Japanese Firms and Intra-Asian Trade and Investment - Case Study Example

Japanese firms and intra-Asian trade and investment How did the production networks established by Japanese firms in East and Southeast Asia encourage intra-Asian trade and economic integration since the 1980s? Japanese firms and intra-Asian trade and investment Introduction The development of close trade ties between Asian countries in the 1980s was influenced by the dynamics of different production networks. The aspect of specialization in different Asian countries led to the rise of sophisticated production in the electronics industry, textile industry as well as in the automobile industry. The Japanese economy established these production networks in different Asian countries encouraging intra-Asian trade as well as economic integration. In this article, a clear insight on the influence of the production networks to the intra-Asian trade as well as integration of the East Asian region is provided. A clear analysis of the financial system adopted in the region and their role in the integration process during the 1980s. The paper also reviews the specific features of the firms that played a role in the integration process. It also incorporates the different features of the intra Asian trade as well as the causes of change across the region. Some of the countries articulated include Taiwan, the people’s republic of china, South Korea, Bangladesh, India, Singapore, as well as Hongkong. The paper further reviews the implications to the business systems of the Asian countries hosting the different Japanese firms. Both the advantages of hosting the firms as well as the disadvantages are covered. Background The establishment of production networks by Japanese firms in southeast and East Asia was encouraged by Japanese FDIs since 1980s. This was motivated by typical foreign direct investments between developed nations and the developing nations. This was based on factor of prices and the equalization model and this has been the basic motivation for most Japanese companies to invest in Asian countries. Taiwan leadership under the independent union movement help in building links with Japan. Japanese companies went into Taiwan searching for cheap labor. The development of Taiwanese companies led to the demand of iron, steel, technology, chemicals, as well as spare parts, which mainly came from Japan. Since 1985, Japan has relied more on foreign investment other than trading within their own country. This was considered as an overseas production as a concept of internationalization. The demand of Japanese technological production system encouraged trade between Japan and Taiwan. It is pertinent to note that the increased balance of trade on the Taiwanese side triggered interests in economic integration since this would help enhance their economy. South Korean companies such as Hyosung group as well as SK holdings sourced technology from Japan two decades ago. Japan was instrumental in encouraging technological development in South Korea. During the 1980s, most of the Japanese companies started developing and establishing networks and market niches South Korea. This led to the growth of credit flows, aid, and trade, which rose together with Japan’s foreign direct investment and significantly strengthened the economic ties between Asia and Japan. The policies implemented in the Korean economy highly reflected the Japanese economic integration concept. The table below indicates some of the aspects that explain the trade relationship between Japan and South Korea. The South Korean government policies were drafted to encourage smooth exchange of goods and services between the two countries. This was in the spirit of economic integration 1960 to Mid-1980S Mid-1980s-1990s INDUSTRIAL regulations encouraging big business from Japan Promotion of SMEs export to Japanese market Export orientation Cooperation between Japanese and Korean heavy as well as chemical industries Trade liberalization enhanced cross border transactions A repressed labor market maintained labor costs low. Emphasis on staff training (Fruin, 1998) Bangladesh economy opened up more than before for cross border trade in the 1980s. The country borrowed heavily in technology from the Japanese organizations established in the country. The trend of rising interdependence had crucial implications in the regions whenever there was a severe economic downturn. Although Asia would be hit by the economic crisis at times, the Japanese companies remained hopeful that the future of their trade was still promising because various aspects discussed in the advantages section promoting partnership (Latham, 2006). They do not expect most parts to recover from this crisis, but they still have plans of expanding most of their overseas operations. Business links between Asia and Japan strengthened significantly in the 1980. Because of this, Japanese exports to Asia have doubled while their imports rose by more than 70 percent as shown in the table below (Latham, 1994). percentage trade growth as a result intra-region trade REGION 1986-1990 1991-1995 1996-2000 east Asia 42.52 26.91 75.02 south Asia 31.2 21.79 34.43 Graph: graphical representation of the percentage trade growth as a result intra-region trade (Lee, Kwon, & Choi, 2007) Inter firm and intra firm production network in the Asian market. This production network characterized the production network across Asia in the 1980s (Fruin, 1998). Activities encouraging economic integration Korean financial systems were heavily influenced by Japan. This was using Japanese technocrats in financial reporting and analysis in countries such as Singapore. The financial systems in Japan can be closely linked to the corporate governance within the country. It is pertinent to note that major structural variations in Korea’s business system were because of Japanese firms such as Daewoo. Japanese business consultants were the avenues of the structural variations in other Asian countries. Until the burst of the bubble economy in 1991, one key factor of corporate governance in Japan has been inadequate financial control, and this has prompted them to establish various forms of strategies to solve this problem. The changes in Japan were reflected in the large commercial banks in Korea where increasing foreign equity participation was evident not only in commercial banks but also in other sectors in the financial sector. Lack of adequate financial control in Japan has led to several consequences for most of the Japanese IPNs organizations (Fan, Hanazaki, & Teranishi, 2004). The firms have not given the locals any chance to participate in key decision-makings, but instead established indirect and centralized control through expatriates. However, Japanese organizations have insisted that the key reason as to why they do not increase their shares of the local managers in East Asia arises from the fact that few people qualify because others do not know enough Japanese. The commercial banking structure of the country is an influential aspect in the financial system of the country. When there are similar practices in the banking sector it is easy to perform cross border transactions thus encouraging trade (Dolan, & Worden, 1992; Legewie, 1998). In India, their openness to international trade with close links in the automobile manufacturing industry encouraged rapid regional integration. The role of various government authorities with financial operations is clearly defined by the country’s money markets regulations. The influence of the monetary policies of Japan is felt across the regions it has significant trade with Japan. As is always the case, exchange rate volatility plays a critical role in influencing the extent in which trade can take place between two partnering counties. This case also occurred in the Japan and other Asian trading partners in the 1980s. Foreign currency changes are closely observed in cross border business entities. Effect of Japanese financial system changes as well as technological changes to India The Indian financial system and business structure heavily borrows from the Japanese case. As a facet of Japanese financial system, it is evident that increased exchange rate volatility discourages regional exports and the eventual establishments of firms in Japan. However, in cases where the currency was stable, many firms found it wise and comfortable to establish their businesses in Japan. Such a favorable business environment was bolstered with the existence of stable financial institutions and intermediaries between Japan and Asian other countries. Japan has been in the ahead of other Asian countries in terms of technological development. The country’s technology and engineering led to the development of successful manufacturing industry in the country. This had an impact to the type of exports Japan took to through the development niche in the production and distribution of technology-intensive products (Tachiki, 1999). Many trends fostered the current flurry of trade negotiations and intra-Asian trade partnerships because technology played a critical role in trade between Japan and other Asian countries. Evidently, the level of trade partnership between Japan and Asian countries could have been low if technology lacked. The need to exchange various technological needs also played a critical role in encouraging the existence of partnerships between Japan and other Asian nations. It would absurd and illogical to discredit the role of technology in any regional partnership as witnessed in this case (Tachiki, 1999). For instance, it is shown that trade flourished between Japan and other Asian countries because industries could segment their value chains into convenient constituents. Additionally, technology enhanced communication between Japan and the other partners thus reducing the distance, enhanced speed, and ensured a well-coordinated geographical integration. This resulted in the establishment of good trading partnership in the Asian region. The need for outsourcing and transfer of opportunities also formed the basis of partnerships in the region as driven by technology. With the existence of such technological knowledge, the countries were attracted to trade in the region because of cheap cost, fast, and attainment of ubiquitous standards (Tang, 2011). The role of proximity in encouraging economic integration Issues centered and conservative nature of Japanese production networks in Asia is proximity. This has facilitated centralized control, which has a scope that diminishes with increasing distance once any Japanese firm has extended its value chain across different borders (Lee, Kwon, & Choi, 2007). It is also faced with various coordination issues and the lack of immediate disruptions. Therefore, firms have had minimal success thereby reducing the chance of such disruptions. Japanese firms are not in any better position to manage these risks than other firms are. However, they can control their East Asian affiliates from Tokyo, since the region is part of the same time zone (Shih, 2012; Tachiki, 1999). Asia’s proximity to Japan has enabled most Japanese firms to implement centralized and Japan-centered IPNs in a fashion that is efficient. Additionally, the size of these firms and their strategic focus is what has shaped the organization of Japanese IPNs. This leaves us with no doubt that several and definite features of domestic production systems have shaped Japanese organizations in East Asia. It is pertinent to note that when a domestic production system is not self-sufficient in that it requires supplies from other countries cross border trade is encouraged. This encouraged intra-Asian trade (Findlay, & Urata, 2010; Legewie, 2000) Production networks in electronics in relation intra Asian trade Japanese electronics firms were leading in technology in the 1980s. Japan accounted for more than fifty percent of the Asian electronics industry then. The transfer of technology to other countries is evident from the table below as other countries such as South Korea became noticeable in the world map. Firm’s definitive features play crucial roles in shaping the international production of these organizations. For instance, one of the peculiar features of japans’ international production networks in electronics is the considerable role played by medium and small sized enterprises. Small and medium enterprises have higher Outward processing relief than their other larger and vertically integrated counterparts do. Smaller enterprises that produce final products have few final products and narrow products focus (Khan, & Yoshihara, 1994; Tejima, 1998). Small firms that Japan has established in both East and Southeast Asia have few resources and capabilities; many of them do not have adequate or strong proprietary assets. International production involves the transaction costs that most small and medium enterprises may be too little to control (Friedman, 1988). For this reason, these small firms can by pass such size related barriers to internationalization if they are a part of a network that has been centered on a key organization or company that minimizes the transaction costs, which are involved in the international production (Kikuchi, 1983). This includes such transactions as hierarchical supplier’s networks that have the traditional characteristics of the Japanese electronics industry (Nakayama, Boulton, & Pecht, 1999; Ernst, 2000). Causes of change in the Japanese economic environment The bursting of the bubble economy forced many Japanese firms in network production to minimize their costs in East and Southeast Asia. This was to be done at every stage of the value added chain in order to rationalize the existing IPNs by opening up their own Asian production network. The volatility of the exchange rate in the region encouraged the integration process. This implied that Japanese affiliates in East Asia paid a high amount of prices for their production equipment and other components, which were imported from Japan to Asia (Wood, 1992). This wiped out any benefits from low labor costs. Some of the most affected companies include sonny, which heavily rely on components, which are shifted from Japan (Nakamura, 2004). Localization of other components sourcing from Asia, thus it becomes a serious prerequisite for sustaining international market share. According to Iito, & Krueger, (1997) the appreciation of Japan yen also led to an increase in the variety of components, which were cheap and reversed imports from East Asia into Japan. For example, this occurred to imports of television sets and other audiovisual equipments. Additionally, there were an increasing number of various other components and computer related products (Abe, & Wilson, 2009). For example, in 1995, the first quarter of the year, most Fujitsu’s PC parts, components, and products were sourced in Japan. This shows an estimate of ninety-five percent of Fujitsu’s products, which were imported in Japan. The bursting of the bubble and appreciation of Japanese yen exposed many hidden costs of closed and others that are Japan centered Asian Production networks (Lau, & Lee, 1999). Intra Asian trade As it has been discussed before, the production networks that were established by Japanese firms in Southeast and East Asia have significantly encouraged intra-Asian trade and the economic integration since 1980s. This is because Japan made it possible for Asia to have ready markets for all the products that are manufactured within Asia, and even those that came from other continents. There is a more friendly approach in east and Southeast Asia as people mingle to carry on different types of trade (Das, 2005; Arndt & Hill, 1999). Additionally, the growth of intra-Asian trade helped in the boosting of the economy of Asia not only in east and south Asia, but also in other parts of Asia. Consequently, improved economy led to the improvement of the Asians’ living standards and this is because most people could afford basic commodities. The spread of diseases and rates of crimes were also minimized; the continent enjoyed continued political stability. Evidently, this boosted both Asian and intra-Asian trade (Langhammer, 1997). In the 1980s, economy in East and Southeast Asia was not stable. This was due to lack of political stability, and there were enormous rates of crimes as people tried to acquire their living. This, therefore, did not encourage trade and hence lack of economic growth. However, when Japanese firms introduced the production networks in East and Southeast Asia, things changed for the better. Implications to the business systems of the Asian countries hosting Japanese firms The implications to the systems within the economies of these countries were both advantageous and disadvantageous. Advantages Different Asian countries especially in the east and Southeast Asia enjoyed various benefits after hosting Japanese firms. 1. They enjoyed economic growth through trade promotion. In this case, Japanese organizations treated most of these Asian countries as developing nations and assisted them to achieve reasonable economic prosperity. They did this by working together with them and strengthening their export industries, improving any other of their systems that were business-related and nurtured human resource. 2. The shift from social capital to a more private sector driven economy is because of the operation of Japanese firms in these countries. 3. Helped in strengthening the certification procedures of these countries through total quality management 4. Adoption of helpful corporate taxation policies 5. Encourage of an effective business culture. 6. Enhanced the human resource management of the other countries Disadvantage 1. Influenced the corporate governance in other countries negatively; when carrying out business in new countries, foreign investors from Japan come with their preferred governance structures. This may have a negative effect to the domestic corporate governance and the eventual performance in the industry. The alteration on the existing corporate governance may create inherent leadership challenges to the host nations (Culpepper, 2011). 2. Adoption if inappropriate techniques in organizational structures: The encouragement of Japanese firms to participate in foreign countries result in the adoption of organizational structures that are inappropriate to all business environments. This often results in unstable working environments that may jeopardize the performance a particular industry. 3. Limits the participation natives from host nations in the business arena; The participation of Japanese firms in foreign economies drives way the participation of natives from lucrative businesses. Oftentimes, Japanese firms as multinational companies have formidable financial muscle besides importing workforces from Japan. This plays a crucial in creating unfavorable business environment. They may also be exempted from domestic policies and tariffs, which natives do not. This is a disadvantage (Morck & Nakamura, 2003). On the other hand, Japanese firms in Asia take into consideration the diversity that is there among different economies and looks at how to assist them accordingly (Whitley, 1992). Additionally, Asian countries’ business systems benefit from the economic ties that are created with Japan. Since Japan has economic partnership with various developing nations, it assists Asian businesses to link with other international markets. As a result, the effects of globalization set into these countries. The figure below represents an interaction of different business networks in the global economy. The impact of globalization to the business systems of a country is usually systematic as gradual adjustment takes place to match the expectations of a free market (Flowers, 1999). (Flowers, 1999) Business systems upgrading On the other hand, business systems in Asia benefited when Japanese organizations helped them in upgrading their business systems. In this case, Japan ensured that all business systems in east and Southeast Asia enjoyed trade. Firm business foundations were laid and other international rules were integrated so that they could carry out international business. With their business systems upgraded, the organizations productivity can increase. It is pertinent to note that the aspect of total quality management in Japan was developed. Total quality management is one of the business structures that help in supporting an organization to engage in capability building continuously. On the other hand, capability building is responsible for adjustment of the business process to match international standards. This process is beneficial to the Asian economies in that they end up with higher quality products (Helmsing, 2011). Strengthening of certification procedures Certification procedures in Japanese firms are stringent. The quality movement in Japan is more than six decades old. Rigid quality standards for products are a common characteristic of Japanese firms. An example of the impact of Japanese firms in Asia is the switching of many low-income cotton farmers to new trends in the industry. The trend is the adoption of standards that insist on the use of organic cotton in apparel design. Through the pre-organic cotton initiative run by two Japanese firms known as Kirkuk and Itochu, the Indian farmers have adopted this trend. The cotton is pre-certified and yields better incomes when compared to the conventional cotton (Kikakuchō, Kaihō, Kujō, & Taisakushitsu, 2000). Benefits to the financial system It is pertinent to note that banks have been used as the major source of financing in Asian countries. Japanese firms influenced the adoption of unique financing opportunities in East Asian countries. The common trend has been the use of an in-house bank for established business group. Credit source and its cost are a critical factor in the development of the private sector of an economy. However, the impact of institutionalized trust in these countries is still evident (Rao, 2008). Impact on business governance Many Japanese firms have a unique corporate governance structure. A number of clustered operatives characterize the Japanese business system. Their operatives are known as Keiretsu and are organized in vertical and horizontal orientation. This creates a network framework of business. The same corporations extend their operations into other Asian countries carrying with them the vertical and horizontal links with other organizations. In Japanese firms, the effect of cross ownership and family controlled business is evident from the proportion of board members shown in the following chart. The operatives have unique and interlocking directorates; Companies in different cross-owned industries characterize horizontal links. This design has been implemented in other countries where there is cross shareholding of various companies with Japanese origin (Culpepper, 2011). Figure: Board Representations (Morck & Nakamura, 2003) Impact on taxation The entry of Japanese multinationals to countries like Taiwan has created a readjustment in the business systems to attain equilibrium. Corporate taxation is a key element that any organization has to consider before entry into a country. Japanese corporations have led to the reduction of corporate taxation in some countries as those countries strategies to attract them to establish operations in the country. Corporate taxation has an unswerving effect on the performance of a company (Phua, 2007). Impact on human resource management Human resource management is considered as one of the central ingredients to the success of Japanese multinational corporations. The human resource management of Japanese companies is keen on seniority and respect. This influenced business structures in other Asian countries. Most Japanese multinational corporations engaged their local human resource operations into stringent training programs where seniority was emphasized. The shift from mere labor control to well thought human resource management strategies in Japanese corporations are aimed at enhancing their effectiveness. In China and the Philippines, Japanese corporations have influenced the integration of recognition systems in other organizations. These structures are aimed at upholding the employee motivation in these institutions. The structure depends on the evaluation system aligned with the growth targets of the corporation. Leadership is necessary in ensuring successful management of human resources (Hanaoka, 1995). Business culture Japan is acknowledged as one of the most homogeneous countries in the world. This has a considerable influence on the organizational culture within Japanese firms. The focus on conformity and teamwork is one of the key features noticeable in Japanese firms. At the business platform, the same focus on group success is highly considered. Organizational culture in Japanese firms influences the practices within the industry with a set of rituals and practices being adopted by other companies in different countries. The basis of operation of Japanese organization is a service to the society rather than profit maximization. The ranking system adopted in Japan is reflected in their firms across the world. This is where an individual is expected to understand their role in an organization. The location of Mitsubishi Motors’ facilities in Thailand and Philippines had a considerable influence to the local business culture. (Nishiyama, 2000). Technology Evidence regarding the implications of Japanese firms to the business systems on host countries suggests considerable transfer of technology relating to manufacturing and distribution channels in host countries. This includes relocation of retailers, suppliers, banks, manufactures and trading companies. Japan has established itself in host countries creating companies that engage in numerous industries, distributing and producing both consumer and capital goods (Latham, 1994). Japan has made extensive investment in different countries across the world especially in Asian countries. Countries where Japan has made such extensive investments in autos and parts, electronics, banking, chemical and metal may affect market opportunities for both domestic and foreign firms involved in supplying and distributing business. Foreign markets may have trouble in entering Asian markets because Japanese firms are engaged in duplication of their own home market practices and organizations. This involves managing their supplies, purchasing components, and marketing products to local consumers (Legewie, 1998). Despite the problems experienced by foreign firms, Japanese business activities have led to several advantages for the local companies. Technological and managerial skills originating from Japan became beneficial to the Asian economies in terms of increasing quality control, productivity, and production management. Improved services and new products could be of substantial benefit to consumers (Dolan & Worden, 1992). Areas next to Japanese industrial estates and production facilities are already enjoying the benefits associated with improved infrastructure such as highways constructed by the investing firms. From a global perspective, if companies from other nations are found to be excluded from the distributor or supplier contracting opportunities, due to Japanese business activities in Asia, these countries may be under pressure to pursue negotiations with host countries. However, the perceived trade barriers may become blurry thus making it impossible to determine the appropriate partners to negotiate. It may be extremely difficult to distinguish the actual source of market access problems caused by indigenous practices that have integrated in to Japanese firms (Fruin, 1998). Conclusion The beneficial impacts of Japanese firms on business systems and the national-institutional structures of different countries reinforcing the aspect of dynamic equilibrium are evident. The dynamic equilibrium of business systems is a consequent of international business, multinational institutions, as well as financial factors. The disparities in the Japanese business systems and other Asian countries business systems have led to transformation of some of the systems. The different consequences of the entry of powerful Japanese multinationals into the countries are evident from the shifts outlined above. References Abe, K., & Wilson, J. S. 2009. Weathering the Storm Investing In Port Infrastructure to Lower Trade Costs in East Asia. Washington, D.C.: World Bank. Arndt, H. W., & Hill, H. 1999. Southeast Asia's Economic Crisis: Origins, Lessons, and the Way Forward. New York: St. Martin's Press. Culpepper, P. D. 2011. 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