Control and coordination

The governance structures that determine whether control over international

production networks is centralized or decentralized are highly sensitive to peculiar

features of national institutions and markets. There is a broad

consensus that Japanese companies, once they moved abroad, were less obsessed

with equity control than American companies.This is a reflection of important differences in the domestic capital markets of both countries and the fact that Japanese firms have had, until quite recently, ample access to patient capital. Some observers also claim that Japanese firms, especially in East Asia, are more willing to engage in joint  ventures and other forms of inter-firm cooperation than American companies because of domestic relations with suppliers. “[A]ccustomed to operating in their home market through an extensive network of cooperation agreements, [Japanese firms] show a higher propensity to enter partnerships in Asia than American

firms”.

As long as their objective was the penetration of protected domestic markets,

Japanese subsidiaries in Asia had relatively strong local roots; local content was

substantial, and this gave rise to a first generation of domestic support industries.

At the same time, these subsidiaries often had considerable leeway with respect to

the main objective: how to reap the windfall profits available in highly protected

domestic markets.

The Matsushita group provides an example. Its core company Matsushita

Electric Industrial (MEI) arguably is “…the company most deeply involved in

East Asian electronics, and most representative of the Japanese approach.”

. Matsushita’s involvement in East Asia started in the early 1960s with minority joint ventures strictly targeted at heavily protected domestic markets. The so-called “mini-Matsus” originally produced simple products like batteries, radios, electric fans, rice cookers and other low-end home appliances, small TV sets and some related components. As minority joint ventures, most of these local affiliates had considerable decision autonomy not only for employment, work practices, and salary, but also on how to organize production, support services (quality control and maintenance) and procurement. Decision autonomy was probably most pronounced in the choice of marketing approaches and distribution channels. Considerable local linkages developed from these investments, and local value-added increased sharply, often, however, at the expense of cost efficiency and quality.

Once their objective shifted from the penetration of domestic markets to

exports, Matsushita increasingly relied on 100 percent affiliates or at least majority

joint ventures. Local linkages declined as components were procured either

directly from Japan or from Matsushita’s affiliates within the region. This general

pattern has been followed by all Japanese electronics firms: as they shift to export

platform production, they close their Asian production networks to outsiders by

centralizing almost all strategic decision-making and high value-added activities in

Japan. Until a few years ago, sourcing components from independent local

suppliers played a very marginal role, and was restricted to technically simple lowend

components and support activities; almost all high value-added components

were imported from Japan.3 This heavy dependence on Japan appears to have

reached its peak by 1992.4 Between fiscal year (FY) 1991 and FY 1992, East Asian

affiliates of Japanese electronics firms increased their procurement from Japan from

less than 40 percent to nearly 47 percent, much higher than the average share of

38 percent reported for all industries. While the share of intra-regional

procurement has stagnated at around 15 percent, there has been a substantial

decline in local purchases from nearly 44 percent to less than 37 percent.

The closed and Japan-centered nature of the Asian production networks of

Japanese electronics firms extends well beyond the sphere of procurement.

Japanese electronics firms rely much less on local managers and engineers in their

Asian affiliates than their American and European counterparts do, leaving Asian

affiliates little scope for autonomous decisions. Japanese electronics firms routinely

engage in sound and systematic “on-the-job” training. Most of the training

however remains restricted to simple operational capabilities required for

production and maintenance.6

We also find only a limited transfer of the Japanese production model to Asian

affiliates of Japanese electronics firms. In most affiliates, seniority-based wage

systems, job rotation, “life-long” employment, quality control circles, and just-intime

(JIT) management approaches play an insignificant role. Often a crude

Fordism prevails, at least during the initial phase of production.7 This contrasts

with the situation in the United States and Europe, where Japanese firms have

made serious attempts to transfer key elements of their domestic production

system and to adapt them to the peculiarities of local institutions and labor

markets. In contrast to the situation in Asia, Japanese IPNs in the United States

and Europe have undergone a certain limited convergence with the investment

patterns of American and European firms (Abo 1993; Encarnation and Mason

1994; and Gittelman and Graham 1994).

The issue of governance structure thus leaves us with a few puzzles. In contrast

to a general perception that Japanese firms are more willing to engage in

partnerships in East Asia, we find that this has not been the case in the electronics

industry. Early partnerships serving local markets gave way to highly centralized

and closed governance structures as production moved toward exports for third

markets.