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Can Domestic Firms Take a Lesson from the Japanese? – Kogod Now
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Kogod Now / Faculty Research  / Can Domestic Firms Take a Lesson from the Japanese?
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Can Domestic Firms Take a Lesson from the Japanese?

Today’s business interactions, from happy hour networking to LinkedIn lists, often thrive on a deceptively simple philosophy: It’s all about relationships. Yet the sentiment takes on a slightly different flavor depending on who’s talking.

Some interpret the maxim to mean the quickest path to success is knowing the right people. Others take the neighborly view that most prefer doing business with familiar people. In either case, the upshot is a desire to cultivate relationships and even believe something more valuable and humanistic is at stake than a business-at-all-costs mentality.

Associate Professor Parthiban David said that when it comes to relationships, US businesses have nothing on Japan.

“Relationships are important anywhere, but clearly the commitment to relationships is very different in Japan versus here,” he said. “[In the US] relationships are very important until they’re not, whereas there, relationships are going to go the extra mile.”

David stressed that neither arrangement is necessarily better, but a research project he conducted leaves no doubt that the two market- places are different, particularly in their decisions about R&D.

CONTRACT OR COMMUNITY?

Compared to Japanese managers, who tend to take a “communitarian” approach, American managers tend to be “contractarian.” The difference lies is in the way each group perceives the nature of relation- ships—the loyalties and obligations they confer.

In a “contractarian” setting, business rests on contractual, arm’s-length obligations. When terms are satisfied, the obligation ends.

By contrast, “communitarian” cultures such as Japan share close connections and a belief in give-and-take; a firm’s stakeholders are wrapped in social and cultural ties.

These philosophical contrasts yield the following practical distinctions:

  • • Japanese companies tend to have closer, longer relationships with a small group of core suppliers;
  • • Japanese firms have more interconnected business ties. For example, the owners who hold the bulk of equity in Japanese firms often are also customers or suppliers; and
  • • US firms typically hold debt through publicly traded bonds, whereas Japanese firms’ debts are often with banks—banks with whom they share other ties.

David and his co-author, Jon O’Brien of Rensselaer Polytechnical Institute, refrained from painting either society too broadly. Significant variation exists among Japanese firms. Even among US companies, David pointed out, family-owned businesses often have more in common with the communitarian model.

Especially in the past two decades, Japan’s marketplace has experienced a clash of cultures. US and UK financial institutions brought a “transactional” approach that is more contractarian. More traditional Japanese firms have “relational” owners who continue to reflect the communitarian model.

Such shifts have created tension between the shareholder model espoused in the US and the stake- holder model seen in Japan, David said. “US and foreign owners just want a return on their investment,” David said. “If things don’t work out, they sell them. For the domestic owners, it’s different. That long- term engagement is economically important to them.”

THE R&D CYCLE

David examined how these outlook differences influenced R&D strategy. The guiding principle is that companies invest in R&D to fix subpar performance. Once they solve the performance problem, they pull back on R&D spending.

Japanese companies also increase R&D activity when performance falls below expectations. But David postulated that once they achieved a turn- around, they would not stop investing in R&D—they would continue.

“The argument we’re making…is that for the Japanese, when performance exceeds aspiration, a different mindset sets in,” he said. “It’s ‘We’re doing so well now, maybe we should invest more because we need to pay our stakeholders forward.’”

What’s more, additional R&D investment can fuel firm growth, which helps everybody flourish. Those stakeholders include employees who gain jobs; partners who receive contracts, buyers, and suppliers; and banks with whom the firm does business.

Interestingly, the norms of reciprocity—by definition—are also at work when Japanese firms do not perform well. As David explained in the paper, “The norm of reciprocity spurs [stakeholders] to rally around the troubled firm: lenders provide funds on generous terms; employees may accept short-term wage adjustments; and long-term suppliers and customers are more willing to make quantity and price adjustments to assist the firm.”

Pragmatism, more than goodwill, motivates this support. “These concessions should help the firm fund the search for solutions,” David wrote.

SELFLESS OR SELF INTEREST?

David analyzed four hypotheses about variations in R&D spending among communitarian firms/ relational owners and contractarian firms/transactional owners. His data set consisted of 18,283 entries from 2,123 firms in the Pacific-Basin Capital Markets Database and the Nikkei NEEDS Database over 12 years.

The results confirmed all but one of his hypotheses (with a performance shortfall, R&D investment does not appear to increase more in firms with relational owners than those with transactional owners). David did find that when performance rebounds, transactional owners cut back on R&D more than twice as strongly as relational owners. Overall, communitarian-oriented relational owners supported high levels of R&D at all levels of performance.

The study marks an important contribution to research in firm behavioral theory because it examines cultural differences. Historically, most research assumes a universal model. This may be especially important in transitional economies, where firm owners bring a different philosophy to the table than firm managers—a distinction noted by the researchers.

David pointed out that the Japanese model is not as purely altruistic as it may appear; the communitarian approach simply reflects a more extensive set of interconnected relationships. “This multiplicity of relationships is what binds us together,” David said. “Sometimes the immediate reaction is to say the Japanese are just more trusting of each other. It’s more than that. It’s also ‘Trust, but verify.’ ”

Beyond that, he said, Japanese firms are just as dedicated to their economic self-interest as American firms, with a twist—recognition that “By working together, we all do better.”

That might be a philosophy worthy of a happy hour chat. KN mark


“Reciprocity and R&D Search: Applying the Behavioral Theory of the Firm to a Communitarian Context,” Parthiban David and Jon O’Brien, was published in the Strategic Management Journal in 2014.

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