus, the kaishas and some smaller groups of flexible firms. The Japanese large firms(the Kaishas1) are either keiretsus(descentants of the zaibatsus2) or other kinds of powerful groups with vertical ties like the Toyota or Hitachi(Weimer and Pape,1999) (Whitley,1992). The Kaishas use the cross-shareholding system to enrich their premium production by cooperating with a number of smaller firms that are technologically specialized. The ties are vertical(like the long vertical structure of Toyota’s subcontractors) or horizontal(like the Mitsubishi Group) or both(mostly found at Keiretsus)(Jackson and Moerke,2005). But even more characteristic of the “Japanese way” are the unique Keiretsu networks which hold under their umbrella a more expanded network of inter-industry organizations that function under their powerful brand name. A Keiretsu group has valuable interlinked members amongst the financial institutions (usually one main bank), trading companies(we can find at least one main trading company at each keiretsu) and producers in different industries(Kosai,1997)(Weimer and Pape,1999)(Hundley and Jacobson,1998). 4.2 US-Japanese Corporate Governance Systems’ responses to crises. Another important part of the US- Japanese firms’ CGS is set off during crises for the individual firm. An investigation of Japanese and US firms’ restructuring process, as a response to a critical downgrading of the firm’s operating performance, can be illuminating for their CGS’ ownership structure, labour relations and their effects on firms’ recovery strategies. US and Japanese firms respond to crises, either by narrowing their size or expanding their activities(or a mixture of the two). They are downsizing by selling assets, reducing their size, reducing capital expenditure and outputs and employee force. Expansion includes the self-expansion of operations or acquisitions. But, as we already

1 The kaisha is the large industrially specialized corporation or clan in Japan, which tends to restrict its economic actions in one industrial sector, to combine the processes needed for the production by linking the different production activities with other smaller through alliances and subcontracting(Whitley,1992). Richard Whitley argues that the Kaishas are the dominant actors of the Japanese Business system, useful for comparative studies purposes. 2 Three of the Keiretsu: Mitsui, Mitsubishi and Sumitomo, have directly descended from the zaibatsu. The other three(Fuyo, Sanwa and Dai-Ichi) are not connected with the pre-war zaibatsu (Hundley and Jacobson,1998).

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know the Japanese and American CGS general differences are literally substantial in a way that determines the following reactions: Asset contraction and asset selling are twice and seven times greater in the US, while the Japanese firms undertake restructuring expansion activities at 76%(55% in the US). The employee layoffs are also greater in the US(15% in the USA and 4,7% in Japan)! Thus, the Japanese firms are able to flatten the consequences of a downfall in performance without affecting their workforce number and their operational assets. This is considered to be the outcome of the Japanese CGS and particularly the ownership structure of the manufacturing firm and the banks’ and blockholders’ involvement in decision making. Thus, the Japanese firms facing poor performance are driven to restructuring as a result of a complex distribution of claims by their main investors(banks and blockholders)(Kang and Shivdasani,1997). They do it more prudentially and dynamically than the US firms. The latter firms destruct all aspects of the firm’s continuity in the spirit of making a new start after the thunder. 4.3 Institutionalized CGSs and international/domestic production performance. Is corporate governance behaviour systematized to the extent that it affects US and Japanese international production? We will attempt to face the issue through the amalgamation of organization theory with the institutional logic. The sound differentiation of national firms can be depictive in an Environment-Conduct-Performance(ECP) Model. The US and Japan’s home country national institutional environment influences the conduct/strategy of their firms, and finally affects their MNEs’ performance to the global markets(or domestic firms’ performance to the national markets)(Thomas and Waring,1999). The first factor of the ECP model is the national institutional environment’s distinct institutional characteristics on corporate control, labor relations, competition, trade policies and innovation systems. The authors name US firms as shareholder firms, while their Japanese counterparts can be named as coalitional firms(Thomas and Waring,1999,p.735). Vertical linkages between US firms, buyers and suppliers are limited and prohibited by the antitrust law, contrary to Japanese firms’ participation in networks of relationships. That is why US firms have to engage in explicit short term contracts with the several trade agents and subcontractors. It can be added that the Japanese government relationships with the native firms are much more spread than in the US. Moreover, the US innovation system is characterized by extra-firm R&D(publicly accessible and mostly conducted in universities and government organizations), while in Japan most of the research is held in the firm1(Thomas and Waring,1999). As for labour relations, the US institutional environment is characterized with great labour mobility, while in Japan the relationship is stable2(Thomas and Waring,1999). The above national institutional environment firstly affects the conduct of “national”3 firms and consequently affects their performance(ECP model). Under the Thomas and Waring(1999) assumption : first, the conduct/strategy of firms determines the investment level, R&D level and the labor strategy of the country’s firms. The authors found that the US domestic firms invest to global manufacturing industries with low levels of current cash flows but with high equity market valuations, while Japanese firms invest in mature industries with high levels of internal cash flows and little dependence on the stock

1 Especially in Germany there are a set of intra or inter-firm research institutes collaborating with each other as well as with state institutes(regional or central)(Lane,2000). 2 For Japan the “lifetime employment” is the widespread reality of labor relationships(especially in Keiretsu firms and the large manufacturing kaisha firms) (Hill,1995) (Whitley,1992). 3 “National” firms here includes both domestic and international firms of the same country of origin(firms of the same “nationality”).

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market(Thomas and Waring,1999). Finally, they found that coalitional firms have higher growth rates and gain more market share in a foreign market while the shareholder firms seek for higher profit rates. The above views place the CGS in the institutional environment, while at the same time bridge the CGS with the factors analyzed below(national innovation systems, corporate strategy) in this paper.

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5. US and Japan’s National Innovation Systems What is the connection between the national institutional context and the innovation system? “Technological knowledge tends to be localized in well-defined technical, institutional, regional and industrial situations: it is specific to each industry, region and firm and consequently costly to use elsewhere”(Antonelli,1999,p.244)1. Several studies2 have shown that different capitalisms present different structures for technology creation that generate different requisites for innovation. 5.1 Innovation systems, institutions and their matching political economies: Radical and incremental innovation strategies. According to Hall and Soskice(2001) there is a key dual distinction in innovation strategies: Radical innovation and Incremental innovation. Radical innovation involves radical shifts in production that lead to entirely new products3 or completely new process technology in production. On the other hand, Incremental Innovation is based on the continuous step-by-step improvement of products4 and process technology. It is understandable that each of the two innovation strategies fits to the advancement of different types of products. Radical innovation is essential to the development of high technology research-based products and it is naturally connected to biotechnology, semiconductor and software creation industries. Furthermore, radical innovation is used for the development of multifaceted system-based products, such as advanced telecommunications and defense systems. It is used at the service sector in advertising, corporate finance and entertainment services. It is an adequate system for LMEs, like the USA(Hall and Soskice,2001). Conversely, the adequate innovation system for the production of capital goods(machine tools, factory equipment, consumer durables, engines and specialized transport equipment) is incremental innovation. Powered by a skilled workforce5 and stakeholder-friendly management systems, the incremental innovation system fits to firms that: maintain a high level of market share, gradually increase their competitiveness and facilitate high quality production standards. It is the system that matches best to the CMEs’(like Japan) cooperative, risk avoidant institutional conditions, and should come as a result of continuous long term industry-based training and differentiation strategies(Hall and Soskice,2001). An intra-firm vertical integration logic results in structures that can secure and support intra-firm incremental innovation oriented R&D departments (Antonelli,1999). During the sixties, the nature of technology shifted towards an R&D 1 See also Pavitt’s empirical research(1984) and theorization(1988) of technological accumulation that clarifies the locational advantage patterns of technology creation. 2 For further analysis see Nelson, Rosenberg and Nelson(1993). 3 The creation of entirely new products is usually followed by or deriving from a marketing strategy that involves the creation of new consumption patterns and is aligned with a relevant support of radical diffusion of innovation according to the consumers’ perception of newness, known as discontinuous innovation(Cateora and Ghauri,2000,p.299) 4 This type of innovation can support marketing strategies for the diffusion of innovation known as: Continuous nad dynamically continuous innovation(Cateora and Ghauri,2000,p.298) 5 In Japan percentages of the total workforce(US statistics in parentheses): 11% university degrees(10%), 8% Higher technician diplomas(7%), 56-57% Craft/lower technical diplomas(20%),23-26% No vocational qualifications(in the US at about 63%).1988 and 1989 Data.(Pavitt,1996)

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and intangible assets intensive system, leaving behind the previous resource-intensive, capital-using, and scale-dependent innovation systems(Pavitt,1996). 5.2 The recent Japanese technology creation practices and their source. In practice Japanese strengths in the previous two decades had been placed on the production of automotive industry and electric-electrical machinery equipment, and on vertically related capital goods industries such as steel and machine tools (Lazonick,1991) (Hall and Soskice,2000). These strengths are indeed accurate with the general CMEs’ innovation systems strength. But the Japanese also were strong in the semiconductor industry, which is considered to be a highly competitive and rapidly evolving industry and is mostly developed by LMEs’ radical innovation systems. The Japanese semiconductor industry had to adjust quickly to the demanding radical innovation conditions, and thus move from one generation of microchips to another. The technological competence of the Japanese innovation system can be traced at the long term intra firm training and accumulation of knowledge(especially to the tacit knowledge accumulation). The Japanese management economic institutions promote the knowledge/technological accumulation process(Goto,2000). Although the Japanese business system is known for the cooperative relationships between firms from different industries or the intense subcontracting relationships, at each industry level in Japan there is intense competition by the different inter-industry groups of firms(Hall and Soskice,2000). This is possibly the key of the success for the Japanese innovation system combined with Japan’s patent system “First to file” and “pre grant disclosure” characteristics, that allows for the quick diffusion of research results of one firm to its competitors. Intra-industry competition leads to more R&D investment. Furthermore, spillovers and externalities create the necessary conditions for R&D encouragement and enhancement. The semiconductor manufacturers in Japan were all following the same production techniques when moving from 4k dram to 256k dram, while their US counterparts(National Semiconductor, Intel, Motorola) were secretively following different techniques that left them behind in the semiconductor industry advancement (Goto,2000)(Saxenian,1994). The Japanese innovation system features(externalities, R&D collaboration and competition) fit to the post-fordist era that made possible the unprecedented technological advancement of certain regions and industrial districts (Saxenian,1994) (Piore and Sabel,1984). 5.3 The current US innovation system as a global model for technology creation. According to theories that can be placed among the globalization stream, an important transformation of the knowledge industry has been in progress since 1990, leading to more market-based interactions for knowledge dissemination. Computer communication platforms have led to new spurious and remote relationships between the core producers of knowledge and customers, in an exchange of codifiable and tacit1 bits of technology

1 Nelson and Winter(1982) provided the pioneer theorization for the dual nature of knowledge(tacit and codifiable) that was then transferred to economic and MNE theories concerning technology creation. As such, Cantwell(1995)(1989)(1994) also sees the nature of technology as dual (codifiable and tacit), and is under the broader and more realistic definition of technology, that Pavitt(1988) also used. The first element of technology is its codifiable aspect. It is its most tangible aspect and is similar to information that can be found in engineering blueprints and designs, scientific knowledge, management manuals and handbooks. This aspect of technology is also described as its public element, because it is easily accessible. However, it is still difficult and cumbersome for the scientists to define in clear lines the steps followed to implement the prototypes of technological knowledge in production systems. Thus, even the public aspect of technology has its unique and firm-based idiosyncrasy(Cantwell,1994b,pp.2-3). Nevertheless, we assume that “in principle,

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information with a parallel extra specialization of knowledge producers and a de-verticalization of R&D activities. Moreover, codified knowledge has gained new increased value through the algorithmic-based remote codification of knowledge. The knowledge production industry has dynamically entered to the service sector, and firms related to it have quickly and costlessly expanded to become multinationals. National innovation systems can not stay intact from the described booming transformation, and the US system has already adjusted to this new order (Antonelli,1999). Some bright results of the new era are the developments of the late 80s in the technologically sophisticated industries of Biotechnology and Information Technology(IT) in the USA. 5.3.1 The challenges for the Japanese innovation system The question stands for Japan: How is Japan related to this hi-tech production? The advancement of such new technologies(IT, Biotech) led to a shift in the methods of technology development. Past or current Japanese practices of "learning-by-doing," "learning by using," "trial and error," and even "muddling through" or "barefoot empiricism” have been very successful cyclic modes of human design in innovation development(Pavitt,1996) and have been theoretically supported by the technological accumulation theory(based on tacit knowledge and intra-firm technology transfer merits). In the case of Biotech and IT, knowledge is created in science parks near universities by small specialized firms, characterized as carriers of scientific entrepreneurship, and operating in a complex institutional variety1 environment (Antonelli,1999)(Clarysse et al,1995). Nowadays innovation creation is linked to a more abstract codification of knowledge useful to a very small group of specialized scientists. Furthermore there is no special need in sharing this knowledge and the transaction costs of transferring it are minimal. It is understandable that a firm is encouraged to enter into arm’s length transactions with such codified general knowledge packages(Goto,2000). The Japanese innovation system, as well as most CMEs’ systems cannot support this market-oriented system of technology development. But these edge-technologies are beginning to play a major part in modern economies with a constantly increasing impact on a variety of different industries, involving manufacturing and services sectors. This macroevolution necessitates the adoption of such practices by most of the CMEs. The Japanese innovation system has to renovate towards more fragmented and scientifically optimum clusters of radical innovation, without sacrificing the traditional Japanese technological competences (Goto,2000)(Fransman, 1999b). The fact is that the issue of convergence to a single universally applied technical development trajectory had been raised every time there was a technological paradigm shift, without changing the distinctive elements of national technological competences(Pavitt,1996). But now the race is longer because the advancements in high

the public aspect of technology can be exchanged between knowledgeable scientists, engineers, practitioners and managers”(Cantwell, 1995,p.24). As a result of it can be traded between firms. The second element of technology is distinct, as it can not be contained in information. The organizational routines and the collective expertise or skills of specific production teams, are the constituents of the tacit part of technology. The tacit technological knowledge is strictly firm-specific (Cantwell,1995) (Pavitt,1988) (Cantwell,1994). It is “derived from and tied to the localized and collective learning expertise of the teams of a given company through their own development of production” (Cantwell,1995,p.24). It is the crucial element that differentiates one firm from another, can not be traded between them and is the basis of the firm’s or the MNE’s competence (technological competitive advantage) (Cantwell,1995 , pp.23-25). 1 An environment where universities and manufacturers collaborate in the process of knowledge production. This environment raises issues about the division of labour between universities and firms in knowledge production, diffusion and development (Antonelli,1999,p.248-249).

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tech industries are diffused rapidly and create an overall image or trend for a national economy. A matter of morale or not, a leading international economy like Japan can not avoid involving in the driver movements of technological change when these guarantee the regeneration of multiple competitive trends in the economy. 5.4 Universities as elements of National Innovation Systems. Apart from the intra-industry or intra-firm innovation systems, universities have been important elements of national innovation systems. In Japan (also in Germany) the post war experience has shown that basic research(university research) had a minor contribution to innovative activities, leaving the Japanese universities at a secondary position to technology creation1(Pavitt,1996). This means that the Japanese were closer to technological implementation than invention. Nowadays there is an increasing tendency of the academic research developments to be cited in patents, a fact that clearly links universities with industrial technology progress. In the USA firms from different industries(especially high tech industries) have traditionally being cooperating with universities in an mutually beneficial relationship. The universities seem to support the economic life in a two-fold way: First, by providing the industry and the academia with well-educated human resources. Second, by participating in a linear innovation process(basic research leading to applied research and development). The latter, the creation of innovation directly from the scientific nuclei and not from the inside of the production process of a company, is not always the case in innovation creation. But it could not be excluded from the innovational activity, as practically happened in Japan during the 70s and the 80s. In practice, the inventors of biotechnology were cited in US university labs and their knowledge was later transferred for development in the different industries. In other cases the companies receive market signals and collaborate with universities to achieve the developments needed for such a demand. Furthermore, universities can become symbols of localized scientific knowledge, as carriers of locational technological competences. To sum up, Japan has to consolidate its technology development in the academic environment, enforce its functionality and modernize its role towards a more interchangeable university-industry relationship(Goto,2000)(Fujisue et al.,2001)(Collins and Wakoh,2000).

5.5 Innovation creation as part of state policies

A national innovation system can well be placed to macroeconomic policy government plans. In Japan the government has been the aspirator of three technological development programs2 during the 1980s. These government led programs may have been one of the possible reasons for the Japanese technological miracle of the time. The original Japanese programs were targeting to specific technological advancements serving specific industries, served by a small number of keiretsus or Kaishas(Fransman, 1999a)(Goto,2000). The ultimate target was to catch up with the most advanced economies 1 Although the universities have been left to play a secondary role, the establishment of Kogakuryo(The School of Engineering) by the Meiji reformation program In 1873 has been substantially reinforcing Japan’s technological trajectories -for many decades-in mechanical engineering, telecommunications, chemistry, mining and metallurgy. After the WWII the universities in Japan adopted the latest educational practices and advanced in parallel lines(aligned their budgets, conducted top-class research and teaching) with the best western universities. Today the Japanese number of published papers at the top international journals holds the second top position world widely(Goto,2000,p.107). 2 The “Large Scale Projects” and the “Next Generation Projects” programmes and the “Mining and Engineering Technological Research Association” system(Goto,2000,p.109)

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and the challenge was clear. Nowadays, the target of advancing peak technology is much more complex and indistinct. The industry has many actors, usually small start-up independent firms. So, now the government intervention to technology affairs must whittle to creating the adequate environment(infrastructure) for the operation of those firms, and not directly intervene to their plans. In broad lines, that is what happened in the case of US government plans. US policy by establishing the preconditions for the creation of a pool of knowledge put in motion two big research oriented programs that are said to have partially led to a couple of paradigmatic technology developments. NIH and US Defense Department research programs, contributed to the creation of biotech labs and the advancement of IT(The Internat, mobile phones technology)(Goto,2000).

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6. Corporate Strategy in the US and Japan 6.1 Culture, Institutions and Corporate Strategy In the formulation of corporate strategy is important to stress the role of informal institutions as key determinants of corporate culture. As we have seen above the informal institutions(informal constraints) are linked with sociocultural characteristics (differences in religious, and historical background), trust, values and norms, unwritten taboos, customs and traditions(North,1990). Moreover, Hofstede(1980) points that cultural propensities at the actions of individuals are simulated in national institutions. 6.1.1 Hofstede’s national cultural elements categorization Hofstede(1980) had made a broad study targeting at the categorization of 50 national cultures. It was a cultural comparative study that involved 12,000 respondents, based on 4 criteria/constituent characteristics: Individualism-collectivism1, Power Distance2, Masculinity-Femininity3 and Uncertainty Avoidance4 (Hofstede,1980). So, cultural issues actually cross the threshold of organizational culture. Hofstede defines organizational culture as “the collective programming of the mind, which characterize the members of one organization from others,” (1991, p. 237). 6.1.2 Japan and USA scores In the above model Japan and USA scored:

Power Distance

Uncertainty Avoidance Individualism Masculinity

Japan 54(28/50) 92(7/50) 46(23/50) 95(1/50) USA 40(34/50) 46(39/50) 91(1/50) 62(13/50)

Overall Mean of the 50 countries 57 65 43 49

Source: Usunier(1996) What can we see and expect from the above index scores ? 6.1.2.1 Masculinity Index Scores and their meaning Japan has the top rate in the Masculinity Index, while the US has 13th score of the 50 countries. So, Japan is the country where masculine values prevail(performance, success

1 Individualism Index(II): Is and indicator of the looseness-tightness level of one’s individual ties. An(high II) individualistic society promotes atomistic behaviours, such as looking out for oneself and his/her family. 2 Power Distance Index(PDI): It is the way the less powerful members of a society accept inequality in the distribution of power. Do they tolerate it or not? In the workplace, it is an indicator superordinate-subordinate interdependence. A small or low PDI shows low tolerance on power inequality, more independence of subordinates to superiors(Hofstede,1980). 3 Masculinity Index(MI): Concerns social gender notions. Masculine(high MI) countries promote assertiveness and material success, while Feminine” countries value modesty, tenderness, and quality of life (Hofstede, 1991). 4 Uncertainty Avoidance Index(UAI): High uncertainty avoidance cultures/societies avoid the possible threats of an uncertain condition by avoiding unnecessary risks or other possible endangering situation (Hofstede, 1991)

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and competition) over the feminine ones(quality of life, solidarity, tenderness in personal relationships, small importance of status). People in masculine cultures stress the importance of materialistic targets over the humanistic ones. Moreover, men and women are having different roles to the society, and apprehended anything big as important. United States score is referred to more moderate to high rates of masculinity which means that is a more open society(Jain and Tucker,1995). 6.1.2.2 Individualism Index Scores On the other hand, the US is the top scoring country in Individualism. The focal point in Individualistic societies is that people act more willingly as individuals than as members of groups. Individuals in individualistic societies are selfishly independent, self-contained, and supportive of their personal interests and cannot be devoted to any groups’ goals. In contrast to it in collectivist cultures like Japan, the premium feature is the group mentality, the willingness to leave personal interests behind in the face of the common goal(group or national). Naturally these characteristics become apparent in the business environment where individualistic American managers are competitive in a competitive environment and, in any case, show no signs of long lasting loyalty to the organizations they are employed to. Furthermore they are conscious of the fact that their subordinates are doing likewise, by pursuing their interests and stemming manager’s decisions that may block their careers. On the other hand, loyalty, harmonic superordinate-subordinate relations, blindfold attachment to the organization in the long term, are characteristics of the Japanese reality(Jain and Tucker,1995). 6.1.2.3 The Uncertainty Avoidance Index(UAI) scores of US and Japan. Japan has one of the highest UAI ranks while the US culture has a low score. Thus the Japanese avoid uncertainty, supererogatory risks, instability and prefer predictability. The Americans have the exact opposite stance. The extend of this cultural constituent to economic life gets a well deserved grade of importance, as it explains most of the economic actors’ methods, practices, strategies and philosophy. Japan as a country with high UAI score tends to create structured schemes(even the Japanese society per se can be called a structured society) to cope with uncertainty. At the workplace, the Japanese prefer long-term employment, deploy bureaucratic organization structures. In industrial relations Japanese firms tend to create tight linkages of cooperation(networks, cross-shareholding arrangements) as a shield to unpredicted catastrophic market pressures(Jain and Tucker,1995). Denzau and North(1994) used as their starting point the divergent decision making behaviour under conditions of uncertainty avoidance, to understand mental models and ideologies of individuals from different polities, their interpersonal relationships and their subsequent connection with the generation or evolution of national institutions. 6.1.2.4 The Power Distance Index(PDI) scores of the two countries Japan has the 28th place whilst the US is in the 34th place. At a high PDI level Japanese society can tolerate power distribution inequality more than the Americans. Japanese can be more faithful to the few people at the top who can justifiably be managing the issues of the majority(Hofstede,1980). 6.1.3 The Strategic implications of Hofstede’s cultural factors.

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6.1.3.1 The Uncertainty Avoidance as a strategic behaviour regulator and the US-Japanese firms different strategic internationalization triggers The Japanese firms’ premium target is company growth and market share increase. As we have noted the Japanese decision making is not driven or controlled by equity markets. In this sense, Japanese firms’ strategic triggers are placed in the intra firm environment. On the other side, the US firms are driven from external forces with stockholder value maximization targets(profit maximization), intense competition and unstable conditions in the workplace. That is why the triggers for the decision to enter in a foreign market present distinct differences: to get the green light from the firm’s board the Japanese have to analyse all possible dimensions in a long range planning growth pattern with clearly set strategic objectives(Jain and Tucker,1995) (Lazonick,1991) (Whitley,1992). In the Japanese domestic market too, the kaisha avoids the waves of uncertainty by not involving in many diverse activities directly, but through subcontracting and establishing mutual dependence with banks, suppliers and customers. A Japanese priority is always to invest in human capital training to enforce the readiness of the workforce to adopt to market changes(Whitley,1992). Liberated from uncertainty avoidance regressions, when deciding to expand abroad the Americans care for the profit making host market’s opportunities and conditions such as: economic conditions, government incentives and cohesiveness in economic policy, property rights allocation as an indicative term for competition intensity(Jain and Tucker,1995). 6.1.3.2 Uncertainty avoidance as a determinant of MNEs’ strategies. How do the Japanese firms approach entry in a foreign market? When they enter a foreign market they follow some careful step by step plan to avoid uncertainty. At first they try to get a competitive advantage by: adapting to the local needs, introducing a new innovative product and enhancing customer value. Thus, they engage in value adding activities to avoid market failure, they put in motion costly R&D investments that support incremental innovation practices to a qualified market niche. Japanese management systems(like Quality First and Total Quality Management) are actually transferred unedited from Japan to the foreign market in different and more adjusted to the local conditions forms, like the Japanese Hybrid Factory in the US(Abo,1994). This is a strategy similar to the multidomestic strategy1 (Bartlett and Ghoshal,1991). When they secure their position in the initial market niche they continue to expand by introducing more new products and thus achieving to enter to new foreign industry markets(Jain and Tucker,1995). On the other hand the American MNEs don’t have a standard approach when entering a foreign market. US firms’ fundamental drivers are to engage in a clear market competition and to grasp a quick high return rate that will improve their balance sheets(Jain and Tucker,1995). In Bartlett and Ghoshal’s(1991) terms the Americans mostly follow a

1 Bartlett And Ghoshal(1991) analyse the four types of international strategies and their matching MNE structures. The international environment is posing new challenges and pressures to MNEs from which the bolder are the cost pressures(in price and non-price sensitive markets) and the local responsiveness pressures(high and lower needs for local responsiveness). The multidomestic strategy is followed to maximize local responsiveness(products are customized to meet the host country’s market needs). Firms establish a complete value chain at the host country’s markets, find difficulties to achieve economies of scale(because of their adaptation to responsiveness) . Firms that adopt the multidomestic strategy must have a divisionalized structure based on geographical area. This is a decentralized structure with self sufficient units that has low needs for coordination(one of the four constituting structural factors of the organization which is defined as “the process of integrating the objectives and activities of the separate units of an organisation in order to achieve organizational goals and efficiency”(Robbins and Barnwell,2002,p.109) and common culture development sufficient for developing knowledge that stays in the limits of each subsidiary

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global strategy1 or an international strategy2.This type of US dynamic internationalization strategy, is close to a prospector or an analyzer strategic form of organization. The prospectors are the flexible organizations who seek for new market opportunities, engage in radical innovation that can bring quick market results, with low complexity, formalization and centralization structures. The analyzers are the companies which seek for new markets for their mass marketed goods, are both flexible and stable and their decision making is based on high centralization and formalization in manufacturing and distribution practices with looser controls in R&D and marketing (Miles and Snow,1978). Both analyzers and prospectors types of American firms described above show low the uncertainty avoidance spirit in their strategy formation in contrast to the Japanese domestic firms and MNEs that exhibit high sociocultural effects of uncertainty avoidance in their respective strategic moves and thrust. 6.1.3.3 The Power Distance effect on entry mode MNE strategies As for the Power Distance cultural characteristic, it is tightly connected to structural decisions. Since the Japanese exhibit higher scores in PDI, they are likely to be more centralized with more authority to the top managers(Jain and Tucker,1995). In foreign MNE subsidiaries although they normally trust experienced local managers in middle management positions in order to capitalize on their knowledge of the local market(this is linked with uncertainty avoidance), they would be hesitant to offer them senior management “strategic” positions(Sharpe,2001)(Jain and Tucker,1995). Japanese firms are prone to investing in wholly owned foreign subsidiaries or Joint Ventures(JV) and not to strategic alliances, because the increased equity control offers the opportunity to the parent company to control key elements of decision making(Jain and Tucker,1995). Evidence from the Japanese entrants to the US market suggest that Japanese firms favour Greenfield3 entry when they are research-intensive, when their operational scale is relatively small and when they intent to produce in the US the same product they produce at home. Greenfield is the entry mode that minimizes transaction costs and offers significant strategic independence and the sufficient power to gain a significant market share through innovation strategies already tested at home(Hennart and Park,1994).When combined with the general characteristics of Japan’s innovation system and economic institutions, Greenfield is the most preferable entry mode for the Japanese firms that replicate their domestic model overseas. On the other hand, when Japanese MNEs are internationally inexperienced and they enter to a new unfamiliar industry or an industry of rapid market growth, they prefer JVs or licensing(Hennart,1991). Kogut and Chang(1991) examined the Japanese entries in 297 US industries(mostly high technology industries), 1 The global strategy adopted by firms which work had on minimizing their Production costs and their key capability is efficiency. Their need for local responsiveness is low their subsidiaries are few at key host countries positions and one of their secondary targets is to transfer knowledge inside their Firm group(parent firm-subsidiaries). Firms of this type belong to aircraft, metal and paper, petroleum goods and automobile industries. Toyota, General Motors, Shell, Mobil and Matsushita are some characteristic global strategy firm examples(Bartlett and Ghoshal,1991) The global strategy’s ideal structure is the worldwide product divisions structure that promotes high centralization(centralized headquarters usually at the home market). This structure has R&D knowledge produced at the core and then spread across units. Naturally, it needs maximum coordination and common culture integration across subsidiaries(Bartlett and Ghoshal,1991) 2 The international strategy aims at the easier transfer of learning. Firms of this camp have their R&D units at their home market while manufacturing, distribution and marketing are located to the host market. Firms of this type are colossal MNEs like IBM, Unilever, Nestle, IBM and Microsoft. To exercise the international strategy firms must be designed in a worldwide divisionalization fashion, that is based on price. Centralization of R&D competences and the other activities to be decentralised and moderate need for coordination and for integrated culture(Bartlett and Ghoshal,1991) 3 Greenfield is the investment targeting to full equity control of foreign subsidiaries.

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and found a positive correlation between the Japanese investments to Joint Ventures in the US and the technology gap between the two countries in each industry. This positive correlation connotes that the Japanese MNEs were investing in the United States to take advantage of the locational advantages of the US technology creation. By the time of the “Japanese invasion”, the general impression in the United States was also in that direction. For that reason the political debate was in contextures, such as the draining of the US economy from inward direct investment or safeguarding national security interest issues. This is a study reflecting the historical reality, with explicit references to the technological motives for foreign involvement. The US firms are more keen on covering a wider part of the foreign market at once(contrary to the narrower niche market foreign entry preference of the Japanese multinationals) through flexible diversification strategies. To be flexible in achieving their above targets the US MNEs are open to all the entry mode forms (mergers and acquisitions, licensing, JVs and strategic alliances) depending on the different host markets’ circumstances(Jain and Tucker,1995). From the above analysis we can see the effect of cultural elements on international strategy related issues i.e the strategic triggers for internationalization, strategic thrust by American and Japanese firms performed in the host market when internationalization had been achieved. Uncertainty Avoidance affects strategic triggers, key functional decisions and the modus operandi for performance measurement and evaluation, while Power Distance can alter structural decisions. Individualism and Masculinity partially influence less countable and more specific elements in the micro environment of the firm, while at the macro level affect the general directions of the economic policies(Jain and Tucker,1995). 6.2 Comparing US-Japan institutional characteristics in a strategic process, content and context perspective. The above analysis of the US-Japanese institutional characteristics leads us to the following conclusions on strategic behaviour. Drawing from De Wit and Meyer’s(2004) analysis what we can spherically see, in the domestic and international US and Japanese firms’ strategic process, content and context, is that they represent the two different ends of a strategic behaviour continuum. In the generative process of strategic thinking and strategic change the Japanese firms adopt a generative reasoning(creativity and deductive judgement) that is achieved through strategic incrementalism, while the Americans are following a rational logic path(inductive, calculative and analytical) that results in strategic planning. The product of strategic thinking is the process of strategic change where the Japanese prefer evolution (and Americans revolution) and continuous renewal against the American firms-like discontinuous renewal1. In the strategic content at the business level American enterprises are attached to the market functions, while the Japanese are closely bounded to their resources and are more distant to the market driven effects. These two divergent tendencies are formulating two different perspectives: the outside-in American perspective and the Japanese inside-out Perspective. Finally, the Americans follow strategies to deal with competition in a discrete organizational perspective, while the Japanese put more weight on the cooperation feeding strategies which are aligned with the embedded organizational perspective. Third, the strategic context involves strategic aims at the industry and the organizational level. Interestingly the high market share Japanese aims fit to DeWit and

1 This is a tension similar to that described above between incremental innovation and radical innovation.

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Meyer’s(2004) view of “industry leadership” that can be achieved through firm dependent diversification to manipulate industry demands, while the Americans are adopting an industry dynamics perspective and converge to an industry dependent and driven environment(DeWit and Meyer,2004). The more overt example of it are the Japanese strong networks, either the traditional ones like the zaibatsus and keiretsus or the newer forms of cross-subcontracting. 6.3 The Japanese networks’ strategic implications. The Japanese were able to concentrate on their unique competences at the value chain. They were able to choose where they will compete, in a fashion that was shaping the value chain(Jarillo,1988). To meet the well embedded institutional pressure for cooperation, the Japanese firms had to become parts of broader teams: the networks1. Nowadays networks have been established between US firms as well, and are considered to be a very effective means of firms’ collaboration and interaction. The Japanese networks were able to achieve high rates of competitiveness, due to their flexibility and focus to a certain production activity. In a certain time t the network members enter in a zero sum buyer-seller win /lose situation, and as time progresses the game becomes a non zero sum win/win situation. In other words, in t+1 or t+2 the success of one member depends on the other member’s success. This is an interaction that guarantees effectiveness(to successfully reach a target) and efficiency(the superior gain to be part of a network in the long term by understanding that a network can offer to a member firm more inducements than the efforts she has to put). In a network the pie is bigger and the sharing is fair. Trust glues the members of a network and enforces the quality of relationships that bypass the high opportunistic temptations and result in achieving the edge in rapid technological change, in global competitive environments (Jarillo,1988). 6.4 US-Japan’s institutional environment effects on firms’ strategic choices. Pauly and Reich(1997) investigated the Triad’s institutional environment (political, economic, ideological) effect on Triad firms’ strategic choices. We will thoroughly focus on the comparison between Japanese and American firms. The starting point is the set of US-Japanese institutions. US and Japan differ significantly in political institutions: In the US we find liberal democracy with divided government and highly organized business groups, while in Japan developmental democracy with strong bureaucracy and reciprocal consent between the state and the firms. Second, differences can be found in the US-Japanese economic institutions: US open markets with unconcentrated fluid capital markets and antitrust tradition, contradicts Japan’s guided markets(difficult to penetrate) with bank-centered capital markets and tight business networks/cartels in declining industries(Pauly and Reich,1997). Third, the dominant economic ideology is: Free enterprise liberalism for USA and Technonationalism for Japan(Pauly and Reich,1997,p.7)..

1 Networks are neither markets nor hierarchies. The strategically important player in a network or the principal firm of a network, the ‘Hub firm’, has to maintain the equilibrium between the member firms in order to be structured in a virtual hierarchy that is not based on the traditional hierarchical relationships. Unstructured tasks, in a long term relational point of view, bound with relational or unspecified contracts to constitute a kind of asset specificity and at the same time allow for the related parties to maintain their independence. These are the foundations for effective and efficient networks, just as the Japanese experience shows(Jarillo,1988).

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The above different institutional environments are linked with the US-Japanese distinctive firms(domestic or MNEs) strategic behaviour in the fields of: 1) Intra-firm trade(IFT), 2) R&D(base and orientation), 3) Corporate governance and 4) corporate financing. First, the IFT rate is moderate for the US firms and very high for the Japanese firms1. Second, in R&D investment US firms follow a pattern of diversified and innovation-oriented strategies and Japanese firms use steady growing R&D in an increased basis which is focused both on process and high technology creation. Third, corporate governance and corporate financing behaviour of the US-Japanese firms is similar to the analysis found above in this paper(Pauly and Reich,1997). Consequently the US-Japanese national institutional environment generates a strategic behaviour pattern not only at the domestic grounds but also in the international arena. This happens in a structure-follows-strategy fashion2. Pauly and Reich(1997) ultimately made a patterned distinction to Foreign Direct Investment3 strategies reception-generation for the US and Japanese firms: USA welcomes inward and equally generates outward FDI and Japan has extensive outward FDI and its domestic market is not easily penetrateable(Pauly and Reich,1997,pp.22-25) (Dunning,1993). 6.5 US and Japanese outward FDI direction as a result of MNE strategies. The importance of the source of FDI. From the MNE theories we can see practical elements from the international activity of both US and Japanese MNEs. I will concentrate on macroeconomic traits on international production. Kojima distinguishes between the Japanese pro-trade FDI and western type anti-trade FDI. US Anti-trade FDI is connected to vertically integrated resource-based production and the extreme exploitation of the factor markets in disadvantaged target countries. On the other hand Kojima(1985) saw that the pro trade-resource based Japanese FDI investment(supply quota arrangements, production sharing agreements of Japanese resource extracting firms with local firms) is conducted through non equity forms of firms and it is helping the local firms and generally the host country’s economy because of production costs reduction and the increased host country exports. This is giving to the Japanese investment a welfare provision flavour(Tolentino,1993). Ozawa’s later criticism to Kojima was targeting his notion of the anti-trade import substitution investments by reinstating that historically they had been proven to be trade promoting at the macro level(increased exports of the host country) but anti trade at the micro level. Ozawa also made a three-staged historical periodization of Japanese FDI development: in 1950-1970 Japanese outward FDI was targeting developing countries and their labour intensive industries with standardized production. Second, following the industrial revolution in the Japanese homeland of the 60s, Japanese FDI targeted developed countries and evolved to import substituting in mass produced consumer durables industries with major subcontracting support. Third, by the early 80s the Japanese FDI adjusted to the post-Fordist technologically sophisticated standards of the time. The transformational forces of flexible manufacturing, CAD, CAE and CAM4 were turning the Japanese outward FDI from resource-based to more technologically sophisticated forms.

1 See also empirical OECD evidence on Intra-Firm Trade in Bonturi and Fukasaku(1993). Supporting evidence from the automotive industry also can be found in Takeishi(2001). 2 Similar to the conventional new economics of organization structure-follows-strategy scheme supported by Alfred Chandler(1962), who associated the historical evolution of the American enterprise with periodical changes to its strategic behaviour, that was followed by a patterned structure. 3 FDI 4 Computer aided designing, engineering and manufacturing respectively.

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The Japanese evolutionary course of FDI over the time had proven to be the leading edge that pushed Japan to turn the focus on industries where it japan did not have comparative advantage(the catch-up mode), like the electronic components industry. Furthermore it must be noted that the swift from one phase to another was rapid and unprecedented1 catalyzed by the Japanese Government and licensing technology practices of the latecomers(Tolentino,1993). 6.5.1 The importance of the source of FDI. Japan and US outward FDI The Emergence and Evolution of the MNE framework points that there are patterned differences in different countries’ developmental course of outward FDI according to their size and differences in endowments of natural resources (Tolentino,2000). Resource abundant countries(RAC) and resource scarce large countries(RSL) have different outward FDI development. The form of the earliest outward FDI for resource abundant countries(like USA) was targeting resource extraction in agriculture, minerals and petroleum and resource processing, distribution and marketing in resource rich foreign host markets with the presence of resource based manufacturing MNCs backwardly integrated to those of the home market(contrary to RSLCs like Japan manufacturing MNCs which were forwardly integrated serving the host market) and resource-based companies. Furthermore, RACs were able to set up mercantile houses abroad as branches of home merchants(while RSLC like Japan set up trading firms in major export host countries) and local market-oriented manufacturing production only in large host countries’ markets(whilst Japan and other RSLCs set up production facilities in small labour intensive production markets). Over time the outward FDI of these sets of countries developed in nature as a result of their domestic growth and their home market industrial development patterns. In RACs like USA, resource extraction became less attractive when downstream processing was upraising. This led to more host market based, resource-oriented and manufacturing firms(contrary to RSLs like Japan small medium sized manufacturing firms as a result of the home market changing comparative advantage towards labour intensive activities). Mass Production led RACs to technological advancements that could support outward FDI with more international sourcing. The US home market by that time was upgrading towards the service sector and was able to secure better services for outward FDI activities, a thing that was transferred in the foreign markets with several service firms in different international industries(whilst Japan as all RSCs was advancing in processing industries with more technology and capital intensity features) (Tolentino,2000). . These developmental steps of outward FDI are associated with the technological competence advancement of the home firms’ from mass production techniques and organizational primary skills(basic engineering skills), to more basic scientific research treatments and more complex organization operations(more sophisticated engineering). Nowadays these two stages are progressed towards research related(and thus more science-based) investment and incorporation into international networks (Tolentino,2000). Differences between RA and RSL countries(like USA and Japan respectively)can only be spotted in the earlier forms of outward FDI and its supporting MNEs. We can say that in the 21st century there are not many differences between the Japanese and US outward FDI form or their respective MNEs forms and methods. Japan and USA are following a

1 See also Dunning’s(1986) investment development cycle Model and the Tolentino’s (1993) econometric testing of it for Newly Industrialized Countries in 1976-1984 that proved it wrong in practice. Newly industrialized countries and Japan have acquired the capacity and incentives and followed by the traditional MNE countries, and were able to pass through the stages of foreign investment development

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similar path towards advanced engineering structures integrated to networks with research related FDI. 7. International Relations paradigms and political economy The international Relations(IR) science schools of thought(Neorealists and Liberal Institutionalists) either recognized a country’s hegemony or globalization trends, with references to the states political and economic role. We will parallelize the IR paradigms bases’ with the premises and certain aspects of state-oriented and institutional-sensitive business theories. 7.1 The Neorealist IR school of thought and the political position of USA and Japan The neorealist school of IR sees international relations as a non guarded area of immunity -and eventually anarchy- that diachronically calls for a hegemonic power to balance it, and reinstate order and peace. The Hegemonic power is conceived as the resultant power of the rise of a nation’s state to global supremacy through the means of economic and military power. The Hegemonic state is ordering, policing and demarcating the global affairs, till its fall from power1. USA has been the hegemonic power since the end of the World War II imposing a Global Pax Americana(Holsti, 2001). Japan could have been an obvious candidate to succeed the Americans and to set up a Pax Nipponica, due to the country’s remarkable growth rates and its great economic steps2, if it wasn’t for the country’s poor will to invest on military infrastructure. But there are other reasons too. Japan have lost its economic dynamism after the nineties and has never been a powerful member of G7, a permanent UN Security Council member and it is the Number two in IMF and World Bank. This country does not qualify for a hegemonic power in the field of neorealist theorizing, but as far as the quest for hegemonies holds, Japan could be part of a “bigemony” (i.e sharing global hegemony and its economic prowess with the US) (Hummel,1998). 7.1.1 Institutionally-based “State” business theories in parallelization with the Neorealists of IR. 7.1.1.1 The Hegemonic State and the international trading structure Krasner(1976) argues about the necessity of the existence of strong states. He sees that nowadays states are trapped in a transnational society of non-state actors, a condition that promotes the notion of interdependence over sovereignty, with proponents that explain developments in a particular international structure[see the analysis on Strange(1992)

1 Looking back to IR history we can see several hegemonic states like Great Britain which seized to power for 1713 till the end of the American revolution (Pax Britannica I), which lasted from 1713 to the American and French revolutions, and regained its position in 1815 till the end of the 19th century (Pax Britannica II)(Hummel,1998). 2 In terms of Japan's share of world GNP or world trade, the competitiveness of Japan’s Productive Units and Work Structures and Japan's leading position in high technology, the superior market power of Japanese companies and the rise of Japan to become the world's top creditor nation.

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below] but not the structure itself. According to the author this structure has institutional and behavioural manifestations. It is a structure of international trade(trading structure) and it is defined by the state’s interests towards openness and the degree of openness. The potential economic power(PEP) of the state is dependent upon a state’s size and level of its economic development. The distribution of a state’s PEP in the international trading structure can be multipolar or hegemonic. One very large and equally developed state, “the hegemonic state”, can support an open international trading structure1 and a stable international monetary system. The hegemonic state is backing its supremacy on many medium sized states (which uses as trading partners) and on its economic robustness and large domestic market. Historically there have been two main controllers of the international trading structure: Great Britain and the United States. The author himself sees that his model is losing power nowadays. The US hegemony has faced many problems with lower openness indicators by the seventies, but the international trading structure remained open. This is due to the emergence of a new international player: the MNC and its supporting international institutions. But Krasner(1976) concludes that this can not diminish the effect of strong states in the development of the international trading structure. 7.1.1.2 The States’ role in economic development Robert Gilpin(1996)constructed an evolutionary model of economic behaviour concerning national systems of political economy. According to the author the economic success is dependable upon the fitness of institutional structures to the dynamics of competitiveness and innovation. This type of institutional fit put economic success in the same line with the successful strategy and structure of the national political economy. This is a deliberate turn of Chandler’s(1977) micro strategy-structure perspective of successful performance to the macro(national) level. According to these factors the Japan and USA have been the most successful systems of political economy. National economies differ not only at the basis of Social welfare policies and the organization of scientific research and labour-management relations, but also at the role of the state in the economy, the CGS and industrial structure and the social and political purpose that they are expected to serve. At this point we would like to focus on Gilpin’s(1996) views on the US and Japanese states’ economic role. Japan has a strong state that is overtly involved in economic life in cooperation with private enterprises for the collective good of the Japanese society. Government bureaucracies and big business form the ruling alliance, typical of the Japanese collective capitalism(Gilpin,1996). Administrative guidance, the targeting of specific competitive industries and the support to research clubs are the Japanese state instruments. The Japanese self regulating or relationally regulated and self policing system is characterized by a political-bureaucratic fragmentation and it is suitable for the development of a skilled workforce and the minimization of costs in business operation(Dore,2000b)(Gilpin,1996). On the other hand, the US state is driven by the political institutional structure system(the federal system) which divides and subdivides the authority on the economy between the Congress, the executive branch and the states. The constitution also divides authority between the executive(the cabinet),the legislative(the Congress) and the Judicial branch. At some points individual businesses and business associations have access to the state’s structure with rent-seeking intentions, and thus form 1 The openness indicators are the tariffs level(must be low), trade proportions(ratios of trade to GNP,must be high) and the concentration of trade within regions(must be high). When the hegemonic state is at its ascendancy (like the US state in the post war era) it highly supports and enforces international trading structure openness but when it reaches its decadency it has a moderate and controlling thrust for openness(Krasner,1976)

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something like a business-state market. But, in general, the institutional(formal or informal) environment is characterized by the opposition between private and public sectors(Hillman and Keim,1995) (Gilpin,1996). Auty(2001) in the same fashion with Krasner distinguished between resource poor countries(like Japan) and resource abundant countries(like USA) and put the state in a catalytical position recognizing that it is the central initiator of economic development policies. He attempted to create a model of competitive industrialization by looking at the economic development trajectories of “developmental states”(in resource scarce countries) and factional predatory wealthy states(of resource abundant countries). The developmental state can guarantee sustainable and equitable economic development through the equitable provision of access to land and education and second, through the promotion of public accountability and competitive economic diversification. All the above factors are characteristics of a resource scarce country(like Japan) which is usually guided by a strong developmental state, that leads to the enhancement of the human and social capital along with a very healthy developmental progression to sustainable economic success(Auty,2001). 7.2 The IR Liberal Institutionalist school of thought conceived as a pro-globalization trend The neorealists’ views on the necessity of a strong hegemonic state as a regulative factor of the international relations are not embraced by the liberal institutionalist IR school of thought. The liberal institutionalists are proponents of a modern theory that circumvents the state as an autonomous entity and extends the field of the developed countries’ interaction to wider boundaries than the national boundaries(regions), and to players other than the states(interest groups and firms). This philosophy is based on interdependence rather than independence, and thus enfolds both cooperation and competition between the players. In terms of values and institutions, the Liberal Institutionalists emphasize on the similarities and avoid the dividing parameters. In similar vein, comes the promotion of the trading state1 contra the military state of the past and the western type of democracy contra the authoritarian regimes. Every society should follow a linear globalization socioeconomic and political transformation with the optimum target to reach to an influential and hegemonic development level, that is paradigmatic for the developing societies (Hummel,1998)(Baldwin,1993). Has Japan reached at this optimum level of society? One way to measure it is to look at two generally acceptable indexes among the developmental studies: The per capita income index and the United Nations Human Development Index(HDI). The HDI is a combined index measuring each country’s deviation from the highest health education and income2international level. In 1993 Japan was number one in HDI and number three in per capita income, while USA was respectively sixth and tenth. Again we can say that Japan qualifies for a dominant development model. But are the Japanese institutions and values ideal for globalization? Which countries could become the followers of a sakoku3 society,

1 The trading state is the state promotes trade and backs the increase of national wealth as a means of power to international relations. It is considered as a modern and natural state, while the military state is outdated and unnatural(Hummel,1998). 2 The indicators used to compute the HDI are: life expectancy at birth (for health), adult literacy rate and average number of years of school attendance (for education), and adjusted average income in purchasing power parities (for income)(Hummel,1998,p.10). 3 Sakoku= the ‘closed country’. It can be conceived as a historical syndrome of the Japanese national identity (Hall,2004)

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a Japanese-like peculiar capitalism or a newborn democracy? Is it necessary to follow of one strict national development model?(Hummel,1998). 7.2.1 Liberal Institutionalists and their business theories counterparts. In similar vein with the Liberal Institutionalists Susan Strange’s(1992) interdisciplinary framework notes that the international relations policies had to adjust to the changing structural factors of the world economy. According to this perception, world politics and world business (where firms are important actors) have the same roots and are developing together leading to structural changes in the world economy and society, which also brought inevitable changes in the nature of diplomacy. The most important drivers of the global structural change are: the accelerating rate of technical change, the increasing internationalization of production (increase of capital mobility) and the change in the structure of knowledge(promoted by cheap and fast telecommunications). The dispersion of the manufacturing industry to NICs1 found host governments and incoming MNEs to bargain2 for many reasons. With the Structural Change being perceivable everywhere, there was a u-turn in traditional economic policies towards export-promotion and liberalization-privatization(from import-substitution and protectionism) in developing countries, in the socialist block, in the US-Japan relationships(Strange,1992). Apart from state-to-state diplomacy after the structural change two more sides of diplomacy were also added in IR activities: firm-to-firm diplomacy and states-firms diplomacy(Strange,1992)(Boddewyn and Brewer, 1994). All those relationships are driven by competition and the new meaning of wealth(as a means to power), with the states being adaptable and quick responders to external forces, protectors of their territory, participants in a game of competition with other states to ensure better market shares by choosing the relevant TNCs as partners(Strange,1992). 7.2.2 The Region State as a product of global structural changes. In the same spirit, Ohmae(1993) adds that the nation state can no longer control the flows of economic activity or manage economic actions. The economic map is drawn very differently from the political map, where nation states used to rule. So he constructs and defines the Region State as the modern state that aroused from the complex multinational economic premises and can provide the necessary conditions(externalities, spillovers) and the institutional infrastructure for highly flexible network-based inexpensive services business , sales and service networks, management information systems and new technologies. Even the strategies of new MNEs are now adopting an incremental region-oriented market entry approach3. Region States welcome FDI and the type of foreign ownership that improves the quality of life of their population by increasing employment and productivity of labour. On the other hand, nation states are not always welcoming to foreign presence because they have to manipulate exchange rates, trade imbalances and even control firms according to their nationality, depending on their diplomatic relationships with their home state. The new national government responsibilities are 1 NIC: Newly Industrialized Country 2 The emergence of the MNCs is a consequence of three factors: First, the appearance of new materials and new processes and new products to the market and the resulting decrease of Product Life Cycle versus increased R&D costs. Second, the liberalization of international finance and third, the steady cumulative lowering of real costs(Strange,1992). 3 Unilever and Procter and Gamble entered to Japan in Kansai Region and not via the capital Tokyo, where large MNES used to enter and from there build a large national network. By realizing that they do not have to build a network to the entire, They chose this region(region that has the 7th GDP rate in the world) after careful market planning that pointed to several desirable characteristics of the market characteristics,.

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restricted to foreign policy, macroeconomic and monetary policies planning. Furthermore they have to set the basis for business advancement with the proper infrastructure, taxation and education system. What they have to avoid are the illusions of the past: the control of information, the restriction of access to particular goods(via tariffs) and the nationalistic economic stance (Ohmae,1993). 7.3 Convergence to a single model: The synthesis of IR and the fragments of Business Comparative Studies At some point of time in the recent history(in the mid 80s) Japan was economically very powerful and very distinctive from the other economies, something that did not qualify the country for a hegemony and could not fit to globalization schemas. This is a condition that was confronted by the IR literature schools of thought and passed on to business theorizations. Nowadays, the above IR paradigms are 20 years old and can be considered as outdated. The IR literature is advancing towards new challenges. On the other hand the business theory academics split into hegemony–convergence camps. We believe that the business-oriented comparative studies purpose is neither to nominate powerful and efficient national institutional or developmental structures, nor to place institutional structures to a single model dictated by the homogenous logic of globalization. The purpose should be an amalgamation of the two (hegemony and globalization, unilateralism and convergence). The IR academics, in the Japan-USA case, are now analyzing the triadic (Japan, US, Europe) structure’s functionality, with Japan being an isomeric member with equal weight to the other two. Their focus of analysis is on the distinctive institutional elements in isolation of other purposes. So, by looking at the IR’s literature paradigm shifts, I can not see the Anglo-Saxon systems prevalence or globalization as a leveler of any national institution-based business comparisons. Conclusion Based on the deep US and Japanese institutional foundations and the two countries’ history we have noted that two distinct CGSs with dissimilar labour markets and distinctive domestic and international strategies have co-existed since the present day. From the early nineties the US innovation system and financial system advancement and their projections-effects in the international economy, were causally contrasted to the financial crises and the discontinuous inefficient technological trajectories of Japan. The proponents of convergence and globalization contested the efficiency of the Japanese development model and causally fit the structural change to the Anglo-Saxon model and its supporting institutions. The homogeneity-divergence tug of war is symbolically elucidated through the analyses of the IR schools of thought-which logically have political and modern state authority implications- that were mature enough to place Japan in its well deserved place: next to the US in a bilateral position with the other members of the Triad. In the beginning of the 21st century with the business literature to be espoused by a cataclysmic number of different social and humanistic disciplines’ traits, we don’t see that it is spiritually enlightening for comparative analysis to proclaim national models for giants as the classical school had done. We believe that the direction is indicatively inductive: from a(area) to w(the world) and not vice versa. A revisit at foundations of the undefined institutions would make the business scientists to embrace, understand, respect, adapt to and expand the elements of diversity alone. At this spirit, comparative studies need to fathom the endemic constituents of each system in comparison as there are still many inconspicuous and unexamined areas. In this sense Japan is treated as a symbol of diversity and the USA is a momentum.

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