Japanese and American Capitalism are Fundamentally Different

2009 Japanese and American Capitalism are Fundamentally Different

Stephen Denham Trinity College Dublin 16/2/2009

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Abstract As countries around the world sink further into economic ressesion, the fundamental principals of business are revisted. Who do corporations really serve? By reviewing the development and case studies it is clear, the objective of corporations differs hugely in Japan to America.

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Introduction The present recessions in the US, Japan, Britain and Germany, show us that undoubtedly, world markets are more intertwined than ever before. Globalisation is reaching a tipping point. In this smaller world, our differences are becoming more poignant.

Over the twentieth century, two main forms of capitalism emerged, American and Japanese. Although there are many aspects to them, this paper’s focus is on the fundamental difference – corporate governance. Who do corporations serve? In America and Britain, companies make decisions which maximise sustainable value for its owners – the shareholders. In Japan and Germany, they make decisions to maximise value for a variety of stakeholders. The difference draws comparisons between Adam Smith’s and John Nash’s idea of the best result – do what is best for oneself or do what is best for oneself and the team.

This paper argues that the two forms of capitalism fundamentally differ in their elementary purpose.

While in both forms, capitalism originally began to provide value to the community, the Japanese have stuck to that creed.

Note 1. Zaibatsu were huge family owned enterprises in Japan which held monopolies. Keiretsu are large conglomerates with many subsidiaries, usually including a bank.

2. Stockholders are the owners of corporations. They invest money in the company in the hope that the company’s success will pay dividend to their investment. Stakeholders are people who benefit from a corporation’s existence – employees, stockholders, suppliers, customers, communities and other externalities affected by a corporation’s transactions. For the most part of this paper, referring to American Capitalism refers to capitalism in Britain as well. American capitalism is also known an Anglo-Saxon or Western capitalism. Referring to Japanese capitalism also refers to capitalism in Germany and France (Plender, 1998).

3. Corporate Governance is the idea central to this argument. In America and Britain, it refers to whether firms pursue the interests of shareholders. In Japan, Germany and France, it refers to whether firms pursue the interests of stakeholders (Allen & Gale, 2002).

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The Development of American Capitalism Capitalism was born out of the industrial age. The first industrial revolution brought large numbers of people to towns and cities. This began new simple market places and industries. In Britain, till the early twentieth century companies existed but were still family owned and managed. The second industrial revolution was when railroads were built across the United States. Such a large logistical operation, together with the new markets it opened up, as well as the market of distribution itself, created enormous growth in the need for large hierarchal firms. This happened in America due to its large population being highly dispersed (Alfred D. Chandler, 1984).

Through the years, these large companies expanded internationally, diversified in their products and above all, joined together in the Great Merger Movement of the 1920s. This caused the schism of ownership and management. Salaried managers made decisions liberally. US law prevented them from acting for their own benefit. This is the birth of the dethatched stock market we know today and managerial capitalism. (Dore, Lazonick, & O'Sullivan, 1999) Corporations in America enjoyed steady growth. The international competition was, by and large, nonexistent until the latter part of the century. Unsatisfied stockholders could only sell their shares if they were not happy with a company’s governance. The success of the world economy after World War II allowed American CEOs to benefit stake and stockholders with relative freedom (Whitman, 2003). In the 1980s, Reagan and Thatcher spearheaded free-market capitalism. Privatisation was wide-spread. (Dore, Lazonick, & O'Sullivan, 1999). Reagan hailed what he called “the magic of the free market”.

Increased competition in export markets, the savings and loans crisis and some top management subordination were part of a huge shift. Shareholders became very frustrated. They were increasingly critical of the running of their companies, putting pressure on CEOs to produce profits in the short-term as is explained later (Dore, Lazonick, & O'Sullivan, 1999).

Shareholder Activism destroyed concern for stakeholder interests in America. Management reacted by mass cost and job cuts, down-sizing, out-sourcing and moving factories abroad (Dore, Lazonick, & O'Sullivan, 1999). This was the beginning of profit desperation. From the 1980s on, CEOs awarded themselves large salary increases and bonuses. Compensation payments doubled in the 1980s and quadrupled in the 1990s. This has frustrated shareholders further, causing a ‘battle of capital versus talent’ for company profits (Martin & Moldoveanu, 2003).

These events lead America to its current style of capitalism. Britain closely followed (Dore, Lazonick, & O'Sullivan, 1999).

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The Development of Japanese Capitalism The Japanese were much later industrialising. At the beginning of the twentieth century, the Japanese government made large investments in industries and from the outset were improving on western technologies. These large nationalised conglomerates were given to large rich families which became known as the zaibatsu (Alfred D. Chandler, 1984) (Dore, Lazonick, & O'Sullivan, 1999).

The zaibatsu made a conscience strategic decision to provide long-term employment to their high-skilled technical staff. That began a culture of a corporate ladder were the people who knew the business best, managed it (Chandler, Amatori, & Hikino, 1997). The zaibatsu families detached themselves from the management of what were some of the world’s largest conglomerates (Morikawa, 1992).

When the Allied Forces Occupied Japan in 1945, they abolished the zaibatsu but the culture of interlinked organisations and jobs-for-life stayed. In 1949 the stock market reopened. The zaibatsu had disintegrated.

Top management was forced to resign in the turbulent years for post-war guilt. This left a generation of younger managers who integrated the novel idea of cross-shareholdings. This meant that the shareholders of firms were banks and other firms in the same supply chain and banks. These shareholders were much more stable as they did business with them. They had different values to their American counterparts.

Many of the interlinked companies were reintegrated or remnants of the zaibatsu. They became known as the keiretsu (Dore, Lazonick, & O'Sullivan, 1999).

After the Second World War, Japan’s economy flourished at an unprecedented level. It is only recently that the bubble burst, due to the ripple effect of the US sub-prime crisis. The rise was greatly helped by their form of capitalism, and good production line relations, particularly in the automotive industry (Ahmadjian & Lincoln, 2001).

The 1970s brought with it a global inflation crisis. Britain and Japan’s inflation was over 25% in one year. Japan dealt with the problem by bringing the top union officials together with government. National cooperation brought the next year’s inflation down to single figure (Dore, 1987).

In 1989 the post-war growth bubble finally burst. Japan’s form of capitalism, which was once hailed as the best way, was fickly condemned by American analysers (Boyer & Yamada, 2000).Large keiretsu are still common today.

These events developed a different style of capitalism to America.

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American Capitalism In law, managers of American companies must act to maximise dividend returns to owners - the shareholders. This is also known as Shareholder capitalism, Anglo-Saxon capitalism or Western capitalism. The latter name is disputed later. If the managers of an American company knew that it could increase economic profit if they cut staff, then this would have to be done – by law. Appendix 1 is a clear indication of that attitude compared to other nations.

This is likely to continue further. Business schools are no longer preaching corporate responsibility, but shareholder value (Dore, Lazonick, & O'Sullivan, 1999). Recently, more than 76,000 jobs were cut in one day (FT Reporters, 2009). Former Goodyear Tyre CEO, Sam Gibara said in relation to job cuts “it is never a decision that any CEO takes lightly…but it is the consequence of modern capitalism” (Achbar & Abbott, 2003).

American capitalism is based on Adam Smith’s view that if everyone does what is best for themselves, ultimately, society is doing what is best for itself (The Wealth of Nations, 1776).

Japanese Capitalism Decision makers are not totally obliged to place the interests of their shareholders above all other interests. Japanese (stakeholder) capitalism is characterised by pursuing of all stakeholders - employees, stockholders, suppliers etc. The two charts, appendix 1 and 2, clearly show the difference in attitudes. As discussed in the later paragraph, Germany and France also have this benevolent nature.

Toyota Motor Corporation’s Chairman, Hiroshi Okuda, told a group the Assembled Money Managers “in Japan's case, it is not enough to serve shareholders”. Japan’s junior high school textbooks say children are told ‘corporations must nurture relationships with stakeholders such as suppliers, employees and the local community’. Prof. Masahiko Aoki even debated the possibility of completely employee owned firms in Japan (Aoki, 1990).

There have been many critics of Japanese capitalism, as it softens competition. Predominantly this means inefficiency, high prices and disincentives for entrepreneurship.

Entrepreneurship has huge disincentives. Traditionally university professors were not allowed to deal in venture capitalist boards. Therefore, the entrepreneur ideology was not taught. Legal changes made in the 1990s have begun to combat this. Graduates are hired straight away into long term employment, lessening the motive for entrepreneurship (Kushida, 2001).

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Prices will typically be higher with the softened competition. This is bad for customers, but what must not be forgotten is that employees are customers (Allen, Carletti, & Marquez, 2007).

Inefficiencies are also likely to occur as well with lower competition. After WWII, the American

government assumed ownership of Japanese and German owned stock. A study showed that the inefficiencies typical of nationalized enterprises were not existent where the industries were already competitive (Megginson & Netter, 2001).

Allen, Carletti and Marquez also offer mathematic models for why the threat of bankruptcy is also reduced in Japanese capitalism (2007). Maintaining employment in times of recession is counter-cyclic. It increases demand in times of recession, helping economic recovery (Achbar & Abbott, 2003).

Japanese Long-term Fidelity, American Short-Term Greed?

When comparing the two models there is one overriding characteristic of the Japanese style - fidelity. It seems ingrained to the culture and essential for their stakeholder driven capitalism. American companies, on the other hand, adopt an attitude which could be seen to be selfish. Maybe the profit motive is too strong. This characteristic can be seen by how corporations, in the respective countries treat their own and others. 

Suppliers and Customers: Even when not part of a larger keiretsu, Japanese firms see each other as part of a common end. The relationships have been long established for generations. In some cases up to 500 years. In American companies, directed by Boston academics, they think of new ways of ‘jockeying for position’ in the ‘profit pools’ (Ghemawat, 2002) (Gadiesh & Gilbert, 1998). Michael Porter assessed industries on the competitive bargaining power of suppliers and customers (Porter, 1979). This is a classic contrast to Japan, where suppliers’ and customers’ interests are respected.

Coca-Cola has in the past done everything possible to cut other companies out of the industry profits as much as possible. It has even bought out a significant part of its concentrate supplier industry, adapted the industry to its preferences and sold it off again – Coca-Cola Enterprises (Yoffie, 2007). This would simply not happen in a Japanese company.



Employees: Japanese fidelity again works both ways here. Employees of Japanese firms typically stay with one company (Yoshimori, 1995). Employees look for job security. The reasons can be seen in the development of the zaibatsu explained earlier.

Japanese and German unions are more concerned about the job security and working conditions then salary. This is clearly evident in the 1970s inflation crisis described earlier.

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Although it reduced mass job losses, it also made labor markets much stricter (Whitman, 2003, p. 3).

The desperation of American companies for profits has had detrimental effects to millions.

Child workers and starvation wages are a very real thing (Achbar & Abbott, 2003). 

Middle Managers: Japanese companies will not pay dividends to shareholders while jobs are being lost, unlike in America (appendix 1). Often jobs are cut in middle management first, which can do huge damage in the longer term. This is not done by companies who are unprofitable, but companies whose profits are down (Mintzberg, 2008).

In the US sub-prime lending crisis, banks were giving loans to people who clearly would never be able to pay them. The debt was then sold off to hedge fund managers, desperate for any returning investment (Blumberg & Davidson, 2008). This yet was another example of the short-term greed American business culture possesses.



Top Managers: American CEOs tend to last longer in the position because they are promoted at a younger age. In Japan, top decisions are made by boards instead of individuals and CEO bonuses are nothing like in the US (Kudo, Tackikawa, & Suzuki, 2002). It is easy to see why American CEOs would prefer to make short-term rather then long-term decisions if they are rewarded for rises in share price while they are in charge.

Enron was the largest corporate scandal in history. Part of the mess was that it marked up share price based on future expected profits (McLean & Elkind, 2005). If CEOs are only valued on the current share price growth in their term, what is the motive to create long-term value?



Profits: All of the above show American firms seek short term returns and Japanese prefer sustainable, long-term returns (Hayes & Abernathy, 1990).

For example, Toyota has by far outperformed GM in the long run. By the American view it performs badly because it does not pay large returns to its shareholders. Its sustainability and long-term porfit are what companies should be valued on.

Capitalism in the UK, France and Germany Japanese and American capitalism are the major modes of capitalism. No discussion of them should be limited to the two countries. They have larger impacts and influence on the rest of the world.

Convergence of other nations is clearly seen in the appendix graphs.

In the UK, corporations act similarly to those in the US. France and Germany are closely related to the Japanese, in that they focus on wider benefit. Thus, calling American capitalism, Western capitalism is inaccurate. French businesses pay a lot of taxes to provide direct assistance for its people through 8|Pa ge

healthcare, education, etc. Undoubtedly other forms of wealth (qualities of life) can easily be undervalued.

German companies have made worker representation mandatory on company advisory boards. The idea of ‘codetermination’ has become an essential part of doing business in Germany (Allen & Gale, 2002). It has also been argued that Germany and Japan have different types of capitalism. Germany with a socialmarket capitalism and Japan with a producer orientated capitalism. It is still widely accepted that these two forms differ (Whitman, 2003).

The Future and Convergences Kipling said “east is east and west is west and never the twain shall meet”. Well there has been much speculation over any convergence east and west. Little or none of this predicts western stockholders voluntarily giving up their profits to convert to Japanese capitalism. The OECD 1999 Principles of Corporate Governance report was a good step to secure equitable treatment of stakeholders (OECD, 1999). The question of convergence is not the duty of this paper to discuss. Some say Japan is going shareholder based (Dore, 2007). Others say it will become more stakeholder based (Steadman, Zimmerer, & Green, 1995). Some say it is too difficult to predict (Dore, Lazonick, & O'Sullivan, 1999).

Conclusion On the outside, there does not seem any difference between American and Japanese capitalism. Through media advertising they seem identical. Both produce similar products, compete and span across the globe.

When we see how these corporations act on the inside, there most certainly is a fundamental difference.

What could be more fundamental than why? Why does this corporation exist in the first place? Why does it do what it does? Who is it for? Through history and case studies it is clear. Japanese and American corporations have very different answers to these questions. American capitalism obsesses over the bottom line. Japanese capitalism benefits society as a whole. Not just those who already can afford to buy shares.

A deep irony lies here. In American corporations’ desperation to create profit, in the long-term, every stakeholder suffers, including shareholders.

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Appendix 1 120 100 80 60 Job Security

40

Job Dividends

20 0

Managers from were asked should a company pay dividends to shareholders while jobs are lost.

Source: Masaru Yoshimori, “Whose Company Is It? The Concept of the Corporation in Japan and the West” Long Range Planning, Vol. 28, No. 4, pp. 33-44, 1995

Appendix 2 120 100 80 60 40

All Stakeholders

20

Shareholders

0

Managers were asked who owns the company.

Source: Masaru Yoshimori, “Whose Company Is It? The Concept of the Corporation in Japan and the West” Long Range Planning, Vol. 28, No. 4, pp. 33-44, 1995 (Yoshimori, 1995)

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