Introduction
Since the second half of the twentieth century, Japan has been able to evolve from a developing country into one of the world’s wealthiest developed economies (Fitzgerald and Rui, 2016). A large role in this evolution has been played by Japanese multinational enterprises (MNEs), which contributed to the growth of the economy by outward foreign direct investment (FDI). Although currently, the Japanese economy is considered to be in decline, it is still one of the world’s largest economies and largest holders of outward FDI stock (Fitzgerald and Rui, 2016). This essay aims to explore Japanese MNEs, taking Toyota, 64% of sales of which come from overseas subsidiaries, as an example (Fitzgerald and Rui, 2016). The question that this paper will answer is how successful Japanese MNEs have been in competing internationally, and what factors explain their achievements and shortcomings. Japanese MNEs, mainly Toyota, will be compared to Korean MNEs, particularly Samsung, to explore whether there are differences in the approach to establishing MNEs and competing globally between these Asia Pacific countries.
Internationalization Strategy
Toyota is one of the world’s largest automobile manufacturers, founded in 1937 in Japan. The company decided to move towards FDI in 1985 when it announced its intention to establish its first manufacturing plant in the US (Aaron, 1999). By 1998, Toyota had invested in five manufacturing plants in North America, namely, in California, Kentucky, Indiana, and West Virginia in the US and Ontario in Canada (Aaron, 1999). North America was the primary FDI destination for many Japanese manufacturing firms since the late 1980s, followed by Europe (Mason, 1998). However, Japanese service and general trading companies were involved in FDI much earlier, since the 1880s, and their main destination was Japan’s neighboring countries, such as China, Korea, and Taiwan (Westney, 2001). According to Fujimoto, Nishiguchi, and Sei (1994), the Japanese FDI pattern is a sequence of investments in sales, manufacturing, and R&D. Thus, in Japan, general trading and service companies were the first to implement FDI, which was conditioned by the government policies and aimed at facilitating the Japanese exports. Manufacturing companies, such as Toyota, turned to FDI later, and their focus was on North America and Europe rather than Asia.
Like Toyota, Samsung Electronics, a Korean company formed in 1969, moved towards FDI in the 1980s, and its destinations were North America and Western Europe (Hemmert and Jackson, 2016). For example, in 1982, it established a television assembly plant in Portugal, and in 1984, a similar plant in New Jersey (Ungson, Steers and Park, 1997). However, in general, it is more common for Korean firms to invest in Asian countries, with 30% of FDI allocated to China, while investing in North America is more prevalent among Japanese firms (Hemmert and Jackson, 2016). Overall, the Korean FDI pattern was similar to that of Japan; only the timing was different because Korea generally moved toward FDI a decade later than Japan.
Toyota’s development into an MNE began in the late 1950s when the company introduced its Toyota Crown to the US market via exporting (Toyota, no date). During this period, the Japanese FDI reflected the country’s need for energy and raw materials, so the main MNE strategy was resource seeking (Farrell, 2008). As for Japanese automobile manufacturers, they invested in Asia for cost-effectiveness and in North America to secure exports and because of trade friction (Farrell, 2008). Anand and Delios (2001) also point out that the rising yen was the cause for Japanese companies to move toward FDI. The next stage of Toyota’s internationalization began in the 1980s, with Toyota’s moving toward FDI. In the Japanese manufacturing industries, the purpose of FDI during this period was to transfer capital, technology, and management to subsidiaries to foster trade (Farrell, 2008). Toyota had the same motivation since it carefully managed its subsidiaries, transferring its home knowledge and experience.
As for the entry mode, Japanese MNEs preferred joint ventures over full ownership in American, European, and Asian markets, especially when investing in resource-intensive industries (Mansour and Hoshino, 2002). According to Hennart (2016), Japanese companies had 694 stakes in manufacturing subsidiaries in the US between 1952 and 1980, with only 35% of them being wholly owned. The reason for establishing joint ventures was to secure the Japanese trade, which was threatened by various trade barriers, such as the US restrictions on Japanese imports of raw materials. Toyota’s preferred entry mode was also joint ventures. It signed contracts with local firms to ensure the national distribution of its cars (Ando, 2005). However, in Germany and Belgium, Toyota established full ownership. The reason for this was that Germany performed poorly in terms of sales, and Belgium was an important market because its capital, Brussels, was the capital of the EU (Ando, 2005).
Samsung became an MNE as a result of government policies. It used joint ventures as an entry mode to facilitate its international market entry, and its important partners were Japan’s NEC and Sanyo (Fitzgerald, 2009). Samsung implemented efficiency- and market-seeking strategies: it located its production plants for domestic production in developing countries to decrease costs and established its subsidiaries in developed countries to expand its market (Kwon, Rhee and Suh, 2007). Samsung’s FDI strategy is representative of Korean FDI since Korean firms were generally motivated to become MNEs for cost advantages, eliminating trade barriers, gaining resources, and promoting exports (Nicolas, 2013).
The selected firms have different patterns in timing and strategy but similar entry modes. The difference in timing is conditioned by the fact that these multinationals originate from different countries. Since Korea generally moved toward FDI later than Japan, Samsung became an MNE later than Toyota. The strategies also differed because of the country. In Japan, companies were first focused on resource-seeking strategies, while in Korea, firms used efficiency- and market-seeking strategies because of the small size of the Korean market and the need to reduce costs.
Ownership Advantages of MNEs
Toyota has several firm-specific advantages that have contributed to its success in the global market. The company has developed effective management and production systems, distribution networks, human resource management, as well as competence in R&D and design (Fitzgerald and Rowley, 2015). The Toyota Production System (TPS) defined Toyota’s success under the circumstances of the lack of natural resources, rising competition, and changing customer demands (Lee and Jo, 2007). TPS has helped Toyota to successfully compete in European and North American markets, and it was so effective that European and American manufacturers attempted to adjust this model to their businesses (Hemmert and Jackson, 2016). Thus, Toyota’s advantages significantly contributed to its success as an MNE.
Apart from firm-specific capabilities, Toyota has benefited from the advantages of most Japanese firms. The advantages of Japanese companies include centralized corporate structure and government support, which are also characteristic of Chinese MNEs (Fitzgerald and Rui, 2016). Furthermore, Japanese MNEs possess strategic intent, unique management systems, core competence, and the capacity for innovation and adaptation (Fitzgerald and Rui, 2016). According to Fitzgerald and Lai (2015), Japanese companies were able to develop their capabilities and were motivated to become multinational because of their environmental circumstances. These included tariffs and quotas, the rising yen, and political factors in host countries (Fitzgerald and Lai, 2015).
Korean Samsung’s ownership advantages were weaker than those of Toyota. Generally, Korean MNEs benefited from the governmental globalization policy, segyehwa, which aimed at raising the share of overseas production (Fitzgerald and Kim, 2007). Like Japanese MNEs, Korean firms have demonstrated strategic intent in going international, which distinguishes them from Chinese firms taking an opportunistic approach (Fitzgerald and Rowley, 2016). In addition, Korean firms more readily take risks and make strategic decisions than Japanese companies (Fitzgerald and Rowley, 2016). However, these scarce ownership advantages were not enough to ensure the success of Korean firms overseas, which was why they often failed in their pursuits (Fitzgerald and Kim, 2007). For example, Samsung initially lacked technology and brand recognition, which led to some business failures. Yet, the company has been able to overcome the challenge by establishing an R&D institute in Silicon Valley to develop its competitive products (Kim and Kim, 2006). Overall, Samsung has been able to compete in European and American markets due to its international management talent, marketing, product design and R&D, and production management, but these advantages were developed as a result of internationalization.
As is evident from the reviewed cases, Japanese and Korean firms possessed unequal ownership advantages. Ownership advantages are part of the OLI framework, according to which there are three factors essential and sufficient for firms to be successful in the foreign market (Hennart, 2016). These three factors are ownership advantages, location, and internalization (Fitzgerald and Kim, 2007; Hennart, 2016). Ownership advantages are firm-specific advantages. Location refers to country-specific advantages, which make it more desirable for firms to establish a foreign subsidiary than produce goods at home for exports (Hennart, 2016). Internalization means that a firm will benefit from transnational operations more than from selling or renting its firm-specific advantages (Fitzgerald and Kim, 2007; Hennart, 2016).
It seems that Japanese companies fit the OLI framework more than Korean companies because they have sound ownership advantages, in addition to location advantages, such as tariffs and quotas. Because of a lack of ownership advantages, Korean firms could not rely much on them and had to make more use of the location advantages. Korean firms fit the Linkage-Leverage-Learning (LLL) framework more because, according to this model, firms succeed as MNEs by linking to foreign firms, leveraging resources, such as technology and assets, from them, and learning from doing so.
Management and Organization
Japanese management and organization systems can be considered an ownership advantage of Japanese firms, as per the OLI framework. Westney (2001) distinguishes such features of Japanese management as a strong orientation toward local markets, high rates of expatriate managers, and a tendency to transfer Japanese production and management systems to overseas subsidiaries. Local market orientation is evident in Toyota’s management since the company aims at adapting its products to the specific needs of its target markets (Toyota, no date). The employment of expatriate managers and the transfer of Japanese practices is linked to “the subtle and unique nature of communication between headquarters and subsidiary,” which is developed over “years of training and education in a homogenous culture” (Beamish and Inkpen, 2001, p. 277). The Japanese management system is long-term-oriented and focused on quality, and it allows for all-level employees’ participation in suggestion schemes and quality circles (Kono and Clegg, 2001).
In human resource management, Japanese firms adhere to kaizen or continuous improvement. Toyota (no date, p. 60), like many other Japanese MNEs, uses this principle to create “an environment where the detection of errors is not a cause for blame and punishment, but rather an opportunity for improvement and growth.” Furthermore, in Japan, the system of lifetime employment was common for a long time. It allowed for investing in employee training and education and being sure that the resources spent on this purpose would not transit to competitors. Although there are assumptions that Japanese lifetime employment is coming to an end, Abegglen (2006, p. 77) has found out that many Japanese companies still use this practice, and Toyota, in particular, considers it “an immense plus.” Yet, the trend for using expatriate managers is in decline because Japanese firms have recognized that local managers lead to better performance of subsidiaries (Beamish and Inkpen, 2001).
Japanese and Korean management and organization systems have much in common. According to Fitzgerald and Rowley (2016), MNEs in both countries rely on strong control from the parental firm and centralization, as well as transferring home-grown advantages to foreign subsidiaries. Samsung, like Toyota, is dedicated to employee training and intends to become a truly global company by hiring fewer expatriates in managerial positions (Ungson, Steers, and Park, 1997). However, while Toyota aims at adhering to Japanese management traditions, Samsung seems to be transforming into a Western-like company (Ungson, Steers and Park, 1997). Overall, Japanese and Korean management and organization systems shaped the success of MNEs in foreign markets.
The Role of Government in FDI
In Japan, the government played a significant role in FDI. In the post-war period, the government restricted FDI outflows by the Foreign Exchange Control Law of 1949, according to which outward FDI could be officially approved only for companies that could contribute to Japanese exports to Europe (Mason, 1998). In 1971, the ban on FDI was lifted, allowing for investment in Asia for resources and cheap labor. These government policies contributed to the Japanese use of FDI, along with policies facilitating inward FDI, which increased domestic competition (Mason, 1998). In the 1980s, the use of outward FDI was more active, mainly because of import restrictions in Europe and the US. As Japanese companies became more competitive and confident in their multinational strategies, their need for governmental support decreased.
In Korea, the government also influenced FDI by restrictive and supportive policies. The most important policy was the segyehwa passed in the early 1990s, which increased market liberalization and encouraged outward FDI (Ungson, Steers and Park, 1997). However, because of a lack of ownership advantages and brand recognition, as well as extensive risk-taking, many Korean companies motivated by segyehwa failed in foreign markets (Fitzgerald and Kim, 2007). The case of Korean MNEs in the 1990s demonstrates that, without institutional changes and developing competitive advantages, the government support of FDI is unlikely to bring success.
The role of the government in supporting FDI in Japan and Korea, as well as the role of governments of host countries, illustrate the importance of considering the political economy in FDI theories. It seems that location advantages, such as government policies allowing inward FDI in host countries, as well as quotas and tariffs imposed on imports, are a more important factor than ownership advantages. Although Japanese MNEs initially were more successful in foreign markets than Korean MNEs because of their own advantages, Korean MNEs still could make use of FDI once they received support from the government. In addition, political economy helps to explain the multinational strategies adopted by MNEs in different periods. For example, before 1971, Japanese MNEs were resource-seeking because the government facilitated exports. When FDI became widely allowed by the government, the strategies were changed to efficiency-seeking and market-seeking.
Conclusion
Japanese and Korean MNEs have common characteristics that have allowed them to compete in foreign markets. These include supportive government policies, strategic intent to internationalization, centralization and strong parental organization control, and dedication to human resource development. In addition, MNEs from both countries show similar patterns over time. In the initial stage, they adopted a resource-seeking strategy and focused on exports. Then, an efficiency-seeking strategy was used to improve cost-efficiency and develop competitive advantages. Finally, MNEs became focused on R&D and other value-added investments. The advantages of Japanese MNEs include adherence to traditional management and organization systems, commitment to quality and technological development, and earlier use of FDI. The employment of expatriates is seen as a shortcoming of Japanese MNEs, and the companies attempt to reduce their number in management.
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