A volume in the series Cornell Studies in Political Economy
Reprograll1ll1ing Japan
edited by Peter]. Katzenstein A full list of titles in the series appears at the end of the book.
The High Tech Crisis under Communitarian Capitalism
Marie Anchordoguy
CORNELL UNIVERSITY
Ithaca and London
PRESS
To Leslie, Mariko, and Eric
Copyright © 200S by Cornell University All rights reserved. Except for brief quotations in a review,
this book, or parts thereof, must not be reproduced in any form without permission in writing from the publisher. For information, address Cornell University Press, Sage House, 512 East State Street, Ithaca, New York 148so.
F irst published 2005 by Cornell University Press Library of Congress Cataloging-in-Publication Data Anchordoguy, Marie. Reprogramming Japan: the high tech crisis under communitarian
capitalism I Marie Anchordoguy.
p. em. - (Cornell studies in political economy) Includes bibliographical references and index. ISBN-I3: 978--0-8014-41 87-S (cloth: alk paper) ISBN-Io: 0-8014-4187-0 (cloth: alk. paper) I. High technology industries-Japan. aspects-Japan.
2. Capitalism-Social
3. Industrial policy-Japan.
conditions-I 989HC46S.HS3AS73
I. Title.
4. Japan-Economic
II. Series.
2005 2005016062
Cornell University Press strives to use environmentally responsible suppliers and materials to the fullest extent possible in the publishing of its books. Such materials include vegetable-based, low-VOC inks and acid-free papers that are recycled, totally chlorine-free, or partly composed of nonwood fibers. For further information, visit our website at www.comellpress.cornell,edu. Doth printing
10 9 8 7 6 5 4 3 2 I
Contents
Acknowledgments Acronyms I. 2. 3· 4· 5· 6. 7· 8.
IX XI
The Dynamics of Communitarian Capitalism Norms and Institutions Telephone Titan Telecommunications: Obsolete Institutions Computers: Cooperation or Competition? Software: Programmed for Failure Semiconductors: From Boom to Bust Crisis in Communitarian Capitalism
35 66 96 125 147 177 206
References Index
235 249
Acknowledgments
I would like to thank the many people who made this book possible. Peter Katzenstein and two anonymous referees made insightful comments that strengthened this book. Chalmers Johnson, Gary Hamilton, and Fujimoto Takahiro commented on the first chapter at different stages. I am also grateful to the Japan-U.S. Friendship Commission, the Japan Foundation's Abe Fellowship Program, and the Japan Studies Program at the University of Washington for fi nancial support that enabled me to spend time doing research in Japan. The faculty and staff at the Institute of Innovation Research at Hitotsubashi University welcomed me there as an Abe Fellow for four months in autumn I999. I have gone back numerous times to discuss this book's ideas with faculty there and to use their library. Special thanks to Yonekura Seiichiro, who headed the Institute while I was there and arranged for my stay. I also thank the numer ous current and retired officials from the Ministry of International Trade and Industry, the Ministry of Posts and Telecommunications, the Nippon Telegraph and Telephone Company, Japan's top computer, software, semiconductor, and telecommunications makers, and various trade associations and banks. They have collectively given me hundreds of hours of their time; their knowledge and the documents they have provided have been critical sources for this book. Many friends, colleagues, and students gave me important support while I pursued this research. Aoshima Yaichi, Chiima Kiyofuku, Imamura Yumio, Iyori Hiroshi, Kurosawa Yoshitaka, Morimoto Tetsuo, Murakami Mutsuko, Nakayama Ichiro, Seki Keiichiro, Tanaka Akiyoshi, Tanaka Tsutomu, Terada Noriyuki, Umezawa Shigeyuki, Yokokawa Hiroshi, and Glen Fukushima have helped me better understand the workings of Japanese business and politics; they have also introduced me to key insiders. At the University of Washington, Don Hellmann and Ken Pyle have been unwavering in their support. Two re-
x
Acknowledgments
search assistants have provided invaluable help: Hiro Sasada helped gather data and created most of the charts used in this book, and Hyun Joo Kang helped with the painstaking task of confirming the footnotes. Martha Walsh, Managing Editor of the Journal ofJapanese Studies and Assistant to the Japan Studies Pro gram, helped edit the manuscript before submission. Roger Haydon of Cornell University Press has given insightful comments and been patient as I revised the manuscript while carrying a heavy administrative load. Thanks also go to my family. My father, Arnold, siblings Ed, Rosalie, Tom, and Jean, and siblings by marriage-Chris, Vickie, Barbie, and Jorge-have en couraged me throughout the process. Memories of my mother, Dorothy, have also guided me. My greatest debt is to my husband, Leslie Helm, and our chil dren, Mariko and Eric. Without their support for the long hours that went into this book as well as their ability to get me away from it to provide needed per spective and balance, it would not have been completed. It is to them that this book is dedicated. I have undoubtedly omitted others who should be thanked. for this and other errors and shortcomings, I apologize and accept full respon sibility. Following Japanese practice, Japanese surnames precede their given names, except in cases where works are published in English. Macrons have been omit ted on common words, such as Tokyo. Chapters 4 and 6 draw upon some mate rial from earlier publications, "Nippon Telegraph and Telephone Company (NTT) and the Building of a Telecommunications Industry in Japan," Business History Review 75 (autumn ZOOl): 507-41 ; and "Japan's Software Industry: A Failure of Institutions?" Research Policy Z9 (zooo): 391-408. The Ministry of International Trade and Industry (MITI) became the Min istry of Economy, Trade, and Industry (METI) and the Ministry of Posts and Telecommunications (MPT) was subsumed under the Ministry of Public Man agement, Home Affairs, and Posts and Telecommunications (MPHPT) in 200 I. In Z004 MPHPT's English name was changed to the Ministry of Internal Af fairs and Communications (MIC). Nihon keizai shimbun articles taken from the Nikkei database have titles that differ slightly from the printed version of the newspaper. All interviews were done in Tokyo unless otherwise noted. M ARIE ANCHORDOGUY
Seattle
Acronyms
ADSL
asymmetric digital subscriber line
AIST
Agency of Industrial Science and Technology (part of MITI)
ABET
Association of Super-Advanced Electronics Technologies Develop
ASPLA
Advanced System-on-a-chip Platform Group
BOJ
Bank of Japan
CDMA
code division multiple access
ment Promotion Consortium
DDI
Daini Denden, Inc.
DEC
Digital Equipment Corporation
DIPS
Denden kosha information processing system
DRAM
dynamic random access memory
FILP
Fiscal Investment and Loan Program
FSA
Financial Services Agency
FTC
Fair Trade Commission
GATT
General Agreement on Tariffs and Trade
HALCA
Highly Agile Line Concept Advancement Project
IC
integrated circuit
ICL
International Computers, Ltd.
IDO
Ido Tsushin, Inc.
INS
Information Network System, Japan's version of ISDN (Integrated Service Digital Networks)
IPA
Information Processing Promotion Association
ITT
International Telephone and Telegraph
JDB
Japan Development Bank
JECC
Japan Electronic Computer Company
JIPDEC
Japan Information-Processing Development Center
JSC
Japan Software Company
KDDI
This name was the result of a merger of KDD (Kokusai Denshin Denwa), DDI (Daini Denden, Inc.), and Nihon Ido Tsushin, Inc.
xii
Acronyms LDP
Liberal Democratic Party
LSI
large-scale integrated circuit
LT CB
Long Term Credit Bank of Japan
METI
Ministry of Economy, Trade, and Industry,was MITI up until 200 I.
MITI
Ministry of International Trade and Industry, the name was changed
MOC
Ministry of Communications (prewar)
to METI in 200 I. MOE
Ministry of Education
MOF
Ministry of Finance
MOl
Ministry ofIndustry (prewar)
MOS
metal oxide silicon
MPHPT
1.
The Dynamics of Comnlunitarian Capitalism
Ministry of P ublic Management, Home Affairs, and Posts and Telecommunications. T his ministry was created in 2001 and took over the Ministry of Posts and Telecommunications (MPT). T he English name of this ministry was changed to the Ministry of Internal Affairs and Communications (MIC) in late 2004.
MPP MPT
massively parallel processing Ministry of Posts and Telecommunications (was subsumed under the Ministry of P ublic Management, Home Affairs, and Posts and Telecommunications in 200 I. T he English name of this ministry was changed to the Ministry of Internal Affairs and Communications [MIC] in late 2004.)
NCC
new common carrier
NEC
Nippon Electric Company
NIT
Nippon Telegraph and Telephone Company
OECD
Organisation for Economic Co-operation and Development
SELET E
Semiconductor Leading Edge Technologies, Inc.
SIGMA
Software Industrialized Generator and Maintenance Aids
SIRI]
Semiconductor Industry Research Institute ofJapan
SOC
system-on-a-chip
STA
Science and Technology Agency
STARC
Semiconductor Technology Academic Research Center
TI
Texas Instruments
T RON
Real-time Operating System Nucleus
TWJ
Teleway Japan
VLSI
very large-scale integrated circuit
WE
Western Electric
WINTEL W indows and Intel
After half a century of explosive growth and increasing global competitive ness, japan's economic power is in decline. While japanese firms remain im portant players in autos, electronics, and machine tools, they are no longer the world's dominant manufacturers. Talk in the late 1 980s of a Pacific Century dominated by japan has been replaced with a sense that japan's economic health is increasingly dependent on the growth of emerging powerhouses such as China. Its banks, once the world's strongest, are now so weak that some fear large bank failures could trigger a financial crisis. In 1998, its per capita GDP fell behind that of the United States; in 200 1 , it slipped to fifth place and in 2002 to thirteenth place.l In a 2004 survey on global competitiveness, japan ranked twenty-third, down from number one in 1 99 3 , though up from thirti eth place in 2002.2 The economy's deterioration has been reflected in the stock market. At its peak, firms listed on the Tokyo Stock Exchange accounted for 3 I percent of the capitalization of firms listed around the world; by 2002 that number had fallen to 9 percent of the global totaL3 In 2002, Okuda Hiroshi, chairman of Keidanren and Toyota Motors, warned that the nation's problems could lead firms to move their headquarters and factories overseas, and a government official acknowl edged that Japan needs foreign investment, technology, and expertise to revital-
1. "Japan's Per Capita GDP Falls Behind U.S. For F irst T ime in Dozen Years," Japan Di gest, Oct. 13,1999,3; "Japan's Assets Fall by 56 Trillion Yen," Japan Times, Dec. 27,2002,10;
http://www.worldfactsandfigures.com. 2. "Japan Rises to No. 23 in Competitiveness," Nikkei Weekly, May 10, 2004,16. 3. "Foreign Brokers said to Cut Back in Japan because of Slow Sales," Japan Digest, Dec. 11,2002,2.
2
Reprogramming Japan
Dynamics of Communitarian Capitalism
3
4· "Japanese Companies May Start Moving Headquarters Abroad" and "Flying Geese have Flown the Coop," Japan Digest, July 29, 2002, 3, and May 23, 200 1 , 1-2. 5· William W. Grimes, Unmaking the Japanese Miracle: Macroeconomic Politics, I98S-2ooo
Katz argues that overinvestment in unproductive industries since at least the early 1 970S created problems that were hidden because of the expansion of other healthy industries and the bubble in asset prices.8 T J. Pempel and other politi cal scientists show that domestic political factors, such as long-term one-party dominance and factional politics, have led to vested interests that obstruct eco nomic and political reform today.9 To be sure, basic macroeconomic errors such as loose monetary policy and tight fiscal policies, too little monitoring of firms, institutional obsolescence, and vested interests in the status quo are critical parts of the explanation for Japan's economic doldrums since the 1 990S. This book suggests an overarching explanation for why these shortcomings appeared to emerge simultaneously to undermine Japan's economic power. The source of the problem lies in the form of capitalism that emerged in Japan in the postwar period. I call this system "communitarian capitalism." The system helped accelerate economic develop ment under the conditions that existed up until the 1980s but is also responsi ble for the economic paralysis that followed. Lincoln, Katz, Pempel, and Grimes are right about the key problems causing Japan's economic malaise. However, all nations experience these difficulties in adapting policies and institutions to a new environment. During good times, all economies tend to overinvest, leading to excess capacity and bad loans, and this overshooting is always exacerbated to some extent by shortcomings in monetary policy and corporate oversight. Every country has its share of obsolete institu tions. Every political system struggles with vested interests that resist change. However, such problems are much more severe in Japan. Even after more than fifteen years of low-to-no growth and the threat of financial collapse, change re mains slow and incremental, though it has accelerated since the late 1990S. Many of these approaches lack an understanding of the norms that broadly shape key decisions. Japan's capitalist system is embedded in deep-seated com munal norms regarding justice, social order, national identity, and national self sufficiency. These broad social forces aim to maximize a strong sense of commu nity. I suggest that these norms, enshrined in communitarian capitalism, help explain the severity of the economic malaise, as well as the nation's inability to respond. Communitarian capitalism explains how overshooting, which leads to excess capacity and bad loans, is a much greater problem in Japan, because firms tend to have similar strategies and product lines; and once they invest, they make commitments that are unacceptable to abandon. In a communitarian capitalist system, it is difficult to eliminate obsolete institutions, because social and devel-
(Ithaca, 2001); Adam Posen, "Finance," in Us.-Japan Relations in a Changing World, ed. Steven Vogel (Washington, nc., 2002), 198-238. 6. Takeo Hoshi and Anil Kashyap, Corporate Financing and Governance in Japan (Cam bridge, 200 1), 254-59, 267--<)8; Koporeto gabanansu kaikaku, ed. Nakatani lwao (Tokyo, 2003), 2 1 , 302-3. 7· Edward Lincoln, Arthritic Japan (Washington, nc., 200 1 ).
8. Richard Katz, Japan, The System that Soured: The Rise and Fall of the Japanese Miracle (Armonk, 1998). 9. T. J. Pempel, Regime Shift: Comparative Dynamics of the Japanese Political Economy (Ithaca, 1998).
ize its economy.4 Official government debt soared to 1 40 percent of GDP by 2004, far higher than any other industrial nation. Including hidden debt, the level is estimated by some at twice the nation's GDP. Wage increases have stag nated and wage cuts are common. Economic decline has had serious social im plications. Suicide rates rose 30-40 percent between 1 997 and 2003, giving Japan the world's second highest suicide rate, more than double that of the United States. Despite massive economic problems, the nation has been slow to respond. Its banking crisis has dragged on for a decade and a half Government debt contin ues to mount through subsidies to inefficient sectors, such as agriculture and construction, at the expense of more efficient firms. Even relatively efficient firms continue to follow policies widely recognized as debilitating. How can we explain this dramatic reversal of fortunes and the nation's slow response to these challenges? Why has a nation of highly educated, disciplined, achievement oriented citizens with a strong sense of nationalism continued to allow its econ omy to drift? Why do strong firms allow themselves to be held back by the weak? Why do firms in so many industries fail to break away from a losing pattern of similar pricing, product, and R&D strategies? Why does the government con tinue to prop up the stock market and bankrupt firms that analysts call "zom bies"? Some experts attribute recent failures to poor monetary and fiscal policies. William Grimes and Adam Posen, for example, argue that a weak Bank ofJapan (BOJ), tied too closely to the Ministry of Finance (MOF), made major mistakes in monetary policy, such as keeping interest rates too low for too long in the late 1 980s. This resulted in a stock and land price bubble, overinvestment in manu facturing capacity, and a huge increase in high-risk loans by banks.5 Others see slow and uneven financial deregulation and inadequate corporate governance regulations as key causes. This view suggests that the absence of transparent, ac countable monitoring mechanisms led banks to loan and firms to borrow and in vest huge sums based on inflated asset prices without properly assessing risks. 6 The economic woes of the 1 990S and early 2000S are also attributed to institu tional gridlock and outmoded institutions. Ed Lincoln, for example, points out that many ofJapan's institutions are outdated but that the pain of its economic downturn has not been severe enough to induce sweeping changes.? Richard
4
Reprogramming Japan
opmental norms make it unacceptable to allow the winds of creative destruction to sweep them away. Also, vested interests can cause severe paralysis, because a broad communal consensus is needed before policies and institutions can shift directions. And in such a system, everyone is a trusted member of the same community, the same family; thus monitoring firms is not a "normal" part of doing business. Communitarian capitalism explains how in nations such as Japan, where behavior is governed by intricate social conventions based on trust rather than law, the tendency to hide problems is especially strong because mak ing a mistake or doing something "untrustworthy" results in harsh social sanc tions. Yet covering up and not dealing with problems only exacerbates them. In sum, only by understanding the social reality that the Japanese state, firms, and citizens have created and maintained in the postwar period can we explain what otherwise appears to be irrational behavior. To explore the sources of Japan's economic success in the postwar period, as well as its recent problems, I draw on a variety of approaches in sociology, law, and political science that emphasize the role of norms in shaping behavior, such as the institutionalist approach in economic sociology drawn from the work of Max Weber and extended by scholars such as Nicole Woolsey Biggart, Gary G. Hamilton, and Mark Granovetter. 1O In contrast to much of the economics and political science literature that views institutions and policies as emerging and evolving over time to advance actors' economic and political interests, these scholars see economic action as social action. They show how economic behavior is influenced not only by narrow self-interests but also by actors' histories, de sires, sense of justice, habits, religious beliefs, nationalism, and other powerful forces that transcend those narrow interests. In this book, I examine a series of cases inductively and show that the emergence and maintenance ofJapan's post war capitalist institutions and policies and the system's paralysis in the past decade cannot be fully explained without understanding the history and social context of these arrangements. II 10. Max Weber, Economy and Society: An Outline of Interpretative Sociology, ed. Guenther Roth and Claus Wittich (New York, 1968), I :3-38; Nicole Woolsey Biggart, "Explaining Asian Economic Organization, Toward a Weberian Institutional Perspective," in The Economic Orga nization of East Asian Capitalism, cd. Marco Orru, Nicole Woolsey Biggart, and Gary G. Hamilton (Thousand Oaks, Calif., 1997), 3-32; Gary G. Hamilton and Cheng-Shu Kao, "Max Weber and the Analysis of East Asian Industrialization," International Sociology 2, no. 3 (Sept. 1987): 289-300; Mark Granovetter, "Economic Action and Social Structure: The Prob lem of Embeddedness," American Journal ofSociology 9 1 , no. 3 (Nov. 1985): 481-510. 1 1. Gary G. Hamilton and Nicole Woolsey Biggart, "Market, Culture, and Authority: A ('. omparative
ganization of East Asian Capitalism, ed. Orru, Biggart, and Hamilton, 1 34-47; and Marco Orru, Nicole Woolsey Biggart, and Gary G. Hamilton, "Organizational Isomorphism in East Asia," in New Institutionalism in Organizational Analysis, ed. Walter W. Powell and Paul J. DiMaggio (Chicago, 1 99 1 ), 361-89; Karl Polanyi, The Great Transformation (New York, 1 944); Max Weber, The Protestant Ethic and the Spirit of Capitalism (New York, 1 9 5 8).
Dynamics of Communitarian Capitalism
5
Just as scholars were identifying some of the key mechanisms that propelled the economy toward rapid growth and industrial competitiveness in the 1 960s, 1 970s, and 1 980s, the system stopped performing. Did we fail to identify the critical ingredients of success, or has the environment changed? If Japan's de velopment was driven largely by a strong and effective developmental state, why has that state been ineffective in promoting economic growth since the 1 990s?12 If the state has been merely a tool of business or politicians, and market forces have been the primary impetus driving development, why did market forces promote development from the 1950S through the I 980s yet go awry starting in the I 990S?13 If, as some studies suggest, business-state networks, keiretsu, the main bank corporate governance system, and trade associations have been essen tial to development, why did they function well in the past but not in the I 990S and early 2000S?14 The environment did dramatically change in the 19808, and the state, firms, and citizens failed to adapt to this new environment because of social and devel opmental commitments enshrined in the institutions and policies of communi tarian capitalism. In the postwar period, patterns of behavior favoring egalitari anism (�y(jd(j shugi), cooperation, consensus decision-making, and national autonomy became "routinized, taken for granted, understandings about the way things are done."15 Institutions and policies embedded in these norms were in sulated, delaying the impact of and adaptation to the forces of globalization. These rules dictated, for example, that workers were not to be laid off, that loyal suppliers were not to be abandoned, and that firms were to rely on domestic products as much as possible, even if they were not competitive. Allied firms were to be bailed out, even if they were in a hopeless situation, just as one would bail out a sibling. Unwilling to alter practices in ways that would disrupt this so cial order, the state, firms, and citizens, by default, chose the alternative: eco nomic decline. 12. Chalmers Johnson, M171 and the Japanese Miracle (Stanford, 1982); Sheldon Garon, Molding Japanese Minds: The State in Everyday Life (Princeton, 1997); Marie Anchordoguy, Computers, Inc.: Japan's Challenge to IBM (Cambridge, Mass., 1 989); Meredith Woo Cumings, ed., The Developmental State (Ithaca, 1999). 1 3 . Kent E. Calder, Strategic Capitalism, Private Business and Public Purpose in Japanese In dustrial Finance (Princeton, 1993); Frances McCall Rosenbluth, Financial Politics in Contempo rary Japan (Ithaca, 1989); Greg W. Noble, Collective Action in East Asia: How Ruling Parties Shape Industrial Policy (Ithaca, 1998); Philip Trezise, "Industrial Policy is Not the Major Rea son for Japan's Success," Brookings Review I, no. 3 ( 1 983): 13-18 . 1 4 . Michael L . Gerlach, Alliance Capitalism: The Social Organization ofJapanese Business (Berkeley, 1992); Paul Analysis Sheard, of "Interlocking and inCorporate Governance in ManagementShareholdings and Organization the Far East," in The Economic Or Japan," and Takeo Hoshi, "The Economic Role of Corporate Grouping and the Main Bank System," in The Japanese Firm: Sources of Competitive Strength, ed. Masahiko Aoki and Ronald Dore (Oxford, 1994), 3 1 0-49 and 285-309; Mark Tilton, Restrained Trade: Cartels in Japan's Basic Materials Industries (Ithaca, 1996). 1 5. Biggart, "Explaining Asian Economic Organization," 24.
6
Reprogramming Japan
1. Communitarian Capitalism Communitarian capitalism is an economic system characterized by an ac tivist state and a number of private-sector organizations that manage markets to promote development and national autonomy in the context of the broader goals of social stability, predictability, and order. Drawing on the notion of "organiza tional logic"-a supra-organizational norm that structures social relations-this study posits that the community is the basic organizational logic that guides state, corporate, and individual behavior in Japan. 16 This logic dictates elaborate social conventions about how the state, firms, and individuals should behave in given situations. The rigidity of these customs binds community members into a strong collective identity. Those who do not abide by these customs are re jected as outsiders and excluded from the benefits granted to members of the community. This study uses the concept of communitarian capitalism as an overarching explanation of behavior in postwar Japan. It should be clearly dis tinguished from George Lodge's use of it as a general term to describe the ten dency of governments of nations such as Japan, Germany, and Sweden to give more priority to the community than countries such as the US. and the UK.17
Historical Roots of Communitarian Capitalism Every society determines for itself what mix of states, markets, rules, and corporate control it finds acceptable. The particular mix is a function of history and the kind of trade-off citizens are willing to accept. Japan's late developer status, its feudal past, the threat of colonization by Western powers, and a strong national consciousness and identity all contributed to the emergence of a strong activist state in the Meiji period, which promoted national autonomy and eco nomic development. IS After World War II, Japan's rulers felt the need to return to their statist tradition in order to rebuild their economy. Just as they had in the Meiji period, the nation's bureaucrats determined that a critical ingredient needed in order to produce prosperity and independence was raising the level of its technology. 19
1 6. Ibid., 26-27. 17. George Cabot Lodge, Comparative Business-Government Relations (Englewood Cliffs, 1988), 4-5. 1 8. Kenneth Pyle, The Making ofModern Japan (Lexington, Mass., 1 996); Johnson, MIT! and the Japanese Miracle; Alexander Gerschenkron, Economic Backwardness in Historical Per spective (Cambridge, Mass., 1962). 19. Richard J. Samuels, "Rich Nation, Strong Army"; National Security and the Technologi cal Transformation ofJapan (Ithaca, 1 994).
Dynamics of Communitarian Capitalism
7
New to postwar capitalism was not simply a higher degree of state control, but, more importantly, a new social contract. In return for working hard and conforming to a rigid set of societal rules, citizens were assured secure employ ment, annual age-based wage increases, and a voice in decisions regarding their group. Call it quasi-capitalism. While there are all the trappings of private prop erty and profit-making institutions, communitarian capitalism gives high prior ity to sustaining large firms as more or less permanent fixtures of the economic landscape. Decisions are made that favor social stability over efficiency. The contribution a firm makes to the nation's technological capability and jobs for its citizens is more important than the profits it produces for shareholders. There is tension between the coexisting social and developmental capitalist goals of the system. Higher priority has been given to sociopolitical objectives in some peri ods and developmental goals in others, and in some periods, such as that since the 1990S, there has been severe tension between them. In contrast, the US. political-economic system emphasizes individual rights, liberty, and the rule of law. Deep-seated beliefs in individual autonomy and eco nomic rationality emerged on account of America's historical experience. The diverse origins of Americans-their lack of a common past or common "cul ture"-required a heavy emphasis on the rule of law to establish a level playing field for all actors. Over time, these norms became institutionalized in a set of laws and regulations that determined reasonable, legitimate behavior. America touts these laws and norms-focused on competition and efficiency, encoded in neoclassical economic and rational choice theory-as universal. The rational economy-the natural economy, it is suggested-would be much like America's. Yet in economies that develop under different conditions, the notion of what is "rational" can vary greatly.20 Japan's capitalist system coalesced in the early postwar period out of the con fluence of controls created in preparation for total war together with measures and institutions developed to help cope with defeat. Horrified by the war expe rience, humbled by a foreign occupation and a constitution written by foreign ers, and ostracized and criticized for their wartime brutality, leaders and citizens felt vulnerable. Isolated and disliked, they turned inward.21 The chaos of war had disrupted once strong social ties and led to pervasive distrust of leaders. To rebuild their social fabric, restore a sense of trust among leaders and followers, and kick-start the economy, they needed security and stability. To cope with so cial unrest caused by hunger, labor strikes, and black markets, leaders and citi zens sought to develop a system whereby the majority of the citizens would be 20. Nicole Woolsey Biggart and Gary G. Hamilton, "On the Limits of a Firm-Based The ory to Explain Business Networks, The Western Bias of Neoclassical Economics" in The Eco nomic Organization of East Asian Capitalism, 53-54. 2 1 . Interview of Managing Director of a large Japanese bank, Dec. 8, 1987.
8
Reprogramming Japan
supported as long as they worked hard and in cooperation with others. Personal and corporate failures were to be minimized to maintain social stability; the na tion had had enough failure during the warP Over time, the desire to minimize vulnerability and create a sense of commu nity by sharing risks became a core norm, a deeply rooted logic around which state, corporate, and social behavior became organized. To draw on nationalist sentiments as a means of cementing community ties, it was necessary to hide Japan's wartime past; to achieve this, leaders promoted a view ofJapanese as vic tims of, rather than aggressors in, World War II. To strengthen the sense of the nation as a community, they focused on their differences with foreigners. The new mantra was the need to work hard to reduce vulnerability as a small island nation with no natural resources. Conformity within the community, among in dividuals and among firms, became an important virtue. Patterns of behavior that focused on promoting economic development, national autonomy, and so cial stability, not competition and profit, became viewed as the "normal" way of doing business.23 These invisible yet powerful norms, promoted in schools, state agencies, and firms, became deeply embedded in the psyche of citizens. To maintain them, institutions and policies emerged, such as lifetime employment, seniority-based wages, keiretsu (industrial groups), the main bank corporate governance system, enterprise unions, and industrial policies. This emphasis on sharing the wealth broadly has led some people to describe Japan as socialist.24 "Japan is the most successful socialist society in the world," argues one senior telecommunications executive.25 Komiya Ryutaro, a renowned economist, says it is inappropriate to call Japan's system "capitalism" because large Japanese firms are worker-managed and employees, not shareholders, share in the distribution of profits.26 The company, in that sense, is not truly "owned" by shareholders. Another top economist explains that Japanese firms "pursue not profit as econ omists usually define it but the value added that can provide the basis for long term job stability, and for a style of management that provides for long-term provision of meaningful and satisfying work for the employees. . . . Therefore it is not the pursuit of profits in the classical sense of resources available for distri22. Noguchi Yukio, 194o-nen taisei (Tokyo, 1995), 1 34, 140-4I . 23. Ibid., 1 34, 142-43; Nakatani lwao, Nihon keizai n o rekishiteki tenkai (Tokyo, 1 996), 24 I -49; interviews of business professors at a Japanese university, June 28, 2004, and June 30, 2004, and of MITI intellectual property expert, June 25, 2004, among others. 24. Interview of former JDB official, now a university professor, July I I , 2002; MITI offi cial,July 9, 2002; MPHPT official,July 9, 2002; Tsumori Shinya, Naze Ninon no keiei wa dame
na no ka (Tokyo, 2001 ), 35-38. 25. Interview of senior manager at NTT Communications, June 26, 200 1 . 26. Ryutaro Komiya, "The Life Insurance Company as a Business Enterprise," i n Business
Enterprise in Japan, ed. Kenichi Imai and Ryutaro Komiya (Cambridge, 1 994), 384.
Dynamics of Communitarian Capitalism
9
bution to shareholders."27 A top executive at Matsushita Electric Industrial, criticizing American-style capitalism in 2004, emphasized that "a corporation is a group of people; it is not private property, it is a public good. "28 Thus, a particular set of historical circumstances led to the emergence of communitarian capitalism in the early postwar period. This experience led the Japanese to put even greater reliance on their existing proclivity toward consen sus decision-making and emphasis on the group over the individual. Low re turns on equity became acceptable. Cross-shareholding was encouraged to pro tect firms from foreign takeovers and gradually became the "normal" way of sealing business relations. A relatively small salary gap between management and labor helped promote a sense of fairness. This is not to say that communi tarian capitalism is driven by benevolence or goodwill.29 Nor is this an argument that a strong society somehow has veto power over the bureaucratic and corpo rate elite. In fact, communitarian capitalism is not always good for all in the community. In the 1 960s and 1 970s, consumers were sacrificed on the altar of industrial growth; since the 1 990s, savers, wage earners, and young university graduates have borne much of the burden of the system as a result of low inter est rates, shrinking pensions, stagnant wages, and fewer jobs. Rather, the argu ment is that any improvement in living standards should go to the broadest base possible. That is, communitarian policies, rather than a universal compact, have been the result of a set of political compromises made by top leaders in the bu reaucracy, big business, and the Liberal Democratic Party (LOP). These poli cies were fashioned to have widespread appeal but clearly benefited some groups more than others. For several decades these risk-sharing, stability-promoting institutions and policies nurtured industrial and technological advances; they maintained secure employment and a sense of everyone being part of the middle class. However, in the 1 980s, when global technological and economic conditions started to change, the social and developmental objectives of communitarian capitalism came into conflict. In this new environment, these arrangements were no longer effective in fostering advanced, competitive firms. Yet, altering or dismantling them would undermine norms regarding employment security, fairness, and the need to keep foreigners at bay. In market-based systems, firms were forced to re structure or go bankrupt. However, communitarian capitalism protected Japa-
27. Hiroyuki Itami, "The 'Human-Capital-ism' of the Japanese Firm as an Integrated Sys tem," in Business Enterprise in Japan, ed. Imai and Komiya, 83. 28. Benjamin Fulford, "The Tortoise Jumps the Hare," Forbes, Feb. 2, 2004, 56. 29. Ronald Dore, Taking Japan Seriously: A Confucian Perspective on Leading Economic Is sues (Stanford, 1987), 1 69-92; John 0. Haley, Authority without Power: Law and the Japanese Paradox (Oxford, 1 99 1).
10
Reprogramming Japan
nese firms from the gales of creative destruction. Gradually, state and corporate leaders started giving priority to social objectives, even though this sapped in dustrial strength. By the dawn of the 2 I st century, clinging to lifetime employ ment, age-based compensation, and the notion that large firms should not be al lowed to fail was hurting the economy and threatened to undermine the cohesiveness of the community. That is, obsession with secure employment and fair treatment of workers and firms became risky, endangering social stability and national autonomy. On account of the recession in the late I 990s, state, corporate, and individual actors started to contest these norms, attempting to reshape them in order to promote better economic returns. Some actors pushed for changes to strengthen corporate balance sheets and encourage new start-ups and more in vention. Others dug in their heels, insisting that job stability should be main tained , that firms burdened with bad debt should be bailed out, and that technological dependence on foreigners should be minimized. The various clashes over how to adjust deep-seated norms led to modifications of practices and ex perimentation with new organizational forms. However, change has been incre mental and late in coming. Communitarian norms are being reshaped, not dis mantled.
Key Characteristics of Communitarian Capitalism Three fundamental characteristics distinguish communitarian capitalism from market-based, liberal capitalist systems. These elements are interrelated parts of a quasi-socialist system with an overall logic that promotes development but also gives high priority to social objectives, especially a strong sense of com munity. They are artificially separated for analytical purposes. The first element is the role of the state and how it intervenes in the economy to promote domes tic industries and social stability. The state manages markets; it does not play the objective umpire role necessary to create and maintain free markets. The second element is the role of the private sector. Firms, rather than focusing on maxi mizing profit, manage markets in ways that promote continuity and minimize failure. They compete, but within relatively clear limits. Rather than fully com peting, they negotiate; they share risks by having similar pricing, product, and R&D strategies and avoid putting each other out of business. The result is a strong feeling of coexistence (kyjjson) and coprosperity (kyjjei}-of belonging to a tight community. Competition rarely results in the bankruptcy of a major firm. One consequence of this process is a civility that can undermine efficiency. The process of creative destruction by which competition clears out firms that fail to adjust to change by adopting new technologies and organizational struc tures, for example, has been blunted.
Dynamics of Cornrnunitarian Capitalism
II
The third element is the role of individual social behavior. The state and the private sector created an environment in which unfettered competition was dis couraged and failure was minimized. Within this environment, individuals also behaved in ways that broadly distributed risks and rewards and minimized per sonal failure.
The Role ofthe State: Managing Markets to Promote Industrial Development and Sociopolitical Stability Communitarian capitalism is characterized first by an activist state; however, the state has not been willing to enforce the antimonopoly law or other neutral competition policies that would encourage and maintain relatively free and fair markets. A free market system requires an umpire, whose job it is to make sure markets are not controlled bv a few firms. The Japanese state does not play this role because it does not wish to upset the social equilibrium among incumbent firms. Playing the umpire role to ensure open competition means creating a sit uation in which there will inevitably be clear-cut winners and losers. In fact, free markets often lead to winner-take-most or winner-take-all outcomes. This can not be allowed in a communitarian system. It would undermine the state's legit imacy as protector of social stability, continuity, and order. In a community where secure employment, survival, and relatively egalitarian outcomes are prized, risk must be shared, hence socialized. Thus, while the state allows mar ket forces to determine success or failure at the margin, it is not willing to allow those forces much leeway because of the social instability and stigma that result from corporate and individual failure. 30 "Americans think competition is best, as if it is a religion. Japanese people feel very differently. In Europe and the U. S., the antimonopoly law has its basis in the principles of freedom and individual rights. However, we have the group principle. We are a family, so we have a completely different way of thinking. We see free competition as unfair," explained a former head of Japan's Fair Trade Commission (FTC), which implements the antimonopoly law.3! This view of competition as unfair leads to strong efforts to minimize failure (and the loss in status and face this involves) and is one reason why the state and firms manage markets. Another reason is to protect firms to create comparative advantages. This element of communitarian capitalism-managing markets for both eco nomic and social purposes-was a key tool used to nurture development during the catch-up stage when the state could control the domestic environment, the 30. Interviews of leading telecommunications expert, July 14, 1 994; senior executive at the Development Bank of Japan, July 2, 200 1 ; two high-level MPHPT officials, July 3, 20m; for mer high-level MITI official, June 27, 200 1 ; Japanese management professor, June 28, 200 1 . 3 1 . Interview, i n Seattle, April 1 9 , 1 994·
12
Dynamics of Communitarian Capitalism
Reprogramming Japan
technological trajectory was clear, products could be reverse-engineered, and there were no other late developers to compete with. At this stage, giving prior ity to nurturing domestic technology and production expertise over the process of free competition spurred development. That is, managing markets during the catch-up stage provided firms with a safe haven free from short-term share holder pressures and takeovers; this protection allowed the state and firms to in vest heavily, plan development, and focus on incremental product advances through ever-improving manufacturing techniques. State management of mar kets helped firms gain access to necessary foreign technology easily and at low cost. Discouraging consumption stimulated savings, allowing rapid capital for mation and low interest loans to large firms. Exemption of firms from the anti monopoly law allowed them to cooperate on prices, R&D, and products in ways that promoted technological progress and reduced wasteful competition. However, when conditions changed, state management of markets not only became very difficult; in some cases, it impaired competitiveness. As Japan's economy grew into the world's second largest, its firms started producing, in vesting, and raising funds abroad. The state could no longer control interest rates or influence where resources were allocated. Nor could it protect and tar get specific industries without eliciting foreign outcries about unfair practices. The nation's focus on boosting manufacturing expertise hindered the develop ment of research, managerial skills, and organizational structures conducive to technological breakthroughs; treating people equally gradually demoralized star performers; the centralized, bank credit-based financial system stunted venture capital and the emergence of new independent firms. In short, protection and encouragement of behavior that promoted egalitarianism, social stability, and order, over time made state and corporate institutions inflexible and unable to adapt to a new technological paradigm that required new ideas and quick labor and capital mobility.
The Private Sector: Managing Markets to Minimize Failure
A second critical aspect of communitarian capitalism that distinguishes it from a U.S.-style market-based system is that the private sector, like the state, also manages markets to spread risks and avoid failure and thereby support the broader community. Okumura Hiroshi, a prominent economist, calls this the logic of continuity (keizoku no rojikku).32 It results in a weak mechanism for get ting rid of institutions that have outlived their usefulness. In market-based cap italist systems where returns are correlated with risk, the market for corporate
13
control and competitive labor and capital markets, including venture capital markets, help sweep away incompetent management, old ideas, and obsolete in stitutions and nurture new ones. Japanese call the U.S. system one of many births, many deaths (tasan, tashl) and Japan's system one of few births and few deaths (shiisan, shiishi) (see Figure 1 . 1 ). "Japan's system prefers no big winners and no big losers," explained a former Ministry of International Trade and In dustry (MITI) officiaJ.33 To promote cohesion among members of the community, firms socialize risks through secure employment, seniority-based wages, cartels, cross shareholding, and main bank relationships. The emergence of winning firms is hindered by the knowledge that company workers cannot be laid off. A firm's primary motivation is to grow sales enough to keep employees busy. "We do not want any bankruptcies. All companies should survive," explained a former Japan Development Bank (JDB) official. 34 To minimize failure, firms compete cooper atively and in an orderly manner: they compete on quality and cost but tend to have similar strategies and cooperate in ways that allow all to survive. This be havior is called yokonarabi kyoso (literally, competition while lined up side by side), although it is sometimes referred to as horizontal, parallel (heikii), or ho mogeneous (diishitsutekt) competition.35 This negotiated, risk-sharing behavior is reflected in the prevalence of yokonarabi kenkyu (research done by firms working side by side) and other forms of limited competition such as the convoy system in finance, the dangii bid-rigging system in the construction industry, and cooperative R&D projects in various industries. Yokonarabi behavior nurtures a strong sense of community, which con tributes to social and economic stability, predictability, and order. It protects weak firms at the expense of the strong. Rather than take on high risks alone, firms prefer to be orderly and cooperative and be blamed collectively if mistakes are made. "Managers and their firms follow yokonarabi strategies because if they fail, they fail together so they won't be blamed. In Japan you do not have to be number one; you have to avoid being the worst," explained a senior fellow at the Fujitsu Research Institute.36 As a consequence, the top firms in a given industry have similar corporate structures, strategies, and competencies. They tcnd to offer relatively equivalent products at about the same prices; when one puts out 33. Interview, June 27, :200I. 34. Interview, July II, :2002. 35. There is no good exact English translation for yokonarabi. Udaga\\<'a Masaru, Kikkawa
Takeo, and Shintaku Junjiro, eds., Nihon no kigyokan kyoso (Tokyo, 2000); Yoneyama Shigemi and Nonaka Ikujiro, "Heiko kyoso to inobeshion," Hitotsubashi University, working paper, 199 1 ; Asaba Shigeru, Nihon kigyo no kyoso genri (Tokyo, 2002).
32. Okumura Hiroshi, Dai kigyo kaitai (Tokyo, 1999), 68.
36. In discussion following his presentation at Japan-America Society, Seattle, June 1 0 , 2004.
Dynamics of Communitarian Capitalism
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a new product, they all tend to jump into the market; when one goes overseas, all tend to follow.37 "If one firm goes to the right, other firms do not think about going to the left. Individuality is weak in Japan, so we compete horizontally [yokonarabi kYllsO]. Everyone wants to do the same thing," explained a former head of the FTC..l8 "We Japanese do not like competition too much. It is not well respected in Japanese society. Japanese don't like clear winners and losers," explained a former JDB official. 39 Yokonarabi behavior by firms tends to lead to price competition, which is often called excessive competition (kato kyoso). Calling it "excessive" shows the strong norms of coexistence and survival (seizon)--that no firms should be left behind. Noguchi Yukio, a prominent economist, says this reflects a view that competition is evil, that its logic is one of promoting the strong and ignoring the weak and should, from the point of view of fairness, be minimized.40 Similar strategies leading to kato kyoso reduce profits and tend to result in overinvestment, excess capacity, and dumping abroad, especially in export oriented industries sensitive to economies of scale. Dumping is viable because managed markets make domestic consumers pay high prices, which subsidize below-cost exports. Because of the community's taboo against behavior that might bankrupt a domestic competitor, firms seek market share gains at the ex pense of foreign firms. "We will compete with each other but in the end will not defeat-bankrupt-each other. We will compromise. If a firm has problems, someone will help it," explained a former JDB official.41 A prominent telecom munications scholar concurs. "One of the big brother firms will always help the small brothers before they get to the point of bankruptcy."42 Firms and share holders accept the lower returns inherent in such risk-sharing arrangements as a trade-off for secure employment and virtually guaranteed corporate survival. However, "with foreigners, you can compete and defeat them because they are not part of our family," explained the same former JDB officia1.43 The private sector's focus on minimizing failure, which encourages yokonarabi behavior, helped protect and nurture firms in specific industries dur ing the catch-up stage, when technological change was relatively stable and in-
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37. "'1.iyamoto Mamoru, Nihon no ginkiigyo to yokonarabi (Tokyo, 1997); Itami Hiroyuki, Keiei 110 mirai no miayamaruna, dijitaru jinhon shugi e no michi (Tokyo, 2000); interview of for mer head of FTC, July 1 3, 1 994. Newspapers are filled with daily accounts ofyokonarabi be havior.
38. 39. 40. 41. 42.
Interview, in Seattle, April 19, 1994Interview, July I I , 2002. Noguchi, 4o-nen taisei. 141 .
Interview, March 31 , 1993. Interview, July 14, 1994; also supported in interview of top executive at a government bank,July 2, 2001 . 43· Interview, March 31 , 1993.
16
Dynamics of Communitarian Capitalism
Reprogramming Japan
cremental. At this stage, competition tended to revolve around production ex pertise, and trade barriers sheltered domestic firms. Close interfirm relations re duced the costs of transactions and technological collaboration, bolstering effi ciency. Cooperative labor-management relations and a strong commitment to job security and wages based on age encouraged workers to embrace the adop tion of new technologies, thereby contributing to their competitiveness. During this catch-up stage, yokonarabi behavior helped create comparative advantages in certain industries by encouraging all firms to invest heavily in order to quickly ramp up mass production and focus early on exports. However, in the 1 980s when the yen strengthened, when technological change became rapid and discontinuous, and when competition in the electron ics industries began to revolve around software standards rather than manufac turing expertise, negotiated competition to ensure continuity hurt the firms. Cooperating to reduce risk did prevent bankruptcy and ensure stable jobs. But it also meant the firms had similar product, research, labor, and marketing strate gies and relatively thin profit margins. None was poised to respond quickly to new economic opportunities. The lack of financial incentives for bold risk taking discouraged the creation of new firms. Researchers avoided working on risky inventions. Banks, unable to assess risk and unwilling to select winners and losers, refused to finance a new class of entrepreneurs. The result has been a slow, painful process of disintegration in which firms survive long after they are incapable of returning value to shareholders and the nation as a whole.
Social Behavior to Promote Egalitarianism and a Sense of Community Japanese individuals also share risks to maintain core communitarian norms. To avoid failure, few managers go out on a limb and thus advances tend to be in cremental. "Learning by your mistakes" is not an experience valued in Japanese society. "In Japan, once someone has failed, he can never start his life again. Our society is not generous toward failures," explained an MPT (Ministry of Posts and Telecommunications) official.44 "We give the highest priority to avoiding losing rather than trying to win . . . . This makes sense. It all depends on whether you are a risk taker or a risk avoider. [In Japan] the worst possible thing is to be destroyed," explained a senior fellow at the Fujitsu Research Institute.45 The stigma associated with failure, along with the lack of economic rewards for risk-taking, has serious implications for individuals' willingness to start and fund new firms; join small, volatile firms; and attempt risky inventions. "Japan is a low-risk, low-return society," acknowledges a former high-level MITI offi44. Interview, July 9, 2002. 45. Interview, June 30, 2004·
17
cial.46 To counter this tendency, MITI has provided implicit guarantees in strategic areas. But since firms avoid risk, they all invest in the same areas, re sulting in overinvestment. To prevent the emergence of a star system, which would threaten the com munity's cohesion, individuals behave in ways that reduce the gap between the best and worst performers. "Our social system does not allow for outstanding people. If someone is a superstar, he will be pulled down by the legs [ashi 0 hip paru]," explained an MPT officia1.47 The emphasis on egalitarianism is aimed at maintaining the group-the broader community-rather than egalitarianism in the Western sense of the word. "The feeling that we should all be the same [equal] is the basic essence of being Japanese," explained one of Japan's top in ternet experts.48 Protecting the weak in all but the most extreme cases is an ex plicit part of the social contract; it is also part of Japan's labor laws and norms. Courts, for example, require "reasonable grounds" for dismissing employees, grounds that essentially mean bankruptcy or at least closure of factories. The education system nurtures individuals willing to conform to relatively rigid so cial rules. The desire to minimize risks is also reflected in the consensus decision-making process and the willingness to take turns and accept a system in which the talented are paid the same as the incompetent. Japanese have also shown themselves to be risk-averse in terms of investing; they pile up savings in bank deposit accounts rather than taking higher risks in the hope of higher re turns. By analyzing these three aspects of communitarian capitalism and bringing "society" back into the analysis of Japan's political economy in the context of technological change, this book seeks to reach a deeper understanding of the logic ofJapan's variant of capitalism; how this logic, combined with technologi cal change, has impacted institutional change; and how communitarian norms contributed to industrial and technological advances up until the 1 980s but later hindered them. Understanding the underlying logic of the system provides insight into vari ous inconsistencies since the late 1 990s. For example, why is the state unwilling to formulate an aggressive competition policy when such policies helped spark technological advances and productivity growth in the United States? Why are policymakers having so much trouble moving from low or no growth to a system that increases productivity and growth? Why is there little exit and entry in do mestic high technology industries when relatively new entrants, such as Dell, Cisco, and Yahoo, dominate global markets? Why do strong firms continue to 46. Interview, June 27, 2oo r . 47· Interview, July 9 , 2002. 48. Deputy Director of the Institute for HyperNetwork Society, in discussion following his presentation, Japan-America Society, Seattle, June 10, 2004.
18
Reprogramming Japan
cushion weak companies? Why has MOl" steadfastly stuck to fiscally conserva tive policies when many argue these contribute significantly to the nation's eco nomic woes? Why do international ratings agencies, such as Moody's and Stan dard and Poor's, give Japanese firms and the government low ratings while Japanese rating agencies do not? Why have Japanese firms been so slow to aban don domestic suppliers and move work offshore? More broadly, why did many of the core strengths of Japan's system become weaknesses by the 1 990S? By providing insight into how Japan's capitalist system is embedded in social and developmental norms regarding stability, j ustice, national autonomy, and sur vival, the concept of communitarian capitalism does a better job explaining the rise and stagnation of Japan's economy, and its high technology electronics in dustries in particular, than approaches that narrowly focus on political and eco nomic self-interests, macroeconomic policies, obsolete institutions, insufficient regulation, and overinvestment. 2. Theoretical Focus To help explain how and why institutions emerge and adapt in response to changing economic and technological conditions, this study builds on literature from economics, political science, sociology, and business administration. Most economists approach institutions and institutional change from the perspective of economic efficiency. Derived from the historical experience of the United States, this body of literature focuses on the role of individuals as au tonomous, rational actors maximizing their self-interest.49 They thus view cor porate structure, business groups, and capitalist systems more broadly as emerging in ways that promote the economic interests of the creators involved. To the extent that economists acknowledge any impact of social relations on eco nomic activities such as production, investment, and consumption, they tend to explain it away as "frictional drag that impedes competitive markets."5o Oliver Williamson and his followers, for example, see corporate organiza tional structure as driven primarily by a desire to reduce transaction costS.5 1 Firms bring operations within corporate boundaries when i t i s most efficient to do so and they leave activities to arm's-length market transactions when that is most efficient. According to this view, Japanese institutions and policies, such as
49. Adam Smith, Inquiry into the Nature and Causes of the Wealth of Nations, ed. R. H. Campbell and A. S. Skinner (Oxford, 1 976); Biggart and Hamilton, "On the Limits of a Firm Based Theory," 45-49, 53-54· 50. Granovetter, "Economic Action and Social Structure," 484. 5 1 . Oliver Williamson, The Economic Institutions of Capitalism (New York, 1985), 15-42, and Markets and Hierarchies (New York, 1975).
Dynamics of Communitarian Capitalism
19
the vertical and horizontal keiretsu groups, interlocking shareholding arrange ments, firm-specific labor unions, cooperative R&D, and the main bank corpo rate governance system emerged to reduce transaction costs. Alfred Chandler's works on the rise of large, multiunit firms in the U.S. follow a similar logic: large multidivisional firms emerged as the most efficient organizational structures to coordinate business activities. 52 The view that institutions emerge as efficient responses to economic prob lems suggests that institutions will adapt in predictable ways to advance their own interests once the nature of the economic problem changes. That is, as new technologies and pressures of globalization bear down on an organization, actors will recalculate the costs and benefits of their behavior and their institutions and will change in economically rational ways. On account of vested interests, econ omists suggest this process can take time. But they believe it will occur as the natural outcome of the competitive process when mounting costs of maintaining the status quo overwhelm the benefits. This would lead us to expect that in the case ofJapan's fifteen-year recession, the state, firms, and individuals would assess the costs and benefits involved in their system of stable suppliers, seniority-based wages, lifetime employment, main bank corporate governance, and close ties with the government, and would abandon them if there were clear net economic gains in doing so. Yet, despite se rious deterioration of the economy, talk of the possibility of a financial melt down, and the obvious huge savings that could be made by laying off workers, abandoning suppliers, and moving work offshore, reforms have been late in coming and have been incremental. This response is not predicted by using the lens of economic interests, because interests are not what they appear to be. Thus, while Williamson and Chandler provide important insight into the eco nomic rationale behind institutions and institutional change, only by looking at how interests are filtered through communitarian capitalism can we understand the severe delay in the response ofJapan's government, firms, and citizens to the pressures of globalization. Much of the political science literature on institutions and individual behav ior, derived from the U.S. experience, also focuses on the role of self-interest. Rational choice theory assumes that individuals are independent and economi cally rational. Like their counterparts in the fields of neoclassical economics and the new institutional economics, these scholars look at organizations and capi talist systems more broadly as a set of incentives and constraints. 53 They over52. Alfred D. Chandler, The Visible Hand: The Managerial Revolution in American Business (Cambridge, 1 977) and Strategy and Structure: Chapters in the History of the Industrial Enter prise (Cambridge, 1 962). 53· J. Mark Ramseyer and Frances McCall Rosenbluth, Japan:� Political Marketplace (Cambridge, 1993).
20
Dynamics of Communitarian Capitalism
Reprogramming Japan
look how people are influenced by their interactions with others and by habit and feelings, often in ways that induce them to go against their narrow self interest. Approaches that emphasize economic and political rationality are obviously powerful explanations for behavior. However, their application has more limited utility in nations such as Japan, where broader social forces shape how actors perceive their interests. These approaches lead us to expect diverse responses by firms, state actors, and individuals to Japan's economic woes. If corporate be havior is determined by firms carefully weighing costs and benefits, strong firms in a given industry would be expected to respond very differently than weak firms to a competitive threat. If workers and investors are driven purely by self interest, how can we explain the acceptance of wages based on age rather than merit, coordinated production cutbacks by both strong and weak firms, collabo rative R&D and other risk-sharing behavior that bolsters the weak at the ex pense of the strong, and a deep collective aversion to firing workers, switching suppliers, and moving work offshore? Rather than diverse adaptations to the forces of globalization occurring at different times, we find remarkably similar timing and patterns of change in Japan, across industries and within industries, and among state, corporate, and individual actors. This relatively homogeneous and simultaneous response sug gests that rather than numerous actors all calculating their net advantages and acting according to their specific situations, broader norms shape institutional and individual behavior. That is, communal rules about what is deemed just and legitimate affect behavior and shape what actors perceive as their self-interest. When these invisible guidelines conflict with desired outcomes over a long pe riod, actors begin to contest them. Gradually, over time, they redefine what is considered acceptable behavior. Thus, we find that certain large firms started modifying institutions and ex perimenting with new practices, such as merit-based wages, u.S.-style corpo rate governance policies, and compensation for inventors in the early 2ooos. This is not because those firms found it most advantageous to do so at the same time. Rather, it is because these firms, along with the bureaucracy, have tended to be leaders in redefining what is considered legitimate behavior. Once they showed success, others shifted to the new "normal" way of doing business. Other studies also show that firms in different types of economies react to simi lar challenges in different ways, supporting the notion that economic interest alone does not explain behavior in many countries. 54 54. Peter Hall and David Soskice, "An Introduction to Varieties of Capitalism," Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, ed. Hall and Soskice (Ox ford, 200 1 ), 56.
21
To explain such homogeneous and seemingly irrational responses to similar economic challenges, scholars in various disciplines have posited social norms as a key determinant of behavior, the emergence of institutions, and institutional change. James March and Johan Olsen argue that actors behave based on a shared understanding of what other actors are likely to do-that is, they follow the "logic of appropriateness."55 Do CEOs in the U.S. receive high pay because it is rational or because of what is deemed appropriate? Similarly, views about what is acceptable establish the relatively low pay of top executives in Japan. Scholarship by other political scientists and sociologists looking at the role of the state in economic development also emphasizes how state autonomy, capac ity, and effectiveness can be shaped by the way the state is embedded in social and developmental norms. 56 In the field of Japanese Studies, John 0. Haley has long argued that Japanese do not avoid committing crimes because of the fear of legal sanctions so much as the fear of being ostracized. 57 Social norms are powerful forces. Peter Katzen stein shows how social and legal norms "help define the interests that inform Japanese policy" and that the norm ofJapan as a peaceful nation has had a major impact on the evolution of police and military power in Japan.58 Richard Samuels highlights how a broad-based commitment to technological autonomy, more than concern for profit, has guided Japan's industrial development. 59 This study also sees norms as critical to understanding the type of capitalist system that emerged in Japan in the postwar period and why it has not changed dramatically despite strong economic and political incentives. It views Japan's capitalist system not merely as a set of incentives and constraints, but as a sys tem based on norms-a set of shared understandings accumulated from histor ical experience.6o The state, firms, and individuals do not merely behave within these social constraints; they shape the evolution of key norms; they construct 55. James G. March and Johan P. Olsen, Rediscovering Institutions, The Organizational Basis
of Politics (New York, 1989), 1 60-72. 56. Peter R. Evans, Dietrich Rueschemeyer, and Theda Skocpol, eds., Bringing the State Back In (Cambridge, 1985); Eric A. Nordlinger, On the Autonomy of the Democratic State (Cambridge, Mass., 1981); Granovetter, "Economic Action and Social Structure," 48 1-5 10; Peter Evans, Embedded Autonomy: States and Industrial Transformation (Princeton, 1 995). 57. John Haley, "Sheathing the Sword of Justice in Japan: An Essay on Law Without Sanc tions," Journal ofJapanese Studies 8, no. 2 ( 1 982): 265-8 1 . 58. Peter J. Katzenstein and Nobuo Okawara,Japan's National Security: Structures, Norms, and Policy Responses in a Changing World (Ithaca, 1993), 2 1 0; also see Katzenstein, Cultural Norms and National Security: Police and Military in Postwar Japan (Ithaca, 1 996), 202-3, 209; Katzenstein and Yutaka Tsujinaka, Deftnding the Japanese State (Ithaca, 1 99 1 ), 1 1 5-40. 59. Samuels, "Rich Nation, Strong Army." 60. Walter W. Powell and Paul]. DiMaggio, introduction to New Institutionalism in Organi zational Analysis, ed. Powell and DiMaggio, 9-10.
22
Reprogramming Japan
and continuously reshape their own social reality. These norms or patterns of behavior become institutionalized over time and infused with deep meaning.6 1 People involved in creating and enforcing norms are insiders and develop a strong vested interest in their maintenance. Failure to behave in ways consistent with institutionalized norms signals that the actor is "outside the system morally and instrumentally, and not to be trusted."62 Thus, behavior in societies such as Japan is driven more by concerns for legitimacy than efficiency.63 These norms are not static-they are contested, but tend to change slowly, often through contentious battles among key actors trying to redefine them. The gradual adjustment of norms leads to institutional and policy change.64 This is not to deny that firms, politicians, bureaucrats, and individuals act in ways that serve their own interests. Rather, it suggests that norms heavily influ ence how actors perceive their interests. These actors will often behave contrary to their narrow economic interest to avoid behavior that might make them unac ceptable in the eyes of the community. Even if faced with bankruptcy, for ex ample, many Japanese executives will refuse to fire workers or engage in other behavior they believe will tarnish their image or that of their organization. If they are caught doing something "wrong," they face ostracism, a social sanction that some may regard as more severe than bankruptcy. Harsh social sanctions may help explain why Japanese male suicide rates are very high-in the high 308 (per 1 00,000), compared to 37.9 in Finland, 27. 1 in France, 20.2 in Germany, 1 9. 6 in Canada, 1 8.8 in South Korea, and 1 7. 6 in the U.S.65 Social and developmental norms impact the state and firms in Japan in a way that makes U.S. social science paradigms, which often suggest a clear dividing line and zero-sum relationship between the state and society and the state and the market, inapplicable to Japan's experience. U.S. literature on state-society relations, for example, tends to view increases in state power as coming at the ex pense of society.66 U.S. literature on the state and the market tends to equate firms with the market and suggests that if business gets its way, state power has necessarily declined.67 In contrast, the notion of communitarian capitalism sug-
6 1 . Weber, Economy and Society, I :3I I -37. 62. Biggart, "Explaining Asian Economic Organization," 25. 63. Orru, Biggart, and Hamilton, "Organizational Isomorphism in East Asia," 3 6 I . 6 4 . Granovetter, "Economic Action and Social Structure," 486-87. 65. Mark D. West, "Dying to Get Out of Debt: Consumer Insolvency Law and Suicide in Japan," Public Law and Legal Theory Research Paper Series, no. 37, University of Michigan Law School, Dec. 2003, 8-10. 66. Woo, Jung-en, Race to the Swift: State and Finance in Korean Industrialization (New York, 1991), 175; Bruce Cumings, "Webs with No Spiders, Spiders with No Webs," in The
Developmental State, ed. Woo-Cumings, 65, 89. 67. Richard Samuels, The Business of the Japanese State: Energy Markets in Comparative and Historical Perspective (Ithaca, 1987); Joel S. Migdal, Strong Societies and weak States:
Dynamics of Communitarian Capitalism
23
gests the line dividing the state and society and the state and the market is often blurred and positive sum.68 3 . Communitarian Capitalism and Institutional Change A key concern of this study is how communitarian capitalism responds to change. This is important because in the years following World War II, Japan underwent enormous societal and economic change. Its economic ministries, firms, and workers showed an exceptional ability to adapt to a fast changing en vironment. Firms moved from success in textiles to steel, and then into machine tools, automobiles, and semiconductors in a matter of two and a half decades. Why then was communitarian capitalism later unsuccessful? Joseph Schum peter argues that new ideas and new technology impact insti tutional change and economic development, not just a drive for efficiency. These forces often require firms to alter their organizational structures; but in times of dramatic change, more sweeping changes are necessary to adapt. Schumpeter helps us understand how large firms, such as those nurtured through targeting policies and yokonarabi behavior, can, in periods of stable technological change, play key roles as innovators and agents of technological and economic change due to their huge R&D labs and temporary monopolies.69 His work also helps explain how, when technological change is rapid and unpre dictable as it was starting in the late I 9808, new and small firms run by entrepre neurs are indispensable to a "perennial gale of creative destruction" that brings in new ideas, organizational structures, and processes that disrupt incumbent firms. To Schumpeter, the most important aspect of capitalism was not the con tinuation and maintenance of existing practices and structures but rather "how it [capitalism] creates and destroys them."70 Communitarian capitalism, by ex plaining why the process of creative destruction is deficient in Japan, helps us understand why systems that focus on continuity and minimizing bankrupt cies-that lack a vibrant set of small independent firms and a financial system to support new entrants-can do well during periods of stable technological change yet suffer economic stagnation and sluggish institutional adaptation dur ing periods of rapid and discontinuous technological change.
State-Socie{y Relations and State Capabilities in the Third World (Princeton, 1988); Garon, Molding Japanese Minds. 68. Evans, EmbeddedAutonomy. 6<}. Franco Malerba and Luigi Orsenigo, "Schumpetarian Patterns of Innovation," Cam bridge Journal ofEconomics 19, no. 1 ( 1995): 47-48; ]oseph Schumpeter, Capitalism, Socialism, and Democracy (New York, 1950), 8 1 -106. 70. Schumpeter, Capitalism, 84-85.
24
Reprogramming Japan
The sociology and business administration literature on organizational ca pacities and institutional change, which examines how leaders, managers, and workers in firms and nations adapt their institutions to technological change, also helps elucidate why Japan's capitalist system was more effective when firms were catching up with than when they were going ahead of their competitors. Like Schumpeter, scholars such as Philip Anderson and Michael Tushman point out that in many industries there are long periods of relatively slow, pre dictable, incremental technological innovations punctuated by radical, discon tinuous technological breakthroughs that cause great uncertainty, even chaos. They and others argue that dealing well with radical and incremental innova tions requires very different sets of organizational capacities---different types of leadership, human resources, knowledge, and social relations within the firm.71 "Incremental innovation reinforces the capabilities of established organizations, while radical innovation forces them to ask a new set of questions, to draw on new technical and commercial skills, and to employ new problem-solving ap proaches. "72 Thus, even if a firm has the technological and economic capacities to respond to a radical breakthrough, its set of human resources and organizational norms regarding how those people work together and with other firms may prevent it from doing so.73 This literature shows that repeated success often leads man agers to continue following customary practices based on past experience rather than make decisions based on rigorous analysis of costs and benefits.74 Commu nitarian capitalism shows how policies and institutions in postwar Japan nur tured strong incumbent firms having rigid sets of employees and suppliers fo cused on manufacturing and incremental innovations; and it explains how repeated success combined with these fixed commitments made these firms un7 1 . Herbert Kitschelt, "Industrial Governance Structures, Innovation Strategies, and the Case of Japan: Sectoral or Cross-National Comparative Analysis?" International Organization 45, no. 4 (1991): 453--<)3; Philip Anderson and Michael L. Tushman, "Technological Discon tinuities and Dominant Designs: A Cyclical Model of Technological Change," Administrative
Science Quarterly 35, no. 4 ( 1 990): 605; Douglass C. North, Institutions, Institutional Change and Economic Performance (Cambridge, 1990). 72. Rebecca M. Henderson and Kim B. Clark, "Architectural Innovation: The Reconfigu ration of Existing Product Technologies and the Failure of Established Firms," Administrative Science Quarterly 35, no. 1 (1990): 9. 73. Clayton M. Christensen and Richard S. Rosenbloom, "Explaining the Attacker's Ad vantage: Technological Paradigms, Organizational Dynamics, and the Value Network," Re search Policy 24 (1995): 233--57; Rosenbloom and Christensen, "Technological Discontinu ities, Organizational Capabilities, and Strategic Commitments," in Technology, Organization, and Competitiveness, ed. Giovanni Dosi, David Teece, and Josef Chytry (Oxford, 1998), 215-45· 74. Christensen and Rosenbloom, "Explaining the Attacker's Advantage," 236--37.
Dynamics of Communitarian Capitalism
25
able to quickly adapt to an era in which radical innovation was key to competi tiveness. The notion of communitarian capitalism also builds upon Chalmers John son's monumental work on the role of the bureaucracy, especially MITI, in Japan's industrial development.75 Johnson has long argued that Japan's capitalist system aims to maximize something other than profit. His theory of the capital ist developmental state emphasizes that the goals of Japan's leaders have not been consumption so much as producing to "obtain leverage over other coun tries and to bolster their own national security and autonomy. "76 The communi tarian capitalism model also sees the state as relatively strong and embedded in serious concerns over technological self-sufficiency and national autonomy. However, the notion of communitarian capitalism suggests a broader and deeper set of objectives that go beyond Japan's relative place in the world and addresses how resources are distributed within its society. Secure employment, age-based compensation, and yokonarabi competition, which minimizes bankruptcies, for example, have little direct impact on Japan's national strength. Yet they color key economic decisions. Thus, the communitarian capitalism model encompasses the developmental state. However, it also includes a wide array of corporate institutions and prac tices, such as the main bank corporate governance system, keiretsu, and employ ment policies that have emerged relatively independent of MITI and the state. Though the communitarian capitalism model acknowledges prewar roots, it sees the system evolving out of wartime controls, the psychology of failure, and Oc cupation reforms. The concept of communitarian capitalism emphasizes social objectives, such as stable and fair treatment of workers and support for the weak at the expense of the strong, as much as developmental goals. While the devel opmental state model works well to explain Japan's economic strength, it does not address its weaknesses. Viewing Japan's capitalist institutions and policies as reflections of deep-seated norms elucidates how the same system contributed to rapid development in one period under a certain set of conditions, but stagna tion in another, when circumstances changed. The developmental state model has always assumed a relatively static role for the political system. This study concurs that, with a stable political system dom inated by one party and a popular consensus backing economic growth, the eco nomic bureaucracy was able to play the most powerful role in shaping the insti tutions and policies of communitarian capitalism. However, when the global and technological environment started to change in the 19805 and the consensus on 75. Johnson, MIT! and the Japanese Miracle. 76. Chalmers Johnson, Japan, Who Governs? The Rise of the Developmental State (New York, 1995), 53·
26
Dynamics of Communitarian Capitalism
Reprogramming Japan
national objectives and how to promote them broke down, the bureaucracy's power weakened somewhat and politicians gained a greater voice in the policy making process than in the past. Pempel argues that changes in the global economy and domestic demograph ics in the 1 980s started a process of political change-what he calls "regime shift," which was reflected in institutional changes, such as a new electoral sys tem for the Lower House in 1 994 and a proliferation of new political parties after the LDP lost the Lower House of the Diet in 1 993 for the first time in 38 yearsJ7 Communitarian capitalism explains why we have yet to see significant political changes despite great pressures. Regime shift has not occurred, because communitarian norms are embedded in institutions and policies across society and resist change. Only when these supra-organizational norms at the founda tion ofJapan's political, economic, and social institutions and policies are rede fined will we see major political change. In sum, the concept of communitarian capitalism helps explain anomalies that other theories do not address. It helps explain how a state can be strong and effective in nurturing development in one era yet relatively strong and ineffec tive in another, when social arrangements and skill sets are no longer in sync with economic realitiesJ8 It explains why owners of capital in Japan have not given profits high priority, despite Japan being a capitalist nation. More broadly, it helps explain why the world's second largest economy, supported by one of the world's most educated and wealthy populations, is stubbornly, seemingly recklessly, acting counter to its own economic and political self-interest, in ways that threaten to undermine its economic future. The proposition that Japan's capitalist system has a different logic than that of the Anglo-American model is supported in a growing body of literature on varieties of capitalismJ9 This research points out that countries have different capitalist systems and that advanced nations, due to the mobility of capital and labor, do not necessarily evolve toward similar economic and political institu tions, policies, and goals. Japan's form of capitalism fits in the category of "non liberal" capitalist nations, which includes Germany, South Korea, France, and most other nations, in contrast to the Anglo-American model of "liberal capital ism."8o Nonliberal capitalist nations, in which the market system is deeply em-
77. Pempel, Regime Shift. 78. Sven Steinmo, Kathleen Thelen, and Frank Longstreth, eds., Structuring Politics: His torical Institutionalism in Comparative Analysis (Cambridge, 1992); Evans, Embedded Auton omy, 228. 79. Suzanne Berger and Ronald Dore, eds., National Diversity and Global Capitalism (Ithaca, 1996); Hall and Soskice, eds., Varieties of Capitalism. 80. Wolfgang Streeck and Kozo Yamamura, eds., The Origins of Nonliberal Capitalism (Ithaca, 2001 ), place countries in these two categories, 8.
27
bedded in norms, place relatively little trust in free markets.81 Within this non liberal category, nations vary in how the market and state are embedded in norms, and they differ in their goals. Some, such as Japan and South Korea, give high priority to developmental objectives; their bureaucracies have been heavily involved in guiding economic development, including actively targeting specific industries.82 Others, such as Germany, are not developmentally oriented.83 Some bureaucracies are economically exploitative; this is true in much of Latin America, the Philippines, India, and Indonesia, where landowners long ago pen etrated the state, leading to what Peter Evans calls "predatory states."84 Nonliberal capitalist nations also vary in their social objectives. Japan's sys tem is developmental yet, due in large part to its chaotic war experience, also gives high priority to a postwar social contract that includes job security, a rela tively equal income distribution, and a safety net that minimizes bankruptcy of major firms. This resembles Germany's "consensus economy," which focused on postwar reconstruction, social cohesion, and unity. Scholars argue that Ger many's focus was the result of its need to pull itself together after being ripped apart by Nazism and that a sense of unity was critical to dealing with its division into East and West Germany.85 South Korea's capitalist system, while similar to Japan's in terms of being developmental, is not infused with the logic of conti nuity and stability of the broader community. The biological family unit plays a big role in South Korea's capitalist system, as well as in Taiwan, though in somewhat different ways.86 Some pillars of Japan's system are similar to those of Germany, which has also had a sluggish economy since the early 1 990S. Many resemble arrangements and practices in France. South Korea, and to a lesser ex tent Taiwan, also consciously created some similar institutions and policies. Still, within this broader category, each nation has its own mix of state, markets, and society, depending on its particular historical circumstances. To better un8 1 . Streeck and Yamamura, eds., The Origins of Nonliberal Capitalism; Polanyi, Great Transformation; Evans, Embedded Autonomy. 82. Woo, Race to the Swift. 83. Sigurt Vitols, "The Origins of Bank-Based and Market-Based Financial Systems: Ger many, Japan, and the United States," in The Origins ofNonliberal Capitalism, ed. Streeck and Yamamura, 171-76. 84. Evans, Embedded Autonomy; Atul Kohli, "Where Do High-Growth Political Economies Come From? The Japanese Lineage of Korea's Developmental State," and Ronald J. Herring, "Embedded Particularism: India's Failed Developmental State," in The Developmental State, ed. Woo-Cumings, 93-136, 306-34. 85. Streeck and Yamamura, Origins of Nonliberal Capitalism, 3. 86. Gary G . Hamilton, William Zeile, and Wan-Jin Kim, "The Network Structures o f East Asian Economies," in Capitalism in Contrasting Cultures, ed. S. R. Clegg and S. G. Redding (Berlin, 1990), 105-29; Gary G. Hamilton and Marco Orru, "Organizational Structure of East Asian Companies," in Korean Managerial Dynamics, ed. Kae H. Chung and Hak Chong Lee (New York, 1989), 39-47.
28
Reprogramming Japan
derstand Japan's development in the postwar period and stagnation since the I 990S, it is necessary to study its variant of capitalism. 4. The Case Studies and the Nature of the Comparison The primary purposes of this book are to show the communitarian nature of Japan's capitalist system and how this socially embedded capitalist system con tributed to both the rise and recent stagnation of the economy. The study fo cuses on four high technology electronics industries-telecommunications, computer hardware, computer software, and semiconductors. This sector of in terrelated industries allows us to gain insight into how norms shaped the evolu tion of technology-intensive industries critical to the economy. Given the im portance of these industries, the state and private sector chose to nurture them. As a result, all firms were subject to a great deal of state intervention as well as industry cooperation. Extensive management of behavior in these industries provides ample opportunities to assess the ways and degrees to which norms help explain the emergence and maintenance of institutions and policies in these industries. This set of industries is also selected because, with minor variations, they all have followed a similar pattern: they grew quickly after the war and have stag nated to differing degrees since the I 980s and I 990S when they experienced radical technological change and were exposed to fierce global competition. While struggling, they are not Japan's worst-off sector nor would their revital ization solve all the nation's problems. Still, they have all been under consid erable competitive stress, giving the state, corporations, and workers strong eco nomic incentives to alter practices to boost their competitiveness. Thus, these are excellent cases for exploring why all four industries stagnated when circum stances changed and why the state and firms were so slow to adapt to the new environment. This study assesses the conditions under which communitarian capitalism has been effective and ineffective by comparing the four cases in two ways. First, the early stage of each industry, covering the period from the I 950S up until the I 980s, is compared with the later period of the same industry, from the I 980s to the present. Dividing the periods in this way provides a comparative snapshot of the industries before several key aspects of their environment changed in the I980s and I990S. The comparison of what causes stagnation and slow adaptation in each industry is complemented by a comparison of the four industries. How ever, while each case highlights a different aspect of communitarian capitalism, there is not enough variation nor enough cases to come to a definitive conclusion about the conditions under which the system has been most effective. Notwithstanding this limitation, the analysis suggests four conditions were
Dynamics of Communitarian Capitalism
29
most important to explaining why communitarian capitalism was more effective in nurturing development up until the I 980s than afterward. The most critical condition was that the industries were in the catch-up stage and focused on manufactured goods. A favorable international environment was also crucial. A strong consensus on the importance of the industries and how to use them in order to contribute to the interests of the broader community was also critical. Another key factor was policies and institutions that worked in market conforming ways-that simulated market forces in ways that protected and pro moted the firms but also required them to advance technologically and cut costs. More specifically, an analysis of the conditions under which communitarian capitalism promoted development suggests that the activist state and other pil lars of the system were effective when the technological trajectory was clear, products could be imitated, and there was a strong consensus on how to use the industry for the national interest. The centralized financial system, keiretsu, and the main bank corporate governance systems worked well when they could be insulated from global markets and when firms and individuals accepted low re turns in order to assure social stability and lower risks. With leaders, managers, and workers having mindsets and skills oriented toward low-risk, incremental innovation and improvement of production processes, the huge vertically inte grated firms became the world's most efficient, high-quality manufacturers in many industries. Institutions and policies that provided job security and accept able salary gaps prevented the massive social upheaval that most nations experi ence during periods of rapid economic growth. However, under the new set of conditions that emerged in the I 980s and I990S, these strengths, in terms of nurturing competitiveness, became weak nesses. In an era of rapid, discontinuous technological change, a system that so cializes risks-that refuses to provide higher returns for higher risks-obstructs the emergence of risk-takers, be they politicians, corporate leaders, entrepre neurs, or scientists. In this environment, various state, labor, and capital risk sharing arrangements aimed at promoting indigenous technology, cooperative competition among firms, and long-term commitments to employees and sup pliers are stifling the emergence of new firms, ideas, and organizational forms. Though it has clearly been in Japan's economic and political interest to adapt to the new global and technological environment, Japan has clung to these norms, to the detriment of these industries and the economy more broadly. While it would be optimal to develop a comparative study of how communi tarian capitalism operates in a wide range of industries that includes services and manufacturing, if not one that also contrasts Japan's case with that of other nations, limitations will confine this analysis to high technology electronics in dustries in Japan that are primarily though not solely dominated by manufactur ing. However, this study does provide information on other industries in Japan and other countries to support its core arguments. It also discusses key excep-
30
Reprogramming Japan
tions to its argument, such as Toyota, Honda, Sony, Canon, Nintendo, and Kyo cera. These firms are doing well despite the economic slowdown and the com munitarian capitalist system. I show that these firms are generally less embed ded in communitarian norms and tend to be in manufacturing industries characterized by stable, incremental technological change and thus are less neg atively impacted by communitarian arrangements. They are the exceptions that prove the rule. My analysis of the telecommunications, computer hardware, software, and semiconductor cases suggests the system's strengths did not become weaknesses overnight. Some studies suggest that many problems started in the 1 970S when the economy was forced to enter the international system.87 In the four indus tries that are analyzed, the core institutions started to undermine industrial and technological advances at varied times, some in the early 1 980s, others not until the late 1 980s. The timing depended on the specific industry's pattern of tech nological change and international competition. There is no doubt, however, that the Plaza Accord in late 1 985, which led to more than a doubling of the yen's value in a few years, exacerbated problems in these and other industries. Economic data support the notion that Japan's leading technology sectors, while strong in the early 1 9808 and by no means the weakest in Japan, have since declined. Although trade numbers show Japan maintaining an impressive trade surplus in many areas, these numbers lump sophisticated products that provide high-wage jobs, profits, and technological spillovers, with simple equipment. Japanese firms' return on equity has never been high compared to the U.S. even in the bubble years, and it plunged in the 1 980s and 1990S (Figure 1 .2). Japan's technology trade balance, despite huge exports of automobile and consumer electronics technology, has also deteriorated somewhat since the 1 980s although it improved in the late 1 990s; it remains in the red and at a level similar to that of the u.K., France, and Germany (Figure 1 .3). Data on the specific firms in this study show they are lagging in comparison to their strength and potential in the past. They have all plunged in the Fortune 500 rankings of firms with the greatest revenues.88 Their profits as a percentage of revenues have slid from the 3-5 percent range in the early and mid- I 9805 to the 0-1 percent range by the early 1 9905 to losses ranging from -3 to -8 percent in the late 1 9905 and early 2000S; however, by 2003 they had rebounded to the
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Dynamics of Communitarian Capitalism
0-1 percent level.89 They were all suffering from negative returns on equity in 200 1 , ranging from -44.8 percent for Fujitsu to -55.2 percent for NEC, though in 2002 this improved to -17.4 percent and -6.9 percent respectively.9o In the semiconductor industry, the most globally successful case of the four analyzed, the firms' global market share plunged from just over 50 percent in the late 1 9808 to less than 30 percent by 200 1 . By 2003, the chip firms had consolidated their DRAM operations into one firm and were beginning to integrate efforts on other chips. In telecommunications equipment, there was serious talk about merging the top three firms' operations into one company.
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This study, through analysis of the telecommunications, computer hardware and software, and semiconductor industries, shows how communitarian norms played a major role in the emergence and evolution ofJapan's postwar capitalist system and contributed to growth and competitiveness in the 1 950S, 1 960s, and 1 970S but later hindered it. More specifically, it suggests that the industry's stage of development and nature of technology, the international environment, the existence of a broad consensus on the industry's importance and how to pro mote it, and policies that simulated market forces have been critical to under standing why communitarian capitalism was more effective in the early stage of these industries' development than since the 1 980s and 1990s. That is, commu nitarian capitalism was most effective when there was a clear, stable technologi cal trajectory, an exceptionally positive global environment, and foreign prod ucts could be legally copied. When these conditions started to change in the 1 980s, communitarian capi talism became much less effective in promoting development and economic growth. Strong global pressures bore down on these industries giving firms, the state, and citizens strong economic and political incentives to adapt to a changed environment. Despite these strong incentives, there was little reform because interests were not what they appeared to be. The firms, unwilling to treat em ployees, suppliers, and competitors in what were deemed inappropriate ways, continued to follow similar strategies even though they proved to be economi cally ineffective. As the system became less effective in nurturing economic growth and tech nological progress, major actors started challenging communitarian practices, attempting to modify them to produce better economic outcomes. In cases such as the telecommunications industry, this contestation played out in open politi89. Ibid. 1<'01' example, Fujitsu's profit as a percentage of sales was 4, 5.7, 2.7, - 1 .2, 1 .7, - 1 .3, -7 . 6, -3, and 1 percent respectively in 1982, 1985, 1 99 1 , 1993, 1995, 1999, 200 1 , 2002, and 2003. Hitachi's percents were 3.7, 4.2, 2.9, 0.9, 1 .7, -4.2, -6. 1 , 0, and 0 in those same years. 90. Toyokeizai, Inc., Japan Company Handbook, quarterly.
34
Reprogramming Japan
cal battles, which on the surface were about nitty-gritty issues such as phone rates, standards, types of service, and deficits, but in reality were over the redef inition of deep-seated norms regarding the appropriate level of competition, the acceptable role of foreign firms and technology in the economy, and how much to support established firms at the expense of new entrants. While norms started being questioned in the 1980s, in all four cases the greatest institutional and policy changes started occurring in the 1 9905, espe cially the late 1 990S. In response to Japan's financial fragility, which triggered the broader financial crisis throughout Asia, the economic ministries-MITI and MOF-together with big business led the nation in redefining norms in order to allow for more vigorous competition leading to successes and failures, a much greater role for foreign firms, and a greater gap in wages and wealth. Politicians have generally followed the bureaucracy and big business, enshrining in law changes that have already become more acceptable. The extremely late and slow response of the state, firms, and citizens to serious threats to the na tion's financial solvency is best explained by looking at Japanese behavior through the lens of communitarian capitalism. While there have been significant changes since the late 1 990s, the logic of communitarian capitalism remains prevalent throughout the economy and, though only one of several important explanations, helps us better understand the dilemma Japan faces today.
2
Norms and Institutions
In order to better understand Japan's capitalist system in terms of how it con tributed to rapid industrial development up until the 1 980s, but hindered it after that, this chapter analyzes how key capitalist institutions and policies, which had emerged and were maintained in Japan during the postwar period, reflected communitarian norms. It examines how these norms and institutions have changed since the I 990S; how and by whom they are being contested; and how they compare to other nations. Analysis then turns to the institutions and policies that became an inte grated capitalist system in the postwar period. These include the set of arrangements that controlled the labor market and broadly distributed the fruits of labor. Among these arrangements are lifetime employment, seniority wages, and enterprise unions; the institutions and practices that emerged to control and stabilize capital markets, such as a bank credit-based financial sys tem, keiretsu industrial groups, and main banks; and the various institutions and policies involved in targeting industries. This chapter also examines how similar corporate strategies and other yokonarabi arrangements, such as the dango and the convoy systems, and an education system that fostered conform ity and egalitarianism, promoted development as well as a strong sense of com munity. In addition to showing how these arrangements emerged as reflections of communitarian norms, this analysis examines how key players responded when, beginning in the 1 980s, these institutions and policies became less effective in promoting development. Rather than adjusting quickly to maximize their eco nomic and political interests, state and corporate actors were unwilling to defy these norms. They only started to contest and reshape them when the viability of the communitarian system was threatened. Even then, it took time to change
36
Reprogramming Japan
customary practices. The bureaucracy, together with big business, took the lead in contesting them, trying to adjust them in ways that gave greater priority to labor and capital mobility, competition, and economic growth. Other actors, es pecially labor and politicians, tended to resist change due to vested interests in the status quo. Once norms were redefined, similar changes occurred nearly si multaneously across industries and firms. Communitarian capitalism started to emerge during the war and came to fruition in the early postwar years, although some of its aspects, especially the developmental state and an emphasis on the group over the individual, have pre war roots. On several indicators, such as reliance on equity and the degree of labor mobility, the economy was relatively market-oriented in the 1 920S.1 In the Taisho period ( 1 912-26), for example, managers often complained that factory workers only worked for a short time before changing firms.2 During this pe riod, entrepreneurs created many companies, and many firms went out of busi ness. Many sectors experienced vibrant competition. This is not an environment typically associated with Japan, and therefore it is impossible to know whether the economy might have stayed relatively market-oriented. However, leaders made dramatic changes in the 1 930S when they took tight control over the econ omy in preparation for war. These institutional and policy changes, together with the psychological impact of defeat, the postwar occupation, and Japanese reforms, led to a new type of capitalist system. What coalesced in the early post war period was state-led, as in the prewar period. As in the Meiji period ( 1 8681 9 1 2), the state would emphasize developing technological and industrial capa bilities to promote self-reliance. New elements added into the system were guaranteed employment, support of losing firms at the expense of winners, and encouragement of firms to compete in cooperative, orderly ways. The logic was one of continuity, stability, and order.
1 . Wartime Roots of Communitarian Capitalism During the war, the state created various arrangements to control the econ omy and orient the nation toward a military build-up. These included measures that shifted the financial system from equities and bonds to a bank-centered sys1 . Tetsuji Okazaki, "The Japanese Firm under the Wartime Planned Economy," in The Japanese Firm: Sources ofCompetitive Strength, ed. Masahiko Aoki and Ronald Dore (Oxford, 1994), 352; Kazuo Veda, "Institutional and Regulatory Frameworks for the Main Bank Sys tem," in The Japanese Main Bank System, ed. Masahiko Aoki and Hugh Patrick (Oxford, 1 994), 90; Tetsuji Okazaki and Masahiro Okuno-Fujiwara, eds., The Japanese Economic System and Its Historical Origins (Oxford, 1 999). 2. Noguchi, 4o-nen taise;, 2 1 .
Norms and Institutions
37
tem that relied heavily on loans.3 This added to the state's control over the econ omy since MOF heavily influenced which industries banks loaned money to. Other measures, such as the BOJ Act of 1 942, which was modeled after Ger many's central bank law of 1 939, gave the BOJ, which was under MOF's influ ence, additional power over the financial system. Around this time, the main bank system emerged to ensure a stable flow of capital to the military:� These new arrangements freed firms from the need to maximize profit, al lowed the state to target strategic industries, and encouraged firms to become worker-friendly, communal organizations.5 The idea of companies operating as communities (kyodotaz) had prewar roots; however, lifetime employment and seniority wages became established during the war and expanded to all workers after the war.6 Creating an employee-centered, communal corporate system that provided job security and fair treatment was deemed critical to keeping employ ees loyal and working hard for the national interest. These arrangements evolved to promote national autonomy, technological self-sufficiency, and social stability, but also helped advance the state's and the firms' economic and politi cal interests. These institutions and policies reflected the broader community's desire for peaceful coexistence and prosperity for all; there were to be no superstars or big losers (datsuryakusha) and all firms had the right to survive (seizon ken). These arrangements gave priority to production over profits (seisanyusen shugi or seisan daiichi shugt); they rejected the laissez faire competitive model (kyoso hitei shugi) and embraced instead a model of managed competition that pursued develop ment as well as social stability, fairness, and order. Notions that consumption was wasteful and thus immoral and that improving the quality of life was an idler's demand took deep root at this time. Firms were to act as a social security system and treat workers equitably.? This "egalitarianism" had strong paternal istic overtones: it was not power sharing so much as a patron-client type pater nalistic concern by the elite for workers. Wartime controls fundamentally modified the role of shareholders and made it customary for firms to act like communities pursuing national autonomy and development rather than their own narrow economic interests. In the prewar pe riod, managers as owners were the biggest shareholders in their companies, and 3. Vitols, "Origins," 1 75; Noguchi, 4 o-nen taisei, 8, 30-31 ; Gao, Japan's Economic Dilemma, 59, 86; Hoshi and Kashyap, Financing and Corporate Governance in Japan, 51-89. 4. Noguchi, 4 o-nen taisei, 3, 34; Gao, Japan's Economic Dilemma. 59-60. 5. Okazaki, "Japanese Firm," 367-69; Gregory Jackson, "The Origins of Nonliheral Cor porate Governance," in Origins of Nonliberal Capitalism. ed. Streeck and Yamamura, 142. 6. Noguchi, 4 o-nen taisei, 26; Ken'ichi Imai and Ryutaro Komiya, "Characteristics ofJap anese Firms," in Business Enterprise in Japan, ed. Ken'ichi Imai and Ryutaro Komiya (Cam bridge, 1994), 23; Gao, Japan's Economic Dilemma, 128; Okazaki, "Japanese Firm," 357. 7 . Noguchi, 4 o-nen tajsei. 1 34, 1 40-43.
38
Reprogramming Japan
firms were organized to maximize profit. In contrast, during the war, firms started emphasizing developmental and social objectives, not profits. Wartime changes institutionalized the role of a strong state guiding the economy. Noguchi Yukio, an influential economist, calls these wartime changes, which modified the capitalist concept of property rights, the " 1 940 system"; he argues that they remain at the foundation of Japan's economic system today.8 These norms, which were aimed at creating a state-led cohesive community, became in stitutionalized in the postwar period and continue to obstruct shareholder power and the emergence of a deregulated, consumers-first economy.9 People solely pursuing profit are still viewed as outsiders acting in greedy, illegitimate ways. 2. Managed Labor Markets: Lifetime Employment, Seniority Wages, and Enterprise Unions While career-long employment and seniority wages have prewar roots, they took off during the war and became an integrated system covering both man agers and blue-collar workers in the postwar period. "In the decade after 1 945, the package identified as the Japanese employment system took shape," argues Andrew Gordon, an authority on Japanese labor. l o "The system of lifetime em ployment and wage payment [pegged] primarily according to seniority devel oped in the postwar years," concur Tadao Kagono and Takao Kobayashi, experts on Japan's labor system. ! 1 It is true that the lifetime employment system for mally covers only 25-30 percent of the labor force and does not generally cover women. However, studies show the norm is deeply held and even firms that do not offer lifetime employment try to provide job security and use layoffs as a last resort. This norm is backed by courts that typically interpret labor disputes in ways that favor workers. Except in cases of misconduct, courts have generally ruled that firms cannot fire workers unless they face dire economic circum stances, secure the union's agreement, exhaust all other means for cutting labor costs, and help those laid off. Thus, while the existing Labor Standards Law permits firms to dismiss employees with 30 days notice, exercising this right is effectively restricted by judicial precedents. Consequently, it has become nor mal for firms to reduce their labor force by attrition rather than layoffs. 1 2
39
As a result, Japanese male workers have the longest tenure of employment of industrialized nations. In 1 995, Japanese males on average had worked for the same firm for 1 3 years, compared to 10.5 for Germany, 9 for the UK., and just under 8 for the US.\3 In 2004, the OECD found that protection for regular em ployment in Japan is the seventh strictest among twenty-seven OECD coun tries. The US., where workers can be fired at will, was the least strict, followed by the United Kingdom; France, Germany, and South Korea are as strict as or slightly stricter than Japan. 14 There were good economic reasons for offering workers secure employment and seniority-based wages. Giving them incentives to stay made them willing to develop firm-specific skills that they could not easily transfer to another firm. This allowed firms to receive a return on investment in training. Lack of portable pensions also provided a strong disincentive to move. According to ex perts, Japanese society accepts this system of employee sovereignty, because workers commit themselves to the firm for the long run and lose the most if their company fails. I S Offering job security also improved management-labor re lations, contributing to innovation and quality control. These labor practices also made employees feel they were treated fairly, as members of a broader com munity. As the system evolved over time, job security, even for people not of fered lifetime employment, was expected-it became part of the social contract. In short, these labor practices contributed to an efficient production system but also reflected concerns about building and maintaining a cohesive community. Thus, the Japanese firm is a social unit, not just an instrument for pursuing profit. It provides welfare and health services. Every aspect of an employee's life is contingent on the firm's fate. Since there is little turnover and employees tend to socialize with each other, personal relationships reinforce policies making dis missal difficult. Bosses frequently help find marriage partners for their workers and give speeches at their weddings. Workers often take time off to attend fu nerals and weddings of fellow workers and their families. For these reasons, many see the Japanese firm, with its employee-first management (jitgyjjin jitshi keiel), as socialist (shakai shugi) in nature. 16 Firms follow the "logic of the orga nization" (soshiki no ronri) rather than the "logic of capital" (shihon no ronri), ex plains Nakatani Iwao, a prominent economistY To keep employees happy, firms Oriental Economist, Sept. 2002, 6. Employment Outlook (Paris, 2004), 72; OECD, Economic Survey: Japan (Paris,
1 3 . "Labor (non) movement,"
8. Ibid., 1 , 9. 9· Ibid., 1 33-34· 10. Andrew Gordon,
Norms and Institutions
14. OECD,
The Evolution ofLabor Relations in Japan (Cambridge, 1 985), 8.
I I. Tadao Kagono and Takao Kobayashi, "The Provision of Resources and Barriers to Exit," in Business Enterprise in Japan, ed. Imai and Komiya, 9 1 ; Imai and Komiya, "Character istics of Japanese Firms," 23.
12. Oriental Economist, Sept. 2002, 7; "Panel Members Clash over Layoff Guidelines," Nikkei Weekly, July 23, 200 1 , 4.
2004),
16I. 1 5 . Imai and Komiya, "Characteristics o fJapanese Firms," 24-25; Kagono and Kobayashi, "Provision of Resources," 93--94; Itami, "The Human-Capital-ism," 8 1 , 87; Ikuo Kume, Dis paraged Success, Labor Politics in Postwar Japan (Ithaca, 1998). 1 6. Interview of MPHPT official, July 9, 2002; former JDB official, July I I , 2002; Tsumori, Naze Nihon, 1 66. 17. Nakatani, ed., Koporeto gabanansu kaikaku, 19-22.
40
treat them relatively equitably, no matter whether they are smart, skilled, and hardworking or not. "Within firms, equality has become the most important value," explains Nakatani. IS In what is called the slow promotion system, people hired in the same year are generally paid the same and their wages stay similar over time. By promoting people slowly, no one sticks out either as a star or a loser. The desire to be egalitarian, in the sense of broadly and relatively equally distributing corporate gains, has strengthened the community-like nature of firms, motivating workers to devote their lives to their company. 19 The result is a relatively narrow income gap between executives and average workers. In 1 99 1 , CEO pay in Japan was 7 .8 times that of an average manufac turing employee; in Germany, it was 1 0.2, and in the US., 25.8. By 1 999, the gap had risen to a factor of I I in Japan, 1 3 in Germany, and 3 4 in the US.20 In 200 1 , the average Japanese top executive earned I I .6 times more than the aver age worker, while an American CEO received 4 1 .3 times more.21 Income distri bution in Japan and Germany is thus remarkably equal compared to that in the US. The most striking contrast is between groups with the highest and lowest incomes. In the 1980s, the ratio between the income of the highest and lowest I O percent of households was 6 in the U S. , 3 in Germany, and 3 . 5 in Japan; the poorest 20 percent of households received 5 percent of total household income in the US. during the postwar period, compared to 9 percent in Japan and 1 0 percent i n Germany.22 Enterprise unions-unions that cover just one firm--emerged after the war. They further blur the lines between management and labor, and therefore foster cooperation.23 Since everyone in the firm is assured job security, employees tend to agree to reinvest profits rather than spend them on large wage increases. Thus, enterprise unions, unlike trade unions in the US. and South Korea, have not engaged in radical struggles for higher wages. In fact, wage negotiations in all Japanese firms occur at the same time-during the spring labor offensive shuntil-and wage hikes tend to be uniform-yokonarabi-in a given industry. Many interpret the relative docility of Japanese workers as weakness. However, looking at workers' behavior through the lens of communitarian capitalism, it is clear that labor has a major voice in the policymaking process and that corporate gains are broadly distributed throughout the community. IS. Nakatani, Nihon keizai no
rekishiteki tenkai, 24I-42.
19. Ibid. 20. Gregory Jackson, "Corporate Governance in Germany and Japan: Liberalization Pres sures and Responses during the I 990s," in
The End o/Diversity? Prospectsfor German andJap anese Capitalism, ed. Kozo Yamamura and Wolfgang Streeck (Ithaca, 2003), 292. 2 1 . "Japan Gropes for Ideal Corporate Governance Model," Japan Times, Aug. 23, 2002, I ,
9·
Norms and Institutions
Reprogramming Japan
22. Vitols, "Origins," 195-96. 23. Rodney Clark,
The Japanese Company (New Haven, 1 979), 45-46; Gordon, Evolution 0/ Labor Relations, 207-8; Noguchi, 4 o-nen taisei, S.
41
The belief that providing job security is appropriate also extends to the bu reaucracy. In the prewar period, the current practice of all equals and seniors "retiring" when one person advances to the position of vice-minister did not exist.24 This practice is another example of honoring seniority and planning or derly "retirements" through amakudari ("descending from heaven"-retiring onto the board of a corporation or nonprofit organization), rather than selecting the most qualified person for the job. Amakudari also allows the bureaucracy to steer the economy through a tight network of people loyal to the state and core communitarian goals such as national autonomy, economic development, and a fair and predictable social order.
Contested Norms: Recent Changes in Lifttime Employment, Seniority Wages, and Enterprise Unions By the 1 990S, these labor policies, because they created high fixed costs and a rigid set of skills, manifested clear economic disadvantages. When the economy is not growing rapidly and technological change makes some older workers inef fective, this system becomes a major burden. "In a stable era, this system worked well to reach a target. But now the target is not clear. In an era of rapid change, the demerits of the system are becoming clear," explained a cabinet-level expert on internet policies.25 These labor practices no longer made economic sense, but firms continued them because abandonment would break deep-seated social taboos. However, after the long recession in the 1 990S, corporate leaders started questioning these practices. They were stunned when the head of Nissan, Car los Ghosn, blatantly abrogated customary practices by firing workers through plant closures and cutting off long-term suppliers, something that happened after Renault took over the ailing firm in 1 999. The accusation was made that only a foreigner would flagrantly defy Japanese social norms, and yet when Ghosn's actions helped turn Nissan around, some leaders started praising him and called for guaranteed employment to be abolished. In response, Prime Minister Koizumi Jun'ichiro suggested the need for new laws to make it easier to fire people. Unions and politicians sensitive to labor issues opposed this pro posal, but the norm is being openly questioned. Due to their sluggish economy, German leaders have also recently proposed measures to make it easier to fire workers. Though leaders are questioning the long-term viability of lifetime employ ment, change has been slow and minimal. So-called layoffs are usually transfers
24· Chalmers Johnson, "Japan: Who Governs? An Essay on Official Bureaucracy," Journal
o/Japanese Studies 2, no. 1 ( 1975): I 3 . 25. Interview, Juiy 10, 2002.
42
Reprogramming Japan
Norms and Institutions
of personnel to subsidiaries or reductions through attrition. for example, NTT (Nippon Telegraph and Telephone) group firms moved 1 10,000 workers to sub sidiaries; salaries were cut by 1 5-30 percent but no one was fired. Voluntary leaves of absences, pay cuts, early retirement, use of temporary and part-time workers, and cutbacks by attrition remain the primary ways firms pare down labor costs. Many large struggling firms, for example, have cut salaries by 5-1 0 percent since 2000. Overall, average wages per worker in 2004 were down 7 per cent from their peak in 1 997.26 Many top firms vigorously defend lifetime employment. In 2000, Nikkeiren and Toyota chairman, Okuda Hiroshi, said the goal ofJapanese managers is the mainte nance of employment.27 In 2003, Cho Fujio, president of Toyota, said "out of re spect for our people, we never fire employees; instead of being solely concerned with our own profitability, we think about how we can serve society and how we can benefit both Japanese industry and Japan's economy."28 Inamori Kazuo, the founder of Kyocera, Inc., explained in 2001 that although Kyocera had fired 1 00,000 workers, they were all overseas employees. "In Japan, we don't have a layoff system. We just won't do it."29 "It is a socialist system . . . we cannot fire people so the only thing we can do is cut wages," explained a vice president at NTT Com munications in 2004.30 State officials are also reluctant to alter the practice. The for mer head of the FTC agreed, "firing people is the last of the last resorts."3l Even when layoffs make clear economic sense, they are still deemed unfair and thus seri ously tarnish a firm's image unless done under the threat of bankruptcy. Due to this aversion to firing workers, firms in declining industries go to great lengths to create work for their employees. Nippon Steel, for example, entered unrelated industries such as semiconductor packaging and amusement parks to give employees something to do. This was rational, regardless of whether it was profitable; the firm had to pay employees anyway, so at least this helped stem losses. From a national perspective, however, this wastes tremendous resources. Most Japanese do not expect lifetime employment to disappear soon. Still, due to competitive pressures, firms are reducing the number of new employees offered job security and experimenting with mid-career hiring. Younger work ers, who have much less vested in their firms, accept that for them there is no longer an implicit guarantee of lifetime employment. Scandals involving former bureaucrats have led to demands to terminate life time employment for bureaucrats through amakudari. However, the greatest ef-
43
fort is going into preventing officials from going directly to firms they regulated. Jobs created through amakudari increased by 27.6 percent in 2003 over 2002, so dramatic reform has not occurred.32 Bureaucrats earn much less than their pri vate sector counterparts; thus most citizens believe it unfair to suddenly stop compensating them with lucrative post-retirement jobs. Still, young bureaucrats no longer expect such positions to be available when they retire. While job security for current employees is proving resilient, there is more vehement criticism of seniority-based wages. This system worked well when the economy was growing rapidly, enabling firms to afford annual raises. It also worked because all firms followed it; the system became institutionalized as the appropriate way of compensating employees. Along with promoting a sense of fairness, it had an economic rationale to it. However, in an era of rapid technological change and sluggish growth, favor ing older people can cause stagnation. Many top managers, for example, are not comfortable using computers or the internet and therefore are not aware of the power of this new technology. "If you can change top management, the company can change," explains a professor at one of Japan's top business schools.33 Even leaders of globally competitive firms, such as Kyocera's Inamori, have publicly criticized the practice. Inamori says today's corporate leaders are too old and that people in their late forties should be allowed to call the shots.34 Age-based wages also discourage people from acquiring graduate degrees or other skills, because employees start at the bottom of the seniority ladder and rise indepen dent of their education or skills. It leaves firms stuck with expensive older em ployees, while millions of young people have no jobs or work part time. In 2004, the unemployment rate of people in the 1 5- 24-year-old age bracket was around 1 2 percent, more than double the overall rate of 5-6 percent, and some 22 per cent of the labor force were part timers. In the spring 2003 labor negotiations, called the shunti), many firms vowed to stop seniority wage increases but ended up granting them. However, in spring 2004, many ended the practice. Some are phasing it out gradually, offering it only for the early stage of an employee's career. In 1 999, pay based on perfor mance (including stock options) represented over 140 percent of the basic salary in the U.S., but only 60 percent in Germany and just 1 3 percent in Japan.35 However, a 2004 survey showed that 49.6 percent of major Japanese firms had 32. MPHPT, Jinjiin,
Eir; kigyo e no shiishoku no shonin ni kansuru nenji hOkoku, maegaki,
2002, 2003. www.jinji.go.jp/recognition/ 26. "Nihongata 'seika shugi,' "
Ekonomisuto, Mar. 2, 2004, 26.
27. Tsumori, Naze Nihon, 1 8.
Oriental Economist, Mar. 2003, I I . Fortune, Dec. 10, ZOO I .
33. Interview, July 8, 2002; others emphasize how old executives deter change (interviews of former MITI official, June 30, zo04; two business professors, one June 28, 2004, and the
28. Cited in "We Think How We Can Serve Society,"
other June 30, 2004; a vice president at NTT Communications, July 2, 2004; a MITI semi
29. Eric Nee, "Kyocera's Dilemma,"
conductor expert, June z8, 2004).
30. Interview, July z, 2004.
34. Interview in "Riida wa 40 sai dai ni," Nihon keizai shimbun, May 18, Z002.
3 1 . Interview in Seattle, Apr. 19, 1994.
35. Jackson, "Corporate Governance in Germany and Japan," 292.
44
Reprogramming japan
Norms and Institutions
partially introduced merit into their compensation systems and another 1 6. 5 percent had completely implemented it; the latter even abandoned the custom ary practice of providing cheap company housing for workers and extra pay for dependents.36 Due to these corporate efforts to redefine acceptable practices, it is gradually becoming legitimate to pay workers differently, depending on their expertise and performance. Still, many complain about the merit system: only 36 percent of firms that have implemented it are satisfied and many employees believe it is just a veil for cutting wages. 37 The fundamental forces pushing for changes in the wage system are de mands for returns from domestic and foreign investors. japanese firms, most of which are owned primarily by domestic investors, do not need high profits but cannot sustain losses over long periods. Corporate leaders also worry that sen iority wages undercut incentives for bold-risk taking and technological break throughs. "Bonuses for inventions are very low because of the socialist principle [shakai shugt1," explained a former JDB officiaI.38 In 2002, NTT's maximum bonus for inventors was ¥3 million ($30,000); inventors' names were on patents but NTT owned them. Stung by defections of several top researchers, Honda Motors, in 2002, raised its ¥Soo,ooo ($5,000) cap on bonuses for key inventions to ¥2-3 million ($20,000-30,000). In the last few years, inventors and the courts have strongly contested low payouts to inventors, making it more acceptable to better compensate them. Tanaka Koichi of Shimazu, Inc. received a ¥200,000 ($2,000) bonus for an in vention leading to a 2002 Nobel Prize for Chemistry. After the award, his firm announced a ¥ IO million ($100,000) award and a new lab for him. Nakamura Shuji initially received a ¥20,000 ($200) bonus for inventing the blue light emitting diode used widely in flat panel displays and video equipment. Ordered to stop his time-consuming research, he continued it in secret, leading to the discovery. He quit and sued the firm in 1 999; in January 2004 the courts awarded him an unprecedented ¥20 billion ($200 million). Nakamura, now a professor at a u.s. university, said the ruling would increase incentives for re searchers and that firms would profit from it over the long run.39 A day after Nakamura's verdict, the Tokyo High Court awarded a former Hi tachi researcher ¥ I 63 million ($1 . 63 million) for his 1 977 invention of important
36. "Seika shugi no donyu," Nihon keizai shimbun, April 23, 2004, 13. 37. "Seika shugi 'hyoka,' '' and "Chingin, seika shugi te saguri," Nihon
April 29, 2004, ro, and Feb. 26, 2004, I .
45
optical disc-reading technology. A month later Ajinomoto, Inc. was forced to pay a former employee ¥ I 89.35 million ($1 .89 million), and a former Toshiba re searcher sued the firm for ¥ I billion ($10 million) related to his flash memory patent. The Patent Law has long allowed inventors to sue for better rewards but they never did so because it was deemed greedy and inappropriate. Once a few in dividuals contested this norm, others followed, leading to significant change. The threat of such lawsuits has prompted many firms to boost payouts to in ventors. However, while firms plan to pay more than in the past, they view the :Kakamura settlement as excessive, though they expect it to be overturned in an appeal. A bill to amend the Patent Law passed the Diet in mid-2oo4 and went into effect in April 2005; it requires firms and workers to set clear guidelines for compensation so as to reduce reliance on the courts.40 However, after the Naka mura verdict, many say this revision alone will be insufficient.4! People are divided over the Nakamura settlement. Some see him as greedy, saying his invention was the result of many innovations and teamwork; others say incentives are needed to encourage people like him to stay in Japan. From the japanese perspective, the U S. intellectual property system is a "winner take all system. It is unfair. But it [is important because it] produces inventions," ac knowledges a MITI expert on intellectual property.42 The state has also modified other regulations to allow wider wage gaps. It re vised the Commercial Code in the 1 9908 to allow stock options, and in 2002 abolished the restriction limiting such options to regular employees. In 2001 , 550 listed firms introduced stock options, compared with 463 that started the system a year earlier.43 In Germany too, there has been a slow move toward stock options since the mid-I 990S; however, this has led to employee protests that such measures break down labor solidarity.+! "Japanese people have a very ambivalent feeling about US.-style shareholder capitalism," explained a Japanese professor at Hitotsubashi's new MBA pro gram; "Japanese are against the idea of capital gains. Making big money just by investing is not considered a good [legitimate] thing. "45 Indeed, moves away from widely distributing corporate gains are shaking deeply rooted norms. "The US. idea is that to motivate people, you must reward them. This idea is in con flict with Japanese people's sense of egalitarianism. . . . However, we are begin ning to recognize that incentives really matter," explained a young MITJ of6ciaL46 "It is difficult to change the social framework, such as the seniority
keizai shimbun,
38. Interv;ew, July I I , 2002.
39. The court said he deserved half the profit his firm received from his invention-¥60
40. Shioya Yoshio, "Hatsumei taika ni 'kogaku' hanketsu," 4 1 . Tarnai Katsuya, "Gakusha ga kiru,"
Ekonomisuto, Apr. 13, 2004, 54-57.
billion; however, he only requested the ¥20 billion he received. "Hatsumei taika 200 oku en
42. Interview, June 2 $, 2004-
35; Nakamura interview in "Hatsumei hOshii ga kyogaku demo, kigyo wa tsuburenai,"
44. Jackson, "Corporate Governance," 293�4.
meirei" and "Yumei no hoshu 'gijutsusha ni hagemi,' " Nihon keizai shimbun, Jan. 3 1 , 2004, I,
Nihon keizai shimbun, March 7,
2004, r6; interview of MITI intellectual property expert, June 25, 2004.
43· "Stock Options find Wider Reception,"
Ekonomisuto, Apr. 1 3 , 2004, 1 02-5. In January 2005, this was reduced to ¥843 million ($8.43
45. Interview, June 30, 2004.
million) by appeal.
46. Interview, July 9, 2002.
Nikkei Jt'eekly, July 1 5, 2002, 9.
46
Reprogramming Japan
Norms and Institutions
system. It [change] is revolutionary, like the revolution in the Meiji period when the Shogun was overthrown. This kind of revolutionary change is needed . . . but we need a lot of time to change," explained a cabinet-level official involved in internet policiesY The headline of an article in a widely circulated magazine reads, "the performance-based pay system is definitely inappropriate" (seika shugi wa zettai ni okashii), highlighting just how uncomfortable people feel about this new system.48 In 2004, Matsushita Electric Industrial's president, Naka mura Kunio, who makes between $500,000 and $1 million a year, defended cor porate efforts to minimize huge wage gaps: "The best-paid employee should not earn more than 1 0 times the least paid employee."49 A key reason for resistance to merit-based wages is the dislike among man agers for evaluating their subordinates. "Evaluation systems are not promoted in Japan. No one is willing to write a bad evaluation of an employee. Because of lifetime employment, if we rate a person poorly, it follows him through his whole life. He cannot quit easily. If he could quit easily and start elsewhere, it would be okay to evaluate him negatively," explained an MPT officiapo The American head of a U.S. firm's Japanese subsidiary and others confirm that get ting managers to evaluate subordinates effectively is a major problem. 5 1 Some believe this unwillingness to accept vigorous competition that in evitably leads to distinct winners and losers also hurts scientific research. Just as farm workers lined up side by side in rows, moving ahead in tandem as they planted or harvested rice, today's researchers move in tandem, in yokonarabi fashion, so that no one gets ahead or behind, they say. Research is not strictly evaluated; most journal articles and grant applications are not refereed; school and other personal ties are necessary to publish and acquire funding. 52 In sum, there are strong economic incentives for firms to abandon traditional labor practices. Yet it is still considered unfair to terminate these practices for older and middle-aged employees who have toiled to rebuild the postwar econ omy. Thus, firms are reducing their workforce through attrition and sluggish new hiring, and new employees are not assured job security. Due to a redefini tion of norms, it is gradually becoming more acceptable to partially base wages on performance. Japanese would like to maintain traditional practices but agree that most firms can no longer afford them. As what is deemed legitimate has been adjusted, firms are all moving in the direction of a more mobile workforce and merit-based wages at about the same time. 47. Interview, July 10, 2002. 48. "Seika shugi wa zettai ni okashii,"
Shi1kan asahi, July 26, 2002, 22.
49. Benjamin Fulford, "The Tortoise Jumps the Hare," Forbes, Feb. 2, 2004, 56.
47
3. Managing Capital Markets: Keiretsu, Cross-Shareholding, and the Main Bank System During the war, the state shifted the financial system to a bank credit-based system. The Occupation tried to shift it back to a shareholder-based system by purging heads of zaibatsu (financial cliques) firms and selling off zaibatsu family shareholdings to individuals. As a result, by 1949\ 69 percent of stocks were owned by individuals or families, compared to 1 6 percent by banks and other firms. However, when individuals sold shares in the early 1950S, the BOJ and MITI encouraged banks to buy them. As in France, Germany, and South Korea, state control over capital was critical to orchestrating investments in key indus trial sectors. 53 Moreover, since the lifetime wealth of employees was at stake in the firm in the form of future claims for seniority payments and retirement compensation, it was necessary to create cross-shareholding arrangements to protect firms from foreign takeovers. Thus, while two-thirds of stocks were held by households after the war, friendly institutions rapidly accumulated them; by the 1960s, some 65-70 percent of the shares of large companies were held by al lied firms relatively unconcerned about the stocks' price. 54 This rise in cross-shareholding, leading to the emergence of the keiretsu in dustrial groups, helped reduce transaction costs. However, a major motivation for these ties was national autonomy and protection of employment. The state encouraged keiretsu because it feared firms would be taken over by foreigners in the early 1960s when the nation was under pressure to liberalize trade and in vestment. In market-based systems, shareholders purchase stocks in firms based on their expectations of profit. In Japan, firms choose their key shareholders. In Germany too, banks, insurance companies, and firms hold shares on a long-term basis; as in Japan, this practice helps insulate firms from fluctuations in stock prices, protects labor, and allows management to focus on long-term objectives. Six main horizontal (intermarket) keiretsu emerged in the postwar period. The Sumitomo, Mitsubishi, and Mitsui groups are descendants of prewar zai batsu. In contrast to the zaibatsu, keiretsu are much looser affiliations, not family owned, and are organized around a bank rather than a holding company. Cross shareholding arrangements, a common logo, interlocking directorates, a main bank as primary overseer, monthly President's Club meetings, and close buyer supplier relationships cement group ties. While the industries analyzed in this study are dominated by firms in or strongly allied with a major keiretsu, even firms with weaker keiretsu ties are en-
50. Interview, July 9, 2002. 5 1 . Interviews of U.S. CEO, July 9, 2002, and three business professors at a national uni versity, two on June 28, 2004, and one June 30, 2004. 52. Nakamura Masami, "Shin no kagaku gijutsu okoku e no michi," and "Daigaku kakushin,"
Nihon keizai shimbun, Feb. 10, 200 1 , 25, and Feb. 23, 2004, 1 5 .
53. Woo, Race
to the Swift; John Zysman, Government, Markets, and Growth; Vitols, "Ori
gins." 54· Vitols, "Origins," 1 88-89; Sheard, "Interlocking Shareholdings and Corporate Gover nance in Japan," 3 1 2.
48
Reprogramming Japan
meshed much more than their U S. counterparts in long-term relationships with suppliers, shareholders, and banks. For this reason, some scholars refer to Japan's system as "alliance capitalism."55 Still, the firms that stand out as exceptions to this study's argument, which are discussed later, such as Sony, Nintendo, and Toyota, are not core members of these large, bank-centered groups. The keiretsu facilitated state influence over the financial system, because city banks at the core of the groups received their credit from the BOJ, which was overseen by MOE Keiretsu also function as an insurance mechanism: they protect employment, pre vent takeovers, and stabilize corporate earnings, and thereby promote corporate survival. Group firms, if anything, have lower but more stable profits than non group companies, indicating that profit maximization is not a group's primary motive. They also help mitigate informational and incentive problems in financial markets and, through close buyer-supplier relationships, reduce transaction costs. 56 Finally, by supporting a strong sense of coexistence and negotiated com petition, the groups help maintain "order" in the market. In addition to cross-shareholding, another key characteristic of Japanese keiretsu and bank-firm relations is the main bank system. A firm's main bank is usually its largest lender, one of its largest shareholders, and has one or two managers on its board of directors. Though not based on a legal contract, this system ensures that insiders monitor corporate activities. In the prewar period, Japan's corporate governance system was more similar to that in the US. today. Shareholders elected the board of directors and dele gated oversight of the firm to the board, which had the fiduciary duty to maxi mize shareholder value. If shareholders were not satisfied with their board or managers, they could vote them out or fire them. If outsiders thought they could manage the firm better, they could take it over. There was a clear separa tion between operating the firm and overseeing it, and outside board members played a very active role. For example, Nihon Yiisen (Japan Mail Shipping), esta blished in 1 894, had I I members on its board; 5 were outsiders. For Tokyo Kaijo (Tokyo Marine Insurance), established about the same time, all board members were outsiders. Many zaibatsu firms separated power between owners and man agers and overall had relatively accountable corporate governance systems. 57 This critical role of outsiders changed during mobilization for war. Norms were redefined in ways that made national security and self-sufficiency a greater
Norms and Institutions
49
priority than profit. To maintain these norms, main banks emerged to ensure a smooth supply of capital to strategic firms and to monitor and intervene if something went wrong.58 The Occupation's dismantling of the military and the zaibatsu and heavy reliance on the bureaucracy after the war also accelerated the shift from a more transparent corporate governance system to one dominated by insiders-primarily MITI, MOF� main banks, and enterprise unions. Over time, this pattern of interfirm cooperation and insider-dominated cor porate governance became institutionalized. It became the normal way to run a business. Risk-sharing arrangements created to maintain continuity, order, and national autonomy became deeply entrenched. 1bday, board members are career employees of the firm; some are amakudari appointees. Auditors are usually cho sen from inside the firm. The shareholder's voice is blunted through stable shareholding arrangements. Moreover, the voice of individual shareholders, which only make up some 25-30 percent of shareholders, is limited because about 80 percent of firms hold their shareholder meetings on the same day and over 60 percent of the meetings last fewer than 30 minutes. This practice pre vents outsiders such as gangsters or sokaiya from disrupting many meetings but also suppresses the voice of shareholders and limits the accountability of direc tors. Corporate oversight is therefore left to the main bank, which only inter venes in corporate affairs during a crisis. 59 Japan is not alone in granting banks a major role in corporate governance. German universal banks, like Japan's main banks, are linked to business through credit, equity ties, and supervisory board representation. In Germany, employ ees are allocated one-third to one-half of the seats on the supervisory board; to gether with shareholders, they appoint and monitor management and make key decisions governing the corporation. While the institutional arrangements are somewhat different, scholars view them as functionally similar.60 In Taiwan and South Korea, banks were nationalized for the first several decades of the post war period and played a key role in monitoring firms. The keiretsu and main bank systems have allowed Japanese firms to survive on low returns on equity (ROE). In 1 989, at the peak of the bubble, their overall ROE was 7.49 percent while that in the US. was 1 4.4; in 1 992, when the US. was in recession and Japan's bubble had burst, Japan's was 3 .6r percent and the U.S.'s 1 0.29 percent; in 2001 , Japan's was -0.72 compared to 9.82 percent in the U.S., but this improved to 7.4 and 12.6 percent respectively in 2003 (see Figure 1 .2).
55. Gerlach, Alliance
Capitalism.
56. Hoshi, "The Economic Role of Corporate Grouping and the Main Bank System," 285-86: Iwao Nakatani, "The Economic Role of Financial Corporate Groups," in The Eco nomic Analysis ofthe Japanese Firm, ed. Masahiko Aoki (Amsterdam, 1 984), 227-58; Sheard, "Interlocking Shareholdings," 3 1 0-1 1 , 329-30; Okumura, Dai kigyii kaitai, 66-6<). 57. Ito Takehiko, "Koporeto gabanansu to shagai torishimariyaku no kyozo to jitsuzO," in
Koporeto gabanansu kaikaku, ed. Nakatani Iwao, 1 5 5 .
58. Gao, Japan's Economic Dilemma, 3 1-32; Hoshi, "The Economic Role," 285. 59· Masahiko Aoki, "Toward an Economic Model of the Japanese Firm," in Business Enter
prise in Japan, ed. Imai and Komiya, 57. 60. Jackson, "Corporate Governance," 263-65.
50
Reprogramming Japan
Norms and Institutions
Contested Norms: Changes in Keiretsu Ties and the Main Bank Corporate Governance System In the 1 980s, when industrial groups and the main bank system became less beneficial to business, firms under severe pressure from investors gradually re shaped these institutions and their underlying norms to allow more capital mo bility, market-based transactions, and corporate accountability. As the economy shrank and asset prices tumbled, group ties initially increased as firms helped each other. Later, as firms faced more harsh circumstances, they were forced to unload some of their cross-shareholdings. Many predict ties will remain strong among profitable group firms because companies still prefer these relationships when they can afford them. Yet, contestation of this customary way of doing business is weakening keiretsu ties, especially shareholding ties between banks and firms. In particular, since the 1 997-{)8 financial crisis when two large banks went bankrupt, banks have begun to pare down shareholdings. Between 1991 and 1994, banks sold 1 0 percent of their holdings; however, between 1997 and 2000, they sold 54 percent.6! According to a National Conference of Stock Ex changes survey, long-term credit banks, city banks, and regional banks held 2 1 .6 percent of listed companies' shares in 1985. By 1 998, the figure had decreased to 14 percent; by 2000, it was down to 1 1 . 5 percent.62 Overall, the ratio of shares in the entire market that are cross-held by listed firms dropped to 5.2 percent in 2002 from 1 5.7 percent in 1 99 1 .63 While strong economic pressures have weakened cross-shareholding ties, stable shareholding by friendly investors continues to hinder hostile takeovers. Although the proportion of stable shareholding has declined in percent from 64.8 in 1990 to 52.8 in 200 1 , it was still 40 percent in 2003; in comparison, in Germany, stable shareholding remained essentially unchanged from 1 990 to 2000 at about 60 percent.64 Moreover, while the role of the main bank dimin ished in the 1980s as firms built up huge cash reserves and were allowed to issue bonds on international markets, main banks nevertheless felt obliged to bail out group firms when they became saddled with debt in the late 1990S. A key part of the problem was that when main banks stopped playing an ac tive monitoring role, the government and the firms did not create a new moni toring mechanism. A system based on trust and personal relationships, which never had much in the way of checks and balances, started revealing its weak-
6 1 . Kuroki Fumiaki and Miyajima Hideaki, "Mochiai kaisho,"
Nihon keizai skimbun, Dec.
30, 2002, 18. 6 2 . "Making Waves,"
Nikkei Weekly, Nov. 5, 2001 , 5. Nikkei Weekly, Feb. 9, 2004, 9.
51
ness. Huge sums of money sloshing around the economy with little oversight led to large-scale scandals when the bubble burst in the early 1990s. In the mid1990S, a copper trader at Sumitomo was found to have accumulated $2. 6 billion in losses. A former Osaka tea house owner went bankrupt with $2.9 billion in losses; she had borrowed some $25.4 billion over several years to play in the stock market, loans often based on merely her signature. Daiwa Bank announced that a rogue trader had made unauthorized bond deals since 1 984, leading to losses of $ 1 . 1 billion. Information emerged about executives paying off gang sters to quiet them. These scandals were largely driven by greed and irrational exuberance char acteristic of most bubbles. In contrast, many recent scandals, ranging from fatal nuclear power plant and automobile accidents to food poisonings, have been caused by lax safety precautions, which resulted in part from firms' desperate attempts to cut costs to maintain employment. These wrongdoings have enraged citizens. It became clear that having com munity members oversee one another was no longer sufficient. New rules were needed. In response, the state started to try to adjust norms to make it more ac ceptable for outsiders to play a role in corporate governance, for firms and in vestors to base decisions on profit rather than relationships, and for firms to be allowed to go bankrupt. The state had altered the Commercial Code in the early 1 990S to allow share holder derivative suits to increase accountability among top executives. How ever, in 2001 , after several lawsuits resulted in high-cost settlements (by Japa nese standards), the state, under heavy pressure from business, watered down the code, limiting executives' liability.65 But, in response to the sharp rise in se rious breaches of corporate oversight in the late 1 990S, the state revised the code again in 2003. The most important revision allows firms to adopt u. S.-style cor porate governance procedures, which separates management of daily operations from oversight of the business. Under this system, a firm establishes three com mittees that deal with compensation, executive nomination, and auditing, and appoints outsiders to more than half of each committee's members. Due to strong opposition from business, the revised law allows but does not require these changes. This shows the difficulties the state faces as it tries to redefine norms. It also shows the power of business to resist state directives with which it does not agree. The state's attempt to modify norms and practices in ways that allow for greater external oversight continue to meet strong resistance from business leaders. This is understandable: oversight by outsiders pressures them to em phasize profit, yet it is still unacceptable to fire workers, abandon suppliers, and
63. "Cross-shareholding drops to 5.2% in FY02,"
64. Jackson, "Corporate Governance," 274-75; Atsushi Suemura, "Shareholder Shift Fa vors Individual,"
Nikkei Weekly, July 12, 2004, 33.
65· "New Law Caps Executive Liability to Shareholder Lawsuits," Japan 200 1 , 3·
Digest, Dec. 5,
52
Reprogramming Japan
Norms and Institutions
close down factories. Thus, it is no surprise that 60 percent of large firms say they will not switch to the u.S.-style system.66 ese of insiders as auditors and the overall shortage of auditors compound the problem. There are some 1 4,000 CPAs in Japan, compared with 340,000 in the U.S. This shortage, and the use of insiders as auditors, makes audits less rigorous: Japanese firms pay one-tenth of what U.S. firms pay for an audit and audits take less than half the time.67 Still, the push by the state and global investors for accountability is gradually making it legitimate for outsiders to play a greater role. According to a 2002 sur vey of leading firms, 42.3 percent have outside directors and 10·5 percent are considering having them in the near future. But the changes are modest. Half of these firms only have one outside director and one-third have two; many say it is hard to find appropriate people, that it is unclear what function outsiders are to fill, and that outsiders are feared.68 Even if firms establish a u.S.-style committee to nominate top executives, it could not replace CEOs after a year of unsatisfactory performance. "In the U.S., executives are highly mobile, but it is very difficult in Japan to lure top officers from outside a company because the social structure differs and internal ad vancement is the rule," explained the president of a Japanese firm.69 However, firms are clearly moving in the direction of greater accountability. The U.S. corporate governance model has its flaws, as is clear from the Enron and Worldcom scandals. Still, "the Japanese business community cannot criti cize the United States. Japan lacks a reliable accounting system . . . . Since there are no outside directors, there is no supervisory system. The accounting offices assume no responsibility. So Japan's system is much worse than the American system," said Miyauchi Yoshihiko, chairman and CEO of Orix Corporation, after the Enron scandaL7° "The accounting system is a critical problem today. . . . Top managers are not so concerned about accounting results. It is not a shareholder wealth-maximizing system," explained a Japanese professor.71 When a U.S. executive joined the board of Mitsui o. S.K. Lines Ltd. in 1 998, he was stunned that at board meetings the president would speak and no other board member would say a word. Only after he started talking did the board begin discussing issues of substance.72 Foreigners' growing ownership ofJapanese stocks-30-50 percent of several 66. "Beikoku gata toehi no seido dony\i,"
Nihon keizai shimbun, Jan. 6, 2003, 1 . Nikkei Weekly, Aug. 19, 2002, 10. 68. "Corporate-officer System Ousting Directors," Nikkei Weekly, June 24, 2002, 3; "Sha gai torishimariyaku no yakuwari meikaku ni," and "Gabanansu saizensen," Nihon keizai shim bun, Feb. 24, 2004, 2" and Mar. 5, 2004, 10. tlt). Interview in "Voices from the Trenches," Oriental Economist, Oct. 2002, 1 3 · 7 0 . Interview i n " 'Japan in No Position t o Criticize the U.S.;" Oriental Economist, Sept. 67. "CPAs Shirk Role o f Whistle-blower,"
2002, I I .
72. "External Forces Take Aim at Governance," Nikkei
large global firms and lO-25 percent of key banks--is adding to domestic pres� sure for more accountability. Still, since stable shareholding arrangements pro tect firms, foreign takeovers only occur when there are no interested domestic buyers. Examples include Ripplewood's takeover of the Long Term Credit Bank (now Shinsei Bank), Renault's takeover of Nissan, and Cerberus's takeover of the Aozora Bank (formerly the Nippon Credit Bank). The quick turnarounds of Nissan and Shinsei Bank and the huge profits foreign investors made by re structuring them have added to momentum for change. These successes also feed fears that if share prices remain low, foreigners will start engaging aggres sively in hostile takeovers.73 In sum, despite over a decade of strong global pressures for greater account ability and profits, firms are still monitored primarily by insiders. However, since the late 19908, there has been slow, incremental change.74 While rising foreign ownership and global pressures for greater accountabil ity are spurring corporate governance reforms, firms remain reluctant to cut off suppliers even when there are strong economic reasons to do so. Christina Ah madjian and James Lincoln find that Japanese "customers and suppliers are bound by common norms of legitimate behavior, e.g. a conviction on both sides that a customer simply does not let a supplier go without cause. Even when grounds for switching exist, there is widespread agreement that suppliers de serve ample warning, even assistance in locating other business."75 They find that firms hesitate to cut off major suppliers because it will hurt their reputa� tion; because of fear that "infraction of the norms governing the treatment of suppliers might invoke real sanctions"; and because this is " 'the way things are done' in Japan, and it would not be right (i.e., moral or legitimate) to do other wise."76 They cite a purchasing manager from a major auto firm who was trying to gently break off from a long-term supplier: We decided to cut orders slowly and even after cuts are made, we still purchase 10% of this type of transmission from them. Why? Because this is Japan. They have been supplying transmissions to us since we began to make passenger cars- and it is difficult to sever a relationship with so much history behind ir.n
73. Interview of former MITI official now at a research institute of a major IT company, June 30, 2004; "Yosha naki M&A," Nihon keizai shimbun, Mar. I I , 2004, 1 . 74. Nakatani Iwao and Tominaga Seiichi, "Koporeto gabanansu kaikaku to Nihon kigyo," in Koporeto gabanansu kaikaku, ed. Nakatani, 302-3; interviews of two business school profes sors, one June 28, 2004, one June 30, 2004. 75. Christina L. Ahmadjian and James R. Lincoln, "Keiretsu, Governance, and Learning:
Case Studies in Change from the Japanese Automotive Industry,"
6 (200 1 ): tlt)S.
7 1 . Interview, June 30, 2004·
»i!ekly, Nov. 25, 2002, 20.
53
76. Ibid., 695-96.
n Ibid., 696.
Organization Science 1 2, no.
54
Reprogramming Japan
In short, economic forces requiring Japanese firms to be more profitable are making state and corporate leaders question the viability of long-term relation ships with suppliers and die traditional corporate governance system. Still, cor porate leaders oppose sudden changes that would make it difficult to maintain lifetime employment and favoritism for established domestic firms. The pres sures for reform are greater than the resistance. However, due to the need to modify norms before change can occur, change has been late, slow, and incre mental. When it has taken place, it has generally occurred across industries and firms around the same time.
Contested Norms: Changes in the Centralized, Bank Credit-Based Financial System Global pressures that have weakened keiretsu and main bank ties have made the financial system less centralized and less dependent on bank loans. MITI has also tried to nurture an active venture capital market. Nevertheless, venture cap ital remains relatively small and insignificant. It is not customary for individuals to invest in new firms, and despite some shift in attitudes, citizens still prefer to work for large, established firms and deposit their savings in banks. Conse quently, so-called "venture capital" comes primarily from banks. Thus, start-ups are immediately burdened with interest payments. "We use the same words venture capital-but the actual operations are very different. Japanese venture capital is risk averse be(''lIuse banks are very conservative here," explained a vice president at NTT Communications.is Banks continue to prefer the customary practice of using land as collateral and have difficulty assessing risks. Japan con sistently placed nineteenth of DECO countries in 1 995, 1 998, 1999, and 2000 in terms of venture capital investment as a percentage of GDp'79 An MPT official acknowledged the contradiction in the government being the primary promoter of venture capital; after all, the market is supposed to play this role.8o The biggest obstacle to an active venture capital market is that it goes against communitarian norms. Making huge profits quickly is still viewed as illegiti mate, inappropriate wheeling and dealing. Supporting new firms that may drive existing firms into bankruptcy involves accepting winners and losers and labor mobility, which disrupts social stability. It goes against the postwar notion of the firm as a stable "family" and gives priority to individual merit over group risk sharing. It rewards investors with outsized gains contrary to the notion that gains should be broadly distributed.
78. Interview, July 2, 2004. 79. OECD, Economic Survey, Japan, 2001-2002, 120.
80. Interview, Nov. IS, 1996.
Norms and Institutions
55
Nevertheless, MITI, viewing new firms as critical to radical innovation and economic revitalization, is working hard to help them and reduce the stigma at tached to bankruptcy, which discourages top talent from launching or working for start-ups. The government helped set up three new stock exchanges in the late 1 990s--the Jasdaq over-the-counter market, the Tokyo Stock Exchange's Mothers market, and a Japanese version of the Nasdaq market-to assist young firms in going public more quickly. "It used to be said that it took a new com pany 17 years on average to go public. But the new stock markets enabled com panies that could not even think of public listing to do so," said a managing di rector of the Japanese arm of a U.S. venture capital firm.sl However, Nasdaq pulled out ofJapan in late 2002. Worldwide, IPO markets have suffered since the dotcom bubble burst. The Frankfurt bourse is discussing shutting down its NeuerMarkt for emerging firms, which was launched in 1997. In 2003, Nasdaq Europe announced its closure and recently shut down Nasdaq Germany. MITI has tried other ways to alter behavior that puts entrepreneurs and small businesses at a disadvantage. In 1998 it launched a loan guarantee program for small businesses. Many loan recipients collapsed, leaving it with some ¥ I O tril lion ($850 million) in defaulted loans; yet in 2003, it said it would continue the loans but charge a 2-3 percent premium and use variable rather than fixed inter est rates, embracing a "new" concept that riskier borrowers should pay higher rates than less risky ones.82 In 2004, MITI put up another ¥250 billion ($2.5 bil lion).83 While state funds can facilitate start-ups and support small businesses, without private funds, these firms are unlikely to be sustainable over the long run. To encourage and legitimize entrepreneurial activities, the government elim inated the capital requirements for establishing a new business. Since 1 990, a firm that wished to issue stock had to have at least ¥ I O million ($100,000) and a limited company (not issuing stock) a minimum of ¥3 million ($30,000). In 2003, firms became exempt from these requirements for their first five years. It is too early to see if this will have a major effect. In 2002, the level of business creation in Japan was about one-fourth that in the U.S. and business closures ex ceeded creations.84 In a 2001-2002 OECD survey, Japan ranked sixteenth of OECD countries on the level of start-up activity as a percentage of GDP; the 8 1 . Sachiko Hirao, "Venture Capitalists Bank on Restructuring Mood," Japan Times, Aug. 16, 200 1 , 1 ,9. 82. "METI Will Take Another Cut at Credit Guarantees for Small Firms," "METI Small Business Loan Program is said to be in Deep Water," and "MET! Plans New Small Company Loan Guarantee Program," in Japan Digest, Jan. 17, 2003, 2; July 29, 2002, 2; and Aug. 28, 2002, 3· 83· "METI Whips Up Another ¥2S0 Billion Program to Help Small Businesses," Japan Digest, Feb. I I, 2004, 5 . 84· "Entrepreneurs t o get Break on Capital Requirements," Nikkei Wt:ekly, July 29, 2002, 4·
56
Reprogramming Japan
us. was first; South Korea, second; the UK., seventh, and Germany, eighth.85 In 2002, The Global Entrepreneurship Monitor ranked Japan last out of 37 coun tries in terms of overall entrepreneurial activity per capita. In this report, Japa nese experts said the biggest cause of Japan's weak entrepreneurial activity was, by far, "cultural and social norms"; financial support, education and training, and government policy were also mentioned, but as much less important rea sons.86 In sum, despite serious efforts by the state, especially MITI, to change com munitarian norms in ways that make capital and labor mobility and start-ups more acceptable, deep-seated views about the importance of stability, continuity, and a cohesive community have hindered dramatic change. 4. Institutions and Instruments of Industrial Targeting Policies A strong state bureaucracy and targeting policies have also been key compo nents of communitarian capitalism. MOF and the BOJ shifted the financial sys tem toward reliance on bank credit during the war and MOF's window guid ance--influence on how scarce credit was allocated-remained important through the 19605 and 19705 when firms had no alternative to bank loans. John son's work on MITI provides great insight into the role of the bureaucracy in promoting Japan's development.87 Here a few key instruments are highlighted. While they were used for developmental purposes in many industries, including those focused on in this study, the state also used them in declining industries to facilitate orderly consolidation, protect employment, and promote price stabil ity and national autonomy. 88 Right after the war, Occupation and Japanese leaders established many key institutions and laws that became the foundation for postwar industrial policy in the field of electronics. MITI, the most critical of these institutions, was created in 1 949. In 1 950, the Japan Export Bank (later called the Export-Import Bank) was established. In 1 95 1 , the JDB, a government bank that would supply low interest loans to designated industries, was created. A JDB loan became an ac cepted "signal" to private banks that the state viewed the industry as critical to the national interest. In 1952, the Nippon Telegraph and Telephone Company (NTT), a public policy company, was established. It became very powerful and, when partially privatized in 1 985, grew into one of the world's largest firms.
85. OECD, Economic Survey, Japan, 2001-2002, 1 19. 86. Paul D. Reynolds, William D. Bygrave, Erkko Autio, and Michael Hay, Global Entrepre neurship Monitor, 2002 Summary Report, Nov. 30, 2002, 9, 47. 87. Johnson, MITI and the Japanese Miracle. 88. Tilton, Restrained Trade.
Norms and Institutions
57
These institutions were all aimed at promoting technological self-sufficiency, sociopolitical stability, and orderly industrial development. Several laws helped MITI protect industry. The Foreign Exchange and For eign Trade Control Law of 1 949 and the Foreign Investment Law of 1950 gave it control over foreign investment, foreign exchange, and imports. Though neces sary in the early years to deal with balance-of-payment problems, these laws constituted powerful tools with which to protect firms from global competition. While Occupation authorities saw them as temporary, they were on the books until the late 1970S and early 1 980s and many of their revisions were cosmetic. The antimonopoly law Was weakened soon after the Occupation ended. Mo rozumi Yoshihiko, who became vice-minister of MITI 25 years later, translated the US. law into Japanese during the Occupation. He explained how he trans lated it but did not really understand it. "It seems laughable today," he wrote, "but then we didn't know what they were talking about"; when he showed the draft of his translation to his senior and was asked about the meaning of part of it, he was embarrassed to say that he did not know.89 With a weakened law, the state set out to protect industry, organize cartels, and encourage cross shareholding and industrial groups centered around main banks. In the late 1950s, the electronics industry was exempted from the law. The government also encouraged citizens to save heavily. State and commu nity savings campaigns, which started during the war but continued through the postwar period, made heavy savings expected as part of the regular duties of a responsible citizen.90 High savings rates supported the Fiscal Investment and Loan Program (FILP), a huge discretionary "second budget" separate from the general account budget. Established in 1 953 when MOF pooled national pen sions, postal savings accounts, and various other accounts, this budget was made annually by MITI and MOF bureaucrats with little input from elected officials. It was large in the 1950s, 1 960s, and early 1970S and played a key role in sup porting firms in strategic industries, such as computers and telecommunica tions.9! In 2003, the postal savings system, which provides much of FILP's funds, had some ¥227 trillion (about $2.27 trillion) in deposits, making it the largest financial institution in the world. The postal savings system attracted citizens' savings because it was allowed to offer slightly higher interest rates on deposits than banks, though these rates have al ways been very low. Depositors accepted low interest rates as a necessary sacrifice to achieve national autonomy and build up capable firms. This allowed the FILP system to subsidize producers with low-interest loans. Since the mid-I980s, firms had alter native sources of capital at better rates, thus diminishing FILP's importance. 89. Cited in Johnson, MIT! and the Japanese Miracle, 175. 90. Sheldon Garon, "Luxury is the Enemy: Mobilizing Savings and Popularizing Thrift in Wartime Japan," Journal ofJapanese Studies 26, no. I (2000): 41--'78. 9 1 . Johnson, MITI and theJapanese Miracle, 2 ID-I I .
58
Norms and Institutions
Reprogramming Japan
MITI and other state actors used these instruments to protect and subsidize industries, organize cartels to ensure orderly competition and exports, and pro mote collaborative R&D to spur technological advances. When these tools be came much less effective in nurturing industries, MITI and MOF took the lead, along with big firms, in redefining core norms in ways that made it acceptable for industrial policies to promote greater competition and, in some cases, even collaboration with foreign firms.
5. Yokonarabi Corporate Strategies and Other Arrangements that Promote Egalitarianism and Order Communitarian norms have become institutionalized and been maintained in a variety of arrangements other than the lifetime employment system, keiretsu, main banks, and targeting policies. MOF's convoy system (goso sendan hOshiki), in which stronger banks shore up weaker ones, is an example of risk-sharing be havior aimed at maintaining a stable, cohesive community. The dango system in the construction industry, in which firms collude so each wins a bid in a pre dictable, orderly fashion, is another example. Regular injections of public pen sion funds into the stock market in order to prop it up, so that banks will not fall below the Bank for International Settlements (BIS) requirements, and the bailout of many large firms are recent examples of how the system works to min imize failures--though increasingly at the expense of the average citizen. "The 'no big-losers' ideology prevails in established industries such as semiconduc tors," explained a MITI official.92 Yokonarabi behavior is reflected in identical dividends by firms in a given industry. The Land Lease and House Lease Laws, strengthened in 1941 to protect lessee rights and only moderately modified in 1 99I, continue to provide unusually strict protection for renters at the expense of landowners, thereby helping minimize gaps in wealth and living standards.93 The kisha kurabu or press club system gives all mainstream news organizations equal access to information, leading to similar news reports and a lack of sCOOpS.94 A strong commitment to the values of peaceful coexistence and the right to exist is apparent in the anomalous tolerance by Japanese authorities and citizens of the yakuza and dangerous cults such as Aum Shinrikyo. It is also re flected in the fact that Japanese baseball games are allowed to end in ties. These arrangements provide "order" to society and industry. Maintaining
92. Interview, July 9, 2002. 93. Yukio Noguchi, "Land Problems and Policies in Japan: Structural Aspects," and John O. Haley, "Japan's New Land and House Lease Law," in Land Issues in Japan: A Policy Fail ure? ed. John O. Haley and Kozo Yamamura (Seattle, 1 992), I I-3 1 , 1 49-73· 94. Laurie Freeman, Closing the Shop, Information Cartels andJapan's Mass Media (Prince ton, 2000).
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"order" has become a sacrosanct norm over rime, and mainstream firms tend not to break these informal rules. "There is some sort of order [chitsujo] to industry. You would expect Japanese firms to dump their excess capacity in Japan at bar gain rates just like they dump it overseas. But they don't because they must keep order," explained a former head of the FTC, which is in charge of Japan's anti monopoly law.95 "Even if nobody orders them not to hurt a domestic company, even if there are no regulations against it, due to culture or should I say tradition, Japanese firms will not price in ways that will break down the domestic order," explained a high-level researcher at the Mitsubishi Research Institute.96 One example of orderly conduct that helped domestic firms at the expense of foreign firms occurred in the television industry in the I960s and 1970s. In the late I950S, Japanese television makers created a variety of risk-sharing institu tions, such as distribution keiretsu, to control distribution prices and eliminate competition among dealers. To stabilize prices and investment, they created the Market Stabilization Association. They also established elaborate forums for meeting monthly to coordinate strategy, set domestic and international prices, and fix distributors' margins and rebates.97 To assure market share was gained at the expense of foreign firms rather than each other, minimum export prices were managed by the Council for the Export ofTVs; agreements on which makers would supply which dealers, including reg istration of such buyer-supplier relationships, was managed by the Japan Ma chinery Exporters Association (JMEA).98 These associations created the orderly "five-company rule," which required that each exporter specify five US. dealers as its only and exclusive customers, thereby preventing US. dealers from playing one Japanese firm off against another. Changes in buyer-supplier relationships required approval by the JMEA. Member firms had to notify the JMEA about each specific television shipment, providing information on the buyers and sup plier involved, the type and quantity of televisions, and the agreed upon domes tic and US. prices.99 Yokonarabi competition, leading to excess production and the dumping of televisions overseas, was a natural outcome of policies that prevented firms from going out of business by encouraging them to have similar product strategies. Fixing domestic prices at a high level assured that each firm could stay afloat. To maintain "order" at home and keep weak producers alive, excess production and 95· Interview, July 1 3 , 1 994· 96. Interview, July 1 3 , 1994. 97· Ninon keizai snimbun, May 2 1 , 1966; Toyokeizai, Jan. 18, 1968, 34-3 5 ; Komiya Ryu taro, Takeuchi Hiroshi, and Kitahara Masao, "Katei denki," in Ninon no sangyo soshik,; ed. Kumagai Hisao, third edition (Tokyo, 1 978), 1 :28-29. 98. Denshi kOgyo nenkan (Tokyo, 1 973), 752; Japan Economic Journal, Aug. 27, 1 963, 1 0. 99· Kozo Yamamura and Jan Vandenberg, "Japan's Rapid-Growth Policy on Trial: The Television Case," in Law and Trade Issues of the Japanese Economy, ed. Gary Saxonhouse and Kozo Yamamura (Seattle, 1986), 259.
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older models were dumped abroad. In other words, keeping order in the domes tic market required that the real competition occur abroad. Generally only fringe firms that are outside the mainstream challenge the "order" of industries, since there are often severe consequences. For example, Lion Oil, a firm that attempted to import oil, was harassed by people who cut its gasoline station hoses, inserted water into its storage tanks, and obstructed de livery tankers. Oil imports were legal but disrupted "order" in the industry. \\'hen the head of the firm complained, the police refused to protect him and re plied: "You're destroying order in the industry. You're the problem." In re sponse to Lion Oil's request to import gas, a MITI report said the request would create a price war in an industry already characterized by kato kyoso, would destroy current energy and petroleum policy, bankrupt gas stations, and "generally, create chaos in a heretofore orderly industry."loo Some call firms that respond to market pressures rather than maintaining industry order "wild, competition-oriented companies." 10 1 Scholars have found that orderly yokonarabi behavior along with lifetime em ployment policies leads to R&D expenditures at Japanese firms being similar and more stable over time than at U S. firms. 102 Low-risk strategies ofJapanese firms make them conservative and patient, while Americans are more experimental and open to new directions. A professor at one of Japan's new MBA programs says Japanese executives cooperatively compete (yokonarabi kyoso) because it is the safest-the least risky-route. 103 This tendency remains prevalent. Even as firms restructure, they tend to do so in similar ways around the same time. Yokonarabi behavior can result in too many actors and excess capacity. "If Mazda was Chrysler, Toyota would have driven it out of the market to bank ruptcy," explained a former head of the FTC; Japanese firms will drive out for eign firms, he explained; "however, it would not have been seen as a plus to drive out Mazda. It is because of this view about not putting domestic companies out of business that Japan has so many auto makers." 104
Consensus Decision-making and Taking Turns Consensus decision-making allows people to voice their views, contributing to a sense of equity. While Japanese have long had a more group-oriented than
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individual approach t o leadership and decision-making, this tendency was strongly reinforced in the postwar period in arrangements such as the lifetime employment system. Gaining a consensus slows down decisions, but once a de cision is made, it is implemented quickly. However, this practice makes man agers less accountable because it is difficult to pinpoint who made a specific de cision. It can lead to disastrous outcomes. "There is an accountability problem. No one is taking responsibility for problems in the telecommunications industry or the banking disaster. No one is making the tough decisions. The same thing happened in the war. It should have ended before the bombs were dropped on Hiroshima and Nagasaki, but no one would make the decision until after the devastation," explained a Science and lechnology Agency (STA) official. I 05 Having people take turns is another way of treating them equitably. However, it prevents organizations from choosing leaders that can best advance the orga nization's narrow political and economic interests. There is competition to get to the top pool of people and firms allowed to take turns, but the norm of fair turns remains prevalent. Keiretsu firms, for example, help each other. "When one firm needed to make big capital investments, all the group firms would help it; then when another needed it, they would help that firm. They took turns," explained a former JDB official. 106 MITI and NTT had the big three firms take turns leading R&D projects in the computer and telecommunications industries. This reduced wasteful competition and promoted stability, assuring that no firm would dominate or be destroyed. The decades-long practice of LDP factions taking turns having a faction leader as the prime minister is another example. Broader political stability is as sured by a system in which top members receive a predictable, seniority-based chance at the top spot. Having politicians become cabinet ministers based on a specific number of elections to the Diet and reshuffling cabinets every year or so are also practices designed to give everyone, based on seniority, a "fair" turn. Again, this minimizes political battles that could undermine the nation's stabil ity. Still, since people in the top echelon in politics and business are each given a turn, there are primarily negative incentives to bold, risk-taking behavior. While this practice has broken down somewhat since the late 1 990s, there is still a strong view that taking turns is the fairest way to select leaders.
The Education System as Promoter of Conformity and Egalitarianism 100. Frank Upham, "The Man Who Would Import: A Cautionary Tale about Bucking the System in Japan," Journal ll.(Japanese Studies 17, no. 2 ( 19 9 1 ): 328-3 I . 1 0 1 . Interview o f former high-level computer researcher a t Hitachi, Apr. 3 , 1989. 102, Daniel Okimoto and Yoshio Nishi, "R&D Organization in Japanese and American Semiconductor Firms," in The Japanese Firm, ed. Aoki and Dore, 1 82-84, 200. 1 03. Interview, July 8, 2002, 104. Interview, Seattle, Apr. 1 9, 1 994.
The education system has long been regarded as a core institution through which Japanese values are protected. Before and during the war, it promoted Shinto and worship of the emperor. Since the war, it has promoted conformity 1 05 . Interview, Oct. 22, 1999. 106. Interview, Mar. 3 1 , 1994.
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and egalitarianism in ways that discourage the type of minds needed to make radical innovations and manage risky high technology firms. As firms became less competitive in the 1 990'S, citizens, businesses, and the state demanded edu cational reform. In response, in 2001 the Ministry of Education (MOE) reduced the school week to five days and cut by 30 percent the time spent studying core academic subjects, allowing students to explore other topics. The goal was to emphasize creativity more than discipline and conformity and thereby nurture a society that allows differences and specializations-to move away from the one size-fits-all, let's-all-Iearn-the-same-thing approach of the past. Still, the sys tem continues to focus on producing a homogenized student body; students are not offered different tracks according to their abilities. The system still empha sizes rote memory, and students spend after-school hours in cram schools learn ing how to take entrance exams that largely test that memory. In 2004, to overhaul university education and reduce state expenditures, all national universities became independent entities. They continue to receive some state aid and keep all tuition, but must attract external funding to survive. By forcing them to compete, the state is pressuring them to ally with private firms. This will be challenging because the ratio of university R&D funding by business in Japan remains quite low. In 1990, 2 percent of university R&D was supported by business, compared to 4.5 percent in the US., 6.8 percent in Britain, and 8 percent in Germany; in 1998, Japan's ratio was still only 2.4 per cent compared to 6, 6.8, and over 10 percent in the US., Britain, and Germany respectively.l07 Moreover, when Japanese firms give funds to local universities, it is in small equal amounts. They give a large amount, such as ¥30 million ($300,000), to a researcher abroad but only ¥500,000 ($5,000) each to re searchers at the University of Tokyo, according to a professor there who says university-business cooperation in Japan is not going well.108 Still, the government's push to promote closer collaboration between univer sities and firms has led to a sharp increase in such ties. The number of joint re search projects between industry and universities jumped 28.8 percent from 1 999 to 2000. Twenty-one universities had incubation facilities to nurture start ups in 2002, up 1 60 percent from 200 1 . The number of start-ups headed or managed by professors more than doubled in 2002 for the second year in a row to 257 firms. Forty-five universities set up technology licensing organizations to handle patent applications and other issues related to transferring technology to firms, a 36.4 percent rise from the year before. 109 Just as there were very inflated expectations for the internet to spark economic revitalization, in 2004 Japan's 1 07. Sachiko Hirao, "Top Schools Eye Uneasy Alliance with Private Sector," Japan Times, Dec. 27, 200 1 , 1 , 3 . lOS. "Sangaku kenkyu shiborikomi 0," Nihon keizai shimbun, Nov. 26, 2002, 12. 1 09. "College Incubators Spawn Start-ups," Nikkei Weekly, Feb. 1 0, 2003, S.
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elite hoped corporate-university relations would somehow kick-start a new era of invention and entrepreneurship. While the increase in these alliances is significant, they are often short lived and involve small sums and personal ties between a professor and a corporate re searcher. "Compared with the U.S. and even Asian countries, where the govern ment takes the initiative to promote closer ties between businesses and universi ties, the ties in Japan are thin and weak," explained Katao Kazuo, a MITI official in charge of promoting such ties.1 10 In its 2002 competitiveness survey, Switzerland's International Institute for Management Development ranked Japan forty-first out of 49 countries and regions in terms of transfer of knowl edge between firms and universities. Japan came in last in the Institute's assess ment of how well university education meets the needs of a competitive econ omy.111 Watanabe Makoto, manager of the science and technology group at Keidan ren, acknowledges that Japanese firms have had successful alliances with foreign universities but "are often disappointed at the lack of conditions for closer ties with Japanese universities."11 2 Firms complain that domestic universities are not motivated to collaborate, do not fully commit to protecting intellectual property, and lack interest in putting research results to practical use. Conse quently, Japanese firms' R&D funding to foreign research institutions-¥1 57 billion ($1 . 57 billion) in 2000-was more than double that granted to domestic universities-¥64·8 billion ($648 million).113 One problem is that Japanese uni versities have fewer graduate students to do the work involved in such partner ships. Indeed, graduate students in Japan, adjusted by population, are one tenth the number in the US. and half that of France. 1 I4 Another reason university-corporate ties in Japan are much weaker than Japanese corporate ties with foreign universities is that research by the latter is deemed much more valuable. With respect to improving universities as well as corporate-university rela tions, "I'm optimistic, but only because the situation has been so bad in the past," explained a business school professor at Hitotsubashi's recently created MBA program. l i S Takeuchi Hirotaka, the school's dean, says that "Japanese business schools lag behind their U.S. counterparts by a century in terms of 1 1 0. Yumiko Suzuki, "Business Looks to Academia for Ideas," Nikkei Weekly, May 27, 2002, 1 , 3 . I I I . Ibid.; Robert Kneller, "University-Industry Cooperation and Technology Transfer in Japan Compared with the U.S. : Another Reason for Japan's Malaise?" University ofPennyslva nia Journal ofInternational Economic Law 24, no. 2 (2003): 329-449. 1 12. Suzuki, "Business Looks to Academia," 3 . 1 1 3· Hirao, "Top Schools eye Uneasy Alliance," 1 , 3 . 1 1 4· "Nihon n o insei," Nihon keizai shimbun, Sept. 2 S , 2002, 27. 1 1 5· Interview, June 30, 2004.
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teaching experience. We won't be able to catch up with them unless we change." 1 l6 Others have a more positive view of growing university-corporate relations. l l7 It is too early to tell how much fruitful change is occurring. How ever, it is likely be measured because turning such collaborations into engines of invention and entrepreneurship counters deep-seated norms regarding broadly distributing wealth, maintaining long-term relationships even when they are economically counterproductive, and limiting new entrants so as to preserve or derly competition that will keep incumbent firms alive. Just as the state and big business have worked to modify the education sys tem, corporate leaders, under strong pressure to boost profits, are increasingly challenging other yokonarabi practices. As norms about what is appropriate be havior are redefined, businesses are changing their policies at the same time. Re tailers, which used to have similar business hours and holidays, all changed this uniform (yokonarabi) practice about the same time. llS Electricity companies all used to have the same dividend; however, as one company head said in 2000, "it is inappropriate to have uniform (yokonarabi) dividend policies. Each firm should engage in independent management reflecting regional conditions." 1 l9 The head of a Matsushita subsidiary argues that consumer electronics firms must "escape from uniform (yokonarabi) R&D and marketing competition." 1 2o The president of Kirin Beer, comparing the beer industry's yokonarabi behavior to the convoy system among banks, says, "all beer firms used to raise prices col lectively, taking into account firms in trouble, but this method will no longer be accepted. " 12 l In sum, in the late 1 990S, as the policies and institutions of communitarian capitalism became much less effective in nurturing growth and technological advances, state and business leaders increasingly contested the norms underly ing these arrangements and tried to modify them to allow more competition, di verse strategies, and distinct winners and losers. Changes have undoubtedly been driven in part by actors trying to advance their economic interests. How ever, the relatively simultaneous and homogeneous shift of corporate and educa-
1 1 6. Yumiko Suzuki, "Japan's Schools' MBAs Starting to Make the Grade,"
Nikkei
Weekly, July 29, 2002, 1 , 3· 1 1 7. Kenneth Pechter, "System Assessment for Innovation Policy Formulation: Measuring the University-Industry Linkage in Japan," PhD. diss., Tokyo University Graduate School of Engineering, 200 1 . 1 1 8. "Daiten ritsuji ho tesuguri no keiei senryaku," Nihon keizai shimbun, regional edition, July 14, 2000, 14· 1 19. "Zen sangatsuki kessan," and "Tokyo denryoku kaicho," Nihon keizai shimbun, May 23, 2000, 3, and May 2 1 , 2000, 9· 1 20. "Matsushita denki sangyo denka jusetsusha shacho," Nihon keizai sangyo shimbun, May I I , 2000, 5 . I 2 I . "Kirin biiru shacho," Nihon keizai shimbun, Jan. 22, 2000, 9 ·
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tional practices suggests that change, rather than resulting from actors individ ually recalculating the net advantages of their behavior and adapting in diverse ways at different times, is primarily the result of redefined norms. This chapter introduced the pillars of communitarian capitalism and the core norms these institutions and policies maintain. By the 1990S these arrangements were no longer effective in promoting industrial and technological develop ment. Most, though not all, firms found themselves under severe competitive pressure from foreign firms able to offer more inventive products at lower prices. While there were strong economic incentives to abandon traditional practices such as long-term employment, seniority wages, stable shareholding, state targeting, and long-term buyer-supplier relations, firms and the state, con cerned with social stability and the cohesiveness of the community, have been slow to adapt in ways that prioritize their economic interest. Rather than discard these practices suddenly, they are working to reshape norms to make greater labor and capital mobility and unmanaged competition more acceptable. Big business-especially globally successful firms such as Sony and Canon-and the economic ministries are leading the way toward creating a hybrid system, mixing traditional practices with elements of what they see as an unacceptably chaotic and unfair U. S. system. While this late, slow pace of reform appears ir rational in terms of protecting their narrow economic and political interests, it is completely consistent with the logic of communitarian capitalism. The following five chapters analyze Japan's capitalist system and how these arrangements worked first to promote and later, under different conditions, to hinder industrial and technological development in the telecommunications, computer hardware and software, and semiconductor industries. The analysis in these cases highlights how, as the system became less effective in promoting healthy industries, state and corporate leaders led the charge to convince unions, politicians, and citizens that a more flexible, market-driven, and less egalitarian form of communitarian capitalism was necessary to help Japan weather the long, severe economic crisis.
Telephone Titan
3
Telephone Titan
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1945 through the early 1 980s, this chapter focuses on four key questions. How did social and developmental norms impact the emergence of the industry's postwar institutions and policies? How did key actors shape the evolution of these norms and the institutions that maintained them, and how did these norms shape the way actors perceived their own interests? How did the system help create the capacity to absorb and accumulate technological knowledge in this industry in an era of heavy reliance on foreign technology? What were the conditions under which communitarian capitalism was able to help build one of the most advanced and reliable phone systems in the world?
1 . Prewar and Wartime Roots of Japan's Postwar Communications System: Building a National System of Innovation
The key institutions and policies of communitarian capitalism emerged as an in tegrated system in the postwar period, reflecting deeply held communitarian norms. The goal was industrial development, constrained by norms of techno logical self-sufficiency, equitable treatment of workers and firms, and orderly competition so that all companies could survive. This chapter analyzes how these norms were reflected in the institutions and policies that emerged in the telecommunications industry. I show how these arrangements, which provide my first case study of communitarian capitalism at work, helped build a strong industry, providing stable jobs, an advanced and re liable infrastructure, and a strong base in communications technology. While the chapter's primary focus is on the period following World War II up until the early 1980s, it first provides historical background on how the state nurtured the industry's emergence in the late nineteenth century through support for a na tional system of innovation that included laboratories and technical education, creating a strong foundation for all of Japan's postwar electronics-based indus tries. However, it is in the period following World War II that the industry de veloped the defining characteristics of communitarian capitalism. During this period, the Nippon Telegraph and Telephone Company (NTT), a state-owned monopoly, played a critical role in the rise of Japan's high technology sector. Technocrats and political leaders made a conscious decision to maintain high telephone prices and to use those revenues to subsidize a massive national effort to promote domestic telecommunications products. The objective was not only to raise the competitiveness of the nation's electronics sector, but also to create a large pool of skilled workers with good-paying jobs and, ultimately, to con tribute to social stability and national autonomy. To assess how communitarian capitalism helped shape the industry from
In telecommunications as in many other industries, the system of communi tarian capitalism that emerged to promote the industry's development in the postwar period had roots that go back as far as the Meiji period, when Japan first recognized the importance of technological self-sufficiency and economic de velopment. Communications was a core component of the nation's drive to catch up with the West. When Commodore Matthew C. Perry first arrived in the mid-19th century, it was his cannons that forced Japan to open up its econ omy. On his second trip, however, Perry demonstrated something equally pow erful, a primitive telegraph machine.! Leaders were quick to realize that to avoid succumbing to a Western power, they would have to become both militarily and economically powerful and that developing such power would require techno logical sophistication. "Fukoku kyohei" (rich nation, strong army) became the rallying cry of the new Meiji government. Waving the flag of technonationalism, the state sparked Japan's industrial revolution by investing in sectors considered strategic for development, such as mining, railroads, electric power, and com munications. 2 The government, however, soon found that state control led to corruption and inefficiency; it was also costly. To minimize these problems as well as reward its supporters, it sold many of its factories to private firms. State leaders recog nized the importance of entrepreneurs in evaluating and introducing new tech nology. Thus, they treated business favorably, even though just a decade earlier, merchants were at the bottom of the class-based social system. The private sec tor consisted primarily of Tokugawa era ( 1 600-1 868) merchant family firms 1 . Saito Ren,
The Story of Yokohama, trans. Yokoyama Mariko and Carol R. Kimmel
(Tokyo, 1989), 1 2 . 2. Fujii Nobuyuki,
Terekomu no keizai shi (Tokyo, 1 998), 63-86.
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Telephone Titan
such as Mitsui and Sumitomo, the precursors of the zaibatsu, While the state gradually gave firms more autonomy in many sectors, it regarded a strong com munications infrastructure as critical to military and economic security, Telecommunications services, as in most countries at the time, remained a gov ernment service, aggressively protected and subsidized by the government. Over time, however, the state helped spawn private firms to supply communica tions equipment. The state viewed the communications sector as one of the core building blocks required for propelling the nation into the industrial revolution, To jump-start these critical sectors, it invested an enormous proportion of its scarce resources in a massive nationwide effort to learn from abroad, The Min istry of Industry (MOl) employed 500 foreign technical experts in the 1 870s; by the mid-I870S, these experts' salaries came to over half its budget,3 The Min istry of Public Works spent two-thirds of its budget on hiring foreigners in 1 879,4 It would have been cheaper for Japan to hire a foreign firm to build its communications system, However, the goal of the new leaders was not to pro vide telegraph and telephone services at the lowest cost, It was to build the ca pacity to absorb and accumulate foreign k nowledge. They desired national au tonomy. These investments paid off. The government started telegraph service in 1 868, for example, by hiring a British engineer and purchasing British equip ment. MOl then asked a local entrepreneur, Tanaka Hisashige, one of the founders of what became the Toshiba Corporation, to copy the foreign telegraph equipment at the ministry's small factory. Tanaka succeeded and went on to train other entrepreneurs, such as Oki Kitaro, Miyoshi ShOichi, and Iwadare Kunio. They, in tum, founded key communications firms. Oki founded Oki Inc., one of the nation's major telecommunications firms; Miyoshi and Iwadare were executives in Western Electric's (WE) activities inJapan. WE'sJapan oper ations later were absorbed into a joint venture that became today's Nippon Elec tric Company (NEC). Japan imported its first telephone in 1 877, just a year after Alexander Gra ham Bell's phone was demonstrated in Boston, Tanaka and his staff reverse engineered the U.S. phone within a year, though their copy was of very low quality.s State leaders chose to build their own telephone network, as they did their telegraph network, because, for military an d administrative reasons, they did not want a foreign firm involved in an infrastructure so critical to national
3. Johannes Hirschmeier and Tsunehiko Yui, u}80 (London, 1 975), 86-87·
The Development ofJapanese Business, 1600-
4. H. J. Jones, Live Machines: Hired Foreigners and Meiji Japan (Vancouver, 1 980), 1 3 , S. Hiroyuki Odagiri and Akira Goto, "The Japanese System of lnnovation," i n National In novation Systems, ed. Richard Nelson (Oxford, 1993), 9 5 ,
69
security.6 Thus, the importance of minimizing foreign influence on the econ omy, especially in strategic industries, emerged as an important norm in the early Meiji period. This basic telephone network was completed in 1 88 1 . Copying WE's im ported phone, MOl's factory produced some 252 phones by 1 885, when the Ministry of Communications (MOC) was established. By 1 888 most govern ment offices were linked by phones. This same year, MOC sent one of its ex perts, Oi Saitaro, to the U.S. and Europe to study telephone and telegraph tech nology. In 1 889, Oi brought home Japan's first WE switchboard equipment. When the government started public phone service in 1 889, it had 200 sub scribers in Tokyo and 40 in Yokohama. It was dear Japan could not effectively exploit these crucial technologies un less its young people could understand them, In 1 873, MOl hired a British edu cator to establish a College of Engineering, which eventually became the Engi neering Department of the University of Tokyo. The state also created a new communications laboratory in 1 873 and a variety of other national laboratories to nurture the capacity to develop and absorb technology. The nation was capa ble of developing these institutions and practices in part because of great gain s in education and living standards made in the Tokugawa period.7 The state's investment in telecommunications was vital for the militarv. The military's access to communications improved its ability to move troops a d ma terials, contributing to its victories in the Sino-Japanese War of 1 894-95 and the Russo-Japanese War of 1 904-5 . Japan's victory over China, together with its new constitution, promulgated in 1 889, won it new respect in the West as a ris ing power. The infamous unequal treaties, which loweredJapanese tariffs on for eign goods and exempted foreigners in Japan from domestic laws, were revised in 1 894 to take effect in 1 899. Japan thus regained full legal control over its trade relations and foreign residents. This diplomatic success reinforced the belief that it should continue on its path of increasing its military strength while re ducing dependence on foreign products and technology as much as possible. Out of necessity, the state relied on WE's telecommunications equipment in the early Meiji period. Copying a switchboard was not as simple as copying a telegraph machine. To avoid becoming dependent on foreign imports, the state allowed WE to manufacture goods in Japan, but only on the condition that it create a joint venture with a domestic firm. In 1 899, WE formed a partnership with a local firm, creating the early predecessor of the modern-day NEe. WE contributed 54 percent of the capital to create Japan's first joint venture with a
r:
6. Dokusen Bunseki Kenkyukai, ed" "Nihon densbin denwa kosba," (Tokyo, 1 973), 120.
Ninon no kiikigyij
7· Susan B. Hanley, Everyday Things in Premodern Japan: The Hidden Legacy of Material Culture (Berkeley, 1997)'
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Reprogramming Japan
foreign firm.s NEC gradually increased domestic production; most telephone parts were manufactured in Japan by I9I I . Phone subscriptions continued to rise, from 240 in 1 890, to 3,000 in 1 895, over 1 00,000 in 1 91 0, and 41 6,000 in 1 923 .9 Reliance on foreign telephone products declined from 39.2 percent of the ministry's phone-related budget in 1 9 1 0 to 25.5 percent in 1 9 1 1 , 1 7 .7 percent in 1 9 1 3 , and 5.6 percent in 1 914.10 In 1 90 1 , 7 1 .7 percent of NEC's sales were of imported goods, but this dropped rapidly to 50.8 percent in 1904 and to 46.4 percent by 1912.11 In this period, Japan was one of only a few nations capable of producing much of its own communications equipment. Japan continued to grow in stature, which reinforced its desire for national autonomy and technological self-sufficiency. In 1 902, it signed a treaty allying itself with Great Britain. In the Treaty ofVersailles ( 1 9 1 9) that ended World War I, it won a seat at the table as one of five major victors. At this time the state eased its control over the economy, ushering in a period often described as lais sez faire. However, because imports of technologically advanced materials and equipment had ceased during the war, the government became increasingly cog nizant of the importance of domestic production. In 1920, WE, concerned about the state's growing inclination to promote local firms, decided to make its joint venture, NEC, appcar less foreign by allowing Sumitomo Electric Wire and Cable Works to purchase 5 percent of the firm. 12 By this time, Japan insisted on all its phones being homemade. As a result, it took 1 0-12 years to get a phone; even with an extra ¥2,000 payment (equivalent to about $12,000 today), it still took a year. 13 While WE was trying to make NEC look more domestic, leaders decided to allow a domestic firm to collaborate with another foreign company to create competition for the U.S. giant and reduce dependence on any one foreign firm. 14 This started what would become a customary practice of fighting foreign power with foreign power. In 1923, Fuji Electric was created "explicitly for the pur pose of making use of Siemens' technology."15 The "Fu" stands for Furukawa and the "ji" a voiced "si" for Siemens, Inc. of Germany. In 1 935, Fuji Electric 8. NEC, ed., Njhon denlei leabushilei gaisha 70 nenshi (Tokyo, 1 972), 26-27, 43-50; D. F. G. Eliot, "Twenty-five Years of Successful Cooperation in Japan," Electrical Communication 2, no. 2 ( 1 923): 98-99.
9. Eliot, "Twenty-five Years," 96. 10. NT1� ed., Denshin denwajigyo shi (Tokyo, 1959), 6: 1 53 . I I . NEC, ed., Nihon denlei leabushjlej gaisha 7 0 nenshi, 74. 1 2 . Mira Wilkins, "American-Japanese Direct Foreign Investment Relationships, 19301952," Business History Review 56, no. 4 ( 1982): 502-3, n . 1 8 . 1 3 . The Japan Chronic/e, weekly edition, Dec. 20, 1923, 843-44.
14. NTT,Jido denwa leokan 25 nenshi (Tokyo, 1953), 3:384-85. IS. Kozo Yamamura, "Japan's Deus ex Machina: Western Technology in the 19208," Jour nal ofJapanese Studies 12, no. 1 ( 1986): 75.
Telephone Titan
71
spun off its communications division into a firm called Fuji Tsushinki Seizo Co., later shortened to Fujitsu. Along with NEC, Fujitsu would become one of the favored client firms of the state. This tie was cemented when Fujitsu was designated a national factory in 1 938, a time when Japan's war in China was in full force. As nationalism intensified in the 1930s, the government decided to use two different types of automatic switching systems to decrease its reliance on any one type of foreign technology. State leaders realized there was no alternative to foreign switching systems, but wanted to play one foreign power off against an other until they were able to make the products domestically. This was all part of a reverse course in state policy. The state had methodi cally encouraged imports, foreign investment, and foreign advisers up until the early 19208. Now, to become more independent, it started to drive foreigners and their investment out of the country.16 In 1925, 37.3 percent of all telecom equipment used by the government was foreign. By 1 926, the foreign share had dropped to 1 7 .8 percent; in 1 930 it was at 9.3, and in 1932 it was at 2.9 percent.17 All foreign collaborations, including those of Ford, General Motors, RCA, B.F. Goodrich, and Singer Sewing Machine, deteriorated as Japan pushed into China in the 1930s. This was the era when the bureaucracy started the process of exploring and refining its industrial policies. One of its first goals was to limit the presence of foreign firms, while still extracting technology from them. From this time on, it became commonplace to exploit foreign firms for technological know-how but minimize their active involvement in the economy. In 1 930, MOC defined as "domestic" those firms that had at least 5 1 percent Japanese ownership. In response, in 1932, International Telephone and Tele graph (ITT), which had bought WE in 1 925 and reduced its share of NEe to 50 percent (from 59 percent) in 1 925, decreased it further to 49 percent. IS In 194 1 , a s part of the war effort, all foreign stock was confiscated a s enemy property. ITT regained control after the war but gradually sold off its holdings. The shift in state policy was feasible only because the state and the firms had built up the research and production capabilities necessary to make these prod ucts on their own through reverse engineering. This capacity was improved dur ing World War I when domestic production of telecommunications equipment and other goods dramatically increased, in part due to the difficulty of import ing goods. Although the communications firms were able to produce equipment on 1 6. Mark Mason, American Multinationals and Japan: The Political Economy ofJapanese Capital Controls, 1899-1980 (Cambridge, Mass., 1992), 49-99. 17· NTT, ed., Denshjn denwajigyo shi, vols. 6, 7 . 1 8 . NEC, ed., Nihon denlei leabushikj gaisha 70 nenshi, 1 4 1 -5 1 , 1 59; NEC ed., Nihon denlei monogatari (Tokyo, 1980), 22Z. ,
72
Reprogramming Japan
their own, by the 1 930S they no longer received full state support. MOC, which had taken charge of civil aviation and the aircraft industry in 1 925, became a center of ultranationalism iIi the 1 930S and started diverting communications revenues to military use. l9 It drastically cut its purchases of communications goods, from ¥21 .6 million in 1926 to ¥2.5 million in 1 93 1 .20 By the time of the 1 9 3 1 Manchurian Incident, in which Japanese soldiers blew up their own train tracks to create an excuse for intensifying their invasion of China, Japanese firms had advanced production facilities in such military areas as shipbuilding, steel, aircraft, and communications equipment. However, keeping them up-to-date was contingent on a constant flow of Western technol ogy. Once Western nations entered the war, this flow stopped, forcing Japanese firms to boost R&D in a desperate attempt to keep from falling behind in these technologies. The technological gap nevertheless widened and was a major fac tor in Japan's defeat. For example, Japanese firms were only able to increase the Zero fighter's speed and maneuverability by 20 percent during the five years of the war, whereas Americans and Germans doubled their fighters' horsepower. Weaker technology in communications and radar were also crucial to the defeatP 2. Rising From the Debris: The Emergence of Communitarian
Capitalism and the Creation of NTT Citizens were physically and emotionally devastated by the war and the hu miliating Occupation that followed. A strong sense of technonationalism had emerged in the Meiji period and developmental institutions and policies, such as a centralized financial system and industrial policies, were created in the pre war and especially wartime periods. These elements were key components of the system of communitarian capitalism that emerged in the postwar period. Rem nants of the " 1 940 system," the wartime apparatus, such as tight financial and production controls, as weIl as cartels, became parts of this new system. New in stitutions, policies, and laws, many created during the Occupation, were crafted to help the nation deal not only with economic crisis but also political disarray and social upheaval. Citizens had been deceived into fighting a war they now knew they could never have won. Faced with widespread misery, popular unrest,
19. Johnson, "MITI, MPT, and the Telecom Wars: How Japan Makes Policy for High Technology," in
Politics and Productivity: How Japan's Development Strategy Works, ed.
Chalmers Johnson, Laura D'Andrea Tyson, and John Zysman (Cambridge, 1 989), 187. 20. NEe, ed.,
Nihon Denki Kabushiki Gaisha 70 nenshi (Tokyo, 1972), 148.
2 1 . Odagiri and Goto, "Japanese System of Innovation," 84-85·
Telephone Titan
73
and repeated strikes in the immediate postwar period, the government needed to somehow give citizens an important stake in future gains. A new consensus emerged, one that balanced capitalist elements imposed by the Occupation and the need for economic growth with social concerns about buttressing local firms and motivating citizens by promising them job security, fair wages, and overall social stability. The bureaucracy, along with big business and top politicians, helped encourage the evolution of these communitarian norms, which emerged out of a set of compromises designed to have broad ap peal but that clearly served the interests of some groups more than others. Building a stable, reliable communications system was a major part of the na tional project of catching up with the West and providing jobs for all citizens. The industry was technologically backward again after the war. Once again, as in the Meiji period, the state and corporate sector needed foreign advisers and technology to catch up, and they relied on their earlier ideology to do so: use foreigners and their investment and products only when necessary and maintain domestic control over firms and the industry. This mentality was summed up in a rallying cry of "ichi go yunyu, ni go kokusan" (import the first one, make the second one domesticalIy). While the industry lagged far behind the West, catching up was feasible. Cit izens were highly educated and firms had substantial experience in trade and working with foreign companies. Moreover, some of the key institutions were already established, including a strong, legitimate bureaucracy, a national com munications lab, and experienced companies that would become members of the NTT family. The strategy of protecting the home market from foreign invest ment and forcing foreigners to license their technology to make money had been firmly established in the prewar period. The reputation of MOC as a hotbed of ultranationalism during the war led Occupation authorities to abolish it. In 1 949, it was replaced with two min istries: the Ministry of Postal Affairs (Yuseisho), which was put in charge of mail and postal savings systems, and the Ministry of Telecommunications (Denki TsushinshO), which was in charge of telephone and telegraph services. In this reorganization, virtually all engineers and technical personnel went to the Ministry of Telecommunications. The prewar laboratory was broken up and replaced with the Electrical Communications Laboratory (Denki Tsushin Kenkyujo), which remains NTT's key system of laboratories today.22 General Douglas MacArthur, who headed the Occupation, initially insisted that Japan create a private telephone monopoly similar to AT&T. However, U.S. Occupation officials, under the influence of New Deal ideas, pointed to the Ten22. Nakagawa Yasuzo, NTT gijutsu suimyaku (Tokyo, 1 990), 7; NTT, Denden ayumi (Tokyo, 1 962), 143-44.
Ia
nen no
74
Telephone Titan
Reprogramming Japan
nessee Valley Authority (TVA) as a potential model for a public corporation. Japanese leaders strongly preferred a public company that could be used to pro mote both developmental and social objectives. In 1952, as the Occupation came to a close, they got their way: the government turned the Ministry of Telecom munications into NTT, which was modeled on the TVA.23 The Ministry of Postal Affairs was renamed the Ministry of Posts and Telecommunications (MPT) and assigned the job of overseeing NTT. The Diet was given the au thority to approve NIT's budgets, investment plans, and price changes. NIT was established at a time when the nation was pouring its efforts into economic revitalization. No longer permitted under Article 9 of the postwar constitution to plow funds into military defense, the state and the firms focused on raising the technological capabilities of industry to achieve national strength. Advanced industries would create good jobs and a strong social fabric, add to national wealth, and reduce the sense of vulnerability that resulted from heavy reliance on imported natural resources. The telecommunications industry and NTT formed a critical component of this new strategy of promoting strategic industries. By creating jobs and wealth and promoting a strong sense of commu nity, NIT would be important to both the nation's industrial infrastructure and its social infrastructure. Thus, norms favoring technological autonomy, man aged competition, and stable employment over profits shaped the types of insti tutions and policies that emerged in this industry. There was a broad consensus among bureaucrats, politicians, and business leaders regarding NTT's mission and the underlying objectives it would pro mote.24 NIT was the monopoly company in what leaders saw as a critical infra structure industry--one that was to supply stable, predictable services to stimu late the economy as a whole. Like the US. Pentagon, NTT and its labs were to nurture a strong family of firms that would provide the essential technological underpinnings of the electronics industry.25 These large firms were of the type that Joseph Schum peter saw as key to incremental technological innovation in high barrier-to-entry industries, especially during periods of relatively slow, stable technological change. The industry itself did not need to be globally com petitive. Every advanced country had either a national telecommunications firm or a highly regulated private firm with a monopoly. Nor did NTT or its family of firms need to be highly profitable--state protection and cross-shareholding arrangements protected them from the brunt of market forces during this criti-
75
cal catch-up period. The goal was to establish stable, predictable services that would create a favorable environment for business and other high technology in dustries, as well as maintain stable employment. As long as the strategy was ef fective in moving toward these objectives and the firms made enough profit to survive, it did not matter whether they were efficient. Other favorable conditions made it a good time for a successful jump into the newly emerging electronic age. The technological trajectory was very clear catching up with AT&T, the world leader. The institutions necessary for carry ing out this commitment, such as a bureaucracy experienced in planning and a state-guided financial system, remained in place after the war and, if anything, were strengthened by the Occupation. Prewar telecommunications firms, such as NEC and Fujitsu, though damaged during the war, had educated, experi enced technological staff: The global environment could not have been more positive. The US. was willing to take care of Japan's defense and international relations commitments, which freed resources for industrial development, and US. businesses provided access to technology on reasonable terms. A new quasi-socialist system of communitarian capitalism, which incorporated some prewar and wartime institutions, emerged to promote catch up and a strong, eq uitable social order. Companies such as NEC, Fujitsu, Hitachi, and Oki started offering employees job security and seniority-based wages. These firms had been nurtured for military purposes in the 1 9308 and early I940s, and they con tinued to be part of the nation's technonationalist agenda. Now, however, they also became employee-centered communities with both developmental and so cial goals. Part of their responsibility was to make employees a strong pillar of the community by providing them security and treating them equitably, NTT dominated the industry. While it was formally monitored by MPT and had to submit its budgets, investment plans, and rate changes to the Diet for ap proval, in reality it was largely independent. Since the thirty-some staff mem bers in MPT's telecommunications office were on loan from NIT, when NTT applied to MPT for licenses, it was an NIT person who inspected and quickly approved the application.26 The Diet rubber stamped NTT's proposals and never raised serious questions in Diet proceedings; MPT did the same.27 NTT generally got what it wanted in terms of rate hikes, incrcased investment budg ets, and rises in installation fees even when MPT opposed them.28 Yet, to main26. Interview of former I\"TT official, Apr. 13, 1993; Yoichi Ito, "Telecommunications and Telecommunications: Regulation and Deregula tion in Industrialized Democracies, ed. Marcellus Snow (New York, 1986), 207-8; Suzumura Industrial Policies in Japan," in Marketplace for
23. Interview of NTT Data Communications official, Apr. 4, 1989; NTT, Denden fO nen no ayumi' I7T NTT' Nihon denshin denwa kOsha 2S nenshi (Tokyo, 1977), 1 : 1 3-19. 24. Inte�views of former NTT official, Apr. 13, 1993; top executive at NTT family com pany, Mar. 26, 1993; Hitachi engineer, Feb. 3, 1993; head of NTT lab, Dec. 5, 1987. 25. Interviews of a Fujitsu manager, Dec. I, 1987; former NTT officials, June 23, 1993, and Apr. 1 3, 1993; a Hitachi engineer, Feb. 3, 1993; NTT, Denden f O nen no ayuml, 63·
Kotaro and Nambu Tsuruhiko, "Intorodakushion, Nihon no denki tsiishin no nani ga mondai ka," in Nihon no denki tsiishin, ed. Okuno Masahiro, Suzumura Kotaro, and Nambu Tsuruhiko (Tokyo,
(993), 3· 27. Interview, Nov. 21, 1996. 28. NTT, Denden fO nen no ayumi, 4, 30-42.
76
Telephone Titan
Reprogramming Japan
tain harmony, NTT officials "were very cautious to save the face of MPT offi cials," said a former NTT officiaP9 Thus, as in the Meiji period, the activist bu reaucracy, now through NiT, played the role of entrepreneur, risk taker, and in vestor. NTT's ability to advance technologically was contingent on access to foreign technology and assistance. AT&T Bell Labs' personnel on General Mac Arthur's staff "taught us a lot about research on communications," explained the head of one of NTT's laboratories.30 NTT's main lab was reorganized after the war and modeled after the Bell Lab system. During the war, Japan's tech nological capabilities in telecommunications had deteriorated such that it would have been more efficient for it to import all its telecommunications equipment. But once again, that option was never considered. Strong norms determined that NTT would import a few products and then reverse-engineer them so the nation would have its own technological base. The aim was to do mesticate foreign technology as quickly as possible, explained several NTT o f ficials.31 Leaders did not want the industry to become a "telephone colony" of the advanced nations; it saw technology as leading to power (gijutsu wa chikara
nari).32 Still, NTT and its suppliers had no choice but to import many products and technologies, primarily from AT&T and Siemens, for the first 25 years of the postwar period.33 Oshima Tetsu, the fifth president of NTT's lab, explained how in the I 960s NTT's lab and Japanese labs, in general, focused on copying U.S. technology.34 The goal was to "catch up with and then go ahead of foreign technology" (gaikoku no gijutsu ni oitsuki, oikose), explained Kitahara Yasusada, a high-level official who later became NTT's vice president.35 The ability of firms to absorb and improve upon foreign technology was fos tered by the lifetime employment system. With secure employment, workers saw technological change as an opportunity for corporate growth rather than as a threat to their jobs. In addition, firms could send their top engineers to study abroad or work at Bell Labs and other research institutes without concern that they would stay overseas or switch employers when they returned to Japan. Sim-
29. Interview of former top-level NIT official, Nov. 14, 1996. 30. Interview, Dec. 5, 1987. 3 1 . Interviews of head of an NTT lab, Dec. 5, 1987; former NTT official, Apr. 13, 1993; and former top-level NTT official, Nov. 14, [996. 32. Omae Masaomi, "Naze denden kosha wa nerawaretaka,"
ila�ly, keiretsu ties provided NTT family firms with the financial security re qUIred to take on long-term projects to challenge established giants, such as AT&T, without fear of debilitating losses. NTT researchers visited AT&T on various occasions, but in I 966 a formal agreement between the two firms made regular visits possible, allowing NTT researchers to learn much more from Bell Labs.36 These visits to their teachers at Bell Labs were called "Beru kenkyii; o maid" or "humble visits to Bell Labs " using words that usually refer to visits to a temple or shrine.37 According ;0 NTT documents, one of its researchers visited Be]] Labs and received all the re search results he requested.38 Not surprisingly, an electronic switching device deveJoped by NTT's Jab in 1966 was a deddo kopii (dead copy) of Bell Labs' I -ESS switching device.39
3. NTT Creates a Cutting-Edge Communications Infrastructure NTT had three broad goals. First, it wanted to stimulate the broader econ omy by providing reliable services-in particular, by gradually getting rid of a long back order for telephones and by automating the system so citizens could dial anywhere in the country without going through an operator. Second, it wanted to nurture several strong firms that would contribute to social stability by offering good, secure jobs and also help the nation become more self sufficient technologically. Third, it sought to contribute to the political stability necessary for economic growth by supporting the ruling party, the LDP. This section focuses on how NTT achieved its first goal. Section 4 shows how it suc ceeded at the latter two goals. After World War II, only about 40 percent ofJapan's 1 .2 million phones were in good working order, and many did not operate well in poor weather. NTT's stated mission was to provide a phone to everyone who ordered one and to pro vide direct dial services nationwide. It invested heaVily to accomplish these goals, and managed to do so by the late 1 970S. Its huge investment was critical to the ?roader eco�omy. As a percentage of the national budget, it was quite large, partIcularly durmg economic slowdowns, when it was used to stimulate demand and keep people employed (Tables 3 . 1 and 3 .2). NTT had the authority to issue bonds, which gave i t the financial muscle
Chuo kiiron 94, no. 7 (July
1979): 257·
33. Nakagawa, NTT gijutsu suimyaku, 1 [0, 1 18, 138; NT1� Demjen 10 nen no ayumi, 76-81 ,
129, 146-48; interview of former NTT official, )une 23, 1 993. 34. Cited in Nakagawa, NITgijutsu £uimyaku, 95. 3 5 . NIT, Nihon denshin denwa kOsha 25 nenshi, 1 :285; NT'f, (Tokyo, 1 972), 25.
77
Denden 20 nen no ayumi
36. Nakagawa, NIT gijutsu suimyaku, 1 19, 138; NTT, . VIew of former top-level NTT official, Nov. 1.'1., 1 996. 37· Omae, "Naze denden kooha wa nerawaretaka," 257. 38. NIT, Denden [0 nen no ayumi, 149.
39· Nakagawa, NITgijutsu suimyaitu, 1 1 8.
Denden [0 nen no ayumi, 78; inter-
TABLE 3 . 1 .
NiT's construction investment budget (Units: ¥ billion, $ million, % )
1 954
1955
1956
1957
1 95 8
1 959
1960
50.3 ($ 1 3 9.7)
53.1 (147.5) 5.6
55.0 ( 1 5 2 .8) 3.6
66.9 (185 .8) 2 1 .6
68.2 ( 1 89.4) 1 .9
88.3 (245.3) 29.5
99. 1 (275.3) 1 2 .2
1 5 1.5 (420.8) 52.9
1 ,027.3
999.9
1953 NiT's construction budget (in U.S. dollars) Budget growth (in yen) over previous year (%) National general budget
(ippan kaiket)
NiT's construction budget as a percentage of national general budget
4.9%
1961 NiT's construction budget (in U.S. dollars) Budget growth (in yen) over previous year (%) National general budget
(ippan kaiket)
NiT's construction budget as a percentage of national general budget
NiT's construction budget (in U.S. dollars) Budget growth (in yen) over previous year (%)
1 83 .4 ($509.4) 21.1 2 , 1 07.4 8.7%
5.3%
1,013.3 5.4%
1 ,089.7 6. 1 %
1 , 1 84.6 5.8%
1962
1 963
1964
1965
2 1 0.2 (583 .9) 14.6
2 58.8 (7 1 8.9) 23.1
287.8 (799.4) 1 1 .2
3 59.0 (997.2) 24.7
2,563 . 1 8.2%
3,056.8 8.5%
3 ,340.5 8.6%
3,744.7 9.6%
1,333.1 6.6%
1,512.1 6.6%
1 ,765.2 8.6%
1 966
1967
1 968
429.0 ( 1 , 1 9 1 .7) 19.5
474.2 ( 1 , 3 1 7.2) 10.5
5 5 5.0 (1 ,541 .7) 17.0
4,47 7 . 1
5,203.4
5,917.3
9.6%
1969
1 970
1971
1972
1973
1 974
602.7 (1 ,674.2) 8.6
720.4 (2,00 1 . 1) 19.5
898.2 (2,584.9) 24.7
1070.5 (3 , 5 3 2 . 1 ) 1 9.2
1 , 1 94.0 (4,407.7) 3.7
1 ,2 54.0 (4, 3 0 1 .5) 2.9
9. 1 %
1975 1 ,4 1 8 . 1 (4,779.7) 24. 1
9.4%
1976 1 ,3 6 1 .8 (4,594.8) (-4.0)
TABLE 3 . 1 .--cont. 1 969
1970
1971
6,930.9
8,2 1 3 . 1
9,414.3
1972
1973
1974
1 975
1976
National general budget
(ippan kaiket)
NTT's construction budget as a percentage of national general budget
NiT's construction budget (in U.S. dollars) Budget growth (in yen) over previous year (%) National general budget
(ippan kaiket)
NiT's construction budget as a percentage of national general budget
NiT's construction budget (in U.S. dollars) Budget growth (in yen) over previous year (%) National general budget
(ippan kaiket)
NiT's construction budget as a percentage of national general budget
8.7%
8.8%
9.5%
1 1 ,467.6
9.3%
14,284.0
8.4%
1 7 ,099.4
7.3%
2 1 ,2 88.8
6.7%
24,296.0
5.6%
1977
1978
1979
1980
1 98 1
1 982
1983
1 984
1 ,624.0 (6,064. 3) 19.3
1 ,639.8 (7,867.9) 1 .0
1 ,666.4 (7,637.8) 1 .6
1 ,709.0 (7,540.9) 2.6
1 ,752.3 (7,942 .3) 2.5
1 ,743.2 (6,999. 1 ) ( -0.5)
1 ,682 . 1 (7,081 .0) (- 3.5)
1 ,722.6 (7,2 54.6) ( - 2 .4)
28,5 14.2
34,295.0
3 8,600 . 1
42,588.8
46,788.1
49,680.8
50,3 79.6
50,627.2
5.7%
4.8%
4.3 %
1 990
3.3%
1991
3 .4%
1992
1 , 580.5 (6,627.7) ( -8.3)
1 ,6 1 3 .3 (9,582 .4) 2.1
1 ,796.7 ( 1 2 ,42 5.3) 1 1 .4
1 , 7 1 2 .8 ( 1 3 , 363.5) (-4.7)
1,735.5 (12,569.7) 1 .3
1 , 82 5 . 1 (12,586.9) 5.2
1 ,886.8 (14,01 8.9) 3.4
1,883.3 (14,854.9) ( -0.2)
52 ,499.6
54,088.6
54, 1 0 1 .0
56,699.7
60,414.2
66,2 36.8
70,347.4
72,2 1 8.0
3.3%
3 .0%
1989
3.5%
1986
3 .0%
1988
3.8%
1985
3 .0%
1987
4.0%
2 .9%
2 .8%
2.7%
2 .6%
Telephone Titan
81
TABLE 3.2.
NTT's five-year construction invesnnent budgets (Unit: ¥ billions, %)
Budget
Growth over
First plan 1953-57
Second plan 1958-62
Third plan 1963-67
Fourth plan 1968-72
Fifth plan 1973-77
Sixth plan 1 97 8-82
3 02 . 1
725.5 140.2
1 ,8 1 1 .7 149.7
3 ,8 1 9.8 1 1 0.8
6,9 1 3 .2 8 1 .0
8,5 10.7 23.1
previous plan (%) Sources: NIT, Denden
20
nen no ayumi, 123-24, 227-28, 339-40; NIT , ed., Nihon Denshin
10 nenshi (Tokyo, 1980) , 20. vary somewhat from those given in Table 3.1 because of planned expendi
Denwa kosha shashi, 1986, 66; NEG, Nihon Denki saikin Note: Numbers ---- ---0'- '" '""
tures versus actual ex penditures and other factors.
-.0 -.0 ",
� e; � ,...: �
...... '-'
""' '"" CO ......
.....; � o 0'- 0 0'- "'"
" "": 00 ......
'-'
\O v ci lXi "
needed to build a strong infrastructure. Rather than borrowing from abroad, which would have been the most efficient way of acquiring a large amount of capital at a time of scarcity, most of its capital came from a policy that required consumers to purchase subscriber bonds when they installed a phone-essen tially forcing phone users to share the risks of building up the industry (Table 3 . 3 ) . NTT's first president created this system. A former NIT executive re called that the process worked like this:
o
CO '0 0'-.., ...."...
Phone users had to buy a bond for ¥IOO,OOO from the government. NT T would
- -
return the money after 10 years. It was a way of gathering a lot of money in ad
�
vance,a ten-year loan. NT T was able to use this money to invest heavily in equip ment and R&D. You keep producing and increasing facilities, so subscribers keep increasing and you get more money. ¥ I OO ,OOO was a tremendous amount of money, but they made it into law so people had no choice. No other country has done this, so while MITI uses taxpayer money, we at NT T used subscriber bond \0 N' .q ��d 0'- N CO O � ...."..
..... "-"
money. In this sense, we borrowed money from citizens to build the telecommuni cations system.40
Consumers accepted the burden of subscriber bonds as the cost of progress . They knew the industry was stimulating economic growth, creating jobs, and raising the nation's technological capability. The bond system, which brought in a total of ¥5.57 trillion ($ 1 9-4 billion) over three decades, was abolished at the end of 1 982 in preparation for NTT's partial privatization; NIT had to return the bond money after ten years and pay interest on it.41 The subscriber bond was not the only way consumers shared the costs and 40. Interview of head of one of NT T 's labs,Dec. 5, 1987. 41. NTT, Nihon denshin denwa kOsha 2S nenshi, 1 :278-79-
TABLE 3.3. Sources of NIT's c-apital: Subscriber bonds, FILP loans, special bonds, and installation fees (Unit: ¥ billion)
Total capital Subscriber bonds (as % of total capital) Fiscal Investment and Loan Program (FILP) funds, Special bonds, etc. Installation fees
1 953
1 954
1 955
1956
1957
50.3 6.0 (1 1 .9) 6.7 ( 1 3 .3 )
53.1 6.4 ( 1 2 . 1) 4.2 (7.9)
55.0 7.0 (1 2.7) 7.4 ( 1 3 .5)
66.9 7.0 (1 0.5) 4.0 (6.0)
68.2 7.9 ( 1 1 .6) 6.4 (9.4)
293.5 34.3 ( 1 1 . 7) 28.7 (9.8)
7.7 (1 5.3)
6.2 ( 1 1 . 7)
7.2 ( 1 3 . 1)
7.3 ( 10.9)
7 .9 (1 1 .6)
36.3 ( 1 2.4) Second 5 -year plan total
1 959
1960
1 96 1
1962
88.3 9.8 ( 1 1 . 1) 6.5 (7.4)
99.1 10.7 ( 10.8) 5.0 (5.0)
146.0 44.5 (30.5) 7.9 (5.4)
1 83 .4 56.2 (30.6) 1 1 .6 (6.3)
2 1 8.5 7 1 .3 (32 .6) 12.5 (5.7)
735.3 192.5 (26.2) 43.5 (5.9)
9.0 ( 1 0.2)
10.2 ( 1 0.3)
6.4 (4.4)
7.4 (4.0)
8.4 (3.8)
4 1 .4 (5.6)
1 95 8 Total capital Subscriber bonds (as % of total capital) Fiscal Investment and Loan Program (FILP) funds, Special bonds, etc. Installation fees
First 5-year plan total
Third
Total capital Subscriber bonds (as % of total capital) Fiscal Investment and Loan Program (FILP) funds, Specia! bonds, etc. Installation fees
Total capital Subscriber bonds (as % of total capital) Fiscal Investment and Loan Program (FILP) funds, Special bonds, etc. Installation fees
plan total
1 963
1964
1965
1 966
1 96 7
2 79.4 82.4 (29.5) 26.0 (9.3)
3 1 6.6 1 00.6 (3 1 .8) 2 3 .6 (7.5)
393.4 1 3 1 .3 (3 3 .4) 46.5 ( 1 1 .8)
458.4 144.3 (3 1 .5) 74.1 ( 16.2)
5 1 LO 1 70.0 (3 3.3) 68.5 ( 1 3 .4)
1,958.8 628.5 (3 2 . 1 ) 2 3 8 .7 ( 1 2 .2)
1 0. 3 (3.7)
13.1 (4. 1)
14.9 (3.8)
1 6. 3 (3 .6)
19.0 (3.7)
7 3 .6 (3.8) Fourth 5-year plan total
1971
1972
879.5 287.0 (32.6) 7 5.0 (8.5)
1,057.4 345.3 (32.7) 80.0 (7.6)
1 ,299.7 405.9 (3 1 .2) 168.0 (1 2.9)
4,534.7 1 ,459.3 (32.2) 414.8 (9.2)
7 3 .0 (8.3)
1 32.8 ( 1 2 .6)
164.4 (1 2.7)
475.1 (10.5)
1 96 8
1 969
1970
6 1 1.8 1 95.2 (3 1 .9) 49.8 (8. 1 )
686.3 225.9 (32 .9) 42.0 (6. 1)
46.6 (7.6)
58.3 (8.5)
TABLE 3.3.-cont.
Total capital Subscriber bonds (as % of total capital) Fiscal Investment and Loan Program (1'1LP) funds, Special bonds, etc. Installation fees
Total capital Subscriber bonds (as % of total capital) Fiscal Investment and Loan Program (FILP) funds, Special bonds, etc. Installation fees
Iotal capital Subscriber bonds (as % of total capital) Fiscal Investment and Loan Program (FILP) funds, Specia! bonds, etc. Installation fees
Fifth 5-year plan total
1973
1974
1 975
1 97 6
1 97 7
1,456.4 432.9 (29.7) 200 ( 1 3 .7)
1 ,584.3 441 .9 (27 .9) 396.7 (2 5.0)
1 ,790.1 429.3 (24.0) 6 82 . 1 (3 8 . 1)
2 ,0 1 5 .6 342.6 ( 1 7.0) 84 1 . 2 (41 . 7)
2 , 3 3 3 .5 2 56.6 (1 1 .0) 525.0 (22 .5)
9,1 79.9 1 ,90 3 . 3 (20.7) 2,645.0 (28.8)
161.1 (9.0)
1 4 1 .0 (7.0)
140.0 (6.0)
789.2 (8.6)
1 7 0.5 ( 1 1 .7)
1 76.6
( I Ll )
1978
1979
1980
1 98 1
1982
Sixth 5-year plan total
2,2 1 3 .4 269.5 ( 1 2 .2) 3 76.6 (1 7.0)
2,241 .7 2 77 . 7 ( 1 2 .4) 247.2 (1 1 .0)
2 ,2 88.6 2 78.7 ( 1 2 .2) 2 84.5 ( 1 2 .4)
2,470.6 268.7 ( 1 0.9) 3 79.7 ( 1 5.4)
2 , 5 1 3 .9 2 58.8 ( 1 003) 342.4 ( 1 3 .6)
1 1 ,72 8 . 1 1 , 3 5 3 .4 (l 1 .5) 1 ,630.4 ( 1 3 . 9)
1 56. 1 (7.1)
1 64. 1 (7.3)
162.5 (7. 1 )
1 52 .6 (6.2)
1 5 5.0 (6.2)
790.3 (6.7)
1983
1984
2 , 536.9
2 , 5 59.8
45 3.8 (17.9)
479.2 ( 1 8.7)
165.7 ( 1 6.5)
163.3 (6.4)
SQurces: NTf, Denden 20 nen no ayumi, 170, 225-228, 230; NTT, Denden 10 ?ten no ll"Iumi, 242; Nihon Kaihatsu Ginko, JDB tiikei yiffan, annual; MPT, Tsllshin lutkusho, annual; Niho'; Denshin Denwa Kosha 25 Nenshi Iinkai, Nihon Denshin Denwa Kosha 25 nenshi (Tokyo. 1978), betsumaki, 90-9 1 , 98-99; NTT, Nihon Denshin Denwa lWsha shruhi, 66-67, appendix, 27.
84
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risks of the industry's development. Phone users also had to pay an installation fee (setsubi hi), and consumers indirectly funded NTT through other special bonds and low-interest FILP loans (see Table 3 .3). Reliance on FILP loans and special bonds rose sharply during economic downturns, when it was difficult to get other funds. For example, during the recession of the early to mid-1 970S, FILP and special bond funds provided 20-40 percent of NTT's capital needs. This exceeded that provided by new subscriber money. Reliance on FILP and special bond money also increased in the early 1 980s as the bond system was phased out in preparation for NTT's "partial privatization" in 1985 (see Table 3 .3). NTT had a monopoly from 1 952 until 1985, so consumers had to pay high prices or forgo telephone service. High prices and the various fees and bonds were "a kind of donation from the customer," explained a former �TT offi cial.42 High phone rates and subscriber and installation fees did not boost NTT's profits, which were limited by regulation. Rather, high prices reflected steep costs, especially the generous sums NTT paid its suppliers.43 NTT's role was not only to create a good phone system, but also to nurture a family of firms ca pable of competing internationally. There was a consensus that Japan should be as technologically independent as possible and on the cutting edge of electron ics. Having NTT act as a surrogate Pentagon would cost money, and this burden was widely distributed among telephone users. Though counter to their imme diate economic interest, citizens did not complain about this system that used their savings to subsidize big firms. Whether they were conscious of the massive subsidies they were providing the industry, there was a broad consensus that this policy represented an appropriate sacrifice to promote domestic technology and products.
4. The NTT Family To promote orderly development of the industry, NTT created a risk sharing family of firms. In the prewar period, NEC and Fujitsu were the core suppliers of sophisticated equipment. In the postwar period, this was expanded to several hundred "family firms," with the bulk of NTT's patronage going to the "big four" large firms-Fujitsu, NEC, Hitachi, and Oki. Ties between NTT and its suppliers were informal and flexible: the firms were essentially guaranteed a stable share of NTT's procurement as long as they met perfor mance standards. The firms conducted joint research with NTT labs. Since the 42. Interview of former top-level NTT official, Nov. 14, 1 996. 43. Roger G. Noll and Frances McCall Rosenbluth, "Telecommunications Policy: Struc ture, Process, Outcomes," in
Structure and Policy in Japan and the United States, ed. Peter
Cowhey and Mathew McCubbins (Cambridge, 1995), 1 19-76.
85
key family firms also produced computer hardware, software, and semiconduc tors, NTT's paternalistic support of them had an important multiplier effect on these industries. The goal was to build up the capacities of firms and use them for the community's interest.44 NTT had created a structure in which it, in ef fect, taxed its customers in order to subsidize its family of suppliers. This re flected a broader consensus that thought it made sense to focus the nation's technological efforts on a select group of incumbent firms. To spread resources too broadly would result in redundant research and potentially waste capital. NTT strictly limited membership in the family. It denied entry to powerful companies such as Matsushita, Sony, and Sharp because they were focused on consumer goods, which were seen as luxuries unworthy of state promotion.45 It is no coincidence that the "big four" all had ties with the risk-sharing horizontal keiretsu that emerged in the postwar period. The bureaucracy strongly favored large, vertically integrated firms that were members of these groups, believing that only such firms, which were protected by stable-shareholding and main bank corporate governance arrangements, were stable enough to survive in global competition. Because these firms were related to the bank-centered groups, the state could better control them. Group membership provided firms with the financial muscle to invest in high-cost, high-risk industries. Close relations between NTT and its family firms were beneficial to each side. For this infrastructure industry--{)ne critical to the smooth functioning of the nation and its business-the state needed the firms just as much as the firms needed the state. After aU, the state and the companies were all focused on de veloping the industry and creating a cohesive community. NTT provided a range of incentives to spur its family firms to develop technologically. It encour aged them to minimize risks by pooling their efforts and resources and following similar strategies. By supporting them all, NTT prevented losers. The border between the public and private sectors was blurred. The family firms, in return, were happy to invest in the capabilities NTT de sired; this was a "joint community project," a positive sum effort, in which the firms and NTT worked together to meet common goals. These firms were the major beneficiaries of NTT's huge materials procurement budgets (Table 3-4). NTT's procurement accounted for a large part of total government purchases, and the weight of NTT and overall government demand as a percentage of do mestic demand was quite high, reaching 50--70 percent up until the early 1980s (Table 3.5). The family firms also benefited from NTT's large R&D budget (Table 3 .6). Much of this money financed collaborative R&D with the "big four," which also figured actively in the computer hardware, software, and semiconduc tor industries. These top firms thus received both direct and indirect R&D funds and expertise from NTT and its labs, which were the nation's best. They could 44. NTT, Denden [0 nen no ayumi, 282-83. 45. Interview of MITI official, Apr. 7, 1989.
86
Reprogramming Japan TABLE 3.4. NIT's procurement of materials/equipment (a subset of its construction budget) (unit: ¥ billion) 1953 1954 1955 1956 1 95 7 1958 1959 1960 1 96 1 1962 1963 1 964 1 96 5 1 966 1 967 1 968 1 969 1970
46.3 36.3 39.3 56.8 44.4 57.1 80.2 102.5 1 23.8 NA NA NA NA NA 2 5 7 .4 286.0 3 1 1 .9 3 58.0
1 97 1 1 972 1 973 1 974 1 975 1 976 1 977 1978 1 979 1 980 198 1 1 982 1 983 1984 1985 1 986 1 987 1988
439.6 NA NA NA NA 510 643.9 620 600 63 5 640 610 615 700 NA NA 1 ,000 1 ,000
o \0 0 0
N
S
o 000 ;:;
N
0 N ;--': 0 0 0
_
o 000 S
NIT, l'.7T 10 nen no ay umi, 252; l\'TT, Jl.l"JT 20 nen no ayumi, 241; Sekai terekomu sensa (To- kyo, 1984), 22; NTT , Nihon Denshin Denwa kOsha shashi, 546; Inoue Teruyuki, N7T, 104-6. Sources:
M
use this funding for long-term development, because the risks associated with entering and competing in these industries were sharply reduced and shared, due to arrangements such as cooperative R&D projects and keiretsu ties. NTT and its labs helped these four firms develop the capacity to produce high-quality switching equipment, computers for data communications, and integrated circuits. Due to overlapping technologies more than a detailed, co ordinated strategy, NIT also had a powerful impact on related industries, such as memory chips and computers.46 As the primary institution in charge of building up the nation's technological capacity in the first few decades after the war, NTT provided a protected haven for basic R&D. ":i\TT was the driving force-the leader of the telecommunications companies in technological devel opment. The best and brightest went to NTT," explained a former Fujitsu ex ecutive.47 NTT also contributed greatly to related industries simply by placing huge, 46. MPT, T;'ushin haleusho, annual; Anchordoguy, Computers, Inc; interviews of former head of MITI software agency, Oct. 27, 1999; former Fujitsu official, Nov. 16, 1999; former Hitachi engineer, Feb. 3, 1993; MPT official, Nov. 2 1 , 1996; former top-level NTT executive and retired NTT official, both on Nov. 1 4 , 1996. 47. Interview of former Fujitsu official, Nov. 1 6, 1999 ·
0 0-. �oo o
N
�o
0
g -
Telephone Titan
00 00 N
,.,.., 0 00 \0 N
r oo ..... N N
""' O�
o r0- .....
N N
..... "" ,.,.., 0 ..... N
00 \0 0- ..... ..... 0 ..... ..... 0 ,,",
..... N
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,.,.., 00 0-..... 00 0- ..... N
\0 0 \0 0
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89
stable, high-profit orders. Family members used these profits to cross subsidize entry into other strategic industries, thereby furthering technological self-sufficiency and providing greater job opportunities to the broader commu nity. "Part of NTT's strategy was to give firms profits to support their other divisions. NTT was the government, so its task was to grow Japanese industry. It wanted to give ample profit to the family companies," explained a top official of a family firm.48 A Fujitsu official acknowledged that profits from sales to NTT were critical to Fujitsu's ability to enter and survive in the cutthroat computer business and a top executive at a medium-sized NTT family firm said they used profits from NTT orders to expand their aerospace equipment division. 49 To understand how the risk-sharing NTT family worked, it is important to analyze NTT's procurement system and how it contributed to the industry's technological strength by nurturing the development of a top-notch phone net work and industry, rather than efficiency in any given company. It worked in the following way: when NTT needed equipment, it met with its family firms to discuss the product and set specifications. Orders for sophisticated switching equipment, which NTT labs developed in collaboration with family firms, went to the top four firms-NEC, Fujitsu, Hitachi, and Oki-that had developed the technological and organizational capacity to absorb foreign technology, learn quickly, and produce reliable products. Sophisticated cable-related work went to seven core cable firms; other, less complex equipment was purchased from vari ous family firms. Contracts with NTT family firms were voluntary (zuii keiyaku); they were not negotiated in an open or even quasi-open bidding sys tem.so To distribute the risks and rewards and treat core firms equitably, NTT avoided relying on just one firm for any product. It provided favored firms with stable, though not necessarily equal, orders so that each firm was assured stable demand year after year. For the top four firms, "NTT always tried to balance the orders; they wanted four healthy companies, not one," explained an NTT offi cial. 51 This balancing of orders among the key firms reduced the gap between the strongest and the weakest and kept the weaker firms alive at the expense of 48. Interview of top executive at NTT family firm, Mar. 26, 1993. 49· Interview of Fujitsu executive, Dec. I , 1 987, and top executive of NTT family firm, Mar. 26, 1993. 50. NTT, Denden 20 nen no ayumi, P.187; NTT, Nihon denshin denwa kOsha 2S nenshi, 3:258-6 1 ; interviews of two former NTT officials, June 23, 1993, and Apr. 13, 1993. 5 1 . Interviews of former NTT official, June 23, 1993; others also emphasized how NTT provided balanced, stable orders: former NTT official then working at MITI agency, Nov. 14, 1996; NTT Data Communications official, April 4, 1 989; interview of a top executive at a medium-sized NTT family firm, Mar. 26, 1993; high-level Hitachi computer division official, Apr. 3, 1989.
90
Reprogramming Japan
stronger firms. NTT limited the number of family firms to aHow each to achieve significant economies of scale through mass production. 52 Competition among NTf family firms, to the extent it occurred, was limited to issues of cost and quality control-that is, manufacturing expertise. 53 Other wise, competition was limited. As a leading scholar explained, "The NTT mar ket was very different from a free market. Most of the equipment was jointly de veloped. NTT carefully watched the performance and this monitoring impacted NTT's next order. It was not healthy competition but the manufactur ers were worried about the evaluation, which pressured them to perform."54 Since procurement was based largely on stable quotas, there was little price competition. "NTT's purpose was to grow the industry so it did not want price competition. Sometimes it ordered things from a company it knew had high costs-in order to promote the growth of family members," explained a high level official of a mid-sized NIT family firm.55 NTT was not merely a large purchaser for these firms. It was essentially a guaranteed purchaser. "I\IT was a very good customer. If we asked them [a firm] to produce something, they knew that if they produced it as we wanted it, we would buy it," explained a high-level NTT official. 56 Business with NIT was also profitable because it paid on a cost-plus basis much like the Pentagon. NTT analyzed costs by visiting the factories and up dating information about the expense of raw materials, administrative charges, and quality-control procedures. 57 It was heavily involved in the production pro cess, and the firms had to pass its inspection. There was mutual trust among NIT and its family members--the firms were essentially assured a fair profit but in return were expected to cut costs. 58 Because of NTT's large, stable, and profitable orders, its family members referred to it as a dollar box (doru bako}.59 This type of procurement and R&D system promoted yokonarabi behavior, making the top firms relatively equal in technological capacity.6o 52. NTT, Denden [0 nen no ayumi, 123, 1 26, 1 29'.'30; interview of former NTT official, Apr. 13, I993· 53. Interviews of former NTT official, June 23, 1993; top executive of a medium-sized NTT family firm, Mar. 26, 1993; former high-level Hitachi computer researcher, Apr. 3, I989. 54. Interview of one of Japan's leading telecommunications scholars, Apr. 19, 1989. 55. Top executive at NTT family firm, Mar. 26, 1993. 56. Interview of head of one of NTT's labs, Dec. 5, 1987.
57. Interview of former NTT official, Apr. 13, 1 993; NTT, Denden [0 nen no ayumi, I 3438; NT1� Nihon denshin denwa kOsha 2S nenshi, 3:261-{j1 . 58. NTT, Denden 20 nen no ayumi, 1 87-88; interviews of two former NTT officials, Apr. 1 3, 1 993 , and June 23, 1993 · 59. Interviews of top executive of NTT family firm, Mar. 26, 1993; and Fujitsu executive, Dec. I , 1987. 60. Interview of a former high-level researcher in Hitachi's computer division, Apr. 3, 1989.
Telephone Titan
91
The result of this symbiotic relationship was that the family firms depended heavily on NTT, especially in the early years. For example, NEC, Fujitsu, and Oki together made 62. 5 percent of their sales to NTT in 1954, but this gradu ally decreased to 53.5 percent in 1 957.6] Dependence continued to decline sharply in the 1 970S and early I980s. In I979, for example, NEC relied on NTT for just I 6. I percent of its total sales. By 1983, that had dropped to 8. 1 percent; for Fujitsu, Oki, and Hitachi, dependence declined from 1 5. 1 percent to 7.7 percent, 26.9 percent to I 3 percent, and 2.3 percent to 1 .5 percent respectively.62 This decline was not due to absolute cuts in NTT's orders. Rather, as the firms grew and started to export, sales to NTT become a smaller portion of their total sales. As previously mentioned, the high prices customers paid for telephone serv ices did not result in high NTT profits, which the state regulated. Instead, they subsidized NTT's payments to family members for the manufacture of ex tremely reliable, but very expensive, products.63 "NTT forced over-designed systems onto Japanese [NIT family] companies. It did not care about the price, just the reliability. They were very proud. The requirement for higher reliability led to higher costs, which were to be covered by consumers," explained a top ac ademic expert.64 This risk-averse strategy of exceeding necessary performance levels was not efficient. Much as citizens assume higher defense spending leads to greater security, despite whether this is true or not, they have accepted the high cost of communications services with the understanding that NTT would nurture a set of capable firms and elevate the nation's technological level. Defective products were rare, and when they occurred, NTT did not drop the firm from its family. Instead, it temporarily cut the firm's share of NTT's procurement.65 Firms reacted quickly to such penalties, working hard to im prove their products to gain back market share. When there were serious prob lems, especially in the smaller family firms, NTT sent its engineers to the firm to improve quality. The result was that family members were filled with former I\IT officials. Amakudari of NTT officials to family firms-a lifetime employment system for bureaucrats-underscores the interdependence of state officials and firms and the blur between the public and private sectors in this all-inclusive community. Manufacturing firms' acceptance of these officials reflected their desire to please 6 1 . NTT, Denshin denwajigyo ski, 6:188. 62. Inoue Teruyuki, NTT, kyiiso to bunkatsu no ckokumen suru jOkoka jidai no kyojin (Tokyo, 1 990), 106. 63. Noll and Rosenbluth, "Telecommunications Policy"; interviews of former NIT offi cials on Apr. I 3 , I993, June 23, 1993, and Nov. 14, 1996; former top-level NTT executive, Nov. 14, I 996. 64. Interview, Apr. 19, I 989. 65. Interview of former NIT official, Apr. I3, I993.
92
ReprogrammingJapan
NTT, but also their acceptance that it is only fair to provide state employees, like their private-sector counterparts, job security. When a medium-sized NTT family firm had problems in 1 967, two NTT men "descended from heaven" to become its chairman and president, displac ing the heir apparent who was the son of the firm's founder. The son explained: "We could not survive without NTT, depending on it for about 60 percent of our sales. So we had to make an NTT man president. . . . Since then NTT or ders increased and we could survive. But we lost our independence. This hap pened with many other competitors."66 Oki Electric, always the smallest and weakest of the "big four," has been a re liable landing spot for NTT officials. Many believe this is one reason it has been protected despite relatively poor performance.a7 While NTT pressured family firms to increase capabilities and cut costs, "NTT would never say sayonara to a family member because there are so many amakudari people in these firms," ex plained a top executive of a family firm.6s "The relationship between NTT and the manufacturers was continuous. It was ongoing. There was never any divorce between NTT and its family members," confirmed a former NTT official.69 The telecommunications giant helped nurture these firms, which reciprocated by taking care of retiring NTT officials. Both NTT and its family firms received the benefit provided by this tightly woven network of people loyal to the norms of national autonomy, social order, and market stabilityJo Because of broad-based agreement on the industry's importance and on how to use it to promote both developmental and social goals, the state was insulated enough from the political process to be able to carry out a relatively autonomous policy toward the industry. By promoting core communitarian objectives, NTT also helped the ruling LDP expand its reach to become more of a catch-all party. Still, the Diet, though clearly the weakest of the three main powers-the bu66. Interviews of top executive at NTT family firm, Mar. 26, 1993; and retired Hitachi engineer, Feb. 3, 1993· 67. Interview of one of Japan's leading telecommunications scholars, Apr. 19, 1989.
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93
reaucracy, big business, and the Diet-during this period of catch up in the in dustry, did have formal powers over NTT's budget and prices. While politicians could not make major changes in NTT policies and plans, they could ask em barrassing questions and delay or refuse to approve certain plans. Thus, in con trast to MITI, which had natural insulation and autonomy, in part because of its relatively small budget, NTT had to acquire autonomy by pleasing politicians, who were inevitably attracted to its large budget and impact on growth rates and employment. NTT gained autonomy and promoted political and social stability by provid ing large-scale, stable employment through public works projects, and supply ing politicians with phones, other equipment, and workers to help in election campaigns. NTT family members provided political funds by inflating prices on NTT orders and using the excess amount for political contributions; campaign provisions were allegedly delivered in units of one million yen.71 MPT helped keep LOP members happy by using the political clout of post office heads to help in elections. The head of the post office, often an inherited position, heav ily influenced voting patterns, especially in rural areas where his family would have known residents' families for generations. This is not to say that politicians never asked NTT for specific benefits. They did at times. For example, a famous hot springs resort, popular with politicians, got automatic dialing much earlier than would have occurred without political interference.72 One might also ex pect that family firms gave kickbacks to NTT officials in exchange for special treatment; however, since NTT made relatively stable orders, firms could not expect to suddenly increase their sales quotas. Still, firms wanted to keep NTT happy and did so by providing amakudari jobs. In sum, the NTT family system emerged in ways that reflected core norms of communitarian capitalism-economic development and technological self sufficiency as well as orderly competition and equitable treatment of workers and firms. Elite actors encouraged the evolution of these norms. Since all the major actors-NTT, its union, MPT, the major firms, and the public-had similar objectives, political conflict was minimized.
68. Interview of top executive of NTT family firm, Mar. 26, 1993. 69. Interview of former NTT official, June 23, I993.
70. In 1971, for example, NEe had two high-level officials who were formerly employed by NTT, and Fujitsu, Oki, and Iwasaki Tsushinki had 4, 3, and 6 such officials. (Dokusen Bun seki Kenkyiikai, "Nihon denshin denwa kosha," 1 35 . ) In 1 98 1 , at the top ten telecommunica tions construction firms, which received about 60 percent of NTT's construction orders, 87 of the top 1 5 7 executives (55.4 percent) were from NTT; for several of these firms, two-thirds of
Communitarian capitalism was able to promote both developmental and so cial objectives in the telecommunications industry up through the 1 970s. The state invested heavily to build up a strong national communications carrier as well as a set of technologically sophisticated firms. NTT's R&D and procure ment system nurtured several key firms and assured them stable orders as long
their top executives were from NIT. See Shimoda Hirotsugu, Tsushin kakumei to denden kosh« (Tokyo, 1 9 8 1 ), 1 54. Former NTT officials especially dominated the top management of small firms that relied heavily on NTT. For example, in one firm that depended o n NTT for 40 per cent of its sales, 13 of its 22 top executives came from NTT; in another, which sold 70 percent of its output to NTT, 6 of 13 top officials were former NTT officials. See "Shinsei NTT wa kateru ka," Nikkei bijinesu, Apr. 7, 1997, 3 1 .
7 1 . Nishii Taisuke and Nishimae Teruo, "Rckurutogeito, Shinto taiho de honmaru ni se maru kensatsu no mesu" and "NTr ni suku, seizaikai no riken kozo," Asahi jiinaru, Mar. 17, 1989, 1 6, and Jan. 6, 1989, 1 04, respectively. 72. Interviews of former NTI' officials, one Apr. 1 3 , 1993, the other Nov. 14, 1996.
94
Reprogramming Japan
as they cut costs and advanced technologically. NTT implicitly guaranteed their survival but this guarantee was only valid as long as the industry was becoming stronger over time. The risk-sharing NTT family system assured that all the major players would be supported and that none would dominate or be defeated. Overall, these institutional arrangements reflected key norms. NIT's ability to promote strong firms was heavily contingent on the firms' ability to invest heavily for long-term gains. Keiretsu ties, stable shareholding, and main bank corporate governance arrangements reduced the costs and risks of such investments. Lifetime employment assured that the fruits of corporate and NTT investments in the employees of family firms stayed within the com munity, rather than moving overseas. Citizens also shared the risks and costs of this national effort. They accepted the high cost of phones as an appropriate trade-off for technological advances, national autonomy, and jobs. Thus, NTT's success was contingent on corporate and social arrangements that supported large firms. Several other conditions were critical to the ability of the bureaucraey and eorporations to change the trajectory of the communications industry, building it into one of the world's most technologically sophisticated and reliable, though not necessarily cost-competitive industries. Since NTT was a state-owned mo nopoly, domestic control of the industry was guaranteed. The nation's broader strategy of investing scarce resources in industrial infrastructure, education, and training to bolster absorption capacity and cumulative knowledge in science and technology dearly buttressed efforts to target technologically advanced in dustries such as communications. A very favorable international environment was critical to NTT's ability to gain access to U.S. technology and expertise and to protect its own market up until the early 1980s. Since telephone users bore a substantial part of the financial risk of nurturing the industry's development, much more money was invested at an earlier stage than would otherwise have been available. This helped quickly nurture an industry that would contribute greatly to jobs, national wealth, and technological self-sufficiency for the broader community over the long run. Being in the catch-up stage meant there was a clear model to follow. The industry's stable technological trajectory and the fact that foreign prod ucts could be legally reverse-engineered also contributed to the effectiveness of communitarian capitalism. A broad consensus that communications was critical to long-term economic and military security minimized political interference in the industry, thereby allowing NTT to focus on building up a strong industry as long as it was done in ways that promoted cohesion among members of the com munity. Close government-business relations were crucial to the joint effort to develop an advanced industry. Having NTT nurture a select family of coopera tive but competing firms, rather than producing equipment itself, created a sim ulated market environment in which firms were forced to make increasingly ad-
Telephone Titan
95
vanced products to remain favored NTT suppliers. The state's unwillingness to play an umpire role and to expose the industry to the gales of creative destruc tion provided the firms with a protected domestic greenhouse in which to grow. A sharp change in these conditions in the early 1980s made communitarian capitalism much less effective in terms of promoting technological advances and the overall health of the industry. As the system became less able to deliver on developmental objectives, there was widespread disagreement among the key actors as to how to reshape policies and institutions in ways that would bet ter foster growth and technological advancement. The ensuing political conflict, which is analyzed in the following chapter, was at heart a battle over how to ad just the balance between the social and developmental objectives at the core of communitarian capitalism.
Telecommunications: Obsolete Institutions
4
Telecommunications : Obsolete Institutions
It was in the late I 970S that communitarian capitalism became noticeable as a handicap to the development of the Japanese telecommunications industry. NTT, having reached its primary goals, needed a new mission. The telecon:mu nications business was undergoing dramatic changes. What had been a relatively straightforward technological trajectory focused on building ever more sophisti cated switching machines to provide more efficient phone service had now be come less dear with the introduction of digital technology and the emergence of new services such as data communications. NTT could no longer simply follow AT&T and reverse-engineer its products. But when it had to forge its own path, it became more difficult for NTT to set priorities about how to spend its huge research budget. NTT faced other changing conditions too. Corporate users complained about its high prices and backward data communications services. The US. gov ernment, facing growing trade deficits, began to pressure NTT to procure for eign equipment. There was talk of selling state-owned companies to help pay off rising national debt. The consensus over what NTT ought to do to promote the community's interest was breaking down. There was disagreement among bu reaucrats, politicians, unions, and firms over what on the surface were nitty gritty issues, such as NTT's ownership and structure, how many and what type of new entrants to allow into the industry, and how to regulate pricing. However, at a deeper level, these dashes represented a struggle over how best to reshape norms regarding the optimal level of competition in the industry, labor prac tices, and the role of foreign firms in the market. While key actors tried to ad vance their own narrow interests, their view of those interests was shaped by communitarian norms. With rising foreign demands, new and rapidly changing technologies, and a
97
breakdown in the consensus over telecommunications policies, communitarian capitalism became much less effective in nurturing a strong industry. Although it was in the economic and political interest of NTT and other key state and cor porate actors to dramatically modify their institutions and policies when condi tions changed, norms favoring long-term commitments to employees and sup pliers as well as domestic technology held them back. These norms locked the sector into a set of managers and workers with knowledge and skills oriented toward incremental technological change and manufacturing. This chapter analyzes how social and developmental norms and changing conditions impacted key government and corporate decisions and policies at turning points in the industry since the late 1 9705. The debate over privatizing NTT in the early I 980s, the way MPT regulated NTT and "new" entrants since the 1980s, and the battle in the I 990S over whether to break up NTT were all struggles in which key actors contested these norms and tried to rebalance them. This led to slow, incremental change in the 1 980s and I990S that did not keep up with the dramatic change in the global industry. The result was a serious crisis starting in 2000, one that dramatically weakened NTT and its suppliers. Only then did a consensus emerge that greater competition, corporate restruc turing, and an expanded role for foreign firms were acceptable and in fact neces sary to revitalize the industry. Thus, only after two decades of foot dragging were more far-reaching institutional and policy changes made. Changes were done out of desperation and in an orderly way to give actors time to gradually adjust.
1. Transformation of the International Environment and Rising Doubts about NTT as a Nationalized Monopoly Firm By the early 1 980s, it was apparent that the telecommunications industry that had evolved under communitarian capitalism, though impressive, did not posi� tion the firms to compete in an open market. Costs were high because of NTT's huge payroll, its subsidization of family firms, and the absence of competition. The international environment changed dramatically, and various scandals raised questions about NTT's business practices. It was in this context that MOF, MITI, MPT, NTT, and the LDP started questioning the ownership structure and organization of NTT and the appropriateness of its monopoly. The US. government, facing rising trade deficits with Japan, started to pres sure the Japanese government to open NTT's procurement market. In 1 980, NTT bought 45 percent of Japan's total telecommunications production and had a construction budget Of ¥ q I trillion ($7.54 billion). NTT President Aki gusa Atsuji said NTT would only buy "rags and buckets" from the US. and balked at creating an open bidding system. Such a system, he argued, would ruin the NTT family of firms that had led to high-quality, low-cost, mass man-
98
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Reprogramming Japan
ufacturing and would result in leaks of technical information to foreign com petitors.l Nonetheless, growing foreign pressure, together with demands from domestic constituents such' as Matsushita and Toshiba, which had been ex cluded from bidding for NTT business, became impossible for the government to ignore.2 It succumbed in January 1981, when it agreed to open NTT's procurement to non-NTT family companies. This partial market opening, prompted by foreign pressure, marked the beginning of a process in which key actors started to contest telecommunications policies and their underlying norms, such as preference for domestic technology and products, support for all incumbent firms whether weak or strong, and long-term commitments to em ployees, suppliers, and customers. Once foreigners disrupted the status quo, do mestic firms began to battle for a piece of the market. A debate emerged over which firms would be allowed to bid for NTT's business. There was also discussion about how NTT should be restructured to adapt to the new era. Should it remain public or be privatized? Should it remain a mo nopoly firm or be broken up? Scandals and reports of gross inefficiencies under cut arguments for protecting NTT's monopoly. In 1 979, 145 corporate users publicly criticized NTT's high prices and argued that its data communications business, which was in the red, was overpaying its equipment makers at the ex pense of users. They complained that NTT family firms were foisting old tech nology on them when cheaper, more sophisticated equipment could be bought overseas.3 The norm of "buying Japanese" to support domestic firms, even if it meant a major sacrifice, was beginning to be questioned. Corporate customers saw that they were giving up concrete gains in productivity and efficiency in ex change for some vague goal of increased national strength. Communitarian capitalism's success depends on basic trust that key institu tions will operate in the interest of the broader community. When NTT officials were caught padding their salaries with fictitious travel and entertainment ex penses, that trust began to erode. In the Kinki bureau alone, the irregularities came to ¥1 .28 billion ($5.8 million).4 These scandals increased public dissatis faction with NTT. While such scandals were not new, the large sums involved and their occurrence at a time when the United States and Britain were radically restructuring their telecommunications industries contributed to momentum for reform. The first step was for Prime Minister Suzuki Zenko to fire NTT's President Akigusa. His "rags and buckets" statement and the various scandals made him
1. Shimoda, Tsushin kakumei, 1 30-33. 2. Shimoda Hirotsugu, "Dokusen kigyo, denden kosha no naiyu
gaikan," Ekonomisuto,
Nov. 4, 1 980, 2 1 . 3 . Shimoda,
Tsiishin kakumei, I 1 5-21 , 1 29, and "Dokusen kigyo," 2 1-22. NTT rieki sanmyaku (Tokyo, 1987), 32-33; Ekusa Ato, Shinto NTT no
4. Kikuchi Hisashi,
kiki senryaku (Tokyo, 1986), 4 1 .
99
an easy target. However, Suzuki made the unusual move in January 1981 of re placing him with Shinto Hisashi, an outsider. Shinto had been the protege of Keidanren head, Doko Toshio, when he was at Ishikawajima Harima Industries. Doko, who would soon become the head of the Second Provisional Commission on Administrative Reform (Rinji Gyosei ChOsakai, or Rincho for short), had also headed Toshiba, a firm interested in selling to NIT. A leading politician, Miyazawa Kiichi, also supported Shinto. Soon after, Shinto, who only had pri vate sector experience, implemented the "opening" up of NTT's market, a move that redefined the acceptable role of foreign firms in the economy and dis rupted orderly competition among NTT family firms. Shinto made it clear that he favored NTT's privatization and increased competition. Doko's push to ap point him and his interest in heading NTT were relatively rare cases in Japan of individuals being key agents of change. The decision to allow a corporate execu tive to head a public corporation also reflected a broader shift in the attitude toward the market. There was a growing recognition that business executives would tend to do a better job managing a firm than bureaucrats. Shinto examined NTT's accounts and found the prices it paid for equipment were at least 30-40 percent higher than market levels. This meant NTT, as a normal part of doing business, was overpaying suppliers by at least ¥500 billion ($2.27 billion) a year. NTT, for example, was buying Fujitsu equipment for twice the price Fujitsu charged overseas. NEC sold fax machines to NTT at twice the market price.5 Shinto's investigation of these prices was the first in a series of important struggles that on the surface were about rates, services, and costs, but that were fundamentally clashes over how to adjust the balance between the social and de velopmental goals of NTT and the industry. By the time Shinto took over, com munitarian capitalism was no longer effective in nurturing the industry's com petitiveness. NTT was buying domestic equipment that was far more expensive and less sophisticated than what was available overseas. NTT family firms were using the money to subsidize an export push into the US. rather than to develop more sophisticated equipment. When the system failed to meet its dcvelopmen tal objectives, reforms should have been in order. However, norms regarding job security, managed competition, and the importance of domestic technology constrained the actions state and corporate officials could take.
2. The Erosion of Consensus on NTT These rising doubts about NTT led to serious disagreement among the elite about how NTT should be reorganized and regulated to balance its commit-
�
�
:
5· Yayama Ta�o, 'Dende� uamirii ga kyo u sum 'Shinto kakumei,' '' Bungei shunju, Aug. . and NIshunae, "NIT m sukii," 104; Ekusa, Shinto NTT, 46. I982, 126-28; Nishn
100
Reprogramming Japan
ments to labor, suppliers, and domestic technology with its role in stimulating the economy by offering advanced services at reasonable costs. Until the late 197os, there was a broad consensus that NTT should focus on building a strong communications infrastructure and that this was the best way to promote eco nomic growth, technological capabilities, and sociopolitical stability. NTT had been a strong and effective state actor and the technological path had been clear. It had essentially operated its own industrial policy, using its own research funds and procurement policies to promote the industry. However, as a former high level NTT official put it, once NTf achieved its initial objectives, it "lost a clear target for the future. There were a lot of discussions and confusion."6 A natural monopoly was no longer necessarily the appropriate form for the indus try. "In the catch-up stage, there was a model to copy," but now there was no model to follow, explained an MPT official.7 New technologies were emerging and it was unclear what path the industry would take. Complicating things further, the family firms were increasingly frustrated with NTT's standards. While they initially supported NTT's use of closed stan dards, now that they had caught up and were in a position to export, they found the standards hindered acceptance of their products overseas. In addition, cost plus procurement and risk-sharing research arrangements prevented them from
Telecommunications: Obsolete Institutions
101
compatible with the rapidly changing technological and competitive environ ment the industry now faced. The challenge was to alter them in ways that would allow NTT and its suppliers to continue to provide stable jobs but also remain technologically advanced in an era when the technological paradigm was shifting. Meanwhile, state and corporate actors clashed over how best to reshape social and developmental norms. MOF, MITI, NTT, and big business led the push for change, with support from the LDP; however, family firms and the unions re sisted.8 Since there were diverse views about how best to change NTT-and given that the industry and communitarian capitalism require a broad consensus before change can occur-the debate over privatizing and breaking up NTT was drawn out over two decades. Analysis of key actors' views reveals the schisms that emerged (within a once stable industry) when global and techno logical conditions shifted and deep-seated norms fell out of step with a new eco nomic reality. Reconfiguring the industry had major ramifications for power within the constraints of communi tar ian capitalism. Political self-interest would play an important role in how these details were worked out. However, commu nitarian norms shaped how actors perceived their interests.
becoming efficient and promoting their own research agendas and technologies. While these policies assured stable sales and lifetime employment for their work ers, they encouraged a conservative culture incapable of adapting to the telecom munications revolution that was beginning to take place with the arrival of digi tal technology and the dramatic increase in the use of data communications. In short, many of the conditions responsible for NTT's success had changed. Communitarian capitalism had become dysfunctional. It was no longer operat ing in ways that would promote both its core social and developmental objec tives. NTT now had a huge work force at a time when its phone system needed less and less maintenance. However, legal and social norms made it very difficult to fire employees. It desperately needed more researchers and technicians in the emerging field of data communications, but it was not acceptable to lure mid career engineers from other firms to fill that need. While new R&D partners and suppliers might have brought in new ideas and technologies, it was intricate re lations among NTT and its family firms (and not just in telecommunications but also in the fields of semiconductors and computers) that made switching suppliers and research partners difficult, if not impossible. Real competition
Views about NTT's Future Behind the debate over NTT's future was a move toward "deregulation" ini tiated by Rincho (Commission on Administrative Reform). Reflecting MOF's concern with financial stability, politicians became worried about the growing national debt, much of which came from Japan National Railways, one of three public companies along with NTT and the Japan Tobacco and Salt Monopoly. When Nakasone Yasuhiro became prime minister in I982, he j umped on the deregulation bandwagon. Influenced by such movements abroad, he was trying to ease Japan's entry into the international system by making it a more "normal" nation in terms of taking on a greater military role and having more open mar kets. Nakasone agreed with MOF that rising debt was threatening national au tonomy. The LDP had strong ties with MPT because the ministry's numerous post offices helped get out the vote for the ruling party. Thus, in pushing for NTT's privatization, Nakasone acted to advance his own narrow interests and well as those of key supporters, MPT and MOF.
among NTT's suppliers might have forced weaker firms such as Oki to go bank rupt. However, such a bankruptcy would be socially disruptive. It would weaken cohesion among members of the community and undermine NTT's legitimacy as an effective steward of the industry. These "normal" practices were no longer
8. Johnson, "MITI, MPT, and the Telecom Wars," 177-240; Ian Gow, "Re-regulation, Competition, and New Industries in Japanese Telecommunications," in The Promotion and Regulation of Industry in Japan, ed. Stephen Wilks and Maurice Wright (New York, 1 99 1 ), 256-85; Noll and Rosenbluth, "Telecommunications Policy," I I 9-76; Steven Vogel, Freer
6. Interview, Nov. 14, 1996. 7. Interview, Nov.
ZI,
1996.
Markets, More Rules (Ithaca, 1 996); NTT, ed., Nihon denshin denwa kosha shashi, keiei keitai henkO made no 8 nen no ayumi (Tokyo, 1986), 6z6-33; Kawakita Takao, Tsman yusei sensii (Tokyo, 1985).
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MOF strongly supported NTT's privatization as a means to cut national debt. While tightly controlling the nation's purse helped MOF enhance its power, its primary goal was to bolster national autonomy. For this same reason, it opposed a breakup of NTT, fearing it would hurt NTT's stock price and thereby reduce the government's take from a public offering. MPT officials generally supported privatizing and breaking up NTT be cause it would enhance their power over the industry and weaken NTT's union, a key source of its inefficiency. They were tired of NTT's de facto control over the industry and annoyed that NTT regulated itself by seconding NTT people to MPT, who then approved NTT licenses, for example.9 They felt NTT offi cials were arrogant, treated MPT officials badly, and did not give MPT access to the information it needed to judge NTT's financial situation.lO NTT did seem to always get its way. For example, MPT was unable to block its large telephone rate increase (30 percent) in 1 976. 11 Some MPT conservatives thought privatization could undermine NTT's technological capacities and hurt national security; thus they opposed it. 12 But the pro-reform group won out. "The government's reasons for privatizing NTT were not so pure," said an MPT official.13 MPT had no intention of deregulating the industry in the American or British sense of the word; it had no experience in creating and maintaining open markets; its expertise lay in run ning post offices. MPT supported privatization to advance its narrow self interest. However, it would end up regulating the industry in ways that abided by core norms such as long-term commitments to employees and suppliers, preference for domestic technology, and yokonarabi competition so as to mini mize big winners and losers. NTT President Shinto and his managers favored NTT's privatization. They felt NTT could best grow, advance technologically, and profit if freed from the constraints placed on it as a public company. The market for conventional tele phone service was saturated. NTT wanted the freedom to pursue high growth areas such as data communications even if it meant losing its monopoly over conventional businesses. While some NTT managers feared competition could weaken NTT, the consensus was that NTT would gain more than lose from pri vatization. 9. Shimoda Hirotsugu, "Dokyumento, yiiseisho denkitsiishin seisakukyoku," Nikkei komyunikeishon, Dec. 30, 1985, 84; Suzumura and Nambu, "Intorodakushion," 3; interview of former MPT official, Nov. 1 2, 1 999. 10. Interview of MPT official, Nov. 26, 1996;
I I. Toyokeizai, May 19, 1984, 28.
Toyokeizai, May 1 9, 1984, 28.
12. Ibid., 28-29; Inoue, NTT, kyoso to bunkatsu, 1 90--9 1 . 1 3 · Interview, Oct. 28, 1999; others agree that socio-political rather than economic con cerns were the key reasons behind NTT's privatization (interviews of top-level former NTT official, Nov. 14, 1996, and Keidanren official, July 28, 1995).
103
However, NTT's union, with some 290,000 members, resisted privatization. They were concerned that a privatized NTT would be under greater pressure to boost profits in ways that would negatively impact labor. One benefit to NTT employees, however, was that privatization would lift limits on NTT salaries, which were fixed at the low level of other civil servants. As for breaking up NTT, the union was strongly opposed.14 When privatization became inevitable, the union's chairman got the union to go along with the consensus in exchange for assurance of employment security and that NTT would not be broken up. I S MITI supported the idea of privatizing NTT. It was interested in bolstering its power by wrestling control of the industry from MPT. However, its primary concern was with Japan's competitiveness and the well-being of key telecommu nications firms that were also key players in semiconductors and computers, which it had been promoting for decades. MITI felt competition was critical to improving the performance of the telecommunications industry. Given the con fluence of technologies in these related industries, it was natural for MITI to want to be in charge of this industry too. Keidanren, which represented big business, also wanted to introduce compe tition and greater foreign participation to show the world Japan was opening up key markets. In addition, it saw privatization of NTT as a means to boost state revenue and thereby circumvent corporate tax increases. Corporate users of NTT services backed privatization, believing it would reduce prices. Non-NTT family firms, such as Toshiba, Matsushita, and Kyocera, strongly supported the change, thinking it would help them sell more to NTT. In sum, these actors fa vored slow, incremental change to advance their narrow interests. However, their lack of support for broad liberalization of the economy reflected fear of seriously disrupting social order and national autonomy. Small and medium-sized NTT family firms opposed NTT's privatization, fearing disruption of the status quo would doom them. The larger family firms, though opposed, did not strongly resist it. They were already coping with a par tial opening of NTT's market and expected benefits to exceed costs. They antic ipated losing some NTT orders but knew NTT's unique standards and the high cost of developing products to meet those standards would protect them from vigorous competition. Furthermore, they thought privatization, which the U.S. supported, would help boost their exports to the United States.16 14· "Kabushiki gaisha denden no shogeki,"
TiJyokeizai, Mar. 19, 1983, 25; Takehiko
Musashi, "Japanese Telecommunications Policy," Harvard University Center for Information Policy Research, 1 985, 29; Interview of NTT official, Apr. 4, 1989. IS· Eiji Kawahata, "Bureaucracy, Politics, and Business in Japan: The Ministry of Post and Telecommunications and Contemporary Economic Policymaking," Ph.D. diss., University of Pittsburgh, 1 996, 58; "NTT vs. NCC ryokin kyoso shinario,"
Nikkei komyunikeishon, Oct. 3,
1988, 73. 1 6. Shimoda, "Dokusen kigyo," 20, and
Tsushin kakumei, I S S-56.
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Reprogramming Japan
None of these actors favored drastic change in the industry. They were trying to reshape not get rid of communitarian norms. The struggle was over how best to balance social and developmental concerns with the reality of competing in a dramatically changed global technological environment. Up until the 1980s, the system was able to nurture the industry while still promoting social stability, technological self-sufficiency, and orderly competition. Now that the system no longer helped the industry's development, leaders had different views about how to change the status quo. While the key actors worked to advance their own economic and political interests, communitarian norms shaped how they per ceived their interests. There would be a move toward privatization and more competition. However, as in Germany and France, change would be slow and the state would heavily manage the process.17 Communitarian concerns would prevail: NTT would remain subject to state guidance and concerns about na tional security. It would continue to support the same set of firms and defend its closed standards even when they were out of sync with global trends. It would not be permitted to fire workers.
3. The Partial Privatization of NTT, 1985-90 In its final 1982 report, the DokO-led Rincho recommended that NTT be broken up and privatized. However, leaders had seen the confusion impending breakup had caused in the U.S. and were afraid to plunge their industry into such chaos. The report thus emphasized privatization and downplayed breakup. The LOP, which intermediated among squabbling ministries, suggested a com promise: NTT would be kept whole and only partially privatized. 18 Breaking up NTT would create new competition and potentially introduce instability. Some firms might go out of business. The state's job would then be to make sure there was fair competition, a role it was unaccustomed to. MPT wanted to avoid such a radical transformation of the state's role. However, hoping to increase its con trol over the industry, MPT had lobbied hard for a breakup and would lose face if NTT remained whole. The only alternative that would preserve the norms of consensus decision-making and thereby save the face of each player was to delay the decision. So there were years of foot dragging and compromise on the issue. Still, the political struggle that led to the 1 985 partial privatization of NTT did modify norms regarding acceptable levels of competition and thereby repre sented the beginning of a slow, incremental shift toward emphasizing user bene17. Vogel, Freer Markets, More Rules. 18. Musashi, "Japanese Telecommunications Policy," 13; Hiramatsu Hiroshi, "Homu rareru kokyosei, denden kosha kaikaku
0 megutte," Sekai, Sept. 1982, 60; Yamamoto Yujiro, "Denden mineika wa naze kinkyii kadaika," Chuo koron, June 1983, 163·
Telecommunications: Obsolete Institutions
1 05
fits and economic performance. In this sense, it represented the first crack in the status quo that had lasted for some thirty-three years. The result was a number of significant changes: legislation stripped NTT of its monopoly, partially pri vatized it, introduced "competition in principle, regulation as an exception," and allowed new firms, including foreign ones, to enter some telecom niches. 19 Ian Gow noted that this was not deregulation but rather "reregulation" or "reg ulatory alignment," and Steven Vogel furthered this analysis in Freer Markets,
More Rules. 20 A move toward reregulation was no surprise. u.S.-style deregulation was never on the agenda and new rules to create and maintain markets are always a part of regulatory reform. Given their concerns about national autonomy and domestic technological capacities, none of the ministries ever proposed com pletely privatizing NTT. From the outset, the plan was for the state to own a minimum of 30 percent of the shares (it held about two-thirds of the stock until the late 1 990S, and 45.9 percent in 2004). No ministry suggested that NTT be allowed to abandon its obligation to guarantee universal service and commer cialize and diffuse its basic research. It was assumed that NTT would continue to provide secure jobs, support its large suppliers, and promote domestic tech nology to serve the objectives of the broader community even though this be havior countered its economic interest. Partially privatizing NTT and postponing a decision about its breakup was a risk-averse compromise. To achieve consensus, all major actors got something. MOP was free to sell stock to cut the national debt. MPT gained new regulatory powers, making Yiiseishoeika (Ministry of Posts and Telecommunications ization) a more accurate description of what happened to NTT than mineika (privatization). NTT was free to enter new businesses. Its union received a more flexible salary system but had to accept pressures for early retirement. Firms ex cluded from the NTT family were now allowed to sell to NT1: although sales were limited to simple equipment that did not involve joint development with NTT's labs. Nakasone could respond to U.S. criticism ofJapan's closed markets by saying he was deregulating the market. Since all actors received a bit of what they wanted, the resolution avoided clear winners and losers and helped main tain a strong sense of community. While the debate often focused on issues such as reducing national debt, al lowing new entrants, and improving NTT salaries, at its center was an epic struggle among the ministries, big business, and unions that resulted in the re shaping of norms regarding competition and labor that had been in place for over three decades. What emerged from the struggles was the notion that a cer19. MPT,
66.
Tsitshin hakusho, 1985, 1-18; NIT, ed., Nihon denshin denwa kosha shashi, 6{2-
20. Gow, "Re-regulation," 258; Vogel, Freer Markets,
More Rules.
Reprogramming Japan
106
Telecommunications: Obsolete Institutions
�
tain degree of competition was critical to enhancing performance; that w il� workers should have security, their wages should be higher than those of cml servants; and that exclusive' family supplier relationships imposed too great a cost on users. A new consensus emerged that the market should be gradually opened up. The LDP, following the lead of MOF, MITI, and big business, en shrined these normative changes in a set of new laws and policies. NTT's liberalization and partial privatization was done in ways that gave family firms time to adjust. In 1 9 8 1 , the first year of open procurement, NTT still purchased 92 percent of its equipment from family members.2! Large NTT family makers actually sold 40 percent more to NTT the year it was privatized than the previous year.22 They benefited greatly from a decision, made just prior to privatization, to have NTT invest heavily in INS (Information Network Sys tem, Japan's version of lSDN or Integrated Service Digital Networks). This de cision was made in part to assure large family members substantial orders after privatization.23 Protecting the large firms meant small and medium-sized family firms bore most of the pain. They were supplying the simple equipment that new entrants could sell more cheaply once the market opened up. The sales of one medium-sized family firm to NTT dropped from 50 percent to 30 percent of its total sales within a few years after NTT's privatization.24 These firms were still supported, though at lower levels; the system continued to give greatest pri ority to the large, diversified firms that produced the most sophisticated equip ment and were key actors in other strategic industries such as semiconductors and computers. Although foreign firms such as Northern Telecom of Canada managed to sell some large systems to NTT, the real beneficiaries were domestic firms. The LDP which led this deregulatory movement for political not economic reasons, ende up losing formal control over NTT budgets, investment plans, and price changes. Instead of a movement toward deregulation and reduced state control, state capacity remained strong, though it shifted from NTT to MPT25 While the 1 985 decision was treated as a fundamental revamping of the industry, an MPT official admitted in 1 996 that little had changed at NTT since privatiza tion, because there has been a "no touch" policy toward the sacred COW.26 Thus, the clashes leading to the 1 985 changes were resolved in ways that made new en trants acceptable. However, competition was managed. No firm was allowed to dominate and none were allowed to go bankrupt. This maintained a strong sense
d
2 1 . Shimoda, 22. Inoue,
Tsushin kakumei, 1 53. NTT, kyosii to bunkatsu, 104.
23. Hiramatsu, "Homurareru kokyosei," 59; NTT, ed.,
.
Nihon denshin denwa kOsha shashl,
107
of prospering together. NTT and the firms still provided job security and all re lied on NTT's technology. This shows how in a communitarian capitalist sys tem, even a major crisis involving a clash of powerful interests results in few rad ical changes because of the power of norms. The resolution of these conflicts resulted in the reshaping of norms and significant but slow, incremental changes in institutions and policies.
MPT Balances Its Political and Social Interests As a result of NTT's partial privatization, MPT gained regulatory authority over pricing and new market entrants. This authority was particularly signifi cant because MPT could make decisions based on its discretion rather than an agreed upon set of rules.27 Decisions that required Diet approval in the past (and were effectively made by NTT) were now under MPT's control. Power therefore shifted from NTT to MPT However, MPT's power was constrained by a lack of consenslls on how to use NTT for the broader community. MPT had to bargain with MOF, big business, NTT, and the LDP in creating and im plementing policies. Nevertheless, the emergence of "new" telecommunications players (actually, they were all rooted in existing firms) in newly established niches such as the long-distance market meant MPT had far broader power than in the days of NTT's monopoly. This substantially raised its prestige and expanded its perks, such as the ability to send retired officials to firms under its jurisdiction through the process of amakudari. Still, MPT used its new powers in ways that maintained core communitarian norms. While it claimed it played the neutral umpire role like the Federal Com munications Commission (FCC) in the U.S. and promoted the development of a wide variety of services at low prices, its actions seldom matched its rhetoric. MPT repeatedly used its authority over NTT and "new" entrants to protect weak firms from failing and to bar smaller companies from entering the sector. For example, in many market segments, MPT only allowed well-established firms with strong ties to the elite to enter the market. This ensured that only conservative firms that would follow MPT's lead and promote communal objec tives would be allowed into the market. This was a move toward more competi tion, but the move was slow, incremental, and managed so as not to threaten order in the industry. In the long-distance market, MPT allowed in three firms, which were backed by large firms. Daini Denden (DDI) was financed by Kyocera, Sony, Sumitomo Trust, and Mitsubishi Trust; Japan Telecom was supported by Japan Railways-
25-26, 68--69 , 1 84-226. 2+ Interview of high-level official of medium-sized NTT family firm, Mar. 26, 1993. 25. Suzumura and Nambu, "Intorodakushion," 3-25; Gow, "Reregulation"; Vogel,
Markets, More Rules, 1 6 1 . 26. Interview, Nov. 2 1 , 1996.
Freer
27· Suzumura and Nambu, "Intorodakushion," and Okuno Masahiro and Suzumura Ko taro," "Denki tsiishin jigyo no kisei to seifu no yakuwari," 104.
Nihon no denki tsushin, 1-25, 75-
108
Reprogramming Japan
related firms, several trading companies, and the Ministry of Transportation; and Teleway Japan (TWJ) was backed by Toyota, several trading companies, and the Ministry of Construction. Rather than allow these new common carriers (NCCs) to set prices independently, MPT pressured them to all have the same price-one significantly lower than NTT's. This yokonarabi behavior meant the "new" entrants would not compete against each other and instead as a group would take market share from NTT. When TWJ proposed lowering its prices, MPT rejected the proposal.28 When a regional NCC applied to offer a paging service and another firm proposed offering intra-office extension services, MPT said their proposed prices were too low.29 MPT thereby assured that while there would be some competition, it would not be so intense as to launch a price war that might destabilize markets and result in the failure of some incumbent firms. NTT would lose market share but only gradually. Market stability would be maintained. Consumers benefited from NCC prices, which were lower than ;\ITT's. Nonetheless, gains would have been greater had the NCCs been allowed to set prices as low as they desired. Long distance prices, for example, declined far less than in the U.S. where firms such as MCI were free to cut prices as deeply as they wanted. Creating cooperative oligopolies in the various market segments stifled incentives for NTT and the NCCs to offer new services. It also prevented firms with superior organizations, efficiency, or product strategies from domi nating the market. There was no incentive for firms to take risks and innovate, since any gains that resulted would not result in increased market share. To the extent that change occurred, it was driven and managed by MPT and shaped in ways that supported yokonarabi competition among select domestic firms. The economic gains from these new markets would be shared across a broader group of firms than in the past. However, there was no room for a completely new firm like MCl to break into the market. MPT also managed competition in the local phone service market. It thought the market could only support three new entrants, so it blocked the entry of three regional electric power firms.30 The major obstacle to local market entrants offering national service was NTT's huge telephone infrastructure. MPT could have created healthy competition by pressuring NTT to reduce its access charges, the fees carriers pay to gain access to NTT's local lines. " It was clear from the time of privatization that the local loop charges were the major prob lem," admitted a former MPT official.31 Cutting access fees was the approach taken in the US. However, NTT in sisted that its access charges reflected its high costs, including the cost of build28. "Tsiishin jiyiika no seitai," Nikkei komyunikeishon, Jan. 18, 1993, 48. 29. Ibid., 48-49. 30. "Chiiki tsiishin ga okashii," Nikkei komyunikeishon, July 6, 1992, 7()-,] I . 3 1 . Interview, Nov. 1 2, I999.
Telecommunications: Obsolete Institutions
109
ing its telephone network and its large labor force. As long as NTT's costs were high, it was not deemed appropriate for MPT to pressure it to cut prices. U.S. telephone companies made similar arguments, but regulators set access charges based on costs determined independently. MPT also limited new entrants to the mobile phone market to avoid exces sive competition. Most experts expected cellular phone service to be popular, since Japanese people spend little time at home and since NTT charges ¥72,ooo (about $720) for installing a landline phone. However, MPT, to advance its own political interests and s!lpport a stable oligopoly of existing firms, unnecessarily restricted bandwidth usage to allow just a handful of companies already compet ing in the long distance industry to enter the mobile sector. It initially allowed in only two firms: 001, backed by Sony and Kyocera, and Nippon Ido Tsushin (100), backed by Toyota. MPT had 100 compete against NTT in the prof itable eastern part of Japan, which includes Tokyo. It had 001, which used Mo torola technology, compete against NTT in the western part of the country, which includes Osaka. Motorola and the U S. Trade Representative complained that 001 was left out of the lucrative Tokyo market, and in June I 990 MPT al lowed DDl to operate in the Tokyo-Nagoya area. Once again, foreign pressure was critical to forcing a move toward more competitive markets. In sum, instead of creating the market-oriented system it publicly espoused, MPT planted well-established domestic firms in the various market niches and forced them into yokonarabi behavior. Though it espoused market competition, MPT found it difficult to counter deeply held norms regarding orderly compe tition and support for established firms. It was careful not to seriously threaten the "national champion" (NTT) nor hurt NTT's stock price and thereby pro voke MOF's wrath. It worked to keep NTT and the new entrants alive and well even though these policies caused higher product prices.32 It refused to play the umpire role and did not allow vigorous competition that would lead to distinct winners and losers. Thus, while MPT pursued its own interest, its interests were heavily shaped by communitarian norms.
4. Further Postponement of Decision about NTT's Breakup and the 1 999 "Breakup" of NTT, 1 990-99
Unwilling to make a decision that would benefit one stakeholder at the ex pense of another, the state continued to cling to the status quo. In its 1 990 Telecommunications Council report, MPT recommended that NTT be broken up into three firms. NTT resisted, saying a breakup would make it difficult to provide comprehensive services, delay digitalization, hurt its R&D capabilities 32. Nikkei komyunikeishon, Oct. 3, 1988, 60-6 1; interview of current and former MPT of
ficials, Oct. 28, 1999. and Nov. 12, 1999.
1 10
Reprogramming Japan
and stock price, and require it to raise prices on local calls.33 NTT's traditional suppliers and its union were also opposed; and Keidanren, MITI, the FTC, and the Economic Planning Agency all said they needed more time to consider the issue. There was also growing distrust of MPT and its argument about the eco nomic benefits of a breakup.34 MOF, concerned about the value ofNTT's shares, provided the most intense opposition to the breakup. After MPT's plan to break up NTT was released, NTT's stock price dropped below the price at which MOF had recently issued it, scaring off investors and forcing MOF to delay selling more shares. Strong opposition also reflected growing concern about a breakup's impact on employ ment, NTT's laboratories, the nation's technological level and autonomy, as well as NTT's long-run competitiveness. Thus even when NTT President Shinto was entangled in the high-profile 1989 Recruit scandal, highlighting NTT's detrimental politicization, leaders did not demand a breakup. Still, saving face is critical in a svstem in which losers must be avoided at all costs. To help MPT save face, a decision was delayed again, this time until fiscal year 1995 (April 1 995-March 1 996). MPT did not give up. In its February 1 996 Telecommunications Council re port, it once again recommended dividing NTT into three firms. However, by this time, MPT's credibility was weak. Users, businesspeople, and government officials had assumed privatization and new entrants would result in better and cheaper services. Yet, all the NCCs had similar prices and no new services. While competition between the NCCs and NTT had brought down long distance fees, NTT had been allowed to raise local rates, and phone installation fees remained high. A growing number of community members were beginning to doubt whether telecommunications policies were still in the broader interest of the communitv or whether they were simply being justified as such. Increas ingly it seemed like the benefits �f the system were focused on a narrow subset of the community-NT'I� its suppliers, and their huge number of employees. Moreover, MPT's policies remained shrouded in secrecy. It never explained how it set prices or decided which firms could enter different market segments. It used "administrative guidance" to pressure firms to set prices according to its dictates.35 Before NTT's partial privatization, there had been some checks and balances because MOF oversaw the budget and the Diet formally approved it. Now, some suggested, MPT's power was largely unchecked, leading it to in-
Telecommunications: Obsolete Institutions
III
creasingly promote its own interests at the expense of the broader community. Many argued MPT had betrayed users by not requiring NTT to keep its prom ise to open up its networks and provide new services.36 One former NTT official admitted in 1996 that little had changed at NTT since privatization: "the form has changed but not the substance; corporate culture does not change quickly."37 Others questioned MPT's motivations, accusing it of trying to enhance its power by breaking NTT into smaller firms less able to oppose its policies. Many believed MPT only allowed in relatively small "new" entrants, many smaller than appropriate to compete with the NTT, to increase amakudari spots for its employees.38 "MPT used its power for themselves," explained a top computer researcher and former head of :,\lITI's Information Processing Promotion Asso ciation (IPA).39 MPT's heavy hand in the management of "new entrants" is reflected in nu merous amakudari positions. For example, all three Tokyo-based firms offering personal handy-phone systems, a proprietary cellular-phone system, had for mer MPT directors in vice president positions in the mid-to-Iate 1 990S. A sen ior official at one of these firms said his company did not decide to hire an MPT person; rather, MPT made the decision. "The ministry demanded almost everything from us-a good salary for the former ministry official, plus a chauf feur, a secretary, a house and above all, the right to speak on behalf of the com pany. Moreover, they did that as if our receiving a ministry official had already been decided. But we had not even discussed it before then," he explained .40 An executive at a paging service firm said his industry was divided into thirty-one small regional firms "only to give all the regional heads of the ministry places to enjoy their retired life"; altogether fifty-two former MPT officials were top ex ecutives at thirty-three telecommunications firms in early 1 996.41 NTT officials also enjoyed this benefit. In 200 1 , 1 39 of 224 (about 60 percent) of the directors at the top 19 telecommunications construction firms were former NTT offi cials; NTT buys some 70 percent of these firms' sales, so the tie is criticalY
36. Ibid. , 56; Nikkei komyunikeishon, Oct. 3, 1988, 67; "NTT bunkatsu, ketsuron made mo 1 nen," Nikkei komyunikeishon, Apr. IS, 1996, 66; Nikkei komyunikeishon, Jan. 2, 1 995, 1 24-27. 37· Interview, Nov. 14, 1996. 38. Discussion with STA official, Oct. 22, 1999; Koichi Nakano, "Becoming a 'Policy'
Ministry: The Organization and Amakudari of the Ministry of Posts and Telecommunica 33. "Dentsii shin toshin wa mazu 'NTT bunkatsu' no ketsuron ariki," Ekotlomisuto, Mar. 27, 1 990, 29; MP'I; Tsuskin hakusho, 1 990, 126-2S. 34. "Fuin tokareru NTT bunkatsu giron," Nikkei komyunikeishon, Jan. 2, 1995, 1 36;
Nambu Tsuruhiko, "NTT bunkatsu toshin no ronkyo wa hakujaku da," Ekonomisuto, Mar. 27, 1990 , 30-33.
35. "Tsushin jiyuka no seitai," Nikkei komyunikeishon, Jan. IS, 1993, 46-47, 55-56.
tions," Journal ofJapanese Studies 24, no. 1 ( 1 998): !O8. 39. Interview, Oct. 27, 1 999. 40. Joshua Ogawa, "Posts Ministry's NTT-Breakup Bid Called Selfish," Nikkei Weekiy,
Feb. 26, 1996, 1 , 23. 41. Ibid. 42. "Oryo 'amakudari' ga monogataru NTT no fuamirii kigyo shihai," Tiiyokeizai, Sept. 29, 200 1 , 48.
1 12
Telecommunications: Obsolete Institutions
Reprogramming Japan
Growing awareness that MPT's proposal was driven primarily by narrow self-interest, plus an overall lack of consensus among key actors on NTT's role in the economy, left few interested in the breakup issue when it was revisited in
1 995. Because MOF thought NTT's stock price would not go much lower, it was less concerned than in the past about the impact of a breakup. MPT's power plays at the expense of the industry's health led to growing discussion of priva tizing its core postal businesses. It ultimately led to its drastic demotion in 200I, when it was placed under the Ministry of Public Management, Home Affairs, and Posts and Telecommunications (MPHPT) in a reorganization of ministries, while MOF and MITI remained intact. MPT did survive MITI's attempt to take over jurisdiction of the industry, even though some MPT officials felt such a transfer of power would have been the most rational decision for the benefit of users and the industry as a whole.43 The lack of a broad consensus about how to use NTT for the community's interest, reflecting conflict over how to best bal ance economic and social imperatives, paralyzed the policymaking process. As a result, a decision was postponed for another year.
1 13
giants such as AT&T, British Telecom (BT), Deutsche Telecom (DT), and MCI.47 The compromise was "primarily aimed at saving MPT's face," explained a former high-level NTT official.48 The "solution" also allowed MPT to tell the U.S. it broke up and thus weakened NTT.49 Leaders had been so concerned with balancing interests among the various stakeholders that they were incapable of undertaking major changes, even though there were strong economic reasons to do so. The result was a series of baby steps which, over time, led to significant change in the industry but which gave each player ample time to adjust. The "breakup" did not increase competition. NTT East and West still mo nopolize local services in their respective areas. New competitors could not emerge in those regions because of NTT's high charges for access to its local network and high construction costs, which make it impractical to build a new network. "The local loop is a bottleneck-a big barrier to entry because of high construction costs," admitted an MPT official, "but it is a valuable national treasure." 50 Many argued that the "breakup" strengthened the NTT group by bringing successful firms that had been nominally independent, such as NTT DoCoMo and NTT Data Communications, under the umbrella and control of the NTT
The Late 1996 Compromise and "Breakup " in 1999 The political stalemate over the "breakup" decision ended in December 1 996 when the key actors reached a compromise. NTT would be broken up into three firms--a long-distance company and two local companies. These firms, along with other NTT firms previously spun off, such as NTT DoCoMo and NTT Data Communications, would be placed under a holding company. NTT's labs would be part of the holding company to assure they would continue to advance the nation's technological capabilities.44 "This was a Japanese-style compro mise," explained a former MITI official. "Something was done, but the effect of it is nothing."45 "Japanese leaders do not want to create a loser. With this com promise MPT can say 'we broke up NTT' and NTT can say 'we were not bro
holding company.51 Strengthening NTT goes against everything MPT said it was trying to do--promote competition and offer lower-cost services. Indeed, despite almost twenty years of deregulation, NTT continues to have a large share of most market niches. In the local phone market, NTT's share dropped to 78.3 percent in 2003 from 99.7 percent in 1 997. In the long-distance market, in which MPT pushed competitors to lower prices, NTT's share fell to 47.2 percent in 2002 from 62.7 percent in 1 997. In the cellular phone market, NTT's share rose from 48.4 percent in 1 995 to 64.3 percent in 2002.52 However, there has been a sharp increase in the number of telecommunications firms since
2000. Thus, though the breakup did not create truly independent firms as did the breakup of AT&T, it did disrupt the status quo and, together with other
ken up.' No one loses," explained the Japanese head of a foreign IP (internet protocol) server company.46 Moreover, leaders feared a true breakup would leave Japan without a national champion that over time could compete against global
47· Interviews of prominent professor long involved in the industry, July 2, 1 997; a high-
level MPT official, July 3, ZooI ; high-level manager at NIT Communications, June z6, 200 1 . 48. Interview, Nov. 14, 1 996. 49· Interview of former MITI official, Oct. 18, 1999. 50. Interview, Oct. z8, 1 999.
43. Interview, Nov. 12, 1999. 44. MPT, Tsiishin hakusho, 2000, I I 7. 45. Interview of former MITI official, Oct. 18, 1999; "NTT saihensei no seisan to kuna,"
Daiyamondo, Jan. 23, 1 999, I 06 7; Hamada Kazuyuki, "JoM tsushin senryaku naki NTT bunkatsu," Voice, Aug. 1999, 1 20. -
46. Chairman of Denver-based internet firm, panel discussion, Foreign Correspondents Club ofJapan, Oct. 18, 1999.
5 I. Yamaguchi Takashi, "NTT kabushiki g-aishaka no michi," Keizai, July 1999, no. 46, 45,
:
67; ' Gurupuka de semaru NTT tsushin jigyosha no erabikata ga samakawari," Nikkei komyu
ntkmhon, Mar. 1 5, 1 999, 2 1 4- 1 5 ; Nikkei komyunikeishon, Mar. I , 1999, 83. 52. MPHPT, ed.,Jiiho tsiishin hakusho, 2002 (Tokyo, 2002), 1 56, 162; "Torahikku kara mita waga kuni no tsiishin riyo jokyo," zo03, 1 0 at www.soumu.go.jp/s-newsIz003/03 1212-J .html.
1 14
Telecommunications: Obsolete Institutions
Reprogramming Japan
changes, represented incremental progress toward changing communitarian capitalism in ways that made greater competition more acceptable in this sector. While deregulation of the sector generally resulted in orderly, incremental change, there is one exception-the emergence of NTT DoCoMo, the world's leading mobile-phone company, which has more than 44 million customers and a 60 percent share of the domestic market. Many point to the success of NTT DoCoMo and its wireless internet i-mode service as evidence that large, bureau cratic Japanese firms can respond quickly and innovatively to changing market conditions. However, its success was heavily contingent on NTT's high fees for landlines, which made cheaper mobile phones an economically rational choice. Anyone could have succeeded in the mobile phone market because of the high installation fee for a regular phone, admitted an MPHPT official.53 Several factors help explain why DoCoMo was less bogged down by commu nitarian commitments than the other NTT firms and their equipment suppli ers. First, it was a new firm in a new industry not dominated by foreign firms. Started as a division of NTT in 1992, it was spun off in October 1998 through an IPO (initial public offering). Thus, unlike the incumbents in the landline phone business, which were always trying to catch up with foreign firms and were stuck with a set of workers and organizational capacities developed over many decades, DoCoMo was a new firm and a first mover, free to move quickly and to establish its own dominant standard. Second, NTT headquarters mis judged this market's promise and neglected it initially, allowing it to be run by a renegade manager and outside experts. DoCoMo's first president, Oboshi Koji, had a reputation in NTT for being too outspoken and individualistic, and was appointed president as a kind of exile to a less-than-promising division. When DoCoMo's business unexpectedly soared, after MPT opened the mobile market in 1994 because of strong pressure from Motorola and the U.S. government, Oboshi, rather than turning to older insiders with outdated skills, turned to young outside experts for help. For example, to develop i-mode service, which is essentially e-mail over a mobile phone, he hired a female editor of the Recruit Corporation's magazine and a local entrepreneur with a Wharton MBA.54 DoCoMo's success with i-mode service shows that large, hierarchical compa nies can spin off new firms with innovative marketing approaches and a unique business model to meet customers' needs. Its small phones demonstrate excel lence in manufacturing and miniaturization skills. However, i-mode is not a
53. Interview, ]uiy 9, 2002. 54. They decided i-mode would provide entertainment content for urban youth, who had little experience with the internet, and thus, were not accustomed to free internet content. Youngsters lacked experience because NTT's high per-minute local charges made it very ex pensive to use the internet and send e-mail. See John M. Ratliff, "NTT DoCoMo and Its
i
mode Success: Origins and Implications," California Management Review 44, no. 3 (2002): 58.
1 15
major technological innovation, admitted an NTT Communications manager. 55 It has been successful i n large part because it serves the needs of a particular cul ture of Japanese teenage girls, who like to send brief messages to each other. "DoCoMo's technology is not so special. Its success is due to emotions. If young people do not have i-mode, they will be isolated, kept out of the group. That is the biggest reason for its success," explained a MPHPT official; he points out that DoCoMo is also successful because parents are willing to pay $1 00-$200 in monthly phone bills for each child.56 Still, DoCoMo stands out as an exception in the broader trend toward slow, incremental change in the industry.
5. Contested Norms, and Institutional and Policy Change, 2000-present
Though in many ways simply a face-saving device, NTT's division into three firms under a holding company in 1 999 represented a significant baby step in a system of institutional rigidities. It sparked user demands for more competition, lower prices, the elimination of outmoded regulations, and improved efficiency of NTT firms. It occurred in the midst of a financial crisis and at a time when the nation's inability to exploit new technologies made possible by the rise of the internet was exacerbating fears that the nation's rigid capitalist system, rather than working in the interest of the broader community, was dragging the coun try down. High rates for landline phones, for example, in which local calls were metered by the minute, made internet use prohibitively expensive at a time when its widespread use was promising huge productivity and efficiency gains. By 2000, due to growing concerns about the health of the major firms and the industry more broadly, MPHPT and NTT started modifying their policies in more significant ways. MPHPT allowed more foreign firms to enter the market and began to wholeheartedly support the use of internet protocol (IP) technolo gies even though this meant a move away from NTT's standards. This led all the firms to start moving away from NTT standards around the same time. NTT also made it easier for consumers to choose competitors by allowing them to keep their telephone numbers when they switched providers. MPHPT called for NTT to open up local networks, promote competition among NTT group companies, reduce its ownership of NTT Communications and KTT DoCoMo, and improve the efficiency of NTT East and NTT West. As a result, NTT East and NTT West pressured some 1 1 0,000 workers to either retire early or be moved to subsidiaries and suffer a 30 percent pay cut. Competition among NTT firms on internet services has increased and there is talk of reducing KTT 55. Interview, July 10, 2002; Ratliff, "NTf DoCoMo," 56. 56. Ibid.; interview, July 9, 2002.
1 16
Reprogramming Japan
Holding Company's shareholdings of DoCoMo. Legal changes in ZOOI intro duced asymmetric regulations to allow smaller firms to compete more effec tively with NTT. 57 Control over entry and price changes, with minor excep tions, have changed from requiring MPHPT's approval beforehand to simply reporting the changes to the ministry after the fact. NTT still has a great deal of power. For example, despite MPHPT's insistence that NTT eliminate the ¥7z,000 installation fee for a landline telephone line in 2002, it continued to charge this fee in 2004.58
8
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Competition has lowered local phone rates. For example, since 1976, NTT charged ¥ 1 0 for a three-minute local call. However, in ZOOI, in response to com petition from mobile phones and IP telephony, NTT cut the price to ¥8· S · Long distance rates have declined b y 8 0 percent since 1986, due t o competition from NCCs. International rates have fallen by 95 percent since 198 5 ·59 Interna tional rates fell at a sharper rate in part because of the growing use of low-cost international telephone "callback" providers that allowed consumers to use services based in the United States. These changes, though significant, have been slow in coming. Moreover, while prices are much lower than in the past, they are still quite high. According to a 2003 OECD survey, Japan's landline residential and business telephone prices were second highest of OECD countries.6O In part because of these high prices, the size of Japan's telecommunications market in dollar terms is very large: in 200 1 , it was about 80 percent that of the US., even though its GDP was only about half that of the US., and it was more than four times the size of the German, British, and French markets (Figure 4. I). These high prices, together with growing saturation of the domestic mobile phone market and technological change that is forcing NTT and its equipment makers to use foreign-dominated internet technologies, are beginning to trans form the industry in ways that are undermining communitarian capitalism. These economic and technological forces are leading to greater competition, a dramatic weakening of NTT and its traditional suppliers, and a sharp rise in de pendence on foreign technology. An example of how these forces are combining to undermine the status quo is the sharp rise in IP telephony since 2000. IP telephony firms charged ¥7·S for three minutes for calls anywhere in the world. In comparison, fixed-line services charged ¥8.S for three minutes for a local call, ¥zo-8o for a 3-minute long dis-
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Regulatory Reform in the Telecommunications Sector (Tokyo, 2001).
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1 18
Telecommunications: Obsolete Institutions
Reprogramming Japan
tance call, and ¥ 1 5-60 for a one-minute call to the US.6\ Initially IP phones, due to lower voice quality, were primarily for casual use; but in July 2004, many large firms, including NEC; Hitachi, and Tokyo Gas, announced they were switching tens of thousands of their office landline phones to IP phones to cut phone bills by 20 percent. By 2004, due to IP telephony and cellular phone use, NTT's landline revenues had plunged by 20 percent. This innovation forced NTT to commit itself to an IP network and standards, a virtual surrender to the foreign firms that control these standards. NTT's high by-the-minute charges for local calls and technological change also spurred a move toward lower-cost ADSL (asymmetric digital subscriber line) services. In 1 999, before these services became prevalent, internet penetra tion in Japan was 200 users per 1 ,000 people compared to 400 in the US., 325 in Finland, and 290 in Singapore.62 However, due to low cost ADSL services of fered by an outsider-Softbank, Inc., a start-up founded and run by a Masayoshi Son, a person of Korean descent raised in Japan and educated at a US. university-prices in Japan have been lower than those in the U S. since 2002. As a result, broadband subscribers more than doubled from 2001 to 2002 to 9.4 million and then rose another 60 percent to 1 5 .3 million users by April 2004.63 In 2001, 44 percent of Japanese used the internet; by 2002, 54. 5 percent of Japan's population was using the internet, up from 9.2 percent five years ago and second only to the US. in terms of absolute numbers. In sum, technological change, coupled with NTT's and its traditional suppliers' slow reaction to it, is beginning to force policy change.64
Remaining Problems Strong economic and political pressures for better products and lower costs have gradually led NTT, new entrants, and, though reluctantly, MPHPT to re shape policies in ways that emphasize economic performance rather than a stable, cohesive community. Though accelerated, change is still relatively slow and incremental. Just as the success of DoCoMo and IP telephony are due to market distortions caused by NTT's high land line prices, so too are other changes somewhat less than meets the eye. For example, in the early 2000S,
6 1 . Wataru Kodaka, "Internet Telephony Getting Dial Tone," Nikkei Weekly, Mar. 3, 2003, 1 6; Akemi Nakamura, "Businesses Gear up to Launch IP Phone Services," Japan
Times, Feb.
25, 2003, 10.
62. METI, ed., Tsushii hakusho 2001 (Tokyo, 2001), 45. 63. MPHPT data, "Increase in the Number of Broadband Users in Japan," June 2004. 64. Gregory Noble, "Let a Hundred Channels Contend: Technological Change, Political
Opening, and Bureaucratic Priorities in Japanese Television Broadcasting," Journal
nese Studies 26, no. I (2000): 79-109.
ofJapa
1 19
NTT East and NTT West announced that 1 10,000 jobs were being cut. How ever, no one was laid off Some workers took early retirement; others were sent to group firms, such as DoCoMo; and some 100,000 workers, primarily people aged 5 I or older, "retired" from NTT but were immediately rehired with salary cuts of 1 5-30 percent by new NTT subsidiaries.65 While this represents a move toward greater labor mobility and more flexible wages, no employees were fired. "Shareholders aren't really on NTT's list of priorities," says a Tokyo-based money manager upset with these restructuring plans; "basically, NTT is pro viding social services for the country of Japan."66 Another example of two steps forward and one step backward is policy toward access fees. These fees had steadily declined due largely to pressure from the US. government, which an STA official acknowledges is "the major opposi tion force in Japan."67 However, in 2003, MPHPT allowed NTT to raise them by an average 5 percent due to its plummeting land line revenues.68 This increase will come out of the profits of the NCCs. In the past, the NCCs would have ac cepted this without open conflict, but now that it has become more acceptable to challenge state policies, they are suing the government, questioning its policy of allowing NTT's costs to determine its prices. Other problems are festering. Confidence in the NTT Group has declined sharply, and DoCoMo, which contributes some 80 percent of the group's prof its, has few new subscribers. It publicly says it wants to be independent; how ever, no one expects the NTT holding company to allow it to break away. NTT East, NTT West, and NTT Communications, Inc. want to exit the landline business and focus on broadband operations; they complain about the require ment that they provide universal service.69 There are growing doubts about MPHPT's ability to regulate the industry. For example, after fifteen years of policies aimed at increasing competition among NTT and the NCCs, in the early 2000S, MPHPT started promoting competition among NTT firms because it realized the NCCs would never be able to effectively compete with NTT for local phone service.7° "NCCs have a
65. "Kyokan NTT 'kiki no honshitsu,' "
Ekonomisuto, May 2 1 , 2002, 29-3 1 ; "NTT 22Tiiyiikeizai, Sept. 29, 200 1 , 30-36. 66. Robert Guth, "Japan's NTT Frustrates Some as It Unveils Three-Year Plan," Wall Street Journal, Apr. 22, 2002, A 1 7 .
man nin no 'jirenma,' "
67. Discussion with STA official, Oct. 2 2 , 1999; other bureaucrats emphasize the critical
role of foreign pressure in forcing change (interviews of former MITI official, Oct. IS, 1999, and former IPA director, Oct. 27, 1999).
6S. "Kosoku netto jidai no NTT setsuzokuryo taisei 0," "NTT setsuzokuryo kaitei kento e,"
Nihon keizai shimbun, Feb. IS, 2003, 2, and April IS, 2004, 4.
69. Tatsuya Yokei and Hideaki Shimaya, "Dwindling Fixed-line Sector Hitting NTT Hard,"
Nikkei Weekly, May 19, 2003, 1 ,3; MPHPT, Regulatory Reform.
70. Interviews of two high-level MPT officials, one July 3, 200 1 , and one June 26, 200 1 .
1 20
Telecommunications: Obsolete Institutions
Reprogramming Japan
big disadvantage from the human resources perspective . . . NTT controls all the good people," said an MPHPT officiaL 71 By 2002, MPHPT gave up its ef forts to truly break up NTT It could swallow its pride in part because it could point to growing competition among NTT firms as traditional phone services declined and internet-related services, which all three firms provide, emerged. "In the 1 9908, we wanted more of an AT&T-style break-up. We were thinking about phones. But now the world has changed. In a few years long distance serv ices will be gone," explained a high-ranking MPHPT official.72 Other than DoCoMo, NTT firms are not very profitable. They have cut their R&D budgets by more than a third from the 1 996 peak of ¥300 billion ($3 bil lion).?3 Despite its rise to stardom, NTT DoCoMo's return on equity, like many successful Japanese firms, has never been very high by US. standards. It hit a peak at 1 4.7 percent in 2002, up from 1 3 . 3 percent in 200 1 ; and analysts expect it to stabilize at some I I percent for the next several years.74 While the NTT group's profit rose significantly in 2003 due to DoCoMo's strength, "the total revenue of the NTT group is going down. It is a serious problem. Prices of these new IP services are one-tenth of the old prices. The government will have to take some action because the NTT group provides the nation's telecommunications infrastructure," explained a vice president at NTT Communications, the long distance arm.75 Even DoCoMo's success is threatened. Its market share in third-generation mobile phone services is being eroded by cheaper alternatives offered by Voda fone of Britain and KDDI, a merger of several local firms which adopted a cheaper, more efficient US. standard called CDMA (code division multiple ac cess), established by Qualcomm. While its profit rose 4 percent in 2003, with an overall decline in the growth of its new subscriptions and saturation of the do mestic market, it expected profits to start declining in 2004. ?6 NTT's stumble is putting its suppliers in dire straits. Indeed, communitar ian capitalism's emphasis on firms working together to develop domestic tech nologies has backfired. The main suppliers have little market share in switching equipment abroad due to their high costs and long-term reliance on NTT's standards. They lag in internet technologies because they all followed KTT's decisions on what technologies to pursue, explained a high-level NTT Commu7 1 . Interview, June 26, 200 ! . 72. Interview, June 25, 2004. 73. "NIT will Shrink R&D Budget," Japan Digest, Feb. 5, 2002, 5; "Kenkyu kaihatsu jitsuyoka 0 jushi," Nihon keizai shimbun, Dec. 5, 2002, I I . 74. "NTT DoCoMo t o See Lower Return on Equity," Nikkei weekly, Nov. 2 , 2002, 1 2 . 7 5 . Interview, July 2, 2004. 76. "Dokorno, eigyo eki I cho 1 029 oku en," and "Keitai rno teikakuku kyOso honkakuka," Nihon keizai shimbun, May 8, 2004, 9, and Feb. 2 1 , 2004, 10. As of 2004, costly efforts to make i-mode a dominant standard abroad have not met NTT's high expectations.
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nications manager.'7 This i s not the only time NTT led its suppliers down the wrong technological path. Another big mistake was its heavy investment in the 1 980s in INS, a Japanese version of ISDN that was incompatible with interna tional standards. Ultimately, NTT was forced to make INS compatible, but it seriously underestimated the costs and overestimated demand. Although grow ing use of the internet finally gave INS a raison d'etre, by the early 20005, its use declined due to growing demand for cheaper ADSL services. This, along with other examples, exposed the economic costs of all the firms blindly following NTT. NTT also funneled too much money into optical fiber networks. It started fiber-to-the-home service in 2001 and expected 10 million households to use it by 2005; while available to 16 million homes in 2004, only 1 .24 million people subscribed, due to preference for cheaper ADSL alternatives.78 U S. phone and cable companies also marched down this same path, but abandoned projects when it became clear they were not economically feasible. In Japan, however, due to minimal discipline from the capital markets and shareholders, there was no mechanism to discourage continuation of these huge investments. Of course, the burden of US. corporate mistakes has been paid by thousands of laid off workers, whereas in Japan the pain has been socialized. The high cost structure ofJapan's telecommunications system and NTT and its suppliers' long-term reluctance to abandon domestic technology in favor of IP standards meant the nation was slow to adapt to the internet and the firms were even slower to develop equipment such as routers for internet-based net works. This left suppliers out of the fastest growing segments of the communi cations equipment market. In early 2004, Fujitsu announced it would stop mak ing routers.i9 However, in mid-2oo4 Hitachi and NEC announced a new joint venture to make routers and switches to reduce reliance on U S. firms such as Cisco and Juniper Networks. With US. firms dominating these standards and products even in the Japanese market, it is hard to see how NEC and Hitachi will be able to turn a profit.80 In sum, the norm of technological self-sufficiency has undercut the ability of the firms to use the best technology available to compete. Support for weak in cumbent firms has cost billions of dollars and prevented new entrants. Assuring job security in an industry undergoing tumultuous technological change has made it impossible for the firms to revamp their human and organizational ca-
77· Discussion with NIT researcher, Oct. 20, 1 999; interview of former Fujitsu official,
Nov. 1 6, 1999.
78. MPHPT data, "Increase in the Number of Broadband Subscribers in Japan," June 2004.
79· "Fujitsu ruta gaibu chotatsu," Nihon keizai shimbun, Feb. 20, 2004, I 3 . 80. "Kosoku netto n o tsiishin seigyo sochi, Hitachi, NEe kyooo kaihatsu," Nihon keizai shimbun, June 25, 2004, I ! .
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pacities. By 2000, it became clear that clinging to these norms was undermining the firms' health, threatening to disrupt the very order and stability the norms aimed to promote. A high-level NTT executive acknowledged: NEe and Fujitsu are seeking technology in Silicon Valley; Japanese firms do not create technology now. That is the problem . . . Japan has lost its confidence. Users import US. goods, such as routers, and Japanese firms are just trying to make copies of the products of Cisco, Juniper, and other U.S. companies. . . . While U.S. leaders [producing routers, servers, software, and IP] will be overtaken by others, the new successful players will not be Japanese.SI
A cabinet-level official involved in internet policies concurs: "Fujitsu and NEC are just assemblers of WINTEL (Windows/Intel) technology."82 "The equipment suppliers do not have any core competencies at all. Ten years ago they did. NEC, Fujitsu, and Hitachi do not have their own technologies or com petitive production processes; they will be eliminated from the telecommunica tions business," explained an NTT Communications vice president in 2004.83 The situation deteriorated so badly that in late 2002 a high-level �lITI offi cial met with top executives of Hitachi, Fujitsu, and NEC to urge them to con sider consolidating their telecommunications equipment businesses into one firm. Officials of the three firms met again in early 2003 but negotiations did not go far. However, a top executive at one of the firms confessed, "We may have to think about it again seriously."84 Foreign telecommunications makers have also struggled since the U.S. dot com bubble burst in the early 20008. Moreover, U.S. regulators have also been slow to introduce competition into the local call market, though prices are much lower than in Japan. Still, with the major global players humbled, NTT, which has the nation's best scientists and a mountain of cash, has the opportunity to become a global player. However, rather than seriously overhaul NTT's struc ture, organizational capacities, and competitive environment, which would break taboos regarding stable employment, support of established suppliers, and reliance on domestic technology, the bureaucratic and political elite continue to encourage orderly, incremental change. Communitarian constraints put NTT in a hard-ta-win situation. It is ex pected to compete in new areas where technology is changing rapidly. Yet it is tied down. MOF demands that nothing be done that might hurt its stock 8 1 . Interview, July 1 0, 2002. 82. Interview, July 10, 2002. 83. Interview, July 2, 2004. 84. "Rivals Tie up in Electric Machinery," Nikkei Weekly, Oct. 1 3 , 2003, 1 0.
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1 23
price.85 MPHPT limits its entrance into certain businesses and prevents it from cutting prices too much. By law it must provide universal service even though it is losing huge sums on fixed lines, and it must conduct and diffuse the results of basic R&D. Operating in a system in which maintaining employment is impera tive makes it impossible for NTT to adapt quickly. Social and developmental norms that favor domestic technology and the sta tus quo, together with disagreement about how to best regulate the industry in the community interest, have led to a vicious cycle in which critical decisions about NTT and the industry have been postponed, resulting in poor economic performance and sluggish technological advances. Unwillingness to create a sys tem in which the most effective competitors would dominate the industry means that all players gradually deteriorate. Since for many years market share was more or less established, and since NTT had a huge cost advantage, there was little incentive for new challengers to find innovative ways of competing. "We wasted a lot of time on the NTT issue over the past 20 years. We spent too much time during which we lost opportunities to do things better," acknowl edged an MPHPT official .86 Changing technological, political, and economic conditions in the late 1 970S and early 1 9808 led to a sharp deterioration in the effectiveness of industrial pol icy toward the industry and confusion over how best to use NTT and the indus try for the interest of the broader community. Various strong actors--especially the economic ministries and large firms--contested policies favoring NTT as a wholly owned public monopoly. Redefinition of norms in the mid-1980s led to changes in NTT's ownership structure and introduced orderly competition into the industry. Once these changes occurred, paralysis set in, as there was no con sensus over how best to change NTT without undermining its key social and developmental goals. Over time this continued gridlock resulted in support for NTT, its traditional equipment makers, and their employees, even though it was no longer dear that these norms were in the interest of the broader community. Despite strong economic incentives to alter their strategies, NTT, the incum bent firms, and state leaders continued to cling to the status quo for decades, be cause it was unacceptable to fire workers, abandon suppliers, and switch from relying on NTT and its technology to dependence on foreign technology and firms. In the late 1 990S, when global pressures started to threaten the very survival of the key firms, the bureaucracy, NTT, and the firms started to more vigorously 85. MOF has not sold any NTT shares for many years due to low prices. "NTT kabu, shijo baikyaku miokuri," Nih(}n keizai shimbun, May 1 8, 2004, 5 . 86. Interview, Oct. 28, 1999.
1 24
Reprogramming Japan
challenge customary practices. A consensus emerged that communitarian insti tutions and policies needed to be modified because they were now undermining economic health and sociahtability. The system is not being dispensed with; practices are being revamped in ways that give greater emphasis to profitability and competitiveness at the expense of wages, support for traditional suppliers, and preference for domestic technology. MOF, MITI, NTT, and big business led the process of redefining norms in ways that allowed for more vibrant com petition and foreign involvement in the industry. MPHPT for the most part greedily pursued expansion of its power, though it used its power in ways con sistent with communitarian norms. Politicians, under the heavy influence of MOF and MPHPT, followed their lead, codifying in law normative changes that already had been accepted and put in place. As of 2004 it is unclear whether recent significant institutional and policy re forms will be sufficient to help the industry become more competitive. The pace and nature of technological change has become more turbulent. The move from basic phone services to new products and services requires software expertise. The rise of the internet requires a new set of skills and new kinds of companies able to rapidly respond to new opportunities. Japan lacks both the skills and the organizations. In the United States, companies such as MCI and AT&T, which once dominated the communications landscape, are relatively minor players. In their place are a myriad of successful new firms arising from among the Baby Bells, the cell phone companies, and more recently, cable providers. In contrast, Japan's telecommunications incumbents remain the same, protected from strong competitive forces by an array of communitarian practices. Locked into close relationships with NTT and a broad set of stakeholders that favor conti nuity over change, the firms have not yet developed the competencies needed to thrive in this new era. The state and the firms are giving greater priority to eco nomic returns without abandoning long-term commitments to workers and suppliers altogether. For the time being at least, technology seems to be chang ing at a faster pace than their ability to adapt.
5
Computers : Cooperation or Competition ?
The telecommunications industry that NTT developed in the early years fol lowing World War II established the foundation upon which much of Japan's high technology sector was built. The industry's structure, typical of those esta blished by communitarian capitalism, consisted of large firms, supported by the state, industrial groups, and main banks. The firms borrowed technology from abroad, which they improved upon, hence competing based on manufacturing skills. Though this system was very effective in the catch-up stage, its success sowed the seeds of its demise. The system nurtured capacities that were un suited to the challenges that the firms faced once they had caught up with for eign firms. It was incapable of supporting the weight, breadth, and complexity of the high tech businesses-a range of industries such as computers, software, and semiconductors-that would come to drive much of the economic growth of advanced industrial nations. Fundamental to this system were several core beliefs about labor, capital, and technology. Labor was not viewed as merely a variable input, given that employ ees were essential members of the enterprise, more important than sharehold ers. Since capital was scarce, it needed to be distributed widely for the sake of the nation. Risks were to be minimized. Since risks were shared, so were re wards. The state was to subsidize key firms because their technological capabili ties represented the nation's technological level. In addition, consumers and corporate users were expected to support important industries, such as comput ers, because this sacrifice would ultimately result in the greater good for the broader community. Computers, after all, would increase the productivity of every industrial sector in Japan. NTT, the main banks, and keiretsu allies would also provide financial backing to help the firms enter what in the early 1960s was considered to be one of the most important and impenetrable of industries.
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Japan had just emerged from the destruction of World War II, a war that had been lost in part because of the backwardness of its radar and other technology. The nation really had no business producing cutting-edge high technology goods. With its masses of low-wage workers, it should have stuck to labor intensive industries such as textiles. However, as I showed in my discussion of the Meiji-era roots of the telecommunications industry, leaders had developed an obsession with nurturing technological self-sufficiency. The nation's techno logical failures during the war, if anything, intensified their recognition of the importance of reducing reliance on foreign technology. Looking forward, lead ers felt that by becoming competitive in certain strategic industries, they would also become competitive in a wide range of related industries. It may not have been economically rational at the time, but the idea was that the computer in dustry would provide high-wage jobs and raise the nation's overall level of tech nological sophistication. It would help Japan become as independent of foreign technology as possible. In what seemed miraculous to many foreign observers, by the late 1 970S Japanese firms were producing mainframe computers that even IBM acknowledged were every bit as good as its own products. And they were cheaper. This was a feat other advanced technological powers, such as France and Germany, had failed to achieve. Japanese firms' success depended not only upon a system of heavy subsidies but also upon an international system that was lenient. Japan was allowed to close its borders to foreign products, and its firms were permitted to copy foreign tech nology. When that environment changed-when the technological trajectory be came hard to predict, foreign firms started aggressively protecting their intellec tual property, foreign governments started demanding open markets, and software capabilities became critical to success-the industry began to falter. This revealed another major weakness of communitarian capitalism. By channeling so much of its subsidies to a core group of firms, the same ones that received generous allowances from NTT, state and corporate leaders had effec tively made it impossible for new firms to emerge that might be better organized to take on the challenges of new technologies. In the computer world, the com pany that dominates one generation of technology frequently loses the battle in the next generation. In part, this occurs because a firm dominant in one tech nology has little incentive to pursue a new technology that might cannibalize its existing business. It also occurs because firms tend to be structured to serve a particular kind of technology. IBM was a highly centralized company designed to manufacture and service the highly centralized business of mainframe com puters. Its culture was poorly organized to adapt to the new era of distributed computing that started in the early 1 980s. Fortunately for the United States, a vibrant marketplace had produced dozens of firms ready to enter the fray with their own alternative distributed computing designs. Hewlett Packard (HP) and Digital Equipment Corporation (DEC) emerged as new powers. They offered
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computers that could be put in every workplace at a reasonable cost. They re duced the need for costly mainframes serviced by an expensive priesthood of programmers in the central corporate office. When computing technology changed from centralized to distributed com puting, however, Japan had no champions for the new technology. All of its com puter makers were in the same business of producing mainframes. Users had to buy machines from DEC and HP. Soon afterward, when workstations emerged as the preferred approach for engineering, Japanese firms had no products to offer. Businesses had no choice but to purchase Apollo and Sun Microsystems machines or forgo the services these machines offered. The state and the firms had put all their eggs in one basket; they had supported a set of firms unable to adapt quickly to new technological paradigms. This is the story of how the rise and fall of Japan's computer industry was heavily shaped by the nature of communitarian capitalism. It highlights how the state, in the early years, encouraged the evolution of business practices that fa vored domestic technology, risk-sharing, and large firms that were members of the main keiretsu. When the industry started to falter in the mid-1980s, the econ omy was in the midst of an economic boom. There was talk of the 2 I st century as the Pacific Century, with Japan as a global leader. This confidence blinded leaders to the problems that were emerging in this and other high technology industries. Viewing their customary way of doing business as superior to Western ap proaches, the state and firms neglected the industry's core weakness-soft ware-for a decade before finally responding. This chapter focuses on how com munitarian capitalism contributed to catch up with IBM in hardware against tremendous odds. It briefly discusses challenges the industry ignored in the I980s but leaves an analysis of the key software problems to the following chapter.
1 . Creating a Comparative Advantage: The 1 960s and 1970s Promotion of the computer mainframe industry began in the late 1 950S when NTT and MITI labs started working on computing devices. There was broad agreement among state and corporate actors that Japan needed to use computers to become more competitive and technologically advanced and that those com puters should be supplied by domestic firms, even though imported machines would have been better and cheaper at the time.]
I . Interviews of director and advisor of JElDA (Japan Electronics Industry Promotion As sociation), Nov. 27, 1987; former MITI official, Nov. 24, 1987; managing director of JIPDEC
Dec. 3, 1987; head of NTT's Communications and Information Laboratory, Dec. 5, 1987; di rector at the ill}, Dec. 4, 1987; managing director of the r.:rCB, Dec. 8, 1987; top academic ex pert on computers and telecommunications, in Boston, Nov. 3, 1987.
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IBM was the standard by which MITI and the industry measured its success during the catch-up period from the 1960s through the early 1 980s. As opposed to the telecommunications industry, where NTT had a protected monopoly and legal access to AT&T technology, the hardware firms had no choice but to con tend with IBM's dominance of computer technology, especially its operating system (OS). The operating system is essentially the traffic cop that directs the overall operations of a computer-the way it loads data, the interaction between the processor and the memory, and the way it interprets keystrokes.2 IBM's standard became the dominant OS standard in the computer mainframe indus try beginning in the early 1960s. In 1969, under antitrust pressure from the U.S. Department of Justice, IBM unbundled its products-sold its software and hardware separately. In order to sell its software as an independent product, IBM had to publish information that would allow competitors to build machines capable of running its software. This information was provided at no cost, which meant that Japanese firms did not need to invest in order to develop a competing standard. Still, because of the dominance of IBM's OS standard, no firms could beat IBM to market. If a competitor tried to do so, it took on the risk that IBM's next OS release would not be compatible with its products. In essence, com petitors that relied on IBM's standard had no choice but to reverse-engineer IBM products after they hit the market. Japanese firms were able to imitate IBM's products partly because IBM was not very concerned about foreign competition at the time, but also because the giant, entangled in a web of an titrust investigations at home, could not aggressively sue firms copying its products. The state had four primary policies to help promote the industry up until the early 1 980s: protectionism, a quasi-public computer rental company called the Japan Electronic Computer Company (JECC), financial assistance, and a variety of state-sponsored cooperative R&D projects.3 Leaders' initial concern was to create and support several viable players in the industry, since comput ers would be key inputs for many industries, ranging from telecommunications and heavy electrical equipment to computerized factory automation . Because the firms' shareholders were banks and other allied companies, they did not de mand high returns. Thus, the hardware makers did not need large profits to survive. Shareholders, however, would not allow them to lose money for long periods. The state's challenge was to create a stable, predictable environment to in-
2. Charles H. Ferguson and Charles R. Morris, Computer Wars: The Fall of IBM and the Future of Global Technology (New York, 1 994), 20, 68. 3. Much of the analysis of state policy in this chapter comes from Anchordoguy, Computers, Inc.
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duce its select champions to invest heavily in a business that promised high risks without commensurate high profits. To do this, it promoted norms that encour aged businesses and shareholders to sacrifice their own short-term economic in terests to invest heavily to develop technological and human capabilities in this field for the broader interest of the community. The state created a number of institutions that worked to promote the industry's growth but that reflected the key social and developmental norms that emerged in the postwar period as dis cussed in chapter two. Most important, in the early stage of the industry's de velopment were institutions and policies that promoted technological self sufficiency. Social norms regarding security, fairness, and predictability were also important. The state was very successful in the early stage, because the firms, protected by cross-shareholding and keiretsu ties, were able to invest large sums in projects that, at best, produced low profits. The firms also had capable, committed employees who worked hard to assure their firm's survival. More over, customers were willing to tolerate inferior machines for the sake of the broader community.
Protectionism The state used various measures to tilt the market in favor of domestic firms and promote technological self-sufficiency. Protectionism, including tariffs (25 percent), import quotas, and discretionary measures, was key. Since MITI con trolled the foreign exchange budget and required users to acquire an import li cense to purchase a foreign machine, its pressure on firms to buy domestic was effective. In the beginning, some firms complained bitterly about policies that forced them to buy low-quality, unreliable domestic machines. MITI's policies were particularly resented in the 1 960s and early I970S when domestic machines were significantly inferior to their foreign counterparts. Still, most executives conceded it was important to buy domestic machines to help build domestic technological capabilities. Governmental institutions were also expected to buy domestic machines, al though critical institutions, such as the BO] and NTT, received permission to use IBM machines. In 1 9 7 1 , for example, NTT was using 1 72 computer sys tems, 1 09 of which were foreign; of these, 75 were IBM.4 These practices changed as domestic products improved. By 1 982, 9 1 percent of government computers were domestic.s Government procurement was a huge market for domestic makers: the government purchased or rented some 25 percent of all domestic machines during the 1 960s and 1 970s; by the early 1980s, this share in-
4. Shiigiin,
Teishin Iinkaigiroku, Kokkai 65, Mar. 25, 197 1 , 10. Kompyutopia, Jan. 1983, 92, 95.
5 . All shares are of computers in monetary value.
1 30
Reprogramming Japan
creased to 30 percent.6 Industrial groups also helped protect the market. As of 1 968, half of the computers used by firms in major keiretsu were produced by their group computer company.7 The playing field was also tilted to the advantage of domestic makers by var ious laws enacted during the Occupation that bolstered the developmental ca pacity of the state and transformed into concrete policies various norms regard ing the inappropriate role of foreign firms in the economy. The Foreign Investment Law of 1950 allowed the state to force foreign firms into joint ven tures with local concerns. IBM Japan was able to avoid this fate, since it reen tered Japan one year before the law was enacted. Still, various legal and discre tionary policies, such as the Foreign Exchange and Foreign Trade Law of 1 949, gave the state control over a wide range of foreign activities. For example, the state controlled foreign currency transactions, the type and quantity of ma chines IBM was allowed to produce in Japan, how much IBM had to export, how many parts it could import, and how much profit it could repatriate. IBM also had to agree to license its patents to local firms at reasonable royalty rates. Similar restrictions constrained the activities of Sperry Rand (UNIVAC com puters), which was forced into a joint venture with Oki Electric, as well as other U.S. players such as HP. It became expected that the state and firms would work hard to restrict the activities of foreign firms. Protectionism often leads to sluggishness and inefficiency. However, the state and the industrial groups promoted several domestic players and this domestic competition, despite extensive collaboration, pressured firms to improve the quality and price-performance of their machines. As a result of the gradual im provement in domestic computers and strict restrictions on imports, the foreign share of the market (imports and IBM's production in Japan) fell from 93 per cent in 1 958 to 42.6 percent in 1969, 33.6 percent in 1977, and 23.3 percent in 1986.8 In contrast, in the first half of the 1 970s, U. S. firms-primarily IBM and Control Data Corporation---continued to control some 75 percent of the French computer market.9
The Japan Electronic Computer Company (JECC) In addition to MITI, other quasi-state institutions also played a critical role in the industry's development. The attributes of communitarian capitalism gov6. JECC, Kompyuta jitsudo jokyo chosa (Tokyo, annual); Anchordoguy, Computers, Inc., 1 68-7 1 . 7 . Dokusen Bunseki Kenkyukai, "Nihon IBM," i n Nihon n o dokusen kigyo (Tokyo, 197 1 ), 5:275. 8. Anchordoguy, Computers, Inc., 34-35. 9. John Zysman, Political Strategies for Industrial Order: State, Market, and Industry in France (Berkeley, 1 977), 83.
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erned the nature of these institutions. Consider JECC, a computer leasing oper ation MITI helped set up in 1 961 as a joint venture among the seven computer makers. MITI excluded other companies to avoid "excessive competition" that it believed would lead to redundant investment and cutthroat pricing. As in other industries, the state selected entrants and supported all the firms in ways that reduced disparities among them. Financed about 50 percent by low-interest government loans, JECC worked in market-conforming ways to buttress firms that worked hard to make more ad vanced computers. When a user decided which domestic computer he wanted, JECC bought it and rented it to the customer. The effect was to give domestic computer firms an immediate return on their investment. If the firms had had to finance their own rentals, they would have received the purchase price spread out over a four-year period. Since JECC only purchased machines users specif ically asked to rent, the member firms were still competing with each other. The firms making the best machines got the most benefit from JECC. From 1 961 to 1981 the state funneled some $2 billion in low-interest loans into JECC to finance computer rentals. With the possible exception of Hitachi, which had a profitable consumer electronics business, none of the other firms could have financed computer rentals without JECC. "We could not have bor rowed the money from banks for the purpose of renting computers," explained a Fujitsu computer division manager. lO The benefits to the computer makers were substantial. From 1961 to 1 98 1 , JECC member firms had a cash flow of ¥1 .09 trillion ($4. 17 billion); under their own hypothetical rental system, they would have had a cash flow of ¥855 .08 bil lion ($3·33 billion). Thus, JECC plowed an additional ¥238 billion ($835.09 million) in up-front cash to the makers. This up-front cash was essentially an interest-free loan. It constituted a ¥20.83 billion ($73 .27 million) subsidy, which is what the firms would have had to pay in interest if they had been able to bor row the money from private banks at the prime rate. Had they run their own rental system (cash flow of ¥855 .08 billion), they would not have been able to af ford the ¥ I .29 trillion ($5.49 billion) they invested in R&D and plant and equipment during this period. 1 1 The JECC system not only helped the firms rent their machines, it also helped maintain orderly competition by managing a price cartel. In consultation with the makers, JECC set the prices on computers it rented out and no dis counts were allowed. This price floor assured the firms that their efforts would not be whittled away in cutthroat price wars. It also protected weak companies at the expense of strong firms that might have, given the chance, engaged in price wars to boost market share, reducing the profits for the entire industry. ro. Interview, Dec. r , 1987. 1 1 . Anchordoguy, Computers, Inc. , 68---<) 1 , 227-30, 238, 244.
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JECC thus functioned as a gatekeeper: without being a part of this joint ven ture, a firm could not expect to compete in computers. JECC membership did not guarantee success; in fact, Matsushita, the only narrowly focused consumer electronics firm allowed to join JECC, withdrew from the industry in 1 964 when IBM introduced its 360 series of computers. However, JECC did guarantee a wide array of state support, which was provided to all member firms. Having one firm rent a large proportion of the nation's computers also encouraged the firms to have similar pricing, product, and marketing strategies. JECC thus stabilized the industry, which encouraged firms to continue to in vest for the long run. This orderly competition, together with the firms' cross shareholding and main bank arrangements, enabled them to provide secure em ployment for their workers. Yet, while it helped during the catch-up stage, JECC has little function today. The hardware makers are large and strong enough to fi nance their own rentals and JECC cannot afford to finance a significant portion of the much larger market. Yet, JECC has survived, due to institutional sticki ness and the fact that it is an amakudari landing spot for retiring MITI officials.
Financial Assistance State financial aid to the computer industry came in various forms. The ab solute amount of subsidies, tax benefits, and low-interest loans was quite small compared to the huge sums the U.S. funneled into Pentagon projects. But the amounts were very large compared to what the firms were investing. A conser vative estimate suggests that from 1 96 1 to 1 969 subsidies and tax benefits ($132 million) were equivalent to 46 percent of what the computer firms themselves were investing in R&D and plant and equipment. If we include government low-interest loans, total aid ($542.8 million) was equal to 1 88 percent of what the firms were investing. That is, the state was plowing in funds not just for invest ment but also working capital. From 1 970 to 1 975, subsidies and tax benefits ($632.4 million) were equivalent to 57 percent of what the firms were investing, 1 69 percent ($ 1 .88 billion) if we include government loans. Software and hard ware were formally liberalized in the mid-1970S, yet from 1 976 through 1981 subsidies and tax benefits ($1 .03 billion) were still 25.2 percent of what the firms were investing. Including state loans, total aid ($3 . 8 1 billion) was still equal to 93 percent of what the firms were investing. 12 It is clear that in relative terms, state aid was quite substantial. It was pro vided to a select set of firms and, while amounts varied and were tied somewhat to performance, the state supported all the firms. It is no coincidence that the biggest recipients were the key members of the NTT family-NEC, Fujitsu, and Hitachi. MITI felt that large, diversified firms were best able to survive over 12. Ibid., 230-43.
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the long run and knew these three could use profits from sales to NTT to subsi dize their entry into the high-cost, high-risk computer business. Financial support was generally effective because it was provided in ways that made the firms produce better machines as a condition for receiving future aid. In most cases, the firms had to match aid to receive it, forcing them to com mit to succeeding. It was also effective because it was largely insulated from po litical interference. MITI had funds to nurture computer makers; however, un like NTT, it did not have access to huge budgets attractive to politicians. Aid kept the firms afloat, but none were highly profitable. This was a strategy of no big winners and no big losers, of reduced risks in exchange for low returns. Firms were to maximize market share and employment-to give priority to na tional self-sufficiency and social stability over efficiency and big profits.
Cooperative R f5D Projects In the 1 960s and 1 970S MITI sponsored various R&D projects, mainly fo cused on catching up with IBM. Their overall impact was to limit entrants, re duce the costs and risks of R&D by pooling resources and sharing R&D results, and encourage the firms to follow similar R&D and product strategies. The first major project was the Super High-Performance Computer Project ( 1966-7 1 ), a response to IBM's introduction in 1 964 of a new family of comput ers called the 360 series. This series represented a huge technological leap: it used integrated circuits (ICs), a more sophisticated type of semiconductor; had much larger core memories with faster access times; allowed many programs to run simultaneously; and offered a new disk memory that allowed the computer to store far more information in secondary memory than had been dreamed pos sible. In short, these computers were faster, smaller, and much cheaper given their processing speed. It was Hitachi's turn to head this project, given that Fujitsu had headed the smaller, earlier FONTAC project that had failed. This new project, which tar geted a prototype machine, had mixed results. Some specific technical goals, such as those for letter-recognition devices, were not fully achieved. However, the project made major advances in the development of ICs for computer use; more sophisticated high-speed main memories, which cut central processing unit idle time; and standardization of the input-output interface.13 Could the firms have made such advances by themselves? "They could have done it, but timewise, they would have been very late; one of the purposes of the project was to help them make the advances as fast as possible," explained a former MITI official. 14 A computer expert at Hitachi's Central Laboratory agreed: "national 13· Ibid., 47-49. 14. Interview of director of]EIDA, Nov. 27, 1987.
1 34
Reprogramming Japan
projects [like the super high-performance computer project] help us do things earlier rather than later."15 Aiso Hideo, then a MITI laboratory researcher and later a prominent professor of computer science at Keio University who headed the fifth-generation and supercomputer projects in the 1 980s, explained that "it would have been very difficult for a firm to do it alone; also, [without the proj ect] Hitachi would have gone along with RCA [then its technical partner] and would not have developed its own technology."16 NTT, working with Hitachi, Fujitsu, and NEC, commercialized the results of this MITI project in its DIPS-I (Denden Kosha Information Processing System) project, which developed NTT's first domestic series of telecommunications related computers. Without the DIPS project, NTT could only have started com munications services using foreign machines, explained Aiso. 17 The three primary firms in both projects were NEC, Fujitsu, and Hitachi. 18 Japanese firms would not have been placed on a path toward self-sufficiency in hardware technology without these projects. By encouraging collaboration among these three firms, the state as sured that they would invest heavily to build advanced mainframes. The projects also resulted in the firms having similar levels of technological and quality skills and similar R&D and product strategies. 19 NTT bought equal numbers of DIPS machines from the three makers, following the norm of byOdo shugi (egalitarian ism). Perhaps the most critical project in terms of helping domestic firms gain a comparative advantage in hardware was MITI's New Series Project ( 1972-76), in which they worked together in three groups to counter IBM's new, techno logically advanced 370 series of computers, announced in 1970. MITI and MOF wanted the six firms to merge into three companies, but the firms, in large part due to conflicting keiretsu ties, refused. The firms willingly formed three collaborative groups, and they were in no position to reject the idea, since their profits were plunging and their market share had begun to slide vis-a-vis foreign machines. MITI, under pressure from the U.S. government, had committed to liberalizing the computer market at the end of 1975. RCA and General Electric (GE), then huge profitable firms, dropped out of the computer business when IBM introduced the 370 series. The Japanese firms knew that to survive they had to cooperate with each other, MITI, and NTT Kiyomiya Hiro, Fujitsu's vice-president, explained the firm's decision to col laborate with Hitachi in the company newsletter:
15. 16. 17. 18. 47· 19.
Interview, Dec. 9, 1987. Interview, Nov. 20, 1 987. Ibid. The details of these projects are available elsewhere. Anchordoguy, Computers, Inc., 45Interview of former high-level engineer in Hitachi's computer division, Apr. 3, 1989.
1 35
Computers: Cooperation or Competition?
Frankly speaking, if we do not do this, we cannot confront our American competi tors . . . . If Japanese makers in the domestic market did not cooperate and only competed, before we knew it, we would be taken over by the American firms; there is a danger that every maker would be dealt a fatal blow. On the other hand, if we only cooperate and do not compete at all, we will all slide into stagnant waters. . . . The British and French computer industries are examples of this. . . . Thus, we will cooperate on R&D, but in sales and production we will compete fiercely. . .
.
I
would like to add that in the background of this move are the earnest guidance of MITI and the deep understanding of NTT. In regard to the big problem created by the decision to liberalize the computer industry in three years, both NTT and MITI have been serious and forward-looking in considering what form our computer industry should take in order to oppose the giant power of American capitaPO
In this project, Hitachi and Fujitsu cooperated in building a large IBM compatible computer. NEC and Toshiba worked together to develop a mid-sized computer, and Mitsubishi and Oki, the two weakest computer firms, collabo rated in developing a small machine. The idea was to divide up the labor so as to provide domestic alternatives for the full line of IBM models as quickly as pos sible. The firms were then free to build machines of any size. MITI provided ¥70·3 billion ($235·5 million)-half the cost of the project.21 The Fujitsu Hitachi group received 45 percent of the subsidies, the NEC-Toshiba group 40 percent, and Mitsubishi and Oki 15 percent.22 "It [the subsidies for the project] was big money back in the 1970s," explained a high-level Fujitsu manager.23 This MITI project was also buttressed by NTT, which started an overlap ping DIPS-I I project in August 1973. In its project, NTT provided Fujitsu, Hitachi, and NEC with a total of ¥5 billion ($ 1 5 . 1 5 million) to develop large scale computers for communications use.24 This effort was largely redundant with MITI's project and gave the three big firms the money they needed to suc ceed. "To cut costs, we made an effort to make them [the New Series and DIPS I I machines] have a common base. If we had not done it that way [overlapping the projects], we would have all lost money," explained the head of NTT's re search lab.25 Keeping foreigners at bay was also a primary concern, given that the industry would be liberalized at the end of 1975. Honoki Minoru, director of NTT's data communications division, explained, "due to coordination be20. Letter in Fujitsu nyuzu, Nov. 197 1 , reprinted in Fujitsu, Ltd., Fujitsu shashi (Tokyo, 1977), 2:134-36. 2 1 . Anchordoguy, Computers, Inc., 108. 22. Uozumi Toru, Kompyutii sensa (Tokyo, 1979), 142. 23· Interview, Dec. I, 1987. . 24· Kokusan denshikeisanki nyuzu, no. 44 (Aug. 25, 1 973), I . 25· Interview o f head of NTT lab, Dec. 5 , 1987.
1 36
Reprogramming Japan
tween MITI and MPT, and following national policy, we are steadily progress ing toward the completion of a large-scale, high performance computer that will be able to sufficiently counter foreign computers in the future."26 Kobayashi Taiyii, Fujitsu chairman, acknowledged that, unlike GE and RCA, Japanese makers were able to stay in the market after IBM introduced the 370 series, "be cause MITI started providing research grants and made different companies get together for cooperative development of new machines. For the first time, Japa nese makers were ready for battle."27 Another project that helped the mainframe makers remain competitive in hardware was MITI's Very Large-Scale Integrated Circuit (VLSI) project ( 1976-79). IBM was expected to use VLSI in its next generation series of com puters. If Japanese firms were to remain competitive, they needed the capability to produce these advanced chips. The goal of the project was not to produce chips, but rather to research different production technologies to figure out how best to draw narrower lines on wafers and thereby be able to more densely inte grate circuits. The government provided ¥30 billion ($1 50 million) and the firms contributed equal amounts to cover the remaining ¥42 billion ($21 0 mil lion) in costs. The most important topics were researched in three parallel groups that took different approaches to a given problem in the hopes that at least one group would succeed. The idea was that by having groups of firms take alternative approaches to the same problem, time and costs would be reduced. This project is given credit for propelling Japanese firms to world status in memory chips and helping the hardware makers come out with mainframes that exceeded IBM's top machines in performance, though at a lower price.28 NTT buttressed this project too, with its own ¥zo billion ($100 million)VLSI project, which gave generous support to Fujitsu, NEC, and Hitachi to develop these ad vanced chips.29 Support from MITI and NTT for a select few firms assured their survival, prevented new entrants, and induced the firms to follow similar R&D and product strategies. By reducing the costs and risks of staying in the computer business, these
26. Shiigiin, Teishin Iinkaigiroku, Kokkai 7 [, July I I, [973, 4· 27. Interview in "IBM wa ya ni hanatareta tora da," Bungei shunju, Sept. [982, [ o r . 28. Anchordoguy, Computers, Inc. , 137-45; Scott Callon, Divided Sun: MIT! and the
Breakdown ofJapanese High-Tech Industrial Policy, [975-[993 (Stanford, [995), [ [ 6-22; Ken
neth Flamm, Mismanaged Trade.' Strategic Policy and the Semiconductor Industry (Washington, 1996), 94-1 I 3; Kiyonari Sakakibara, "From Imitation to Innovation : The Very Large-Scale
Integrated (VLSI) Semiconductor Project in Japan," Sloan School, Working paper No. 1490-
Computers: Cooperation or Competition?
1 37
projects enabled a select group of domestic makers to work hard in order to cre ate a comparative advantage in computer hardware. By collaborating on R&D but competing on production costs and quality, the firms were encouraged to follow similar strategies but had to advance technologically and cut costs in order to survive. Had they been subject to more competition and shareholder pressure for returns, it is highly unlikely that they would have been allowed to take fifteen years or so to become competitive in computer hardware. In contrast to the C.S., which used antimonopoly law to prevent the same firms from dom inating both the telecommunications and computer markets, in Japan the state nurtured the same three firms to be the top communications and computer makers; these firms are also very active in the semiconductor industry. Having the firms operate in several related industries and work collaboratively gave the state more bang for its buck and accelerated the catch-up process. The last major hardware project was MITI's High Speed Computing Sys tem for Scientific and Technological Uses Project (I981-89, also known as the supercomputer project). The project was fully funded by the government with ¥ 18.2 billion ($12 1 .33 million); it targeted a ten-gigaflop parallel processing su percomputer. Initially, the firms were not interested in entering the supercom puter market. " When the [government-sponsored cooperative R&D] project was started, there were few supercomputers in use worldwide, so we thought there was not enough demand. I do not think that one company would have made such a big effort in supercomputers [as the project has]," explained a Fu jitsu manager.30 Still, MITI and the three top hardware firms, NEC, Hitachi, and Fujitsu, knew that high-speed devices and parallel computer architectures would be necessary to make more advanced computers in the future and that these technologies would have critical spillovers onto the broader electronics in dustry, including industries that use electronic parts and computers.3! As in other projects, the hardware part was more successful than the software part, suggesting that state targeting is more effective when targets are clear and involve reverse-engineering and manufacturing expertise. The supercomputer case also highlights the way in which strong state support, the huge, vertically integrated structure of the electronics giants, and little discipline from capital markets-due to cross-shareholding and main-bank corporate governance prac tices-allowed these firms to continue investing in supercomputers, despite the fact that they were not profitable.32 "We don't need to make a profit on our line of supercomputers," explained Watanabe Tadashi, the major architect of NEC supercomputers, who added, "whatever is spun off from our supercomputer
83 (Cambridge, Mass.: MIT, October 1983); discussion with Toshiba senior managing direc
tor, Feb.3, 1986; Tarui Yasuo and Nihon Handotai Seizo Sochi Kyokai, eds., Handotai rikkoku Nippon (Tokyo, [992), 99-151.; "Fujitsu Tops IBM's Sierra in Price/Performance," Eleclron ics, Nov. 25, [985, 20-1. 1 . 29. Anchordoguy, Computers, Inc., [38-40.
30. Interview, Dec. [, [987. 3 1 . MITI, Saisentan gijutsu no doko (Tokyo, [983), 748; Kompyutopia, Oct. [ 980, 107-8. 32. Marie Anchordoguy, "Japanese-American Trade Conflict and Supercomputers," Polit
ical Science Q:j;at'teriy [09, no. [ ( I994): 3 5-80.
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R&D helps in other information-technology fields."33 This case also shows how through public procurement the state continued to support all three firms, which it had encouraged to enter this market niche, despite the fact that NEC and Hitachi were not very competitive in the private-sector market. Because the state wanted several players in these technologies, it supported NEC and Hi tachi, the weaker makers, at the expense of Fujitsu. The keiretsu also helped the weaker firms stay afloat. Fujitsu machines ac counted for 80 percent of Fujitsu group firms' supercomputer purchases up through 1 992; NEC machines accounted for 43 percent of its group firms' pur chases; and Hitachi machines, by far the least competitive, still accounted for 29 percent of the supercomputer purchases made by its affiliated group firms.34 2. Conditions Key to Effective Intervention in the Market The institutions of communitarian capitalism helped promote the develop ment of a computer hardware industry, shaping market forces and creating in centives for firms to invest heavily in a risky industry. However, effective inter vention in the market requires certain conditions. Many of these institutions and policies would not have been effective if the firms were not in the catch-up stage in an industry where the technological path was quite clear (follow IBM) and foreign machines could be legally reverse-engineered. Under these condi tions, a system that focused on detailed planning and incremental change with an emphasis on manufacturing expertise had a chance to succeed. Also important was that while the firms were protected from global competi tion, domestic competition was strongly encouraged. "One mistake France and the u.K. made was to promote only one company, but in japan MITI always promotes at least a few firms. Domestic competition is key," explained an STA officia1.35 Even though there was significant cooperation on products, invest ment, and R&D, market forces were kept intact enough to pressure the firms to advance technologically and cut costs. The jECC system is a typical institution of communitarian capitalism, because it shifts the market logic to guide firms toward communitarian goals such as technological autonomy and orderly com petition. jECC encouraged the firms to develop better products at lower costs but also promoted equality among member firms. The goal was to raise the tide to lift all boats. It was set up to help firms that were helping themselves. Firms only benefited from jECC if they made increasingly advanced machines that users wanted to rent. Still, the state prevented unfettered competition. It pro33. Cited in "Supercomputer Bout," Business Tokyo, Apr. 1 990, 34. 34. Anchordoguy, "Japanese-American Trade Conflict," 58. 35· Interview, June 23, 1993·
Computers: Cooperation or Competition?
1 39
vided continuous support for all of the firms it had selected to enter the indus try; this support, together with jECC's price cartel, reduced the gap between winners and losers and prevented cutthroat competition from bankrupting the firms. A broad societal consensus in favor of raising japan's technological level and promoting economic growth allowed the bureaucracy to choose strategic indus tries and promote them. This was an era of deep respect for the bureaucracy, due in part to its ability to deliver the goods in the past. A strong consensus among state actors and the firms regarding the importance of the industry for the nation's long-term economic health was also critical. As long as MITI's tar geting policies were deemed to be helping the industry counter IBM and be come more technologically self-sufficient, the ministry was given broad leeway in structuring its policies and goals. Another key ingredient was a stable institution, MITI, which had consistent policies that did not change with each new administration. MITI's policies were much less politicized than those of MPT and NTT. Its insulation from the po litical process was due to two major factors. First, it had a relatively small budget compared to other ministries, such as the Ministry of Construction, MPT, and the Ministry of Transportation, all of which had huge public works budgets. Second, while MITI had the authority to support and protect the firms, it did not have the broad legal regulatory authority over the computer industry that NTT, MPT, and other ministries had over specific industries. An STA official explained that MITI's policies were not so politicized because politicians had little reason to intervene. Politicians want roads, bridges, telecommunications infrastructure, and the like for their prefectures. "The return is much smaller for politicians on MITI-related things."36 A jDB official and others concurred that MITI's relatively small budget was key to its insulation from political inter ference.37 NTT's cooperation was also critical. Communitarian capitalism at this time was oriented toward a common goal: industrial development. This was impor tant in coordinating the operations of institutions with different missions. Con sequently, despite power struggles between MITI, whose mission was to ad vance the overall level ofjapanese technology, and NTT, whose primary mission was to develop an advanced and reliable telecommunications infrastructure they cooperated on several R&D projects and together provided long-term sub� sidies and stable procurement that bolstered the same set of firms. To be effective, communitarian capitalism requires a relatively large domestic market in which firms can operate insulated from international market forces. 36. Ibid. 37· Interviews of former JDB official, Mar. 3 1 , 1 993; senior adviser to the Nuclear Material Control Center, Mar. 25, 1 993; former MITI official, Mar. 2, 1992.
140
Reprogramming Japan
The large market provides a place in which firms can collaborate in a relatively of risk-free environment and improve their capabilities and gain economies for markets foreign scale before facing tough offshore competition. Access to that technology and to sell products was also necessary. Macroeconomic policies enabled tion encouraged savings and investment and discouraged consump in Japan to remain independent of foreign loans while still investing heavily strategic industries. The diversified corporate structure of the hardware makers and their capac to ity to quickly absorb foreign technology through learning were also critical s, industrie ntensive the industry's success during this era. In all the capital-i that ms r fi huge of set a communitarian capitalism nurtured the development of were were members of large, stable industrial groups. These types of firms learning gy, technolo skilled at absorbing risk, reverse-engineering foreign The quickly, and advancing methodically through incremental innovations. un from ent managem d firms' corporate governance procedures, which protecte the with together firms, friendly shareholder demands and takeovers by foreign than rather ent, employm socialist view of corporations as providers of stable producers of profit, enabled these firms to survive despite low returns. ent. Of critical importance was an extremely favorable international environm on way other the looked , The U.S. government, busy with Cold War concerns of array wide a as well as clear infringements of U.S. patent and copyright laws, umpire, an as role ent's tariff and non-tariff barriers. The Justice Departm which led to IBM's unbundling, opened up a world of opportunity for Japan's hardware makers. It allowed Fujitsu and Hitachi to take an IBM-compatible were route--that is, to focus on hardware rather than the software in which they con antitrust of web a in very inexperienced. More important, tying IBM up competi foreign small, about cerns meant it was constrained from complaining tors copying its OS and applications software. In short, very favorable global and technological conditions, a smart state a strategy, willing and capable firms, and technonationalism worked to create of nothing say to decades, two comparative advantage in hardware in less than r providing a growing number of stable jobs in this sector. Success in compute u telecomm as such too, s, hardware had positive spillovers onto other industrie nications, semiconductors, and computer software. 3. Changing Conditions and Institutional Inertia ( 19808-1990s) In the late 1980S, favorable conditions critical to the state's prior effectiveness in targeting the industry had changed. When that occurred, the focus on incre mental change in manufacturing along with rigid capital and labor markets,
Computers: Cooperation or Competition?
141
close inter-firm ties, and preference for indigenous technology made it difficult for the industry to take the steps necessary to maintain competitiveness. Al though a large part of the explanation is related to software, which is analyzed in the following chapter, it is the hardware industry's environment that changed dramatically; yet the firms simply could not adapt, because of relatively fixed human and organizational capacities tied to hardware. One dramatic shift in the external environment came in the summer of 1 982 when IBM, cooperating with the FBI in a sting operation, caught Japanese firms stealing its software technology. Subsequently, the firms had to start paying IBM significant sums for copying its OS and were thus put under severe pres sure to find less costly alternatives to the IBM standard. This occurred at a time of great technological upheaval. Hardware was rapidly becoming a commodity product and software became the high value-added, profitable part of the com puter business. The rise in the importance of software and powerful micro processors radically shifted the industry's technological trajectory away from mainframes toward smaller machines that were placed closer to the user instead of in central corporate offices. The nature of competition in the industrv ' was transformed: it started to revolve around the creation and maintenance of glob ally dominant software standards-around innovation and strategies to capture network externalities by locking users into standards rather than around high quality, low-cost manufacturing. Companies such as DEC, which established it self briefly in the late 1980s as the standard for distributed mini-computers, be came hugely profitable. On account of this technological shift and the burst of the economic bubble in the early 1 990S, demand for mainframes started to decline. With a strong yen, a dramatic slowdown in the economy, and plummeting stock market values, it was clear to the firms and the government that they needed to shift from pro ducing expensive, centralized mainframes to much cheaper, smaller machines and, more important, from manufacturing commodity products to higher value added, profit-producing software-based products that could support the na tion's high wages. However, unlike in the past, when IBM's latest model provided a clear target to pursue, the technological path was no longer clear. Just when the bureaucrats and industrialists started putting together policies for mini-computers, that era was over and the industry was already shifting toward workstations. MITI and the firms knew their institutions and policies were no longer effective and needed to be overhauled. However, because policies had been established and worked well for a long time, they could not be altered without ( I ) abrogating commitments to workers and suppliers and (2) neglecting their responsibility to promote domestic technology. Moreover, the economy was booming, and Japan was increasingly viewed as an emerging global leader. Faced with this confusion, the computer firms, unwilling to renege on communal commitments and confi-
1 42
Computers: Cooperation or Competition?
Reprogramming Japan
dent about their business practices, continued to focus on mainframes, working to increase their speed even as sales ceased to expand. The labor practices of the computer makers contributed to this paralysis. The seniority system assured that the key managers in the computer firms were men who had established their careers in the age of mainframe computing. They found it difficult to admit that the world was changing. And even if they recog nized change, the lifetime employment system made it difficult to hire mid career engineers and executives who might have been able to help redirect the company. In addition, the computer makers and users were burdened with a labor force trained to design and maintain mainframe computers. Those work ers, who had once worked hard to build the industry, would now hold back the firms. NTT and MITI labs were similarly stuck with employees and research capacities oriented toward incremental innovation, planning, and reverse engineering. Thus, while in the U.S., market forces led producers and users to shift rapidly away from mainframes toward mini-computers and workstations in the late 1980s and early 1 990S, the Japanese market for mainframes, though de clining, was still quite large until 1995.38 Even in 200 1 , a large part of these con glomerates' investment went to hardware: software investment in Japan was only 28 percent more than hardware investment in 200 I; U.S. firms, in contrast, in vested 70 percent more in software than hardware.39 Even though it was no longer in the firms' economic interest to maintain the status quo, it was in their social interest to do so. The rise in the importance of distributed computing and software also hit hard Japan's supercomputer makers. Starting in the mid-1 990s, the global su percomputer market shifted from vector-based machines to massively parallel processing (MPP) machines. This played to the advantage of U.S. makers, be cause MPP machines required very sophisticated software to get thousands of processors to work together. In 1999, the Prime Minister's Science and Tech nology Panel found Japan lagging behind both the U.S. and Europe in overall software development. Around the same time, MITI announced a software project to bolster the nation's supercomputer makers, because of concern that many research institutes were relying on foreign supercomputer applications programs and that fundamental R&D technologies would be controlled by for eign firms.4o To help keep them alive, the government also continued to spread its orders relatively equally among the domestic firms. In 1 998, there were 1 6 in stallations of Fujitsu supercomputers at government labs, 1 3 NEC machines,
1 43
and 1 I Hitachi supercomputers.41 The shift to MPP machines also led Cray of the U.S., which, like the Japanese, had stuck to vector processing machines, to the brink of bankruptcy.42 The Japanese and U.S. governments have continued to support their domes tic supercomputer makers out of concern for national security and the desire for a strong science and technology infrastructure. Japan's STA collaborated with various national labs in the Earth Simulator Project, a five-year $500 million project started in I 997. NEC led this project since Fujitsu had its turn leading the 1 9808 supercomputer project. In April 2002, the project and NEC an nounced the world's fastest supercomputer, a 5,000-processor machine that runs at 40 teraflops, some five times faster than other machines. The Earth Sim ulator machine is used in climate and earth research to help better predict earth quakes, rainfall, and volcano eruptions. NEC's success in this field, at a time when most had written off Japanese makers because the market moved toward MPP machines, shocked the U.S. gov ernment. Some dismissed the impact of the project, noting its extremely high cost, the machine's limited use and applications, and the very slim potential for any commercial use of the expensive machine. However, NEC's success shows that when the Japanese focus on a known technology for a narrow set of applica tions and invest huge resources, they can still develop remarkable machines. Not to be outdone, in May 2004 the U.S. Department of Energy announced a na tional project to surpass the Japanese machine. Notwithstanding the impressive NEC supercomputer, a lack of sophisticated software remains a major weakness for Japanese supercomputer makers. Consequently, U.S. makers still dominate the global market. They have produced 91 percent of all supercomputers cur rently used in the world.43 In sum, in both the mainframe and supercomputer industries, rapid and dis continuous technological change caught Japanese firms unaware in the late 19808 and early 1 990S. The benefits of communitarian capitalism started to erode in an era of radical technological change. Lacking a threat from new en trants or demanding shareholders, the huge hardware firms were not required to quickly restructure to survive. To the contrary, while they could have boosted profits by overhauling their practices, close relationships with employees, banks, suppliers, and users made them reluctant to change. As a result, they were slow to respond to the shift toward distributed computing in the late 1 980s. 4 1 . Asian Technology Information Program, HP0)9.02 "Current Japanese HPC Installa
38. Wataru Kakayama, William Boulton, and Michael Pecht, The Japanese Electronics In dustry (New York, 1999), 67; Onishi Katsuaki and Nihei Satoshi, eds., Nihon no sangyo kozo
(Tokyo, 1999), 1 66; Kihon Joho Shori Kaihatsu Kyokai, ed.,Johoka hakushQ
2002,
442.
39. METI, JoM shori shinko shisaku n; tsuite, July 2002. 40. "Supakon no sofuto kaihatsu shien," Nihon keizai shimhun, Mar. 29, 1999, 1 7 .
tion in the Public Sector," Jan. 4, J 999. 42. In the late J9908, Cray was taken over by Silicon Graphics, sold off, and then spun off as an independent company. 43. John Markoff, "NEC Machine Again Leads Speed Ranks," New York Times, Nov. 1 5, 2002, C2.
1 44
Reprogramming Japan
Accustomed to pursuing the same goals and following similar strategies, none of the firms wanted to take the risk of committing to a particular new tech nology, so they were always late to the game. And, dissimilar to the United States, because of the centralized bank-based financial system, the lack of ven ture capital, and norms that favor large established firms in industrial groups, no new companies emerged to fill the breach. As a result, Japan's industry remained focused on how to improve the performance of mainframe hardware at a time when the international community had long since begun to recognize that smaller computers running off-the-shelf software were crucial to performance. Still, though irrational from the perspective of maximizing profits, allied firms and the state have continued to support the large mainframe makers. It should be acknowledged that Japan's efforts have been more successful than their British, French, and German counterparts, which all attempted to build a national champion computer company. Fujitsu took over ICL (Interna tional Computers, Ltd.), Britain's national champion computer firm, in the early 1 990S. Siemens, which had relations with Fujitsu since the prewar period, ceded its entire computer business in 2002 to a coUaborative venture led by Fu jitsu. France's Machine Bull was folded into a venture with Honeywell and NEC in the last half of the 1 980s. The market power of Japan's computer mak ers continues to make itself felt in the PC business, even though the companies were late to the market. At the end of 2002, NEC's market share in PCs in Japan was 2 I .4 percent, Fujitsu 20 percent, Sony I I .8 percent, Dell 7.7 percent, Toshiba 7.5 percent, Japan IBM 6 · 3 percent, Hitachi 4 · 9 percent, HP Japan 3 · 7 percent, Sharp 3 . 1 percent, and Apple 2.9 percent.44 But it is a Pyrrhic victory. Japanese firms have only a small share of the PC business overseas and the mainframe business continues to shrink as a propor tion of the total computer market. In the more rapidly growing server business, foreign firms dominate the Japanese market. In 2002, Sun Microsystems had a 52.6 percent share; HP Japan, 1 6 . 1 percent; Fujitsu, 1 I percent; IBM Japan, 8.8 percent; and NEC, 3.7 percent.45 Foreign penetration of such industries has made vigorous competition and a focus on profits more acceptable. Growing competition since the late 1990S has led firms and the state to con test norms, resulting in cost-cutting measures and unprecedented consolidation of firms. Hitachi still makes mainframes; however, since 2000, it buys PCs for corporate use from NEC under an OEM arrangement. Mitsubishi Electric, which struggled for decades, now purchases PCs and computer servers from NEe. This type of consolidation among firms that are members of different keiretsu groups was unheard of just a few years ago. Sony's entrance and strong showing in the PC market starting in the late 1990S also indicates a more open 44. "Pasokon shukka 1 1% gen," Nihon keizai shimbun, Feb. 26, 2003, 13. 45. "San, Nihon NCR to teikei, saba harbai kyoka," Nihon keizai shimbun, June 29, 2002, 9·
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market, as does the rising share of foreign makers. Another sign of change is that a foreigner leads NEC's team effort in collaboration with a government agency to develop a quantwn computer, a still largely hypothetical device that would be much more powerful than current supercomputers.46 Computer imports started to soar in the 1 990S and in 2003 totaled some ¥735 billion ($73.5 billion) up from ¥258 billion ($25.8 billion) in 1 993; exports, primarily laptops, have lev eled off, declining from ¥445 billion ($44. 5 billion) in 1 993 to ¥239 billion ($23.9 billion) in 2003 (Figure 5 . 1 ). Foreign firms disrupted order in this industry, destabilizing a stagnating market based on institutions and policies that reflected social and developmental norms out of step with a transformed technological environment. To better un derstand why the Japanese state and firms failed to leverage a competitive hard ware industry into a vibrant software industry, this study now turns to an analy sis of the software industry's development. 46. "
6
Software: Programmed for Failure
If the institutions and practices of communitarian capitalism shaped the develop ment of the software industry differently in contrast to the other three industries examined in this volume, it is because the nature of the software technology was so fundamentally different. The big winners in software are the firms that emerge early to establish industry standards. They are able to gain "network externali ties." That is, the more people use the software of these firms, the more dominant the standard becomes and the harder it is to dislodge. Creative ideas and not pro duction skills and economies of scale are critical to competitiveness. Experts have pointed to a lack of creativity and other factors to explain the weakness of Japan's computer software industry. Some observers point to char acteristics of the Japanese language that make it harder to use for programming. Still others point to poor computer science education. l All of these factors have certainly contributed to Japan's weakness in software. This study, however, fo cuses on how communitarian institutions and policies exacerbated the indus try's problems by encouraging the development of an industry structure domi nated by large firms, an education system that promoted conformity, and a business approach that promoted closed standards. These arrangements were unsuited to an industry in which technological change is rapid and unpre dictable and competition focuses upon the establishment of dominant standards and problem-solving ideas rather than production skills.
1 . Yasunori Baba, Shin;i Takai, and Yuji Mizuta, "The User Driven Evolution of the Japa nese Software Industry: The Case of Customized Software for Mainframes," in The Interna tional Computer Software Industry, ed. David Mowery (New York, 1996), 1 04-30; Martin Fransman , Japan 's Computer and Communications Industry: The Evolution of Industrial Giants
and Global Competitiveness (Oxford, 1995).
148
Reprogramming Japan
Communitarian capitalism, with its focus on market stability, predictability, and risk avoidance, promoted large firms with close government and keiretsu ties. But small firms are most likely to produce the innovations necessary to emerge as a strong player in the software industry. The rigid labor system was ill-fitted to the needs of a technologically turbulent industry. State and corpo rate leaders failed to recognize that software differed fundamentally from man ufacturing sectors and thus pursued policies in software that had been effective in hardware. They did not understand the power of international standards and repeatedly tried to insulate themselves from the global market. On the surface, Japan's software industry looks relatively successful. Its pro ducers are second only to U.S. firms as global players. However, this apparent success is misleading because they are only doing well in the domestic market, worth $17.25 billion in 2003. Furthermore, this dominance is based on propri etary systems whose share has diminished over the years. Though less depen dent than its European counterparts, Japan's imports of software have skyrock eted in recent years. Its trade deficit in software, including game software, a major export, rose from $3.57 billion in 1999 to $7.6 billion in 2003. In 2003, 52. 1 percent of its computer software was imported, up from 39.7 percent in 1 999. During this time, 75-90 percent of software imports came from the United States. Imports of software technology also increased sharply starting in the mid-1980s (Figures 6. 1 and 6.2). Almost no Japanese software for computers is sold abroad. Of the world's top 20 software vendors (software and services) in 2000, there is only one Japanese firm-Hitachi, ranked thirteenth because of its huge share of the domestic mar ket.2 In contrast, Germany's SAP AG is successful in world markets and was ranked eleventh.3 Japan's lack of exports in this sector suggests it has only suc ceeded by insulating itself from world markets. In this industry, where use of the product is in many respects more critical to the nation's development than the industry itself, this insularity has hurt Japan. Indeed, in 2001 the size of Japan's market was only 1 4 .2 percent that of the United States. Even though Germany's economy is much smaller than Japan's, its software market is slightly larger, and the U.K.'s market only a bit smaller, than Japan's (Figure 6.3).4 In terms of packaged software use, the business that is growing most rapidly, Japan ranks 25 out of 28 major nations in 2001 ; only South Korea, Mexico, and Turkey ranked lower than Japan.5 Japan's software weakness stands out in contrast to its success in related industries, such as telecommunications, computer mainframes, per sonal computers, semiconductors, and consumer electronics.
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152
Software: Programmed for Failure
ReprogrammingJapan
There is one area in which this does not apply, and it offers an interesting counterpoint: game software. This chapter will show, however, that the game in dustry is the exception that proves the rule. It was a new industry, not domi nated by foreign firms and foreign standards, and network externalities were much less important in terms of locking in users. Game software makers were not tied closely to the government, industrial groups, or main banks. In short, the nature of technology in the game industry was different and the firms in it were much less embedded in the institutions and policies of communitarian capitalism.
1 . A Vicious Cycle The computer software industry was heavily influenced by the norms of communitarian capitalism. Long-term relations between the software makers and their customers, favoritism toward large firms and domestic technology, and the state's role as a promoter of firms rather than a neutral umpire, all helped support the industry but in the end contributed to its failure. The effort by large firms to shield their customer base contributed to fragmented, closed stan dards.6 The unwillingness of the state and the firms to allow companies to fail prevented dominant software systems from emerging as standards. The makers' factory approach to software focused on boosting efficiency in writing code rather than using code to approach business problems in innovative ways. Let's recall that when the U.S. government forced IBM to unbundle its hard ware and software in I 969, IBM was required to release the specifications for its OS so that other firms could develop applications software that could run on its OS. This was the first "open" standard and it was proprietary-IBM owned and controlled it. Although IBM initially resisted unbundling, its open standard was the ultimate source of its dominance over the next two decades. Once indepen dent software firms could sell programs that worked with IBM's OS, they in vested huge sums to develop complex accounting and finance programs. IBM customers preferred buying this off-the-shelf software to developing their own applications. This provided U.S. businesses with a large library of programs to choose from, assuring IBM's dominance over early competitors, such as Bur roughs and Honeywell. By the late 1 970S, it was clear that only firms offering open standards would succeed. Wang Computers offered closed standards and failed. DEC, with open standards, became dominant. Apple, with an open standard, took an early lead in PC software. Then Microsoft introduced a new twist with its DOS and Win6. Thomas Cottrell, "Standards and the Arrested Development ofJapan's Microcomputer Software Industry," in The International Computer Software Industry, ed. Mowery.
153
dows standards. Not only did it design its OS so that independent software firms could develop programs to run on it; it also developed an OS that could run on any computer designed to specifications originally set by IBM with its first Pc. Through this combination of hardware and software standards, Mi crosoft soon dominated the global PC software business. What is important in the U. S. case is that by forcing IBM to move to open standards, the government unleashed powerful market forces that pushed the industry steadily toward increased standardization. Firms with good problem solving ideas that developed open standards emerged early as victors. In Japan's industry, in contrast, the bureaucracy sought to replicate its success in other in dustries by encouraging the diversification into software of a few established hardware makers. The state's unwillingness to force unbundling, together with software users' ardent loyalty to their suppliers, meant there were no new en trants or competition; the result was that the main firms continued to develop and sell machines with closed operating systems long after most U.S. firms had abandoned the practice. Several cases analyzed below highlight how communi tarian norms shaped the industry's structure, degree of competition, and prod uct line in the I 9608 and I 970s.
The Japan Software Company (JSC) The firms' first move into the software business came as part of MITl's first major computer project, the Super High-Performance Computer Project ( 1 966-7 I ), which was aimed at countering IBM's 360 series of mainframes, in troduced in 1964. To develop the project's software, MITI helped create the Japan Software Company (JSC), a joint venture among the three strongest hardware makers-NEC, Fujitsu, and Hitachi-and the Industrial Bank of Japan, a bank long supportive of state targeting policies. This software venture received only 25 percent of the project's total cost, reflecting a lack of consensus on the importance of software. The JSC's mission was to develop an OS that could run on all three makers' machines. By encouraging the firms to develop a common standard, MITI hoped to induce them to unbundle their software and hardware. This would help create an independent software market, one in which firms unrelated to the hardware incumbents could develop applications software to run on these gi ants' machines. While making the firms' machines compatible made sense from a national perspective, the firms were losing money on their computers and needed a strategy that would enable them to survive. They believed the most ef fective way to assure sales of their hardware and software was to bundle them into one product, thereby locking users into their closed standards. Since they were allied with major keiretsu, they enjoyed a captive market within their groups. Thus, the JSC's goal of creating a common OS standard countered the
1 54
Reprogramming Japan
firms' short-term economic interest of locking users into their own standard and worked against customary close ties between keiretsu members. 7 This approach was modeled after MITI's efforts in hardware, steel, and autos. The state favored large, vertically integrated firms with keiretsu ties that focused on imitating foreign products and competing on manufacturing capa bilities. Neither MITI nor the firms fully grasped that computer software was a different type of technology. In software, first-movers determined standards; as these standards became dominant, they enjoyed network externalities, which at tracted more users and thereby created huge barriers to entry for newcomers. Unlike in the other industries that MITI was targeting, economies of scale and manufacturing expertise were not critical to competitiveness in software. By se lecting the three major mainframe makers for the JSC, the state assured that they would dominate the computer software industry. The JSC did not meet its ambitious objectives. State and corporate lack of knowledge about software, minimal financial support, and contradictory incen tives for the firms led to its bankruptcy in 1 972.8 MITI allowed this bankruptcy because it was unhappy with the firm's radical labor union and because all the employees could return to their original firms. The company's failure was also the result of the firms' opposition to developing a common standard. Their risk averse strategy of relying on closed standards made economic sense in the 1 960s when their hardware was not competitive because customers had no choice but to purchase hardware and software as a package. It was also consistent with long-term commitments to employees and customers. However, it set them on a path that would haunt them decades later.
IBM's Unbundling The ]SC's work was also made obsolete by a dramatic shift in the global en vironment: IBM's unbundling of its hardware and software in 1 969. As ex plained in chapter five, IBM's unbundling allowed Japanese firms to "borrow" IBM's OS and applications software for free. The firms altered IBM's software enough to make their machines incompatible, thereby locking users into their machines. This strategy allowed MIT! and the makers to focus on nurturing hardware and related products such as semiconductors. While IBM's unbundling influenced the firms' strategies, other characteris tics of communitarian capitalism also encouraged closed standards and bundling. Close interfirm relations in general and the keiretsu in particular en couraged users to purchase computers from allied firms, pressuring them to buy 7. Interview of the IPA Director involved in this project, Nov. 14, 1996. 8. "Konmei no sofutouea gyokai 0 ikinuku,"Komp'vutopia, Jan. 1 979, 95-100; Anchor doguy, Computers. Inc., 49-53; interview of IPA Director, Nov. 14, 1996.
Software: Programmed for Failure
1 55
closed systems they might not otherwise have purchased. Low labor mobility, because of the lifetime employment and seniority wage systems, reduced pres sure for common standards; since workers generally did not change companies, learning firm-specific computer standards was not a major problem. Stable shareholding arrangements, the main bank corporate governance system, and state favoritism for large, diversified firms encouraged firms to grow internally, keeping technology within the firm. Reliance on closed standards made it diffi cult for foreign firms to enter the market and thus bolstered technological au tonomy. The risk-averse large firms' proclivity for yokonarabi behavior meant all the hardware makers followed similar strategies so that none would stick out. In contrast, in the U.S., some makers bundled (Wang) and some unbundled (IBM, DEC); some had open, nonproprietary standards (AT&T's Unix) and others had open, proprietary standards (Apple, IBM). The firms with open, propri etary standards profited the most.
The Information Processing Promotion Association (IPA) l\lITI's approach to computer software was much like its approach to hard ware. Although it subsidized small independent software makers, it was unwill ing to force unbundling. This left the industry dominated by the large hardware makers. Since these firms were all supported by JECC, state subsidies, and co operative R&D projects involving MITI and NTT labs, no dominant Japanese standard could emerge, nor could new entrants. State and corporate policies that supported all the firms prevented clear winners and losers and obstructed the emergence of an independent software market. In fact, there was no software market at all, since virtually all software was sold bundled with hardware. To help create a market for software, MIT I created the IPA in 1970. The IPA's goal was to help small, independent software houses develop standardized, general-purpose, applications software packages. As part of this effort, the IPA organized two MITI-funded research projects: the Software Module Project ( 1973-75 ) and the Software Production Technology Development Program ( 1 976-8 1 ).9 But the IPA and its projects were not very effective. Low funding and the lack of an intellectual property regime to protect software inventions contributed to this failure. III However, even if there had been more funds and better legal protection, the IPA was destined to be ineffective as long as the firms insisted on bundling their software and hardware. Even if MITI had required the firms to unbundle, elements of communitar ian capitalism hindered the emergence of an independent software market in other ways. The financial system provided little support for small independent 9. Anchordoguy, Computers, Inc., 1 3 1-32, 148-49. 10. Interview of IPA Director, Nov. 14, 1996.
156
Software: Programmed for Failure
Reprogramming Japan
firms. Banks insisted, for example, on land as collateral to get a loan. A firm's earnings potential was not enough to acquire a loan because banks lacked the skill to analyze such data. Since there was no venture capital, there was no alter native source of capital for start-ups. The lifetime employment and seniority wage systems, together with the prestige attached to working for a large, well established company, discouraged top minds from creating or joining start-ups and blocked mid-career labor mobility. In short, key communitarian arrange ments worked against the IPA's goal of encouraging small, independent software makers. Few new independent firms emerged during this period in any core in dustry, let alone software. The catch-up mentality and institutional arrange ments that focused on incremental innovations and quality control led the in dustry to approach software development as primarily a production problem, one of cutting costs and improving quality. Michael Cusumano has shown how the electronics conglomerates took a fac tory approach to software: they focused on cutting costs by reusing software, minimizing bugs, and using other techniques to increase productivity. l l This ap proach helped develop routine, production-oriented software, such as that used to automate robots or factories. Japanese firms understood these products and so they knew what kind of software was needed to deal with potential problems. But developing OS and applications software required a fundamental understanding of the complexities of databases, spreadsheets, and other key functions of general use computers. Programming required not only an understanding of the busi ness problems that the software was designed to solve, but also a creative ap proach to solving those problems. Japan's risk-averse approaches dealt with nei ther of those challenges. MITI's and IPA's policies encouraged this factory approach to software. IPA's efforts, for example, focused on increasing the number and productivity of software engineers by creating reusable software modules and training more en gineers. This approach was out of step with an industry in which concept, cre ativity, and standards, not merely productivity, were crucial to competitiveness. Moreover, since software was based on closed standards and bundled with hard ware, the IPA had difficulty renting the incompatible programs it paid small firms to develop.12 Users bought their software bundled with their hardware, so they did not need-and could not use-the IPA-supported packages. While IBM was required to publicize the information needed to produce programs to run on its machines, Japanese makers were not, making it difficult and costly for I I . Michael Cusumano, Japan's Software Factories: A Challenge to U.S. Management (New York, 1 99 1 ). 12. Japan Electronics Industry Promotion Association (JEIDA), ed., Nichibei sofutouea gyappu ni kan suru chosa hokokusho, waga kuni no joho sangyo no kadai (Tokyo, Mar. 1 994); Tojo Akio, "Sofutouea kojo kara sofutouea kobo e," bit, 27, no. 7 (July 1 995): 4-9.
1 57
independents to develop software for the major makers' machines. Because of this structural barrier, banks were unwilling to lend money to software start-ups even when the IPA guaranteed 95 percent of the loan. 13 In sum, relatively closed capital and labor markets and close buyer-supplier and government-business ties aimed at promoting stable employment, yokona rabi competition, and technological self-sufficiency led to an industry domi nated by a few large hardware makers that clung to closed standards long after such strategies countered their economic interest and had been jettisoned in the rest of the world. The state's efforts to nurture an independent software indus try were doomed by its inability to foster broad standards and financing mecha nisms that small, independent firms would require. 2. The Dilemma Deepens Given the absence of broad-based standards, the software industry emerged in the late 1 970S as a collection of firms whose primary work was developing custom software. And though they may have developed the world's best soft ware factories for writing custom software, there was no way this software could ever compete with mass market software programs that are developed once and then sold to many thousands of customers. Customized software was extremely expensive to develop, making it difficult to upgrade regularly. Yet having soft ware specifically tailored to your needs was considered standard practice in Japan. Costs were also high because software had to be made for the wide array of computer standards in use. In short, by the early 1 980s it no longer made eco nomic sense for users to rely on expensive, technologically inferior software based on closed standards. In a market-based system, standards emerge in ac cordance with survival of the fittest. However, targeting policies, lifetime em ployment, and user loyalty to their suppliers supported the makers and their standards irrespective of their capabilities. Since the economy was booming, software users-mostly firms-could ab sorb the costs of this inefficiency. The computer makers were still free to "bor row" and modify IBM's OS, and the capitalist system was working well in other industries. Thus, while the firms became increasingly aware that fragmented, closed standards were a long-term liability, they were unwilling to unbundle, fearing it would hurt their business and disrupt ties with their customers. Given that shareholders did not pressure the firms to emphasize profits, there was no immediate pressure on the state and firms to revise their strategies. Nevertheless, MITI, concerned about the industry's future, added software to its priorities in 1 978 when it passed the Kijoho, an extension of the 1957 Ki1 3 . Anchordoguy, Computers, Inc. , 128-3 1 .
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Reprogramming Japan
denhO, a law that targeted computers and electronics. MITI used the fanfare over the new law to publicly advise the makers that their various closed stan dards would harm them over the long run and thus they should unbundle their products. With the hardware makers competitive and users buoyed by a boom ing economy, it was a good time to discuss unbundling and a shift toward global standards. 14 As of 1 978, to help spur unbundling, MIT! had JECC, the quasi-public computer rental company, offer to rent software separate from hardware. The hardware-software producers, however, continued to waver, convinced un bundling would devastate their business because users would be free to choose software based on price and performance.ls Since the government and loyal users continued to support the top makers and thereby hindered new entrants, and shareholders continued to be unconcerned about maximizing profits, there were no immediate incentives to unbundle. MITI and other state agencies also still saw the industry as needing large, strong firms to counter IBM. 16 As one MITI official put it, there was no reason to push for change when "the users and computer firms were happy."!7
The IBM Industrial Spy Incident
As the firms continued to improve their hardware-the so-called IBM clones-IBM started to perceive a threat, and its only weapon was to use its software to delay clone makers. Since 1 980, makers of IBM-compatible ma chines had been under increased pressure to gain quick access to IBM's tech nology because Big Blue, trying to delay clones, introduced computers that in corporated some key OS microcode into their hardware. IBM still made its hardware information public. However, now clone makers had to figure out the software embedded in the hardware. IBM knew that Japanese firms were trying to steal this information. Recently freed from a thirteen-year antitrust suit by the U.S. government, it decided to crack down. IBM and the FBI, cooperating in a sting operation, caught Hitachi and Mitsubishi stealing IBM technology in the summer of 1982. What the Jap14. MITI, Sofutouea gyo no genjo to tenbo, ed. Kikai Sangyo Kyoku (Tokyo, 1979); "Sofuto chushin jidai ni sonae," "Yushoka, mushoka no toitsu 0," "Kakaku kijun kasen ga kabe," "So
Software: Programmed for Failure
anese call the "IBM Industrial Spy Incident" transformed the industry's tech nological, economic, and intellectual property parameters, shaking Japan and the industry to its core. "In all of Hitachi's history, there was never a shock like that," said Hitachi's vice president. 18 Hitachi and Mitsubishi were soon forced to settle with IBM. Not long afterward, Fujitsu agreed to pay IBM for access to its technology. Fujitsu Chairman, Kobayashi Taiyu, admitted that Fujitsu did not have to steal IBM's technology because it was already receiving it from Am dahl, its U.S. partner. Amdahl presumably had stolen the technology. The firms never denied copying the software; evidence showed they had even copied the bugs. 19 The Spy Incident meant the firms now had to pay IBM annual licensing fees. Hitachi paid IBM ¥ 1 0 billion ($45.45 million) for the cost of the suit and past use of IBM's software and started paying it ¥8-I2 billion ($36.36-$54.54 mil lion) in annual licensing fees.20 As late as 1 990, Fujitsu was paying IBM an esti mated $26-5 1 million annually, equivalent to 5-1 0 percent of Fujitsu's annual profits at the time.21 Since the makers had never made much profit on their machines, they did not want to pay IBM these fees indefinitely. Moreover, they wanted to continue to bundle software and hardware and use standards that were incompatible with the rest of the world to ensure technological independence as well as pro tect themselves from competition. While a shake out in the industry might have led to convergence on a couple of dominant domestic standards over time, there were no competitive mechanisms to weed out good and bad software makers. The firms could afford IBM's fees, so this crisis was driven as much by na tional pride as financial concerns. There was a strong consensus among MITI, other state institutions, big business, and users that Japan needed its own stan dards to protect national security and corporate secrets. Technonationalism, along with labor and capital rigidities of the producers and users, led the state and the firms to cling to their old ways, even though these policies countered their economic interests. They organized risk-sharing R&D projects and used nationalist slogans to rally the industry and users behind non-IBM standards. "We have to make a complete break from the IBM standard in order to survive," explained the Managing Director of the Japan Information Processing Develop ment Center (JIPDEC).22
futo ryu.tsu taisei ga kage," "Kyokyu taisei no tayoka susumu," Nihon keizai sangy/} shimbun, Feb. 28, 1979, 4, Mar. 2, 1979, 4, Mar. 3, I979, 4, Mar. 6, 1979, 4, �ar. 8, 1979, 4. The head of the Japan Users Association of Information Systems, among others, emphasized that users hindered unbundling; interview, Nov. 1 3 , 1996. 1 5 . "Konmei no sofutouea gyokai 0 ikinuku," Kompyiitopia, Jan. 1979, 95-100.
159
1 8. ToyiJkeizai, Feb. I, 1986, 34. I9. Bungei shunju, Sept. 1982, 98-99 .
20. Shimoda Hirotsugu, IBAf to no 10 nen senso (Kyoto, I 984), 60-61 .
1 6. Interview of MITI official, July 8, 1 994.
2 1 . Fujitsu, Yiika shOken hokokusho soran, H}89 (Tokyo, 1990), 25.
1 7 . Interview of MITI official, Nov. 13, 1996.
22. Interview, Feb. 28, 1986.
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Reprogramming Japan
Throughout the period from the late 1 970S to late 1 980s there was a flurry of R&D projects aimed at reducing reliance on IBM's standard, such as the Fifth Generation, Software Interoperability, and Sigma projects. The Fifth Genera tion Project ( 1982-92) was a bold initiative to develop a new computer architec ture. While it contributed greatly to parallel processing training and infrastruc ture, it did not reduce reliance on IBM's standard. Moreover, when it ended in the early 1 990s, the industry had already shifted in a different technological di rection, highlighting the difficulty of targeting effectively when the target is not clear and technological change is rapid and discontinuous. The Sigma Project ( 1 985-90) was also aimed at reducing the firms' reliance billion ($13 1 .2 million) in state funds, the largest budget on IBM. With yet of any state-sponsored software effort, the project promoted the open, non proprietary Unix OS standard. By promoting a free open standard, MITI was trying to make it acceptable for firms to unbundle and use the Unix OS on their machines. However, in this project, MITI and the IPA continued to approach the in dustry as a problem of production. They focused funds and researchers on soft ware productivity and the development of reusable Unix-based software tools rather than software concepts and functions users desired. Some say the project nudged the firms toward the Unix standard quicker than would have otherwise occurred. But most, including MITI and IPA officials, agree the move would have happened anyway and that the jump-start was probably not worth the cost.Z3 The project's relative ineffectiveness exposed how a system that focused on manufacturing, planning, and having all the firms follow similar strategies was not conducive to the health of an industry characterized by rapid and un predictable technological change. The Sigma Project also failed to encourage unbundling. During this time of crisis, the last thing firms wanted was to lose their customer base. Desperate to continue to lock in users, the makers developed their own closed versions of the Unix OS and bundled it with their hardware. This occurred to a certain degree in the U.S.; however, in Japan all the main firms followed this strategy. Since users remained loval to their allied software makers, software remained bundled and no independ;nt software firms emerged. The industry was caught in a vi cious cycle. No matter how much MITI's IPA nurtured independent software houses, there was no market for their products as long as the hardware compa nies sold bundled systems. When AT&T suggested it might start asserting its copyright on Unix, a consensus emerged that a dominant domestic standard was 23. jEIDA, Nichibei sofutouea gyappu; Hayashi Ryozo, "Nihon no sofutouea sangyo to sono seisaku kadai," Bijinesu rebyu 41 ( 1 993): 24; interviews of IPA Deputy Director, july 1 9, 1994, and Sigma Project head, july 1 3, 1994·
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needed. "There i s a feeling that i n the future Japan may no longer b e able t o use America's operating systems freely. We must create and promote the diffusion of a Japanese Rising-Sun [hi no maru] operating system standard," said the manag ing director ofJIPDEc.u The TRON (Real-Time Operating System Nucleus) project, which created a Japanese hi no maru OS, was announced with tremendous fanfare in 1 984 and continues today. Though not state-sponsored, the Ministry of Education (MOE) supported it with a 1 987 announcement that TRON-based PCs would be used in public schools. The ministry ultimately rejected this plan because of disagreement about how to best promote the industry. MITI officials and Saka mura Ken of the University of Tokyo, who headed the project, said pressure on MITI from the U.S. Trade Representative nixed the plan. However, in this case MOE used gaiatsu (foreign pressure) as an excuse for rejecting a proposal that experts knew would lead Japan to depend on yet another unusual standard .25 Most users around the world relied on IBM mainframe and PC (MS-DOS) standards at the time. Thus, even ifTRON had been superior, it would not likely have succeeded internationally. The high expectations of TRON reflected the desperation the industry and state felt on account of their dependence on IBM. Yet, at the same time, it also showed confidence in their technological capacities. MITI and the firms thus spent significant sums and many years trying to cre ate a domestic standard, which, even jf accepted domestically, would have left Japanese producers and users isolated in global markets. That is, the d rive to be technologically independent and to maintain existing commitments to employ ees and customers led the state and the firms to behave in ways contrary to their economic interest. Of course, that did not matter, because their interests were not economic so much as social and nationalistic. Around the same time, MITI, in a desperate attempt to bolster domestic makers, proposed a new law that would protect software intellectual property for fifteen years instead of the fifty years provided by international copyright law. Since the IBM spy case, the U.S. government had been pressuring Japan to provide clear legal protection to software. The U.S. and MOE's Cultural Affairs Agency, which oversees Japan's copyright law, wanted software included in the copyright law, as is the case in the U.S. and Europe. MITI's proposed new law would have given it control over software protection and the authority to require a firm to license its software to another company when MITI deemed it in the national interest or when a firm had substantially altered the original software and wanted to sell it as a new product. "We want to prevent firms from having to completely rewrite software that already exists," explained MITI's Kawano Hi24. Interview, Dec. 13, 1987. 25. Interview of one of japan's top computer industry experts,july 1 4, 1 994.
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Reprogramming Japan
robumi.26 Experts acknowledged that the proposed law was aimed at helping do mestic firms cheaply copy foreign software programs. 27 Also behind MITI's move was a copyright dispute between IBM and Fu jitsu. After the FBI sting, the two firms had settled. However, in I 985, IBM ac cused Fujitsu of infringing the agreement. Fujitsu denied the charges, although one of its managers admitted that it could not suddenly drop the IBM standard its customers had invested heavily in. 28 The American Arbitration Association arranged a settlement in which Fujitsu paid IBM a penalty of $400 million, about the same amount as Fujitsu's annual profit at the time.29 Given Fujitsu's bind, it is no surprise that MITI was trying to help it by gaining control over software protection. However, MITI lost the battle. MOE's Cultural Affairs Agency sided with the US. At a time of global tensions over Japan's rising trade surpluses, MITI could not get away with protecting soft ware for fifteen years when other advanced nations protected it for fi fty years. In I986, software was included in the copyright law, making Japan's software pro tection similar to that of the US. and Europe.3o A mixed sense of confidence and insecurity thus characterized the industry in the 1980s. The firms had caught up with IBM in hardware and were very proud of this achievement. Yet, the humiliating FBI sting made them keenly aware of their vulnerability in software. MITI, the makers, and users became more anxious about the long-term ramifications of relying on machines based on a wide array of closed standards. Abroad, foreign makers were fighting it out in minicomputers, workstations, PCs, and the software packages that made these machines run. However, Japan's capitalist system promoted continuity; the market remained wedded to mainframes and to the key incumbents that had long been supported by keiretsu, powerful banks, and state policies. The incumbents continued to fear that unbundling, by allowing users to compare software and buy it based on price and performance rather than rela tionships, would hurt their business and undermine domestic technology. How ever, users remained loyal to their suppliers and continued to oppose un bundling.31 They had spent huge sums on computers based on a given standard and their employees only knew how to run those machines. Converting to global standards would require them to invest in new software and retrain personnel. 26. Business Week, Feb. 13, 1 984, I loa. 27. 28. 29. Jan. 1 ,
"Fukiareta IBM taifii, " Kompyutopia, Feb. 1984, 53. "Fujitsu, IBM gokae guriipu ridatsu?" Nihon keizai shimbun, Dec. 3r, 1 985, 6. "Chiteki shoyiiken do taio," "Hitachi gokae sofuto kaihatsu," Nihon keizai shimbun, 1 990, 47, and Mar. 27, 1 990, I I . Fujitsu's annual payments to IBM ended in May 1997,
but by April 1998 Fujitsu turned to IBM again to cooperate on mainframe software ("Fujitsu ga bei IBM to meinfuremu no gijutsu teikei," Nikkei kompyiita, Apr. 27, 1998, I I) . 30. Amakasa Keisuke, Denshi rikkoku Nippon (Tokyo, 1 99 1 ) . 3 1 . Interview o f head o f Japan Users Association of Information Systems, Nov. 13, 1 996.
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Having always depended on one supplier, users had never compared different software systems and thus were not fully aware of the availability of cheaper, more sophisticated software. The dilemma was that the longer the industry and users delayed conversion to dominant standards, the higher its cost. MITI was unwilling to allow unfettered competition to weed out the worst firms. NEC, Toshiba, and perhaps even Hitachi would have seen their computer divisions decimated. There was no broad consensus among bureaucratic actors on how to deal with the issue; firms and users, locked into a rigid set of human resources and long-term ties, could not convert to a new standard easily and were satisfied with the status quo, even though it left them using more costly, inferior soft ware. The bubble economy and rising trade surpluses made the makers and MITI confident they could overcome their weaknesses with incremental gains in the existing closed systems. In fact, the firms had the opportunity to start over when the landscape of the computer industry began to change in the mid- I 980s. A new generation of mini computers and workstation companies, with new types of software, were taking on more and more of the key computing tasks. If the Japanese had been operat ing in a free market, they would have felt those competitive pressures and would have had to adapt or faiL Instead, they remained obsessed with customized soft ware for the mainframe world. "The IBM era is over," said Aiso Hideo, a top computer academic, in late 1987. 32 But if the IBM era was over, it was hardly a solution to Japan's problem. After all, its industry was modeled after IBM. Because all of the firms had fol lowed each other and the state in focusing on large centralized computers, they failed to foresee the shift in technology leading toward smaller, cheaper ma chines. They missed the boat on mini-computers and workstations and the huge software opportunities that came with those changes. They were also late in rec ognizing the importance of the Pc.
3. Game Software Makers When two Americans launched the video game business in the 1970S with a company using a Japanese name, ''Atari,'' the industry was just taking off. There was a period of intense battling among the many players that led to the collapse of the US. industry in I 984 . Most US. consumers had ditched their consoles in favor of cheap home computers; aU the major US. players of the early 1 9808- Atari, Mattel, and Coleco-had either given up selling video games, were sold off, or went bankrupt. This provided Nintendo, a maker of playing cards and other games, the opportunity to move into the US. market with a version of its 32. Interview, Nov. 20, 1987.
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Reprogramming Japan
Family Computer (fomicon) in 1985. Nintendo had created an open, proprietary standard, which encouraged independent software makers to develop software packages to run on its machines. An entire industry of game software makers had emerged that were developing software for the machine, which had become a hit in Japan with its light-hearted games and attractive characters. Those same characters and games were an immediate hit with American youth. Although the machine involved the use of computer technology, it was in a distinct mar ket with distinct software products. There was not much US. competition to speak of. Sega and NEC tried to muscle into the market in the late 1 980s, but had little success. With millions of Nintendo game consoles in use, game makers had few incentives to put their games on any other machine. Consequently, only the Nintendo machine could boast hundreds of popular games and therefore the young players who wanted to play those games had to buy Nintendo machines. Because Nintendo had captured the first mover advantage, it was reaping the network externalities of the software business. Since it earned royalties from every game sold, it made huge profits, which it then plowed back into better ma chines and games. Sega, a firm that had been strong in the arcade game business, started win ning converts with its Sega Genesis machine in the early 1990s. Its strength was in its ability to take games that had been popular on arcade machines and put them on its consoles. However, it started to lose market share in the home con sole market starting in 1 993. Then when the Sony PlayStation was released in 1 995, it dealt a deathblow to Sega. By 2001 , the size of the Japanese game market (consoles and software) was ¥61 3 .4 billion ($5 . 1 billion) and game software accounted for some 60 percent of this.33 The US. market was a bit larger, which meant that Japanese firms had tapped into a goldmine. How could Japanese game makers so rapidly penetrate a sector while its com puter software companies had failed? As new players in a new industry, the game makers were relatively insulated from the institutions and practices of commu nitarian capitalism. They offered lifetime employment but lacked close ties to the government and the keiretsu. As players in a global industry relying heavily on exports for survival, they were subject to fierce competition from the outset, in contrast to the relatively insulated computer hardware and software, semicon ductor, and telecommunications markets. Unlike the conglomerates in these in dustries, which could survive despite low rates of return due to state support, cross-shareholding, and main-bank relations, game software makers had no such safety net. Vulnerable, they had to be profitable to survive. 33. Market Research Reports, Computer Software Report, Mar. 19, 2003. www.stat-usa.gov/ mrd.ns(
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Initial entry into game software did not require heavy up-front investment, government contacts, or keiretsu support. Low initial barriers-to-entry and rela tively short product life cycles allowed firms to gain a foothold as long as they could find financing. Given the capitalist system's bias against new and small firms, especially those lacking land as collateral for loans, Nintendo, like Sony and Kyocera, had to find financing through unconventional means. Differences in language and business practices were not a hindrance to selling game software abroad and the firms' early success abroad was crucial to gaining further financ ing. Sony was already a successful firm in its own right by this time. However, it too, lacking ties to the government and industrial groups, had to borrow from co-founder Akio Morita's rich family to kick-start the Sony empire. Since no foreign firm dominated this new industry, Japanese firms, as first movers, were able to profit from creating open standards that became dominant. Moreover, unlike the huge conglomerates that dominated the computer soft ware market, game makers were relatively small, lean, and focused; their leaders and workers did not have elite university backgrounds; and, when necessary, they hired outsiders mid-career. For example, the mastermind behind Nin tendo's early game machines initially worked at Sharp Corporation.34 In 1997, one of Nintendo's top software makers defected to Sony, saying it offered better royalties.35 Nintendo's president in 2004 was just 44 years old and joined the company mid-career in 2000; the head of Sega, appointed in 2003, was also 44 years old. In comparison, in 2004, the presidents of Fujitsu, Hitachi, and NEC were all in their sixties. Until Sony's founders died in the 1990s, Sony was owner-founder run. Ya mauchi Hiroshi, the great-grandson of the founder of Kyoto-based Nintendo, ran the firm for 52 years until his retirement in 2002. Sega, Japan's third major game software firm, was also initially run by its US. founder, David Rosen. (Originally called Rosen Enterprises when founded in 1 9 5 1 , it was renamed Sega in 1 965 and sold to Japanese investors in 1 983.) These strong-willed lead ers had top down decision-making styles that helped them respond much more quickly to rapidly changing market needs than their large, hierarchical, diversi fied computer software counterparts. They used strong brand names, strong distribution systems, and creativity to compete. Other technological conditions also made game software different from com puter software. Network externalities, for example, while of great importance to encouraging independent makers to produce game software for a given stan dard, are of minimal importance in terms of technological and training lock-in of users. One may desire to borrow a friend's game software, but this situation 34. "Nintendo Mastermind Enters World ofAcademia," Nikkei Weekly, Mar. 10, 2003, 1 7. 35. Seanna Browder, Steven Brull, and Andy Reinhardt, "Nintendo: At the Top of Its Game," Business Week, June 9, 1997, 72.
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differs significantly from the importance of network effects to the efficiency of a business, for example. Moreover, while game customers are locked into specific standards, the different standards are easy to use; and, since the consoles are rel atively inexpensive, many children own more than one type of machine. Thus, the existence of somewhat fragmented standards in game software did not lead to a vicious cycle as it did in computer software. Finally, Nintendo and Sony have freely sought help from foreign firms to im prove their products. Unlike NEC, Fujitsu, and Hitachi, which were agents of the nation's technonationalist drive to catch up with the West, these firms fo cused on making profits and responded quickly when profits suffered. When Sony needed help making super-fast chips for its PlayStation II machine, it did not hesitate to ask a foreign firm-IBM-for help.36 Nintendo turned to Silicon Graphics of the US. to make the central microprocessor for its early consoles and to IBM for the central chip in its recent Game Cube machineY Sony and other focused, lean firms in industries not deeply linked to the financial institu tions, industrial policies, industrial groups, and values at the core of communi tarian capitalism have been quicker to move design and production offshore. While detailed comparison of the game and computer software industries would be optimal, it is beyond the scope of this study. Suffice it to say that different histories; much looser ties between game software makers and the state, keiretsu, and major banks; more flexible labor policies; as well as the differ ing nature of the industry's technologies and barriers-to-entry help explain why game software firms have been more successful in global markets than their computer software counterparts.
4. Gaiatsu and Naiatsu (foreign and domestic pressure), and Policy Change
In the early r9908, the computer software industry was at a crossroads: it could continue offering closed, modified versions of foreign standards or un bundle and embrace open, internationally accepted standards. MITI strongly favored the latter path even though it would temporarily hurt the hardware makers and users of the old closed systems. MITI now viewed software as a "leading industry" with critical positive spillovers onto other industries. It ac knowledged that targeting policies that had worked well in other industries were
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not effective in software. Expensive, substandard software was exposed as a dear cost of a system that relied on large, hierarchical firms stuck with fixed human and organizational capacities oriented toward incremental change.38 Inferior software was also caused by the close buyer-supplier ties at the core of commu nitarian capitalism. Indeed, the firms' strategy of closed standards could only succeed as long as users did not complain or switch suppliers. Users' acceptance of substandard software, together with the state's unwillingness to force the firms to unbundle, which would inevitably lead to winners and losers, prevented the industry from converging around one or two standards and hampered the emergence of an independent industry capable of producing sophisticated soft ware packages. The software makers' and users' commitments to a diverse set of stakeholders that favored the status quo pushed for continuity rather than change and thus bred inefficiencies throughout the economy. High costs, along with a limited supply of programmers, made i t dear the in dustry's strategy was unsustainable. Makers and users were throwing money into a black hole. Spiraling costs spurred a debate among the elite about how to encourage entrepreneurship, invention, creativity, and venture capital and thereby boost efficiency. They felt Japan's information industries had already become subcontractors of the US. and were in danger of becoming completely dependent on US. technology. A top software company executive acknowledged "MITI now has a real sense of emergency, a feeling of crisis regarding high tech industries in general and the software industry in particular. They want to do something for software and MITI has to do something. That is their mission."39 Gradually a consensus emerged that the producers needed to unbundle their hardware and software, move toward open standards, and shift their focus from quantity to quality.40 Although local computer software production rose to $9.65 billion in 2003 from $8 billion in 1 996 (see Figure 6.r), much of that growth came from the game software industry. And computer software remained costly because 83 percent of it is still custom-made.41 Rather than allow market forces to restructure the industry, which would have inevitably resulted in some bankruptcies, MITI took the lead in nurturing a consensus that it was acceptable for firms to unbundle and offer machines and 38. Marie Anchordoguy, "Japan at a Technological Crossroads: Does Change Support Convergence Theory?" Journal ofJapanese Studies 23 ( J 997): 363�7; MITI, Sofuto indasu torii no jidai,
2I
seiki kasoku suru keizai sozo no nami, ed. Sangyo Seisaku Sabisu Sangyoka
(Tokyo, 1996); JEIDA, Nickibei sofutouea gyappu, 4, 20. 39· Interview, July 20, 1 994· 36. "Sony Taps Synergy in Broadband Era," Nikkei Weekly, June 3, 2002, 8; Kobuyuki
40. MITI, Kinkyu teigen: sofutouea skin jidai (Tokyo, 1992); Hayashi, 20; MITI, Kongo no
Okada, "Video Game Industry Shifts Focus to Overseas Markets," Nikkei Weekly, Feb. 29,
sofutouea seisaku ni kan suru kihonteki kangaekata, I995; Toja, "Sofutouea kojo," 27; interview
2002, 9; interview of U.S. semiconductor expert based in Tokyo, July J 0, 2002.
of IPA Director, Nov. I4, 1996.
37. Richard Brandt with Kathy Rebello, "Pow! Bam! Sock!" Business Week, Sept. 6, 1993, 28; Okada, "Video Game Industry," Nikkei Weekly, Feb. 29, 2002, 9.
4 I . METI, Shomu joho seisakukyoku, jobO shori shinkoka, Joho sabisu sangyo no gyokyo ni tsuite, June 2004, 4.
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Reprogramming japan
Software: Programmed for Failure
1 69
applications software that ran on foreign standards. MITI started issuing re
ministry that had for decades preached the virtues of using domestic technology
ports emphasizing the industry's importance and how dosed standards were sti
in all industries, from banking to manufacturing, was a last resort to bolster the
fling it and damaging the whole economy. These reports sharply criticized the
floundering industry. Fundamentally, MITI was bowing to the powerful global
low priority the state had given computer software. Only 16 percent of the
nature of software. Japan's approach of using an insulated domestic market as a
state's funding of computer projects from the early 1 970S up through the late
launching pad to become a global player simply did not work. It was hurting
1 990S went to software; excluding the Sigma Project, it was only 6 percent. The
Japan and threatening to undermine the capacity of its firms to maintain em
reports also criticized the state for approaching software as an appendage to
ployment and industrial order. MITI was not dismantling communitarian prac
hardware; viewing software problems as an issue pitting small firms against big
tices; rather, it was reshaping them in order to preserve them. As in other cases,
ones; being inflexible and unable to reevaluate state policies that were dearly
MITI decided it needed to borrow the strength of foreign firms to promote the
failing; and emphasizing the shortage of programmers when their quality not
domestic industry.47
quantity was most criticaL42 The problems were obvious, making it easy to criticize the status quo. How
In 1 99 1 , IBM's introduction of DOS/V, a japanese-language version of DOS, paved the way for Japanese PC companies to convert to open, global stan
ever, how best to orchestrate change in ways that would prevent bankruptcies
dards. In an effort to establish DOS/V as the standard, IBM made it available to
and serious instability was much less clear. The computer software market was
its competitors for free. Toshiba and Fujitsu, aware that a single standard was
evolving far beyond Japan's reach. Windows, Intel microprocessors, and the in
needed to counter NEG's hold on 60 percent of japan's PC market, took up the
ternet swept the globe, promoting significant e fficiencies in communication and
offer and soon came out with their own DOS/V machines.
business practices for those using these technologies. Japanese firms' lag in soft
In October 1 992, Compaq introduced DOS/V machines priced at about half
ware and reliance on dosed standards were dearly handicapping the whole
that of a comparable NEe. This Kompakku shokku (Compaq shock) was re
economy. The quickest and most diplomatic way to get the industry to convert to
ferred to as the return of Commodore Perry's Black Ships that forced Japan to
global standards was to have foreign competitors disrupt order in the industry.
open to the West in the mid-1 8oos. Compaq's aggressive pricing set off a price
MITI publicized this strategy in various reports, such as its 1 992 Kinkyu teigen:
war. Fujitsu responded with the Fujitsu shokku (Fujitsu shock), using profits
sofutouea shinjidai (Urgent proposal: the new age of software), in which it wel
from semiconductors to subsidize below-cost PC prices. It tripled its PC sales,
comed foreign software and PC firms into the market. MITI's Hayashi Ryozo
increasing its market share to 1 8 .4 percent.48 NEG's position started to weaken.
argued that Japan needed software makers in the domestic market that were able
Since its machines were sold only in Japan, only Japanese firms could develop
to provide high-quality services cheaply and "it is no longer important whether
software for them. In contrast, tens of thousands of software programs were
they are Japanese or foreign firms. "43 Due to different languages and cultures, he
being developed for DOS all over the world. When the dust settled, NEG's mar
added, imports alone could not solve the problem. Soon after MITI's report,
ket share was down to 37 percent, leading it to reluctantly embrace the DOS/V
which helped redefine acceptable behavior, the Nihon keizai shimbun reported
standard. IBM, DOS/V's inventor, ended up healthy but not a big winner,
that the computer software market was now open to foreign firms. 44
showing that under certain conditions imitators can profit more than inventors
The complete turn around in MITI's policies toward foreign software mak
from new innovations.49 Still, over time foreign firms have built up a 20 percent
ers contested deeply entrenched technonationalist norms. It reflected MITI's
share of Japan's PC market. In 2002, Dell's share was 7.7 percent, Japan IBM
desperation and acknowledgment that software, given its rapid and unpre
6·3 percent, HP Japan 3.7 percent, and Apple 2.9 percent.
dictable technological change and the powerfu l impact of standards, was signifi
An important side effect of the new DOS standard was that Japanese soft
cantly different from other industries it had targeted.45 MITI's Hayashi argued
ware developers who had developed products for the proprietary NEC machine
that in such industries, where the technological trajectory is unclear, using mar
were no longer protected from foreign competition. They were now forced to
ket forces is the best way to promote development.46 This abrupt turnabout by a
develop for a worldwide standard. They had to compete with the best in the
42. JEIDA, Nichibei sofutouea gyappu, I I -I 3, 2 I -22. 43. Hayashi, "Nihon no sofmouea sangyo," 20; MITI, Kinkyu teigen, 7-8.
44. "Kaikoku semerareru sofuto gyoka," Nihon keizai shimbun, Dec. 16, 1992, 1 1 . 45. MITI, Kinkyu teigen, 4-5; interview of MITI official, July 13, 1994. 46. Hayashi, "Nihon no sofutouea sangyo," 24-25.
47· "Nichibei sofma, OS jigyo de teikei," Nihon keizai sangyo shimbun, Nov. 17, I993, I; in terview of MITI official, Nov. 13, 1 996. 48. "Pasokon gyo 0 osotta 'Fujitsu shokku,' '' Kompyutopia, Apr. I996, 42-43. 49· David J. Teece, "Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing, and Public Policy," Research Policy 1 5 (1986): 285-305.
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Reprogramming Japan
world. As a result, imports of software rose, from 38 percent of the market in 1 997 to 52 percent in 2003 (see Figure 6 . 1 ) . Japanese firms only succeeded in custom applications software, especially in areas such as word processing, where they had an important advantage over foreign products. Even here, Microsoft would eventually dominate. The profit rates of Japanese firms remained low: the top ten foreign software firms had profit rates ranging from 6 to 1 8 percent dur ing the period 1 997 to 2003 compared to 0-3 percent for their Japanese counter parts.50 The PC software industry was not the only area foreign firms came to domi nate. The server market also became dominated by international standards such as Windows NT, Unix, and Linux. In 2004, Windows had 63 .2 percent of the Japanese server OS market, Linux, 1 5 . 7 percent, and Unix, 1 2.6 percent.51 Concerns about long-term commitments to workers, buyers, and suppliers as well as technological self-sufficiency led makers and users to cling to obsolete standards for at least a decade after it was clear this strategy countered their long-term economic interests. However, once MITI was able to nurture a con sensus that reliance on foreign standards was necessary to preserve other com munitarian priorities, firms and users all started to shift toward global standards around the same time. The existence of sympathetic domestic interest groups made it much easier for MITI to exploit the emergence of DOS/V and use ga iatsu to disrupt order and thereby reshape communal norms. 52 Indeed, MITI was not so much leading change as being the first to accept global changes and use its powers to build a consensus that relying on foreign standards was accept able and should be embraced quickly rather than resisted. Many bureaucratic, business, and academic experts wanted makers to unbundle and move toward in ternationally accepted standards. Since foreign firms contested the status quo, domestic actors did not have to take the political heat of forcing computer pro ducers and users to make costly changes. When foreign firms made major headway in the market and MIT I started welcoming them, the ministry gave domestic makers fair warning that it could no longer fully protect them but was prepared to help stabilize them. It desig nated the software industry as seriously affected by the recession, and thereby got the Labor Ministry to subsidize firms to protect employment. To help in dependent software houses get loans, MITI and the IPA set up a system in 1 996 in which major banks would accept software as collateral; however, this has not had much impact.53
50. METI, JoM siibisu sangyo no gyokyo ni tsuite, June 2004, roo 5 I. Ibid., 14. 52. Leonard Schoppa, Bargaining with Japan (New York, 1997); interview of IPA director, Nov. 14, 1996. 53· MITI, Joho siibisu sangyo no genjo to kadai, June 1997, 9.
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Foreign competition upset the rigid market structure that had prevented the emergence of independent software makers. This shake up also paved the way for several MITI moves to shore up this strategic industry. MITI argued that there needed to be a competitive market for computer software, since domestic competition had been critical to targeting other industries. It called on hardware makers to stop subsidizing software with profits from other divisions. It also asked them to disclose information regarding their hardware so independent software houses could make compatible software. 54 Despite talk of the need for more competition, stronger intellectual property protection, and greater participation by foreign firms, MITI continued to mini mize and shape the impact this disruption had on domestic firms. For MITI was still acutely concerned with national autonomy, order in the industry, and the need to prevent bankruptcies.55 In 1 993, it tried again to modify software pro tection, suggesting the copyright law be revised to make reverse-engineering of software legal. When this failed, it tried to establish a voluntary quality assur ance program for software, which U. S. makers argued would require them to di vulge trade secrets to get a stamp of approval. U.S. firms and their government strongly opposed both measures; MITI was forced to back off. To help bolster domestic makers, MITI sharply boosted funding for software-related projects. Large chunks of the supplemental budgets used to stimulate the economy in the mid- to late 1 990S went to software-related pro grams. For example, MITI spent ¥60 billion ($600 million) in fiscal 1 995 for software-related projects.56 In the three 1998 supplementary budgets, software for electronic commerce received ¥50 billion ($500 million) in extra fundingY Most of these funds went to the incumbent hardware-software producers. One exception is the Exploratory Software Project, an IPA program started in 2000 to support software geniuses; this is the first time MITI has granted money to individuals. In 2000, this program provided ¥ 1 billion ($ 10 million) in grants; the amount was raised to ¥ I . l billion for both 2001 and 2002.58 Though a sig nificant change, this support is miniscule compared to the funds lavished on the best and the brightest in other nations. In December 2002, MITI started planning an effort to standardize IT (infor mation technology) software skills (IT sukiru hyojun) and in July 2003 an54· MITI, Kinkyu teigen, 7-8, 1 3-19; MITI, S�futouea no tekiseina torihiki 0 mezashite, June 1993, 14-18; Hayashi, "Nihon no sofutouea sangyo," 24. 55· MITI, Kinkyu teigen, 1 9-30; MITI, Kodojohoka puroguramu, May 1 994, 60-79; MITI, Dijitaru keizai no jidai ni mukete, May I, 1 997, �. 56. Kompyutopia, Aug. 1 996, 34; interview of IPA Director, Nov. 14, 1996.
2.
57· MITI, Denshi sho torihiki kanren shisaku (Aug. 1998), 9; Asahi shimbun, Nov. 27, 1998,
58. METI, Mito sofutouea sozo jigyo, sofutouea kaihatsu (Tokyo, 2002).
0
tojita jinzai no hakkutsu, ikusei
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nounced a roadmap of important software skills specialists should acquire. 59 In April 2004 it started a project with South Korea and China focused on develop ing Open Source Software, especially Linux, an open source nonproprietary variant of Unix, the OS developed at Bell Labs in the late 1 960s and early 1 970s. "We do not have any intention of excluding Microsoft, but we cannot bear to only have one [OS] alternative in the world," explained a MITI official.60 In Oc tober 2004, MITI established a Software Engineering Center under the IPA to strengthen the industry by fostering collaboration with universities and making tools to measure software quality; the government is providing ¥ I .48 billion (about $14.8 million) to the Center for the first year.61 Thus, while MITI allowed market forces to pressure firms to convert to global standards, it is not relying on them to determine other outcomes. It is more involved in promoting the industry than ever. In fact, industry leaders looked to MITI for guidance during this crisis, raising doubts about Callon's conclusions that conflict and political infighting have prevented close state private sector collaboration since the 1 990s.62 Industrial policy is oriented toward encouraging more competition, venture capital, and basic R&D, and es tablishing a sophisticated infrastructure for the new information age. "It is more difficult for the government to target software than in the past. The target is not clear. So the government must be flexible," explained a MITI official in charge of software issues.63 However, current efforts show the state and firms have not abandoned past practices and institutions. They modified communitarian norms to make reliance on foreign standards acceptable but are still working hard to explore open source alternatives to shore up domestic firms and promote technological autonomy. Other communitarian arrangements, such as employment practices, indus trial group ties, conformist education policies, and the lack of close links be tween universities and firms, continue to work against the emergence of more vigorous competition and invention in the software industry and the field of IT more broadly. There has been much talk of moving toward more merit-based pay and bonuses for top stars. However, as discussed in chapter two, movement in this direction has been relatively slow, though it has accelerated in recent years. Similarly, though MITI support for new start-ups could help the indus try over the long run, during the economic slowdown, investors in such ventures 59. MITI document, "Sakutei no haikai, 'monouri' kara 'sabisu' e,' " June 2004. 60. Interview, June 30, 2004; MITI document, "Nitchiikan OSS kyoryoku," June 2004. 6 1 . METI, Wagakuni no sofutouea kaihatsu no kadai, sofutouea enjiniaringu sentii, 1-5, June 2004; interview of MITI software official, June 30, 2004. 62. Interviews of head of one of Japan's top software firms, July 20, 1 994; Mitsubishi soft ware manager, July 19, 1 994; Fujitsu software manager, Nov. 12, 1996; former IPA director, Oct. 27, 1 999· 63. Interview, July 10, 2002.
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Software: Programmed for Failure
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are proving elusive. University ties with firms are growing; however, it will take a long time for them to become productive. Educational reforms may also have some impact, but effects will not be felt for years. Norms that nurture industrial development and a strong sense of community, such as favoritism toward do mestic technology, close corporate-customer ties, and yokonarabi competition to minimize big winners and losers, are clearly being contested. However, change, though significant, has been late, slow, and orderly despite strong economic in centives for earlier and more dramatic change. These changes have been ac cepted as necessary sacrifices to preserve other communitarian commitments. Japanese leaders hope the TRON and Linux standards will help assure na tional autonomy by providing alternatives to Microsoft's standards. The Linux standard was created by a person from Finland who has allowed people around the world to improve upon it. TRON, an open standard, is used in NTT's switchboards, DoCoMo's mobile phones, and Sony camcorders, and Japanese firms are collaborating in an attempt to make it the global standard in home elec tronics systems. However, TRON, like other standards, has many incompatible versions. It also has distinct disadvantages compared to Linux, which is being embraced by many large firms around the world. To better ally itself with Japanese interests, Microsoft formed an alliance with TRON in September 2003 to develop a modified version of the Windows CE OS that can run on top ofTRON. Windows CE is currently not well suited to applications such as cellular phones and digital cameras, areas in which Mi crosoft hopes to build market share.64 Concerned about the growing move toward Linux, Microsoft Chairman Bill Gates went to Tokyo in early 2003 to announce that Microsoft would open its source code to governments and international organizations worldwide on the condition that they not disclose the code. However, in July 2003, the Japanese government decided to use Linux for a new personnel and payroll system for all ministries and agencies, suggesting it will broadly adopt the Linux standard to maintain as much independence as possible. With Linux, firms make money not by selling the software, but by installing and maintaining the systems. This would be a good match for large firms such as Fujitsu and Hitachi, which have large staffs to support. Still, while Linux is open, free, and modifiable, it has significant limitations and only accounted for less than 1 percent of Japan's PC market as of 2004. Japan's challenge will be to contribute to the Linux effort to make applications easier to install and use. Moreover, the unstructured nature of the Linux move ment could undermine efforts to make it a single standard. Already, there are several versions of Linux. Most expect Unix, not Windows, to suffer most from the emergence of Linux in advanced nations such as Japan, which already have 64· "Microsoft, TRON Forge Alliance," Nikkei Weekly, Sept. 29, 2003, 4.
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huge sunk investments in Windows-based systems. In China, however, the Unux OS was already used in some 1 0 percent ofPCs as of 2004.65 Despite hopes for Linux and TRON, Japan's confidence has been severely shaken in the software arena. "MITI software people usually talk about software in terms of defeat," acknowledged a cabinet-level official involved in internet policy.66 An NTT researcher concurs: "software development is related to oper ating systems and microprocessors. These key parts are controlled by major leaders-Microsoft and InteL Japan has not succeeded in creating dominant standards so it is very difficult. "67 The key institutions of communitarian capitalism that worked well in pro moting many industries in the early years of Japan's postwar economic develop ment hindered the development of a strong, independent software industry. The traditional approach of nurturing industries through large, hierarchical firms and various cooperative arrangements was unsuccessful because of rapid, unpredictable, and discontinuous technological change. In an industry charac terized by dominant standards with significant network externalities and cus tomer lock-in, being a latecomer to the game made it difficult. While firms could reverse-engineer products in other industries, U.S. software makers became vig ilant by the early 1 9808, which made copying products difficult. The develop ment of a strong industry was also hindered by limited capital and labor mobil ity, the tendency for all the firms to have similar research and product strategies, and education and social systems that encourage conformity. In the industrial age, where conformity is an advantage, following the old proverb that "the nail that sticks out gets hammered back in" was appropriate. In the information age, in which radical innovation is critical, that mentality is proving to be a major stumbling block. Japanese firms have succeeded in software areas directly related to products they dominate. They develop sophisticated software for embedded systems in copiers, machine tools, cameras, home entertainment systems, and mobile phones. That is because the software in these products has dedicated functions. This type of software can be created with a factory approach. Japanese firms have failed to produce software for more general use, which tends to come from entrepreneurial firms. It is unlikely that Japan would have more vibrant software makers if it had completely opened its markets to foreign products and provided no protection to domestic firms. In this respect, communitarian capitalism provided firms
Software: Programmed for Failure
17 5
with a safe haven in which they could gradually build up software knowledge and skills. Without the targeting policies and risk-sharing yokonarabi behavior that helped build competitive hardware, semiconductor, and telecommunica tions industries, Japan would not likely have a major computer software industry today. Still, the software case shows the difficulties nations experience in dis mantling systems that are obsolete. Finally, this analysis shows that though it was clear by the mid- I 98os that it was in the economic interest ofJapanese software makers and users to convert to global standards, they resisted change because of deeply entrenched norms that favored domestic technology and products, orderly competition among esta blished firms, and irrevocable commitments to employees and suppliers. In deed, the software case highlights how user loyalty to their software suppliers' closed standards was critical to the early success of the industry, but later be came a cause of its weakness. MITI raised concerns about the long-term costs of closed standards starting in the late [ 9708. Yet it took over a decade to nurture a broad consensus that clinging to these practices actually threatened to under mine communitarian objectives-that insisting on closed standards, which maintained long-term commitments to customers and employees, threatened the very existence of the software makers and software users and thus broader market stability. Once a consensus was reached, the community decided to mod ify communitarian norms as a means of preserving them. Once norms were al tered, the firms all converted to global standards at about the same time. Accepting foreign standards was a major reversal of technonationalist poli cies. But MITI and the firms have not given up. The state remains unwilling to function as a neutral umpire and there is reluctance to allow the invisible hand to steer the future of this critical industry. Great effort is going into Linux, which could help Japan become more technologically independent. The rela tively inactive FTC has on several occasions raided the Japan offices of Intel and Microsoft on suspicion of antimonopoly law violations in an attempt to hinder their growing grip on the domestic industry. In summer 2004 it warned Mi crosoft once again that it was violating the antimonopoly law and the U.S. giant is challenging the ruling.68 Though struggling, Fujitsu, NEe, and Hitachi are still heavily supported by their keiretsu, main banks, and MITI and NTT. Core norms continue to be contested: there is increased experimentation with venture capital, stock options, greater compensation for inventors, and new educational approaches to encourage creativity and critical thinking. These ef forts and experiments have been late in coming and have occurred across the in dustry and the economy more broadly at around the same time. In many ways
65. "Kosei rinakkusu, geigeki uindOzu," Nikkei bijinesu, Mar. 10, 2003, 160; Toyoaki Fuji wara, "Battle Lines Being Drawn over Linux," Nikkei Weekly, Apr. 5, 2004, 23.
68. The suit is about Microsoft's inclusion of the "non-assertion of patents provision" in
66. Interview, July ro, 2002.
licensing contracts with PC makers. "Microsoft to Challenge FTC Ruling," and "FTC Warn
67. Interview, July ro, 2002.
ing May Encourage Patents," Nikkei Weekly, July [9, 2004, 5, and July 26, 2004, [0.
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the basic philosophy remains the same: global market forces cannot be trusted to protect the community's interests. The approach, however, now differs some what from the past. It is one that combines communitarian capitalism's concern for stable, orderly markets with a greater degree of competition and reliance on foreign firms.
7
Semiconductors : From Boom to Bust
I n n o high technology sector did Japan come as close to reaching its goal of global leadership as it did in semiconductors. With Japanese chip makers strug gling today, it is easy to forget the degree to which their success in the 1980s was regarded as a fundamental challenge to U.S. capitalism. With firms such as NEe and Toshiba dominating the booming memory market, and stalwart U.S. com panies such as Texas Instruments (TI) and Intel in the doldrums, many scholars were beginning to question America's venture model. The kind of small firms generated by America's start-up model, they said, could never stand up to Japan's integrated electronics giants with their enormous sources of capital, ability to invest for the long term, band of lifetime employees dedicated to pro gressively improving the quality of their chips, and superiority of their custom made chip-making equipment. It is difficult to believe that there was a time when Intel was in such difficult straits that it needed IBM's support. It is hard to imagine that the U.S. chip industry actually copied the Japanese model and established cooperative research projects designed to respond to the challenge from Japan and to put the U.S. back on the road to supremacy. So how is it that Japan's chip makers have now fallen behind? This chapter looks at how Japan's chip industry rose to supremacy as a consequence of both the developmental policies of the state and the communitarian approaches of its industry leaders. The firms, protected by stable shareholding and main bank re lationships, were able to invest heavily. By focusing on the same market niche and on manufacturing techniques, they collectively came to dominate the global market. These institutions and policies reflected communitarian norms: job se curity, domestic technology, long-term ties with suppliers, and orderly yokonarabi competition took precedence over shareholder returns. As long as technological change was predictable and the international envi-
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ronment was favorable, the industry did well. But when the technological par adigm shifted in the late 1980s, the companies were unable to adapt. The skills and organizational capacities they had built up over the years were out of step with those needed. Long-term commitments to labor and suppliers and huge investments in billion dollar factories made them inflexible. Repeated success made them arrogant about the superiority of their business practices. While there were strong economic reasons to alter their practices, they refused to change for nearly a decade. It simply was not in their social interest to do so. Even once they recognized the need for a new strategy, communitarian inter ests were barriers to change. As in the software case, MITI led the process of contesting the status quo and reshaping norms in ways that made it acceptable for firms from different keiretsu to merge their DRAM operations, collaborate on other types of chips, and reach out to foreign firms for assistance. The firms were slow to change and only did so out of desperation. Once norms were re defined, all the major firms responded in similar ways around the same time.
1 . The Visible Hand By the early 1960s, MITI viewed semiconductors as a critical input to other industries, from televisions and computers to sophisticated switching equip ment. Semiconductors were the new "rice of industry," a term first used in Japan to describe the steel industry in the 1950S. The industry was important for economic reasons, but also because it would enhance technological indepen dence and contribute to the growth of many other industries. Without advanced computer, telecommunications, and military sectors, MITI and the firms had no choice but to start the industry from scratch. In the US., firms that specialized in semiconductors emerged early to respond to the specific needs of the military. In Japan, however, it was natural to have semiconductors developed by the same large electronics firms that were also the major players in the telecommunica tions, software, and computer industries. Consumer electronics makers, such as Sony and Sharp, also produced chips, but they were based on simple technology for use in consumer products.
Building Walls As in computers, the activist state and the communitarian capitalism system more broadly nurtured a domestic industry by protecting fledgling makers from foreign products while simultaneously funding R&D projects to bolster their technological capacities. When TI applied for patent recognition in 1960 and for a wholly owned subsidiary in 1964, MITI and the firms saw this as the begin ning of the "TI Tornado" and made analogies between it and the arrival of the
Semiconductors: From Boom to Bust
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Black Ships that helped end the Tokugawa era. l Industry leaders appealed to the government, "please, somehow, stop the entry of a [TI] wholly owned sub sidiary."2 In 1 964, Japan changed to advanced nation status in GATT (General Agreement on Tariffs and Trade) and joined the OECD (Organisation for Eco nomic Co-operation and Development), both of which committed it to liberal izing its economy. There was no thought of allowing TI free rein even though at the time this would have been the most economically rational policy. The state and the firms were interested in technological autonomy and long-term development. Allow ing TI to participate in the market unconstrained would have devastated both the chip and computer industries. Domestic firms were charging three times the US. price for semiconductors because their yields, the number of usable chips from each wafer produced, were much lower-under 10 percent compared to 25 percent for US. makers.3 TI's entry also would have meant new royalty fees, above and beyond those they were already paying Western Electric and Fairchild for chip technology. The state needed to cut a deal with the US. giant. MITI knew the firms would ultimately need TI's patents to produce chips legally. However, there was no rush. To give the firms time to build up economies of scale and technological expertise, MITI initially refused to acknowledge TI's patent and subsidiary applications.4 MITI also started several R&D initiatives to promote a technologically sound industry. These included a project, supported by ¥29 million ($80,000) in state funds, to help the computer-semiconductor makers get a jump on inte grated circuits (IC).5 Tarui Yasuo, a member of the MITI lab involved in this project, admitted its goal was to reduce duplication of effort through specializa tion and "frankly [much of the project's aim is] to avoid patents that cover pro cedures developed in the US."6 In general, MITI was urging makers to go into hybrid ICs to avoid infringing on TI's patents.7 Other state support included 10w-interest JDB loans (¥6 billion-$1 6.67 million over ten years) and a ban on
I. Kaisha zenshiryo, denki gyokai no keiei hikaku, no. I I (Tokyo, 1980), 28; Shimura Yukio, Nippon handotai hanseki (Tokyo, 1 999), 9 1-()3; Nakagawa Yasuzo, Nihon no handotai kaihatsu (Tokyo, 198 1 ), 1 57. 2. Nihon keizai shimbun, Apr. 17, 1967, 1 2 . 3. Toyokeizai, Oct. 2 2 , 1966, 26. 4. Nihon Denshi Kikai Kogyokai, Denshi kogyo 30 nenshi (Tokyo, 1979), 1 0 1-3; Nakagawa, Nihon no handotai kaihatsu, 1 54-58; Long Term Credit Bank of Japan, Chogin chosa geppo, May 1966, 55. 5. Flamm, Mismanaged Trade, 60. 6. Tarui Yasuo, "Japan Seeks Its Own Route to Improved IC Techniques," Electronics, Dec. 1 3 , 1 965, 90--9 1 . 7 · Nihon keizai shimbun, July 26, 1967, 5 .
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Reprogramming Japan
advanced chip imports starting in 1 966.8 MITl's 1 966-71 Super High Performance Computer Project also provided crucial support for ICs.9 MITI knew it could not ignore Tl's requests forever. In 1966, it said that if TI would open up its patents, MITI would allow a 50-50 joint venture with a domestic firm, which would be restricted to IO percent of Japan's chip produc tion for three years. TI did not respond immediately, though it feared delaying entry would allow local firms to advance quickly. It was the consumer electronics firms-the primary users of semiconduc tors-that pressured MITI to cut a deal. TI's threat to sue firms exporting goods that infringed on its patents was hindering chip exports and, more impor tantly, consumer products that contained chips. "To expand our IC production, we want to export. But to export we have to approve of TI's establishment of a wholly owned subsidiary," lamented the IC makers. 10 A MITI official involved in the negotiations concurred, "MITI had to agree with TI's request for a sub sidiary because it needed TI's patents." l l T I and MITI compromised. The US. giant accepted MITl's conditions, but MITI allowed the joint venture with Sony, established in 1968, to end after three years. Once MITI persuaded TI to form a joint venture, it was able to force Motorola and Fairchild to find joint venture partners. However, no major firms wanted to join hands with these US. giants. They knew MITI would be heavily funding the industry and favored pure-blooded (junketsu) Japanese firms over mixed breed (konketsu) ventures. Also, stable shareholding, main bank, and amakudari ties made it difficult for mainstream firms to ally with foreign firms. This, of course, had the desired effect of delaying entry of these firms. 12 MITI arranged for Motorola to tie up with Alps and Fairchild to join hands with TDK, both makers of small parts and cassette tapes and amateurs in the field of ICs. Tying the two foreign giants up in meaningless joint ventures minimized their impact on the market. The Motorola-Alps venture col1apsed in 1 975 dur ing the oil shock recession and the Fairchild-TDK joint venture closed in 1 977 after years of problems. TI, unaware that MITI decides amakudari positions for its own purposes, hired the MITI official involved in the negotiations to head its Japan operations for nearly two decades.
8. Nakagawa, Nihon no handotai kaihatsu, 1 57-58; "Onward and Upward," Electronics. Ocr. 3, 1 966, 257. 9. Anchordoguy, Computers, Inc., 46-53; Nihon keizai shimbun, Sept. 28, 1968, Nov. 1 3, 1970, and Feb. 14, 197 1 . 1 0 . Nihon keizai shimbun, July 26, 1967, S . I I . Interview o f former MITI official who became a top TI executive, Apr. I 1 , 1989. 1 2. Toyokeizai, June 10, [972, 8 I, and .Feb. 26, 1972, 8 I .
181
The "Calculator Wars " Another way MITI enhanced technological independence was by helping domestic firms win the so-called "calculator wars" in the early 1970s. When the calculator market started to take off in the late 1 960s, domestic calculator mak ers, then one of the largest users of chips, relied heavily on foreign suppliers of large-scale integrated (LSI) circuits. LSI were in such short supply that MITI temporarily allowed TI to increase domestic production of them to help calcula tor makers until Japanese makers could ramp up. 13 This made MITI and the makers aware of the importance of LSI. However, US. firms had a jumpstart and priced aggressively. Calculator industry leaders complained: "we are dissat isfied with domestic LSIs from the point of view of price, delivery, and qual ity. "14 When MITI rebuked them for buying US. chips, they said they had no alternative because domestic makers did not produce enough. I S By 1971 some 40 percent of all ICs produced in Japan were used in calcula tors. l 6 Imports amounted to 29 percent of the market in 1 968 and 36 percent in 197 1 .17 Japanese firms were not yet mass-producing LSI and thus yields were low. 13 The sharp rise in imported LSI precipitated complaints about dumping by mid-197°. "If this [dumping] continues, our nation's market will be con trolled by US. makers."19 To compete, Japanese makers had to sell their chips at over 20 percent below cost.21) Having committed to liberalizing chips for consumer electronics use by 1973, MITI and chip producers started a concerted nationalistic "you can't trust foreigners" campaign to convince Sharp and other calculator makers that it was wrong to buy foreign chips now that domestic products were available, even if they were more costly and of inferior quality. Rclying on foreign ICs, MITI and the chip makers argued, made chip users vulnerable to leaks of con fidential information, and ordering chips from selfish, hard to understand for eign makers (katte no wakarinikui gaikoku meika) should make them very nerv-
1 3. Japan EconomicJournal. Dec. 1 6, 196<), I I ; Toyokeizai, Apr. I I , 1970, 2 1 ; Aida Yutaka, Denshi rikkoku, Nihon no jijodm (Tokyo, 1992), 3:264-7 1 , 3 I I-16. 14. Tiiyiikeizai, Feb. 26, 1972, 8 1 . 1 5. Nakagawa, Nihon 1UJ htltldiitai kaihatsu, I96. 1 6. Aida, Demhi rikkoku no jijoden, 3:402. 17. Ibid. , 3 1 2 . 1 8 . Nihon keizai shimbutl, Feb. I 6 , 197 ! ; the amount of good chips that come from one wafer is referred to as the yield. Yields for new products are often below 10% whereas mature products achieve yields of some 60-<)0%. Yui Kimura, The Japanese Semiconductor Industry (London, 1988), 49-50. 19 · Asahi shimbun, Aug. 28, 1970; Nihon keizai shimbun, July 4, 1970. 20. Nihon kejzai shimbun, Sept. 26, 197 1 .
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Reprogramrning Japan
ous. 21 Japanese firms were becoming subcontractors of the U.S., they warned. 22 MITI told the consumer electronics firms to sacrifice their economic interests and "buy Japanese" to support the broader community. By encouraging Japanese firms to buy domestic chips, MITI made it safe for the chip makers to invest in expanded LSI production. "If there was no MITI backing, no one would have the courage to do so [invest]. It would be too risky," explained a high-level NEC executive.23 Confident that chip users would follow J\HTI's guidance rather than their own economic interests, domestic makers ramped up LSI production, cutting reliance on imports from 80 percent in 1 97 I to 50-60 percent in I 972.24 Still, they were all in the red because of the effort to catch up with their for eign counterparts.25 They could sustain continued losses because stable share holding and main bank ties did not require profitability. NTT was also support ing the industry through R&D projects and agreements to specialize. In 1 97 I , for example, to help NEC and Fujitsu gain economies o f scale, NTT arranged for them to focus on ICs for digital switches and supply them to Hitachi and Oki for use in equipment they built for NTT.26 Indeed, the whole community was backing these firms to elevate the nation's technological capacity. The chip users listened to MITI's appeals to support the broader commu nity,27 In 1 97 1 , a managing director at Sharp said, "Even if it is a bit more ex pensive, we should use domestic LSI."28 For Japan's IC industry, the boom in calculators was a "divine wind."29 "\Vithout calculators, our semiconductor in dustry could not have gotten off the ground," explained a STA official.30 In meeting demand by calculator and watchmakers, domestic IC makers started to master MOS memory technology, a decision that set them on a path toward dominating that sector. They were able to quickly catch up because U.S. firms were still focusing on bipolar chips, so the lag between the two nations was
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not too large.31 This was the type of industry in which industrial policies, work ing together with large firms with human and organizational capacities oriented toward incremental technological improvements and manufacturing, could be very effective. The industry had a stable technological trajectory and was very sensitive to economies of scale. Foreign products could be reverse-engineered legally and competitiveness depended heavily on manufacturing expertise. After MITI helped institutionalize the practice of buying domestic products and thereby helped the firms win the calculator wars, it could liberalize the in dustry without concern that foreigners would disrupt order in the industry. It started to open the market in 1 97 3 and by the end of 1 97 5 lifted all formal re strictions on IC imports.32 MITI also buttressed the industry with new R&D projects, which reduced costs and risks.33 Communitarian capitalism, by delaying and sharply limiting foreign invest ment and controlling imports, provided the firms with a safe haven within which they could build up skills and market share. Domestic firms gained con trol of the market by the mid-I 970S. In 1975, U.S. firms had a 98 percent market share at home and 78 percent in Europe, but only 20 percent in Japan. 34 JWITI's and NTT's Very Large Scale Integrated Circuit (VLSI) Projects
Just after liberalizing the imports of LSI and computers at the end of 1 975, MITI and NIT started their most ambitious effort to promote VLSI. Their labs had already made many semiconductor advances, but the VLSI projects, which focused on MOS technology, were the big push that propelled the firms to the frontier of this technology. These projects provided important funding to the chip companies at a time when they were reeling from the oil shock, a strengthened yen, and the threat of IBM releasing a very advanced series of computers. 35 As a result of the projects, Fujitsu announced the world's first 64K
2 1 . Toyokeizai, Feb. 16, 1972, 8 1 and Apr. 1 8, 1970, 72; interview of former "\l1TI official who became a top TI executive, Apr. 1 I, 1989. 22. TfJyokeizai, May 26, 1973, 63. 23. Thomas Howell, Brent Bartlett, and Warren Davis, Creating Advantage: Semiconductors
and Government Industrial Policy in the I990S (San Jose, 1992), 49; Verner, Liipfert, Bernhard
3 1 . Yui Kimura, "Technological Innovation and Competition in the Japanese Semiconduc tor Industry," in Hiroyuki Odagiri and Akira Goto, Innovation in Japan (Oxford, 1997), 1 25-27. 32. Flamm, Mismanaged Trade, 87. 33· Ibid., 85; Nihon keizai shimbun, Mar. IS , 1973; Tiiyokeizai, Feb. 26, 1972, 80; Nihon
and McPherson, and the SIA, The Effect 0/ Government Targeting on World Semiconductor
keizai shimbun, Apr. 1 8, 1973.
Competition, A Case History o/Japanese Industrial Strategy and Its Costs for America (San Jose,
34. Laura D'Andrea Tyson and David B. Yoffie, "Semiconductors: From Manipulated to Managed Trade," Berkeley Roundtable on the International Economy (BRIE), working paper
1 983), 47, 61). 24. Nihon keizai shimbun, July 19, 1 972. 25. Tiiyokejzai, June 10, 1972, 82. 26. Nihon keizai shimbun, Feb. 3, I97 I .
47, 1 99 1 , 1 2 . 35 · Kimura, "Technological Innovation," 1 27-29; interviews of Science and Technology Agency official, June 23, 1 993, and former head of MITI software agency, Oct. 27, 1 999; An
29. Nakagawa, Nihon n o handotai kaihatsu, 206.
chordoguy, Computers, Inc. , 1 3 8-47; Calion, Divided Sun, I I6-22; Flamm, Mismanaging Trade, 94-I I 3 ; Sakakibara, "From Imitation to Innovation." Discussion with Toshiba senior managing director, }i'eb. 3, 1986; Tarui and Nihon Handotai Seizo Sochi Kyokai, eds., Hando
30. Interview, June 23, 1 993.
tal Rikkoku Nippon, 99- 1 52.
2 7 . Toyokeizai, June 1 0 , 1972, 83. 28. Quoted in Nihon keizai shimbun, Feb. 16, 1 97 1 .
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DRAM in 1 978 and by 1 9 8 1 Japanese makers had captured a 70 percent share of the 64K chip market in the U.S.36 The death knell for U.S. DRAM makers sounded in 1 979 when a Hewlett Packard study reported that Japanese defect rates were 1 127th that of U.S. makers.37
2. Cooperative Competition, Excess Investment, and Dumping: The 1 980s
The VLSI and other chip projects encouraged the firms to focus their re sources on becoming competitive in memory chips. Since they all invested in the same technology and production capabilities, the industry was able to quickly establish a critical mass in the design, production, and sale of these chips. They were first in the world to introduce 2S6K chips in 1982-83 and a 1 M DRAM in 1984. Soon they became well known for having the most ad vanced process technology for chip production. Their success was in part due to the industry's clear technological trajectory. For the foreseeable future, advances would involve shrinking designs and cramming more circuits into smaller spaces. The obstacles they faced in achieving these objectives were clear and well defined, and they steadily overcame them to make chips of higher and higher densities. The international environment, however, started to shift dramatically in the 1 980s. The u.s. government, suffering from growing trade deficits, sharply crit icized MITI's policies. MITI responded by ending its VLSI project slightly ear lier than planned. State and corporate leaders feared that semiconductor trade friction would spill over onto other trade issues, such as automobiles. Foreign trade complaints, along with the fact that the industry had caught up, led to an erosion of the consensus about the need to support the chip makers. As a result, the state stopped actively targeting the industry. Still, the state remained unwill ing to play the umpire role necessary to establish and maintain free markets. Being an umpire would lead to clear-cut winners and losers, which would dis turb order and predictability in the industry. Rather than actively manage competition in the industry, the state allowed the firms to do so. The firms, which had become fixated on memories, had trouble diversifying. Given their similar organizational capacities, focus on similar markets, and lack of oversight and discipline from capital markets, it was not surprising that they tended to over-invest. To increase global market share, which would assure long-term survival and thus secure employment, 36. Kimura, Japanese Semiconductor Industry. 53.
37. Brad Glosserman, "Sematech Formula Proves a Winner," Japan Times, Mar. 20, 1995, 17 ·
Semiconductors: From Boom to Bust
1 85
they invested about 20 percent of sales in capital equipment up until the late 1 970s; that jumped to 25-30 percent in the 1 9808. They were investing 6-10 percent more than their U.S. counterparts.38 They built the world's largest memory chip factories, suspending them on huge concrete pillars to minimize vibrations, which could cause imperfections in the etching of densely inte grated circuits. They built clean rooms, covered workers completely, and changed the air some 5 00 times an hour to prevent dust from invading the pro duction process.39 As in the computer and telecommunications industries, the chip firms all pursued the same strategy: better, faster, cheaper. In effect, they had no strategy. The firms' collective focus on memory chips meant few were involved in emerging market niches such as logic chips and microprocessors. In 1 984, for example, only 1 0 percent of domestic chip production was of microproces sors-a stored program computer incorporated into an LSI chip, the value and performance of which are highly dependent on software. They did not enter the microprocessor market more aggressively because thcy were keenly aware of their vulnerability in software. As shown in chapter six, this weakness was in large part due to a rigid labor pool, keiretsu ties that supported dosed standards, and corporate capacities oriented toward incremental rather than radical organizational and technological change. They were also reluctant to produce microprocessors because U.S. firms had sued them several times for patent infringement. Instead, they retreated and became second sources for U.S. firms in the 1 980s, a role NEC played for Intel's 8-bit and 1 6-bit micro processors. Their lack of involvement in the competition to create dominant standards in microprocessors made it increasingly difficult to enter the market once Intel's standard became dominant, providing it with the network exter nalities and customer lock-in characteristic of this winner-take-most game. By 1 990, Intel had a 53.2 percent share of the world microprocessor market; Mo torola had 1 3 . 3 percent, Hitachi 3.6 percent, NEC 3 . 5 percent, and Toshiba 2 . 1 percent.40 In high performance microprocessors, Intel was even more dominant. Meanwhile, the investment binge in memories led to excess production, lower prices, and dumping abroad in the early to mid- I980s. The most effective method to get rid of excess production in ways that hurt foreign rather than do mestic firms was to shift cutthroat competition overseas by dumping chips abroad. Supported by keiretsu ties and a corporate governance system that did not require high returns, the makers could afford to dump chips overseas to gain market share there. These and other risk-sharing arrangements helped them 38. Kimura, 64-65. 39. Ferguson and Morris, Computer Wars, I08-IO.
40. Tyson and Yoffie, "Semiconductors," 40, 60.
1 86
Reprogramming Japan
survive the plunge in revenues brought on by the thousand-fold drop in the price of a memory chip in just a few years. However, US. chip makers, which tended to be one-product firms subject to strict monitoring by capital markets, could not survive. By 1 986, Japan's share of the world DRAM market had grown from almost nothing in 1 970 to a peak of almost 80 percent.41 Several US. firms folded. Intel, on the brink of bankruptcy, turned itself around by ex iting DRAMs and focusing on microprocessors. In retrospect, it is clear that Japanese firms' quality and cost advantages would have ultimately forced most US. firms out of DRAMs anyway. However, the dumping clearly exacerbated the industry's slide, especially since it coincided with a severe U S. recession. Unlike in the 1 960s and 1 970s, when the US. government consistently gave priority to the US.-Japan military alliance over economic concerns, now it re sponded aggressively. It pressured the Japanese government into an "arrange ment" to minimize dumping. The agreement established a system for monitor ing prices and included a side agreement setting a target for US. makers of a 20 percent share of Japan's market, double that at the time. The arrangement slowed Japanese firms' massive annual production increases. Monitored costs and managed trade led to significantly higher prices, boosting Japanese firms' revenues. While the agreement did not achieve all US. objectives, it stabilized the share of US. makers in the global DRAM market and increased the US. share in the Japanese market.42 The way in which prices rose following the chip agreement suggests close collaboration between MITI and the firms and shows how communal risk sharing behavior occurred at US. makers' expense. In a quasi-free market in which actors are advancing their own economic interests, even one in which au thorities are monitoring prices to prevent dumping, low-cost Japanese produc ers would be expected to adjust prices and production to gain market share at the expense of higher-cost Japanese producers. Instead, Japanese firms all an nounced production cuts on the same day, suggesting that MITI and the firms cooperated on investment and pricing to benefit domestic firms at the expense of foreign chip producers.43 This behavior resembles that in the financial sec tor's convoy system. In both cases, the most efficient firms voluntarily constrain themselves to bolster less efficient firms so that none fall behind. MITI's publi cation of three- and six-month guideposts for chip production as well as pro duction indices for each firm helped orchestrate the cooperation. MITI was not
4 1 . Howell, Bartlett, and David, Creating Advantage, 1 0.
42. Electronics Industries Association of Japan (EIAJ), A Look at So Years of the Japanese Electronics Industry (Tokyo, 1 998), 8 1 -82; Nakayama, Bouton, and Pecht, The Japanese Elec tronics Industry, 47-48; Flamm, Mismanaged Trade, 227-304; Tyson and Yoffie, "Semiconductors." 43. Tyson and Yoffie, "Semiconductors," 33-34.
Semiconductors: From Boom to Bust
1 87
a neutral umpire. It was propping up domestic producers; and among those pro ducers, it was assuring that a large gap did not appear between weak and strong firms. It wanted to maintain cohesion among members of the community. In addition to the trade agreement, the US. also responded to the dumping by creating a risk-sharing organization to shore up US. memory producers and chip equipment makers. Like MITI, the US. government was concerned about excessive reliance on foreign firms for strategic inputs to high technology prod ucts and military equipment. The products of US. chip suppliers were of such poor quality by the mid- to late 1 980s that Cray Research, then America's top supercomputer maker, had no choice but to buy its most sophisticated chips from its key competitor, Fujitsu. IBM, concerned about relying too heavily on Japanese chip manufacturing equipment makers, wanted other healthy US. chip firms to support domestic chip equipment makers. With heightened economic and security concerns in the US. at the time, IBM and Intel, then close to bankruptcy, convinced the US. government to re vise the antimonopoly law to permit interfirm collaboration. The result was the creation of Sematech in 1 987, which received some $700 million in state subsi dies over a decade. By promoting standardization of chip producers and their equipment makers, Sematech helped a few US. memory producers survive. When it was created, Japanese chip makers were the envy of the world. Their share of the world DRAM market rose from about 22 percent in 1 978, to a peak of 79 percent in 1 986, and a 70 percent share in 1988; US. makers' 75 percent share in 1 978 plummeted to 1 8 percent by 1 988.44 In 1 990, in response to Japa nese firms' growing prowess, Andrew Grove, chairman of Intel, warned that Sil icon Valley was about to become a techno-colony of Japan. 3 . Problems Emerge in the 1 990s Though Japanese chip makers had overtaken their US. counterparts in mar ket share by 1 985, in 1 993--94 US. makers once again pulled ahead, largely due to success in the exploding microprocessor market. In dollars, US. makers' share of the world market rose steadily, from 39.2 percent in 1 99 1 , to 46.2 per cent and 5 1 .2 percent in 1 996 and 2001 respectively; Japanese makers' share fell from a peak of 5 1 .2 percent in 1 988 to 46.4 percent, 36.0 percent, and 28. 1 per cent in 1991, 1 996, and 2001 (Figure 7. I). While market shares fluctuated some what due to changes in exchange rates and Korean makers' activities, the overall trend of decline for Japanese firms and relative increase for their US. counter parts is clear. By company, in 2002, the top semiconductor (DRAMs and other types) maker in the world was Intel with a 1 5.5 percent share, followed by Sam44. Howell, Bartlett, and Davis, Creating Advantage, 10.
1 88
Reprogramming Japan
sung with 5.3 percent, Toshiba 4.2 percent, ST Microelectronics (a French Italian joint venture) with 4 . 1 percent, TI at 4 percent, NEC with 3 . 7 percent, and Germany's Infineon at 3.4 percent.45 In DRAMs, the rise of Korean makers, which had not been subject to the chip arrangement's monitoring system, undermined Japanese dominance. Sam sung took over the number one spot in DRAMs from Japanese makers in the 1 992 recession. In 2003, Samsung had a 28.6 percent share of the global DRAM market; Micron Technology of the U.S. had 19 percent; Infineon Technologies of Germany had a 16.3 percent share; Hynix, another South Korean maker, had 14.7 percent; and Japan's only remaining DRAM maker had a 4.3 percent share.46 The foreign share ofJapan's market was 1 3 .9 percent in 199 1 , 24 percent in 1995, and around 30 percent from 1997 through 2001 (Figure 7.2). What caused Japanese firms to lose market share? How did changes in technological and international conditions in the 1990S impact the industry? How did the institu tions and practices of communitarian capitalism respond to these new conditions? The way in which radical technological change occurs is unpredictable.47 In cumbent firms are often caught unaware. IBM, for example, was very late in re sponding to the shift toward small, powerful machines, away from mainframes. In the 1990S, when the technological paradigm in semiconductors shifted toward custom-made chips and microprocessors, Japan's chip makers were not prepared. Their slide in the global market clearly indicated their strategy was not working. With the forces of globalization bearing down on them, it might very well have been in their economic interest to lay off workers, cut off suppli ers, stop DRAM production or move it offshore, and shift domestic production to higher value-added chips. However, they had long-term commitments to their employees and equipment makers. Unable to adjust without undermining key norms, they continued their existing operations. MITI was concerned about maintaining jobs, preventing bankruptcies, and promoting domestic technol ogy; experienced in targeting industries for catch-up through incremental man ufacturing improvements, it also found it difficult to chart a new path. The key problem was that the firms were locked into memory chips. All firms are locked into their products to some degree; however, lifetime employment, little mid-career labor mobility, long-term ties to equipment suppliers, and huge sunk investments in memory-related physical assets made Japanese firms espe cially entrenched in this market niche. Confident in their superior manufactur45· "Sekai handotai uriage daka," Nihon keizai shimbun, Jan. 3, 2003, 7. 46 . "Sekai saidai no DRAM kojo," Nihon keizai shimbun, June 9, 2004, I .
47. Schumpeter, Capitalism; W. Brian Arthur, "Competing Technologies, Increasing Re turns and Lock-in by Historical Events," Economic Journal 99 ( 1 989): 1 16-3 1 , and "Increasing Returns and the New World of Business," Harvard Business Review (July-August 1996): 1 00-
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As late as the mid-I990S, Japanese makers continued to follow their well trodden path, ignoring threats from the growing competitiveness of Korean and US. memory makers as well as indications of a sharp industry slowdown. Confi dent, they all poured huge sums into physical plant in 1995, investing 60 percent more than in 1 994.50 After these huge investments, there was no way they could compete. In 1 998, for example, a U.S. firm, Micron Technology, had a $4 breakeven point for a r 6-megabit chip compared to $6 for Japanese makers,51 48. Okimoto and Nishi, "R&D Organization," 200-201 . 49. Ibid., 201.
Nihon keizai shimbun, Jan. I8, 200 1 . Toyokeizai, Dec. 27, 1997-Jan. 3, 1998, 24-25.
50. "Handotai toshi, nobi donka," 5 1 . "KoZQ fukyo d e saihen,"
1 92
Reprogramming Japan
Overall, their chip making costs were 10 percent, 1 5 percent, and 25 percent higher than their Korean, U. S., and Taiwanese counterparts. 52 Organizational inertia and a mindset that the future would be like the past caused this danger ous massive investment in DRAMs, according to a Japanese expert. 53 Japanese weeklies called it "reckless investment competition" (mubo na setsubi toshi kyoso), "big investment that they cannot stop" (yamerarenai dai tashi), and "in vestment that doesn't stop" (tomaranai tashi).54 "If you start worrying about it, you can't sleep at night," acknowledged a high-level Hitachi executive. 55 The industry's vulnerability was not only due to its focus on memories or the tendency for the firms to have similar pricing, R&D, and product strategies. It was also because the chip makers and their equipment affiliates clung to frag mented, closed standards for too long. In the past, close keiretsu ties had pro tected the market and reduced transaction costs, nurturing the chip and chip equipment makers into world-class competitors. However, as in the case of com puter software standards, in this industry too, over the long run, these close, rigid relationships obstructed the introduction of new technologies and ideas. While foreign chip equipment makers made technological advances and used global standards, Japanese chip makers were locked into expensive and increas ingly inferior domestic chip manufacturing equipment that used closed stan dards. Switching costs were inordinately high and they did not want to rely on foreign products. Thus, a strategy that initially made economic sense led to higher costs over time because of the need to sustain stable relationships with suppliers. Though contrary to their economic interest, chip makers continued to purchase whole manufacturing systems from their suppliers rather than put together a system using the best equipment in the world. Once makers from the U. S. and other na tions caught up in chip making equipment because of standardization, special ization, technological advances, and a rising yen, the economic costs of exclusive ties between chip makers and their equipment suppliers became clear. The problem with standards was well recognized, as it was in the softwarc case. A major business weekly cautioned that if the equipment makers did not stop egotistically clinging to their own fragmented, incompatible standards, the entire chip industry would become a subcontractor of the United States. 56 The Electronics Industry Association of Japan and others warned that the lack of
Semiconductors: From Boom to Bust
1 93
standardization in equipment was leading to unacceptably high costs and long delivery times.57 Thus there were clear economic reasons for the firms to abandon dosed standards and embrace global standards. However, purchasing the equipment of group members helped maintain group employment and promoted domes tic technology and "order" in the industry; it was the customary way of doing business. A prominent academic expert argued in 1999 that labor rigidities caused by the lifetime employment system pressured chip makers to use their affiliates' machinery, preventing them from flexibly adjusting their produc tion.58 At this same time, NEC's president publicly questioned this labor prac tice, arguing that unless lifetime employment was done away with, chip makers could not regain competitiveness. 59 This marked the beginning of the contesta tion of traditional practices by the firms and the state. Still, despite talk of re defining acceptable practices, commitments to labor and allied firms as well as concerns about preventing the bankruptcy of struggling incumbents made quick restructuring impossible. Protected by state policies and stable share holding arrangements, stuck with a rigid set of employees and immense orga nizations that did everything from design through production, and locked into similar strategies, the firms could not quickly respond to new conditions. Without access to venture capital, new firms with innovative ideas did not emerge to force change. Though the economic costs of maintaining the status quo were mounting, the firms barely budged. The system continued to support weak makers at the expense of the strong, helping to maintain a strong sense of community. In 1 999, over a dozen Japanese DRAM makers were struggling to survive, despite having the world's highest production costs. The gap in prices became so large that consumer electronics firms started purchasing foreign DRAMs to keep their products competitive, showing willingness to break with traditional practices to survive. "We want to stop producing commodity DRAMs. But, given the in vestment we have made and the personnel we have, we cannot stop," explained a top executive at a major chip company. 60 4. Communitarian Response to Changing Conditions and
Contestation of Norms: The Mid- to Late 1 990s 52. Roger Mathus, Semiconductor Industry Association, "Recent Developments in the Re Structure of the Japanese Semiconductor Industry," June 13, 2002. 53. Kimura, "Technological Innovation," I SO-52. 54. Sato Naoki, "NEC, Toshiba, Hitachi, Fujitsu, Mitsubishi, Oki, kokunai meik1i no
As the market share of Japanese chip makers plummeted in the mid-I 990s, MITI, fearing serious disruption if not bankruptcy in this strategic industry,
anmei," Ekonomisuto, Oct. 3 1 , 1995, 37; "Handotai ga abunai," 1Oyokeizai, Mar. 9, 1996, [4; "Do naru handotai keiki," Nihon keizai shimbun, Mar. 8, 1 996, [3. 5 5 . "Do natu handotai keiki," Nihon keizai shimbun, Mar. 8, 1 996, 13. 56. "Handotai seizo sochi" and "Handotai seizo 0 080 'hyojunka' no nami," Tiiyiikeizai,
58. Cited in "Handotai batoru roiyaru," Sankei shimbun. July 1 6, 1999. 59· "Nishigaki NEC shin shacho ni kiku," Sankei shimbun, Mar. 26, 1 999, 6.
Mar. 9, 1996, 20, and Dec. 1 3 , 1 997, 1 10-13 .
60. "Handotai, naze 'hi no maru rengo,' " Nihon keizai shimbun, July
57. EIA), A Look at 50 Years, 17.
I I,
[999, 7.
1 94
Reprogramming Japan
reemerged as a leader to manage competition and reshape norms in ways that made it acceptable for distressed firms to restructure their operations and stan dardize their production processes and equipment. The state did not contest commitments to employees and suppliers so much as question the industry's continued focus on DRAM chips. The state and the firms gradually reached a consensus that the firms needed to move out of DRAMs and into systems on a chip (SoC) to position themselves between Korea's strong memory producers and America's strong microprocessor chip designers. SoC couple memory and processing functions (software) on the same chip, therefore offering the advantages of greater performance and reliability, as well as lower power consumption and costs. Japan's chip makers, in particular, found the growing SoC market attractive, because they knew it would be easier to sell their SoC if they could embed them in application-specific products in which Japanese firms have a hardware edge; this includes auto navigation systems, dig ital cameras, digital video discs, and mobile phones. They also knew that succeeding in SoCs would be very difficult, given that the success of U.S. firms had been contingent on software tools for designing chip circuitry, labor mobility, access to venture capital, and flexible wage systems that reward creative minds. Indeed, there were major concerns about the capa bility of the Japanese to succeed in these areas. ''Japanese firms are still very weak in design and you need good designs to make other types of chips. Japanese are good at producing but not at deciding what to produce," explained a MITI expert.61 Still, going headlong into SoC was a welcome move away from memory chips. It showed a growing degree of corporate flexibility, and disrupted the sta tus quo. "System LSI is the only way that Japanese companies can survive in the semiconductor business," said an NEC officia1.62 Going into SoC required shifts in resources and organizational capacities, but not layoffs or cutting off suppliers. Still, it would require a clear strategy, something they sorely lacked.63 To reshape norms in ways that would allow the firms to consolidate losing operations and shift toward higher value-added chips such as SoC, the state and the private sector created several new organizations and initiated a flurry of co operative projects starting in the mid-1 990S. While there was an opportunity to dramatically restructure the industry, the firms resisted change that would fun damentally alter their customary way of doing business. Arrogant due to re-
6 r . Interview, June 27, 200 r . 62. "Major Makers Ante u p for System Chips," Nikkei Weekly, Apr. 27, 1998, 6; " 'Hi no maru' handotai," Toyokeizai, Feb. 14, 1998, 104. 63. "Kokusai kyoso, kyocho ni senryaku 0," Nihon keizai shimbun, July 29, 1996, 27; Shimura Yukio, "Dokuso Interu, 0 Motorora, nichibei sai gyakuten de genki na beikoku,"
Ekonomisuto, Oct. 3 1 , 1995, 32.
Semiconductors: From Boom to Bust
1 95
peated success, managers were unwilling to completely reverse course as the software makers did in the mid-1 990s. MITI was very concerned about the in dustry; however, it was confused about what course to take, given the unclear technological trajectory, and was afraid to take dramatic actions that might fur ther weaken the chip giants. These large firms were the pillars of communitarian capitalism, and their greatest global success had been in semiconductors. MITI was more willing than the firms to experiment with change, but MITI also knew that, unlike in the past, state policies alone could not make a major difference. In fact, MITI knew its policies were part of the problem and that the firms needed to become more responsive to market forces rather than ministerial plans. As long as the firms were unwilling to disrupt ties with labor and suppliers and give up their yokonarabi strategies, there was little MITI could do all by itself Thus, despite strong global pressures to overhaul their strategies and much talk about change, for the most part these projects promoted continuity. While they explored design issues, they primarily focused on improving and standard izing production processes and equipment; they encouraged the firms to have similar capacities and strategies; and they were all aimed at keeping the same set of large firms afloat.64 Many of the project ideas came from the Semiconductor Industry Research Institute of Japan (SIRJJ), which Japan's ten largest chip makers established in 1994 to help regain their manufacturing edge, promote standardization, and move beyond memory chips into higher value-added chips.65 Soon after its establishment, SIR!] helped create ASET (Association of Super-Advanced Electronics Technologies Development Promotion Consor tium), STARC (Semiconductor Technology Academic Research Center), and SELETE (Semiconductor Leading Edge Technologies, Inc.). Examination of projects by these organizations suggests that despite signifi cant changes since 2000, the communitarian capitalist system has continued to follow its traditional approach-state guidance and extensive corporate collabo ration-and to promote traditional objectives: technological independence and yokonarabi competition so as to prevent big winners and big losers. This return to extensive state-corporate cooperation raises serious questions about Scott CalIon's analysis of industrial consortia in Divided Sun: MITI and the Break down of Industrial Policy, 1 975-1993. CalIon argued that since the late 1970S, policies related to industrial consortia have involved great conflict and political infighting. Misleading even for the period he analyzed, his argument is further undermined by the following analysis, which shows relatively harmonious coop64. Ibid. 65· Koki Inoue, "R&D Consortia in the 1990S," in Martin Hemmert and Christian Ober lander, eds. Technology and Innovation in Japan (London, 1998), 199-208; Semiconductor In dustry Research Institute of Japan (SIRIJ), Outline ofthe Semiconductor Industry Research In
stitute ofJapan,
200I
(Tokyo, 2001), 1-4.
1 96
Semiconductors: From Boom to Bust
Reprogramming Japan
eration among public and private-sector actors in various chip-related projects since the mid-I 990S. 66 ASE1; S TARe, and SELETE Soon after SIRIJ's establishment, MITI started ASET, its largest chip effort since the VLSI project in the 1 9708. ASET's twenty-one corporate members in clude chip makers, chip materials makers, and semiconductor equipment manu facturers. They are all large firms and, while some foreign companies such as Nihon IBM and TI Japan are members, for most projects only Japanese firms participate. Fully funded by MITI, ASET's goal is to research technologies deemed important in the future for production of very advanced chips. ASET's budget from 1 995 through 2001 was ¥58.76 billion ($587.6 million). It runs many different production-related projects, ranging from ultra-fine beam tech nologies to magnetic storage disk drives and liquid crystal displays. Many of its projects were initially proposed by SIRI], showing that the firms were returning to close collaboration with the state to bolster the industry. As of March 2003, ASET had applied for 869 patents and received 172 patents.67 In late 1 995, SIRIJ also helped set up STARe. Ties between firms and uni versities in the U. S. are often touted as critical to radical innovation; therefore, STARC was trying to make such ties customary in Japan. A private joint venture of the top eleven chip makers, STARC provides research and financial support for projects at Japanese universities. The firms' initial capitalization of STARC at ¥ I OO million was increased to ¥440 million ($4.4 million) in 200 1 . Initially the Center was to have an annual budget of ¥ I Oo million ($1 million); however, by I999, it had risen to $6.5 million, going to 27 projects at 1 3 universities.68 Much of STA.RC's emphasis has been on chip design rather than process technology, reflecting the makers' desire to shift away from manufacturing to designing and their belief that universities can contribute best to design ideas.69 While the hope is to strengthen university-corporate ties, there are mixed re views about how much change has occurred.70 In fact, only a few universities
66. See review of Calion's book in Journal ofJapanese Studies 23, no. 2 ( 1997): 495-99· 67. ASET, Heisei 14 nendo jigyo hOkokusho no yiiten, May 2003; "Association of Super
1 97
even research integrated circuits. One MITI expert says it will take a long time to change universities: "STARC has a long way to gO."71 SIRI] members also helped establish SELETE. Its first main project in volved testing and evaluating materials and equipment for manufacturing larger wafers-300mm or 1 2-inch wafers. Announced in 1 996 and completed in 2002, it standardized interfaces for the firms that make equipment to produce wafers. Making larger wafers cuts per chip costs by 30 percent. Though seemingly a small step, a move toward making standardization customary in an industry that had long resisted common standards represented significant change. Member companies invested ¥5 .5 billion ($55 million) to establish SELETE and ¥35 billion ($350 million) for the project to make larger wafers.72 But the firms could have saved this huge sum by joining Sematech's International 300mm Initiative, established in I 994, which created global standards for pro ducing 300mm wafers. Sematech invited foreign firms to participate and many did; however, Japanese firms, favoring a domestic solution, decided to organize their own effort to beat Sematech.73 "The reason for waving the [Japanese] flag [in the SELETE project] and cooperatively developing technologies for next generation semiconductor manufacturing equipment is a sense of crisis [kikikan]."74 SELETE intentionally used different standards than Sematech and "is not simply submitting to U. S. standards"; for example, it developed different standards for the carriers that hold the wafers.75 This wafer project, by making it acceptable for domestic firms to use the same standards, nudged the industry in ways that would weaken buyer-supplier ties over time. However, blindly continuing to follow norms that favor domestic over international stan dards led them to needlessly spend hundreds of millions of dollars to keep their standards slightly different from those used internationally, even though this made no economic or strategic sense whatsoever. Though a private-sector initiative, SELETE has taken over several projects started under MITI's ASET, showing growing public-private cooperation to shore up struggling incumbents. For example, in 1 997, SELETE took over three of nine ASET projects, all related to the exposure technology needed to draw the deep submicron circuit lines for upcoming super-dense chips. The goal was to speed up commercial development of the research. A business weekly notes that firms in SELETE feel it is safest to work together on these
Advanced Electronics Technologies" (Tokyo, 2003), www.aset.or.jp. 6S. Inoue, "R&D Consortia," 200-20 1 ; "STARC: Semiconductor Technology Academic Research," ATIP Report no. 99.040, May 17, 1 999; Semiconductor Technology Academic Re search Center, STARe Kaisha Anna; (Tokyo, annual). 69. One such project, the "SoC Sentan Sekkei Gijutsu Kaihatsu Project," a five-year proj ect, started in 2000 with a ¥6so million (about 56.5 million) annual budget. MET!, JoM Seisaku Kyoku, JoM Tsushinkika, Handiitai sangyii no genjii kadai to keizai sangyiishii no shisaku (Tokyo, 2002), 65-66. 70. Shinichi Yamamoto, "Higher Education in Japan from the Perspective of R&D" in Technology and Innovation in Japan, 6 1-69, and "The Role of the Japanese Higher Education
System in Relation to Industry," in Innovation in Japan, 294-307; Pechter, System Assessment
for Innovation Poliq Formulation. 7 1 . Interview, June 27, 200 1 . 72. METI, Handiitai sangyo n o genjo kadai, 4S; " 1 0 sha kyodo d e kyoka rain," Nihon keizai shimbun, Dec. 29, 1995, I; Inoue, "R&D Consortia," 200. 73. Yokota Emi, "Nihon meika," EkQnomisuto, Oct. 3 1 , 1995, 42; "Ashinami soroka," Toyokeizai. Aug. 26, 1995, So. 74. "Jiseidai handotai sOchi no kaihatsu," Nihon keizai shimbun. July 8, 1995, 9. 75. "Handotai seizo 0 osO 'hyojunka' no nami," Toyiikeizai, Dec. 13, 1 997, 1 13 .
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types of technologies-that by having the same strategy, no firm will get hurt.76 SELETE is also sponsoring several lithography-related R&D projects and in 2004 announced an effort to develop processing technology for producing chips expected to come into mass production about 201 3 . These types of projects, where the goals are clear and production-oriented, have long tended to achieve their objectives.
5. Accelerated Change
To prevent bankruptcies and instability in the industry, collaboration among SELETE, STARC, and other organizations increased in the 2000S. Rather than adapt uniquely to their specific market situations, all the main firms responded collectively through various large-scale projects and joint firms. The Asuka and Mirai Projects
In 2001 SELETE initiated the ambitious, heavily funded Asuka Project (Zoo l2005) to help all the makers move into Soc. The project targets the development of key process and design technologies for 0.07-{). 1 O micron devices--the density that will be needed around 2005. It involves collaboration with STARC, and again pushes standardization of equipment for producing SoC and thus contests cus tomary exclusive ties between chip makers and their equipment makers. "Think ing about common standards is a new idea. In the past, a given firm's semiconduc tor design was only used in that firm," explained a MITI official.77 SELETE put ¥70 billion ($583 million) and STARC ¥I4 billion ($I I 6 mil lion) into this five-year project, which has a staff of 340 people.78 The consor tium also spent ¥z8 billion ($z33 million) to establish three R&D facilities to produce prototypes of next-generation chips. Japan's major business daily, not ing that this project encourages yokonarabi behavior, questions how much fun damental change there has been in the consciousness of state and corporate leaders.79 Still, the effort is helping make common standards more acceptable. The huge sums going into the project-some $1 billion-suggest the firms are trying to seriously respond to global pressures for new approaches. However,
199
rather than responding in different ways based on their own strengths and weaknesses and strategies, they are all responding in similar ways. The Asuka Project's potential is magnified, because it is coupled with MITI's seven-year Mirai Project (zool-z007.) Mirai targets key process tech nologies to produce 0.05-0.07 micron SoC, the technology expected to be used around 2010. Thus, it follows the Asuka Project, one targeting the production technologies needed by around 2005, the other targeting technologies needed by 20 IO. Mirai brings together 1 3 universities, research labs, MITI's AIST (Agency of Industrial Science and Technology) lab, and ASET's members. MITI plans to spend a total of ¥30 billion ($250 million) on the project as well as manage its intellectual property rights.80 Mirai's broader objective is to sur pass the U.S. in this area by establishing a new international standard in manu facturing technology.sl It is also developing software tools to design the highly integrated circuitry needed for high-performance memories and microproces sors, areas in which the U. S. is significantly ahead. "This is the last chance for the revival of Uapan's] semiconductor industry," explained the Hiroshima Uni versity professor in charge of the project.82 Though formally separate public- and private-sector efforts, the projects have collaborated extensively. However, the approach, so similar to past MITI projects, encourages similar competitive and R&D strategies. Moreover, while it appears ambitious, it is simply helping the industry keep up with the established roadmap for chip advances rather than leapfrogging into new territory. To get quicker results, MITI started pushing for a merger of the two projects in late 2003. At the time, it was not clear whether all the firms would go along. NEe's chairman, for example, said NEC would not necessarily stick to one standard and might even drop out of the project.83 However, NEC agreed to go along with a merger of the projects when it was announced in summer zo04.84 Another production-oriented chip project, the HALCA (Highly Agile Line Concept Advancement) Project, helped the firms create energy-efficient pro duction technology to allow for small-lot production of various types of systems
80. Mirai stands for The Millennium Research for Advanced Information Technology; in Japanese, mirai means "future." METI, Handotai sangyii no genjo kadai, 34; www.miraipj .jp; ASET, Heisei 14 nendo jigyii hiikokusko no yoten (Tokyo, May 2003).
8 1 . "Tsiisansho to ote 10 sha," and "Handotai II sha ga kessoku," Nikon keizai skimbun,
Oct. 25, 1999, 1, and Sept. 20, 2000, 3 . 76. Ibid.,
IlL
82. "Kagaku gijutsu sOzo rikkoku, kigyo R&D saisei," Dec.
2,
2000, Nihon keizai skimbun,
77. Interview, June 27, 200 1 . 7 8 . The project headquarters is i n Tsukuba where a cutting-edge $200 million clean room
13·
was opened in 2002. SELETE, "Asuka Purojekuto Gaiyo" www.selete.co.jp; "Kyodo kaihatsu
1 6.
s!!i no gyakuten (Tokyo, 2003), 98- I 19·
collaborate with the Mirai project. Interview of MITI expert, June 28, 2004; "MITI, Private
keikaku," Nikon keizai skimbun, Sept. 30, 2000, 1 I; Izumiya Wataru, Nikon kant/otai kishi kai 79. "Kagaku gijutsu sOw rikkoku," Nikon keizai shimbun, Dec. 2, 2000, 1 3 ·
8 3 . "METI Attempts to Redefine Advanced Chip Projects," Nikkei Weekly, Dec. 1 5 , 2003, 84. The Asuka project ends in 2005 and will be continued in a successor project that will
Sector to Unify Chip Development Projects," Nikkei Weekry, June 14, 2004, 14.
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Reprogramming Japan
on a chip. The three-year project (2001-2004) had a budget of ¥8 billion ($74.8 million) and used the same Tsukuba clean room as the Mirai and Asuka Proj ects.85 Consolidatio,z into One DRAM Company
These projects helped the firms shift into SoC and, by making standardiza tion and collaboration acceptable, encouraged the firms to merge their DRAM operations in so-called "rising sun alliances." Hitachi tied up with �EC, and in late 1 999, they decided to consolidate their DRAM divisions in a 50-50 joint venture, Elpida Memory. Fujitsu and Oki gradually exited the DRl\M business and Toshiba joined them in late 200 1 . Norms made it impossible for Toshiba to sell its domestic operations to a foreign firm, so it slowly shifted them away from DRAMs; however, it sold its U.S. DRAM operations to Micron Technology. Mitsubishi Electric merged its DRAM operations with Elpida in 2003 at the same time that it integrated most of its other chip operations with Hitachi in a new firm called Renesas Technology. These moves meant that in 2003 Elpida was the last Japanese firm in the DRAM business. This restructuring was very unconventional, especially since these firms were all in different keiretsu groups and had firm-specific unions and suppliers. Just a few years ago such consolidation would have been unthinkable, but now "we all feel a sense of crisis," explains Inayoshi Hideo, a top Hitachi engineer.86 These mergers, like those between banks that occurred around the same time, completely redefined what was considered acceptable corporate behavior. Elpida initially struggled to find investors to finance its next generation memories. Its factory was ready in 2000, but, due to a lack of funds, it had not installed equipment in it by late 2002 and was being called a failure.87 1b resur rect it, Hitachi and NEC brought in a new head, Sakamoto Yukio, who had held high-level positions at TI and other foreign makers and had the personal con tacts to reach out to foreign firms to obtain needed capital.8Ii In mid-2oo3, Intel agreed to cooperate technologically and invest $ 1 00 million in the firm, while 30 other firms agreed to buy ¥3I.8 billion ($254 million) in shares. The consolidation of the DRAM industry into one firm and the need for a 85. http://www.semiconductorporta\.com/GSC; METI, Handotai Sllngyo flO genjo kadai, 6z-64; "Firms See Future in High-end Chips," Nikkei VVt?eklj, March 29, zo04, 3Z; http: / / w\,,"w.aset.or.jp. 86. Irene Kunii, "Japan Hits the Panic Button," Business Week, May 27, 200Z, 20. 87. Interview, July IO, ZOOZ; "Handotai saihen," Ekonomisuto, July 30, 2002, 23; "DRAM haiboku no kyokun 0 ikase," Nihon keizai shimbun, Sept. z8, 2002, 2. 88. "Elpida President Drums Up Support for Japan DRAMs," Nikkei VVt?ekly, Dec. z3, Z002, Z I; "Hi no roaru rengo zento wa tanan," Nihon keizai shimbun, Sept. 30, 2002, 7.
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capital infusion by a foreign firm was no major surprise. It had been clear since the mid-1990S that the firms could no longer compete in DRAMs. As their prof its plunged, their ability to maintain the huge investments necessary to build new DRAM factories diminished. For example, investment by the five top mak ers in 200 1 plunged 63 percent from 2000; consequently, in 200 1 , they were in vesting one-third of what Samsung and one-fourth of what Intel was investing.89 The inability to invest in new facilities means that yield falls. It is a vicious cvcle. The writing was on the wall. "They hung onto DRAMs for so long. They �ere bleeding, so they had to get out before they had something to replace it," ex plained a U.S. chip expert based in Japan.90 Accepting financial and technologi cal assistance from Intel was humiliating, and as in the software case, dealt a major blow to the nation's overall confidence in its technological capacities. The creation of Elpida indicated significant change. However, it was late in coming and was done out of desperation. It is unclear whether the firm will suc ceed. It expected to have a 1 5 percent global market share in 2004, but only had a 4 percent share and posted a ¥z6 billion ($208 million) loss on sales Of¥ I OO bil lion ($800 million) in the fiscal year ending March 2003.91 The state is doing everything it can to protect it. MOF agreed in June 2004 to investigate dumping charges against Hynix of South Korea, a move expected to lead to Japan's first ever imposition of countervailing duties. Confident that the domestic commu nity will protect it and buy its products, Elpida announced in mid-2oo4 that it would invest ¥500 billion ($4 billion) to build the world's largest DRAM factory. Adva1lced SoC Platform Group (ASPLA)
Merging their DRAM divisions made it more acceptable for the firms to combine other operations. 'Ibshiba and Fujitsu are collaborating in several chip related areas and talking about fully integrating their system chip business. Moreover, the major firms jointly created a new company in July 2002 called the Advanced SoC Platform Group (ASPLA). Based in Tokyo, ASPLA focuses on the design and standardization of manufacturing technologies for 90nm (0.09 micron) Soc.92 The aim is to adopt a standard platform for SoC. "The design cost of SoC devices is soaring as the scale is going down. It's essential to have a standardized design and process platform to share design and process resources 89. "Handotai hajime no kyodo seisan," Nihon keizai shimbutl, Dec. 30, 200 1 , 90. Interview, July 10, 200Z.
"
9 1 . "Bci Interu ni shusshi yosei e,
I.
"Interu ga shikin shien," "Erupida 1 000 oku en
chotatsu," and "Nihon sei DRAM fukkatsu e ashigakari," Nihon keizai shimbun, Oct. 4, Z002, n,
Feb. 22, zo03,
I,
and June 4, 2003, 1, 3.
92. ASPLA's initial ¥9So million capitalization was boosted to ¥1.8S billion ($14.8 million) in 2004.
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Reprogramming Japan
to lower the cost," explained Kawate Keiichi, ASPLA's president and CEo.93 To encourage the firms to consolidate production, MITI lent ASPLA a ¥3 I . 5 bil lion ($252 million) pilot manufacturing line. MITI played a major role in ASPLA's creation. The idea was that ASPLA would research manufacturing technology and commercialize this technology, as well as the results of the Mirai and Asuka projects, in the MITI-owned trial manufacturing line.94 Sharing a production line was key, according to a MITI expert: Asuka and Mirai will take five to ten years and if there is no industry alive then, it will be a problem. That is why we started the recent next generation joint plant. We had to do it for survival. I know the government should not support produc tion. But in this case we had to. Japanese firms are very weak in design. But we can't give up. We don't need to do DRAMs necessarily, but semiconductors will always be important so we need a domestic industry.95
Standardizing specifications and having production done at one facility frees the chip makers to focus on new designs. Now they all handle everything-from design to production-themselves. Merging production makes sense because they all have similar products and capacities. Indeed, a 2002 MITI report found "no significant difference in production technology among the five leading [semiconductor] companies."96 "The Japanese are engaging in a lot of 'wasteful competition' in technology, where they take virtually identical products to vir tually all the same customers," explained Fujita Katsuji, head of Toshiba's sys tem chip operations.97 "There are just too many chip makers in Japan today making the same products. They have to regroup or merge," says MITI's Umezawa Shigeyuki.98 There are many doubts about whether ASPLA and these other projects will help solve the industry's serious problems. They are responses typical of a com munitarian capitalist system: planned, focused collaborations aimed at raising 93. Yoshiko Hara, "Japan's SoC Effort Forges Standard Fab Network," July 2 1 , 2004, http://www.siliconstrategies.com/article. 94. METI, "Jiseidai handotai no sekkei seizo gijutsu hyojunka 0 ninau shin kaisha no se tsuritsu ni tsuite," press release, July I I , 2002; interview of MITI expert, June 28, 2004; www .aspla.com. 95. Interview, July 9, 2002; also see METI, Joho seisaku kyoku, Nihon handotai sangyo no
Jukkatsu ni mukete, Oct. 2003, 1-13. 96. "Government to Promote National Chip Foundry," translation of Nihon keizai shimbun article, June 1 2, 2002. 97. Edmund Klamann, "Toshiba, Allies Seek Key to System Chip Success," Reuters News Service, Aug. 29, 2002. 98. Cited in Kunii, "Japan Hits the Panic Button."
Semiconductors: From Boom to Bust
203
the tide and lifting all boats. Moreover, these projects primarily focus on helping huge firms improve manufacturing skills. However, given high wages and other high costs, the firms can no longer profitably compete on superior production processes. They need innovative designs, which are much more likely to emerge from small, entrepreneurial firms than if done by committee. Even MITI offi cials acknowledge problems with this collective rush into Soc. There are too many SoC makers in Japan, admits Fukuda Hidetaka, a high-level MITI offi cial; "with the unprofitable SoC business, how can . . . [these makers] survive? Japan's semiconductor industry will fall into a severe situation in 2006, and the situation will be much worse in 2007. "99 Indeed, even after global demand for chips improved in 2004, Samsung's chip investment was four times that of NEC and almost five times that of Toshiba. 100 The firms also have growing doubts about the value of consolidating their ef forts, including production, in ASPLA. When the economy and demand for chips picked up somewhat in 2004, they started talking about ending ASPLA in 2005 . 1 1)1 They would rather go it alone than collaborate on design and produc tion of Soc. This shows flexibility and willingness to break away from the pack. However, it is also aimed at maintaining employment and ties with traditional suppliers. The chip case shows how communitarian capitalism helped nurture the in dustry in the 1960s and 1 970S yet contributed to its inability to respond to prob lems that emerged in the late 1 980s. In the early decades, a strong state protected all the key players from the full brunt of foreign competition and supported them through various risk-sharing arrangements. A positive global environ ment, a broad consensus on how to use the industry for the community's inter est, a stable technological trajectory, sensitivity to economies of scale, being in the catch-up stage, market-conforming policies, and a business sector willing to invest heavily to become competitive also contributed significantly to creating the world's most efficient memory chip producers. When many of these conditions changed in the mid- to late 1980s, the firms were unable to adapt. Confident due to repeated success and bound by long term commitments to employees and suppliers, they refused to change even though it was in their economic interest to do so. Despite acknowledging weaknesses that result from a surfeit of state and cor porate controls over competition, the state and firms have returned to the same toolbox to fix their problems. Notwithstanding talk of the need for using market 99. Hara, "Japan's SoC effort," July 2 1 , 2004, http://www.siliconstrategies.com/article. 1 00. "Samusun 7 cho en toshi," Nihon keizai shimbun, May 28, 2004, ! . 1 0 ! . Interview, June 28, 2004.
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forces to stimulate invention and entrepreneurship in high tech industries, the primary market pressure on Japanese firms continues to be competition with foreign firms and demands from foreign investors. Yet the effect of foreign pres sure is at best crude and slow. Despite plunging market share, firms, unable to slash employment rolls and restructure quickly, took almost a decade to consol idate unprofitable DRAM operations. In the process of keeping firms on life support, rather than letting them die, the chip makers may have fallen so far be hind that they will be unable to stage a comeback. While it has become acceptable for firms in different keiretsu to merge their losing operations-and the firms have shifted from DRAMs to systems on a chip-these changes have been late in corning and were done out of desperation. Despite strong economic incentives to overhaul their strategies, the firms con tinue to resist radical changes in their practices. Communitarian practices re , main prevalent. MIT! s top chip expert admits that Japan's form of capitalism continues to prevent big winners and big losers. "Japan is not changing much in this regard. There are few incentives to change. Yes, we must change but we can't change with the same people. For a new company, you can have different rules from the beginning. For existing firms, you can't change the rules mid stream." I02 But, preventing losers means handicapping winners. Without a mechanism for creative destruction, it is very difficult for firms in a communi tarian capitalist system to break out of a vicious cycle. Communitarian capitalism still promotes large firms and prevents them from going bankrupt. It continues to encourage risk-sharing behavior that supports overall social stability, predictability, and order, contributing to a strong sense of community. Despite talk of the need to encourage small firms and innovative de sign, huge sums continue to be invested in projects aimed at large firms that focus on manufacturing technology. "We also nced to support small companies. But big semiconductor companies are very important to the broader Japanese economy so we have to support them," explained a MITI expert. 1 03 The state and the industry are paralyzed, caught bctween a system of communitarian cap italism and a market no longer in step. There are growing doubts about the efficacy of the collective push into Soc. Even if the firms meet their objectives in SoC, it is unlikely they will signifi cantly boost their global standing. It is a more profitable niche than DRAMs and it allows them to take advantage of the nation's strength in sophisticated consumer electronics products. However, unless they have good ideas and solu tions to real problems, they could end up building SoC for which there is no great demand. Moreover, they are all focusing their resources on this one mar ket niche, though in 2004 they began to specialize somewhat, leading Japan's 102. Interview, July 9, 2002. 1 03 . Interview, June 27, 200 1 .
Semiconductors: From Boom to Bust
205
economic daily to say they are saying farewell to yokonarabi toshi (similar in vestments). I 04 The firms remain weak in chip design. " If we hope to set standards in next generation chips, we need to boost our design capabilities," says Takemoto Toyoki, STARe's chief operating officer. 105 Others point out problems related to the shortage of engineers capable of designing the kind of SoC for next gen eration products, and the firms' slow organizational change and decision making. "Japanese companies are typically too slow and bureaucratic. In this in dustry, you need to be fast and decisive," says Minamisawa Akira, senior analyst at WestLB Securities Pacific Ltd. in Tokyo. lOb One possibility is a major move of(.,hore to China. " As long as we produce in Japan, it is difficult to be free from the moral obligation to procure from long term suppliers who have contributed to our businesses. In China, we can choose the supplier that offers the most competitive price," admits Matsumoto Tadashi of Toshiba. 107 This move is in many ways inevitable, although it will be done in crementally and in an orderly fashion so suppliers can gradually adjust. As con sumer electronics production continues to move offshore, so go the captive semiconductor sales that Japanese chip makers have enjoyed . Analysis of the chip case shows that strengths can quickly become weak nesses during periods of rapid, discontinuous technological change. The difficult-ta-predict shift in the pace and direction of chip technology in the 1990S blind sided Japanese as well as US. electronics giants, Motorola and TI. However, the US. political economic system, despite numerous weaknesses, is better equipped to respond in periods of rapid, unpredictable technological change. With a vibrant venture capital market and an active market for corporate control, competition from new and existing firms forces US. firms to restruc ture or die and nurtures an environment conducive to the birth of new firms. In contrast, in Japan, due to reluctance to radically alter deeply entrenched social and developmental norms, a wrenching process of uncreative destruction con tinues. 1 04. "Hiyaku e no josho, handotai, 'yokonarabi toshi' ketsubetsu," Nihon keizai shimbun, June 1 6, 2004, I I ; Elpida does DRAMs, Toshiba and Renesas Technologies do System-LSI and flash memories, and NEe and Fujitsu do System-LSI and no memories at all. 1 05 . Cited in Kunii, "Japan Hits the Panic Button." I06. Ibid. 107. Mathus, "Recent Developments," 14.
Crisis in Communitarian Capitalism
8
Crisis in Communitarian Capitalism
After decades as the model for economic development, Japan's economy has stalled. While there are many reasons for this decline and the nation's late and slow response to its new challenges, this study suggests that these problems are rooted in the very form of communitarian capitalism that produced the widely admired economic miracle. After the physical and psychological devastation of World War II, leaders and citizens created a new economic system that focused on promoting both economic growth and social stability. At the heart of the new system was an implicit social contract-a paternalistic commitment by leaders to take care of its citizens. If everyone worked hard to promote national inter ests, everybody would benefit from the fruits of that growth. The egalitarian tone of this contract was set by the Occupation's land reform and tax policies, which vastly narrowed the gap in wealth between the rich and the poor. Under the new system, an activist state, supported by banks and other key institutions, managed labor and capital markets in ways that provided job secu rity, promoted yokonarabi competition, and targeted strategic industries. Over time, the strong commitment to norms of equitable treatment of workers and firms, technological self-sufficiency, and wealth-sharing that grew out of prepa ration for total war and experience of defeat became deeply entrenched. Vested interests also supported the institutions and policies that maintained these norms even though these policies were often counterproductive. In short, the very sense of insularity and community that empowered Japanese to pull to gether for the war and postwar recovery is contributing to their inflexibility and decline in a new era of global competition and turbulent technological change. Understanding the norms that underpin this variant of capitalism helps to explain why the world's second largest economy and largest creditor nation, sit ting on over $700 billion in foreign reserves and $ 1 4 trillion in savings in 2004,
207
finds it so difficult to make the structural changes required to prevent a contin ued slide into mediocrity. These norms, embedded in Japan's institutions, help explain why leaders continue to coddle NTT even though they know this hurts its ability to become a global player. Because of these norms, the state is target ing the software and semiconductor industries, even though it knows targeting is ineffective in industries characterized by rapid, discontinuous technological change. These norms explain why the government and firms continue to bail out losers, why Japanese are weak in assessing risks, why there are few risk-takers and decisive leaders, and why firms are loathe to lay off workers and abandon suppliers. Understanding that the supra-organizational logic of the system is to create and maintain a cohesive community rather than to simply maximize shareholder value helps elucidate why institutions and policies are particularly inflexible and why citizens are choosing to decline economica1ly together rather than allow market forces to decide which firms go bankrupt, which workers get fired, and whose pay gets cut. Only by bringing society back into our analysis of Japan's political economy-by analyzing the social reality that the state, firms, and citizens have constructed and maintained in the postwar period-can we explain what otherwise appears to be self:'defeating behavior. This chapter builds on the previous case study analyses to demonstrate the many ways Japan's capitalist system is communitarian in nature. It also shows that while communitarian norms have been contested and redefined, leading to significant change in the last decade, the system remains fundamentally commu nitarian. Comparisons of the early and late stages of each industry and the in dustries with one another provide insight into the conditions under which the system contributed to the development of a particular industry and those under which it did not. I assess counterarguments and examine firms that are excep tions to my argument-that are competitive despite communitarian capitalism. Finally, I discuss broad trends of continuity and change from the perspective of 2004, whether the system is converging with the Anglo-American model, and prospects.
1 . Norms and Institutional and Policy Change Japan developed a variant of capitalism in the postwar period that focused on economic development but also a stable social order and national autonomy. Al though state agencies and corporations all tried to advance their narrow self interests, those interests were shaped by social and developmental norms. Profit was important; however, strong firms, technological self-sufficiency, and a cohe sive community were the top priorities. The fact that Japan's elite was sharing the benefits of development with the broader populace did not necessarily mean they were sharing power; rather, this was a paternalistic system in which leaders
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Reprogramming Japan
could only maintain their legitimacy as long as they took care of the broader community. Communitarian capitalism has characteristics common to other nations with nonliberal capitalist systems. It resembles Germany's postwar system in terms of emphasizing social stability. Its focus on national autonomy, technological self-sufficiency, and targeting of specific industries resembles South Korea, which was left a developmental template by its Japanese colonizers. l Japan's sys tem had both developmental and social objectives, and when these goals started conflicting in the 1980s, concerns about social cohesion were given priority. This study builds on Chalmers Johnson's work on the state's important role in Japan's industrial development. Japan would not have developed viable telecommunications, computer hardware, computer software, and chip indus tries without the strong, smart role of the bureaucracy. MITl and NTT were critical in protecting and promoting firms in these industries while pressuring them to advance technologically and cut costs. By helping build up core techno logical and organizational capacities in the early stages, these industrial policies altered the nation's technological trajectory, putting it on a path toward increas ing technological sophistication. Missing from the notion of the developmental state is the broader context in which those policies were developed and pursued. The developmental state did not merely implement the same economic policies pursued by nations of the West. Nor did it follow the self-interested policies of bureaucratic-authoritarian states such as those in Latin America, India, and Indonesia, which were bogged down with demands from wealthy landholders and burdened with the legacies of exploitative colonizers. 2 Instead, Japanese leaders pursued policies that repre sented a broad consensus about what was important. The developmental state's goal was to raise the nation's level of prosperity but only so long as it did not re duce social stability, autonomy, and security. While the state is a critical member of the community, so are firms and citi zens. Thus the consensus on the importance of social order, national security, and economic development that was reflected in state policies was also reflected in economic arrangements that emerged in the private sector. Main bank and stable-shareholding relationships protected firms from takeovers and assured employees secure jobs. Purchases by allied keiretsu companies and a buy Japanese ethic helped firms gain experience and economies of scale. This nur turing environment allowed them to invest heavily for long-term gains and en couraged employees to work hard to assure a healthy future for their firm. A strong sense of community discouraged talented Japanese from emigrating or I. Woo, Race to the Swift. 2. Kohli, "Where Do High-Growth Political Economies Come From?"; Herring, "Embed ded Particularism."
Crisis in Communitarian Capitalism
209
going abroad for higher education. Thus, unlike other late developers (such as South Korea, Taiwan, India, and China), Japan did not experience brain drain. Corporations valued graduates of local not foreign universities, which encour aged talented people to work on behalf of the community. The case analyses show that the calculator makers' willingness to buy domes tic chips in the early 1 9708, even though they were inferior in quality and more expensive than foreign chips, helped tip the balance in favor of domestic firms. Corporate users of software, phones, and computers also paid high prices for in ferior products in the early years but accepted this as a necessary trade-off for bolstering these industries and creating stable jobs and a rising standard of liv ing. This kind of broad corporate support, along with heavy state aid, allowed the mainframe makers to survive in the 19708 even though GE and RCA exited the industry. Strong chip makers voluntarily adjusted their production and pricing strategies to prevent weaker firms from going out of business, thereby contributing to cohesion among community members. Individuals also followed communitarian norms. Few consumers objected to NTT's requirement that they purchase a ¥ 100,000 subscriber bond and pay high installation fees to get a phone. They implicitly accepted these costs as nec essary for creating jobs and steady improvements in quality of living. The best and the brightest accepted a rigid labor market that gave them the same financial rewards as their less competent colleagues. It was all part of being a member of a national community, a national family. Due to this strong mutual commitment, firms could invest heavily to train employees without worrying that they would move to another firm or demand higher wages. Since individuals did not de mand compensation for critical inventions, money earned could be plowed back into the firm. Putting money in low-interest postal savings accounts was tied to a broader sense of duty toward the nation and continued even after citizens had the option of moving money off<;hore. A huge pool of domestic savings allowed banks to funnel low-interest loans into domestic firms and assured national sov ereignty by making it unnecessary for the government to borrow from foreign ers to cover the growing national debt. Acting in ways that nurtured a strong sense of community became the norm, the appropriate way of behaving, for citizens, the state, and corporate officials. Strong social sanctions punished those that acted in ways contrary to these norms. Thus, while the developmental state played a critical role, it did not or chestrate many aspects of the capitalist system. Firms and individuals also played crucial developmental roles. The case studies show that while there is always tension between the devel opmental and social goals of communitarian capitalism, until the 1980s commu nitarian arrangements generally contributed to both of these objectives. In the telecommunications industry, for example, NTT promoted its family firms but also treated them fairly equally; it gave them stable orders and made sure they
2 10
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Reprogramming Japan
would not fail. In the hardware case, cooperative R&D projects helped the firms advance technologically, but MITI had the three main firms take turns heading the projects, leading to yokonarabi competition and similar corporate capacities. JECC helped the firms finance computer rentals, but also prevented new en trants and managed a price cartel that protected the weak at the expense of the strong. MITI nurtured the chip makers, but encouraged them to have similar capacities and strategies so as to maintain orderly competition in the industry. Loyal ties between users and suppliers of software protected the software mak ers, helping them become more advanced. But it also kept all the firms, weak and strong, afloat. However, the social and developmental objectives of communitarian capital ism came into conflict in the I 980s. Practices that had nurtured orderly competi tion, technological self-sufficiency, and a stable social order no longer promoted development. In some cases, where a new global technological environment cre ated a market in which the future was increasingly hard to predict, communitar ian capitalism had a negative impact. The state and firms began to question the value of continuing traditional practices, but, they were reluctant to dramatically alter them because it would require breaking long-held taboos and would ruin the sense of community. Moreover, the economy was booming, enabling the firms to absorb such inefficiencies. For example, in telecommunications in the I980s, when there were obvious economic gains to be made from moving away from NTT's standards and laying off tens of thousands of excess workers, state leaders avoided these moves be cause supporting labor and incumbent firms was more important than provid ing better and lower-priced services and earning high profits. The government did partially privatize NTT and introduce some competition. However, MPT promoted continuity and stability by favoring NTT and a select few new en trants that could be relied on to avoid cutthroat competition. MPT allowed NTT to set its prices based on costs and thereby enabled it to continue employ ing an excessively large work force and paying high prices to its equipment sup pliers. This, in turn, made it possible for the big conglomerates to run their firms like communities operating on behalf of employees rather than sharehold ers. MPT rejected new entrants' proposals to cut prices because it feared price competition would undermine predictability in the marketplace and discourage firms from making long-term investments. NTT continued to buy equipment from Oki, even though it was much weaker than the other family firms. Similarly, though it was obvious that lock-in to closed OS standards was hurting software users and the economy more broadly in the 1980S, MITI was unable to create a consensus for unbundling and users remained loyal to their suppliers; thus, the makers and users continued to cling to those standards. It may have been in the economic interests of users to change, but it would have broken ties with their allied companies, which in a communitarian system was
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like cutting off a sibling. I n hardware, when the global industry started shifting to smaller, powerful machines in the 1980s, producers and users continued to cling to mainframes, and the workers that produced them, rather than fire work ers and cut off divisions to adapt. The chip trade agreement gave strong firms incentives to adjust production and prices in ways that undercut weaker ones. However, all the firms cut their production in unison. In sum, when social and developmental goals started to clash in the 1 980S, firms and the state remained loyal to key members of the community--employees and suppliers--even though these commitments often undermined profits and long-term competi tiveness. In the I 990s, the forces of globalization started to threaten the very existence of these firms and the communitarian system. It became clear that uncondition ally supporting labor and the established firms was beginning to undermine the well-being of the community that these norms aimed to promote. A MITI offi cial explained the root of the problem: We have to change the social system. Japan's current social system is the continuation of the system from the high-growth era of the 1 950S and 19608.
.
.
. The
large companies determined this social system, but this era is over. . . . The biggest problem for Japan's economy now is the social structure. . . . But changing the companies' consciousness means changing people's consciousness, so this will take a very long time.3
To preserve these norms and communitarian goals as much as possible, the state and firms started to more vigorously challenge and adjust them. The bu reaucracy, especially MITI, MOF, and to a lesser extent MPT, took the lead in this process of redefining appropriate corporate behavior, in collaboration with big business. It was MITI that publicly accepted foreign firms in the software market, abandoning decades-long policies that made reliance on foreign tech nology taboo. In the chip industry too, MITI was behind many of the moves to merge the firms' DRAM operations, consolidate production, and shift toward more profitable systems-on-a-chip. MPT, responding to intense global pres sures, pushed through significant changes in telecommunications policies start ing around 2000. In all of these cases, the bureaucracy was the first to publicly acknowledge that past practices were no longer sustainable and that consensus was needed to make modifications acceptable. The state and the firms reshaped communitarian policies; they did not dis card them. The government continues to buy Hitachi supercomputers even though they are inferior to Fujitsu machines. MITI pressured the software in3· Interview, July 13, 1994·
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dustry to abandon its closed standards, but is pushing TRON and Linux stan dards to minimize reliance on the Wintel standard. MPT has allowed in new en trants and more competition, but it continues to heavily protect NTT. The chip firms exited DRAMs and consolidated some of their other operations, but vari ous collaborative projects still provide them with life-support. In sum, the case studies show Japan has its own variant of capitalism, and that the way it works and its slow response to a dramatic shift in its environment since the 1980s cannot be fully understood without reference to deep-seated communal norms. It has all the trappings of a capitalist system. However, its goals are quite distinct from those of the Anglo-American model, and despite some institutions and practices in common with other nonliberal capitalist na tions such as Germany and South Korea, there are key differences. Profit is not irrelevant, but continuity, predictability, egalitarianism, and national autonomy are the guiding objectives. Preferences for practices that promote a strong com munity are still deeply entrenched.
2. Strengths and Weaknesses of Communitarian Capitalism Communitarian capitalism helped promote development from the 1950S up to the 1980s, but was less successful after that. What is it about the system that made it work in some cases and periods but not in others? Are there key condi tions that help explain these broad trends? A comprehensive test of the notion of communitarian capitalism would require analysis of many industries in Japan and other nations. Such an effort is beyond the scope of this study, which fo cuses on four important industries where extreme conditions placed the greatest stress on the system. Notwithstanding this limitation, comparisons of the early and late stages of each industry and of the industries with each other suggest several conditions that help explain why the system was more effective in the earlier period than later on. In three of the four cases, communitarian capitalism helped promote devel opment in the early period but failed in the later period. There is one exception: software. In this case, the system was not particularly effective in either the early or late stage. Several key conditions help explain how communitarian capitalism turned from an asset in the early decades to a liability in recent years. They are: the stage of the development of the industry; whether the industry was manufacturing-based with a clear technological trajectory; the international en vironment; whether there was a broad consensus on the industry's importance and on how to use it for the community's interest; and whether policies and in stitutions worked in market-conforming ways.
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Stage a/Development and Nature a/ Technology The most critical condition explaining the system's effectiveness in the early stages and its failure later on was the stage of the industry's development and the nature of its core technologies. In telecommunications, computers, and semiconductors, communitarian capitalism worked well when the industries were in the catch-up stage-when the technological path was clear, foreign products could be copied, and the focus was on manufacturing. Communitarian capitalism was effective in this stage in manufacturing-based industries because the system nurtured large firms that had deep pockets and were skilled at planning and incremental innovation. To minimize risk and pre vent clear-cut winners and losers, the system encouraged firms to pursue simi lar product and R&D strategies. As a result, firms focused scarce resources on one or a few select market niches or approaches. NTT and the large electronics conglomerates, backed by strong banks, the state, and keiretsu ties, functioned as the temporary monopolies Joseph Schumpeter deemed necessary to carry out innovation during periods of stable, predictable technological change. The path was clear: follow IBM, AT&T, and TI. The conglomerates borrowed from abroad and focused on learning. They made detailed long-range plans and in vested heavily in up-to-date manufacturing facilities. They worked hard to in crementally improve manufacturing processes and product features. They coop erated on research and pricing. The result was high-quality products manufactured at reasonable costs. This risk-sharing system was critical in the catch-up stage when resources were scarce. JECC, MITI's R&D projects, and NTT's procurement and re search policies pooled state and corporate resources to finance computer rentals and accelerate technological catch-up. By pooling their efforts and resources, the hardware makers were able to more quickly counter IBM's new machines. Similarly, the chip firms' collective focus on DRAMs helped flood the global market with high-quality, low-cost goods and drive foreign competitors out of business. The overlap in MITI and NTT projects in the early years consolidated the firms' efforts and helped them quickly respond to foreign competition. However, once firms in these industries caught up, the nature of technologi cal change made the kind of problem solving embodied in software, as opposed to manufacturing skills, key to competitiveness, and therefore the old capacities impaired performance. The firms needed new organizational capabilities de signed to identify and solve these problems, and therefore new ideas were cru cial. In a more market-based system, firms would have had to adapt or go bank rupt. However, communitarian capitalism buffered firms from the full brunt of competition, enabling them to maintain policies that otherwise would have be come too costly.
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Bogged down in commitments to various stakeholders, firms were not nimble enough to adapt. Since communitarian capitalism favored large permanent fix tures in the economy, it obstructed new firms from emerging in mainstream in dustries. Moreover, the state, the main bank corporate governance system, and the keiretsu obstructed active foreign participation in the market via imports or corporate takeovers. A vibrant venture capital market could not emerge in a sys tem that promoted continuity and preferred large, relatively similar firms. A sys tem that held back successful organizations blunted the emergence of new firms capable of assessing and taking bold risks. The result: Japan's landscape was lit tered with many large firms with capacities suited to manufacturing, not techno logical breakthroughs. The nature of technology was very different in the software case, even in the catch-up stage. Competitiveness depended on ideas and standards, not manu facturing skills. Since the technological path for software was never clear, com munitarian arrangemcnts were never particularly effective in promoting the in dustry. One reason may be that when technological change is radical and unpredictable, when competition is on ideas and standards, and when foreign products cannot be legally copied, the roles of the activist state and large hierar chical firms are neutralized. Bureaucrats and corporate planners cannot predict the direction of technology so subsidies and detailed plans are ineffective. Moreover, communitarian capitalism's logic of continuity and stability discour ages invention and entrepreneurship. Japan's weakness in other technologically turbulent industries such as biotechnology underscores this claim. International Environment
Communitarian capitalism's success was contingent on a favorable global en vironment. This is because catching up requires access to foreign markets and technology and the ability to protect the home market. Foreign nations may tol erate protectionism, infringement of intellectual property rights, and dumping early on; but over time, they invariably protest when overseas industries become strong. Once a country is forced to behave according to international norms, it cannot control the domestic system and will not have easy access to cheap for eign technology and markets. Cartels are ineffective when foreign firms can flood the market with low-cost products; credit allocation does not work when firms can borrow overseas at better rates; main bank corporate governance is not effective when foreigners own a huge chunk of shares and demand high returns; lifetime employment can only be assured if foreigners are not allowed to take over domestic firms. In each of the cases presented, the shift in the international environment was the second most important condition that helped explain why communitar-
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ian capitalism was more effective i n spurring development i n the early period but later proved to be ineffective. While the telecommunications industry was controlled by a government monopoly, it was critical that the other three indus tries were sheltered from foreign competition, and that all four industries had relatively easy and cheap access to foreign technology and overseas markets. The global environment turned inhospitable in the 1 980s, primarily on ac count of Japan's economic success and resulting trade surpluses. Aggressive in tellectual property protection, foreign demands for more open markets and vol untary export restraints, a rising yen, increased competition from South Korea and Taiwan, and accelerated technological change impacted all the high technol ogy firms. With growing competition from Japanese firms, for example, IBM was less tolerant of them copying its technology. After the 1 982 FBI sting made it impossible to legally copy IBM's software, the industry was hit hard. Japanese firms' success in memory chips resulted in a trade agreement, which led to re duced exports and increased imports. A hostile global environment had less im pact on the telecommunications industry because NTT was a quasi-public en tity dedicated to buying domestic products. Still, technological advances abroad, especially the rise of the internet, left domestic firms trailing when U.S. first movers came to dominate this sector and its standards. The importance of a positive global environment is underscored by the suc cess of other countries that have benefited from U.S. largesse. America's military protection, open markets, relatively accessible technology, and tolerance of closed markets also helped South Korean and laiwanese firms accumulate knowledge and build up human and organizational capacities to move from being imitators to innovators.4 Though necessary, favorable global conditions are not sufficient. The Philippines was also protected and subsidized, but never was able to kick-start its economy, and not all Japanese, Korean, and Taiwanese industries succeeded, despite this advantage. Broad Agreement about an Industry 's Importance
A third key condition determining the success of the developmental aspects of communitarian capitalism was the degree to which there was a solid consen sus on an industry's importance and how to use it in the community's interest. In the early stages of the telecommunications, hardware, and chip industries, there was broad agreement about the value of these industries and how to ap4. Linsu Kim, "National System of Industrial Innovation: Dynamics of Capability Build ing in Korea," and Chi-Ming Hou and San Gee, "National Systems Supporting Technical
Advance in Industry: The Case of Taiwan," in National Innovation Systems, cd. Nelson, 3 5783 and 384-4 1 3 .
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proach them. Under these conditions, communitarian capitalism worked well. When communitarian arrangements became less effective in bolstering eco nomic performance and the consensus regarding whether and how to promote these industries eroded, it became difficult to mobilize state support and to ex pect various actors to continue to sacrifice for the common good. There was no strong agreement on the importance of software or how to foster it and this in dustry was not effectively nurtured. A broad-based consensus was particularly critical to effectiveness when the industry was in manufacturing and the target was clear. In hardware, it was rel atively easy to build a consensus when IBM machines dominated the global market; however, when IBM machines fell out of favor in the late 1980s, the computer firms could not agree on a new direction. In telecommunications too, it was fairly easy to agree when the objectives were automatic dialing, getting rid of the backlog of phone orders, providing jobs, and nurturing domestic technol ogy. It was much harder to gain agreement when it became unclear what NTT's objectives should be and when NTT and its suppliers' interests had to be weighed against the growing tax on industry created by high-priced, and often backward, communications services. In semiconductors, it was relatively easy to agree on promoting more densely integrated memory chips, given their clear technological trajectory. Though a new consensus on the industry's importance emerged in the 1 990s, there were disagreements about how to best assist the in dustry, thus policy effectiveness was limited. The cases suggest a strong consensus on how to use an industry to promote the community's interest was especially critical when numerous actors partici pated and heavy state spending was involved. When there was a lack of agree ment under these circumstances, such as in the telecommunications industry since the 1980s, the result tended to be politicized policies, rent-seeking behav ior at the expense of the industry's long-term competitiveness, and paralysis, as the forces pressing for reform meet strong resistance from those trying to pre serve the status quo.
Market-Conforming Industrial Policies
Although communitarian capitalism operates in ways that deliberately distort the market, it is only effective when the distortion is not so great as to under mine basic principles of competition. That is, state and industry behavior must conform to market principles. Furthermore, shaping markets works best in the early stages of an industry's development. JECC, for example, only played a key positive role in the catch-up stage, when resources were limited and the indus try was focused on catching up with IBM. Simulated competition in the NTT family also only spurred technological advances when the trajectory was clear
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and related to manufacturing. Requiring firms to invest money and human re sources in cooperative R&D projects helped pool scarce resources and increase corporate commitment to advances. However, these policies were not effective once the target of projects was no longer clear. When the goal is less tangible as in the software case, market-conforming policies have never been particularly effective. In sum, communitarian capitalism worked well in promoting the growth of a particular industry when the international environment was favorable, when there was broad agreement on the importance of the targeted industry and how to nurture it, when technological change was stable and predictable, when for eign products could be imitated, and when capital was scarce. It was effective in fostering industries in which success was dependent primarily on price and quality. With slow, incremental technological change, corporate and state man agers could devise detailed plans to increase productivity and cut costs. Cooper ative projects that pooled resources and encouraged similar approaches helped build up strong firms quickly. The huge, vertically integrated firms that com munitarian capitalism encouraged had organizational capacities that were most successful at low-risk, incremental innovation and constant improvement in manufacturing processes. The institutions and policies fostered by communitar ian capitalism provided job security and relatively equitable salaries that avoided the massive social upheaval many nations experience during rapid economic growth. As long as the economy was growing, the inefficiencies that invariably result from practices such as lifetime employment were outweighed by the broader benefits of the system. However, the success of communitarian capitalism sowed the seeds of its de mise. A system that focused on risk-sharing and consensus decision-making worked well during catch-up, when resources were limited. However, decades of collective decision-making and risk avoidance created a generation of indecisive state and business leaders that were ill-prepared to chart a new course when ob stacles arose. When capital became readily available, these risk-sharing strategies resulted in over-investment and excess capacity in many mature sectors, while promising new areas were starved of necessary capital. The capabilities needed in the catch-up phase-planning, incremental innovation, and deep pockets- were not those required of a mature economy. Increasingly, to differentiate itself from other emerging industrial economies such as South Korea and Taiwan, Japan needed new ideas, organizations, and approaches. However, its old poli cies, institutions, and management culture left it unprepared for this new world. A centralized, credit-based financial system, which denied funds to risky start ups and lacked risk-assessing capabilities, prevented the emergence of new firms better equipped to respond to the challenge. Economic success led to rising for eign demands that made many communitarian practices internationally unac-
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ceptable. Repeated Success over decades led to arrogance and an unwillingness to rigorously assess current strategies and structures. Communitarian capitalism was unable to adapt quickly when the environment changed and the skills Japan had nurtured no longer matched those it needed. The institutions and policies of communitarian capitalism that emerged in the catch-up stage were ill-fitted to Japan's new situation in other ways, too. An important element of the system's success was the way it could credibly be said to represent the community: the state, firms, and citizens. The telecom munications case highlights the huge voice of labor in the community's poli cymaking process. The hardware case shows the important role of the devel opmental state. The software case highlights how the intense loyalty of users to their suppliers helped promote cohesiveness of the community. The chip case shows how strong firms voluntarily constrained themselves so that all members of the community would survive and none would stick out. In the first few decades when the economy was growing rapidly, this inclusion of all citizens and firms in the community assured that broad community interests were weighed. However, as Japan became a larger and wealthier community, its citizens had higher expectations. When the economy deteriorated at the same time that de mographic change turned Japan into one of the world's most aging societies, it became impossible to sustain aU commitments to every member of the commu nity. Moreover, economic success made it necessary for Japan to conform to in ternational norms. Its firms were subject to global pressures for profits like never before and many communitarian policies became internationally unac ceptable. Now, following the logic of communitarian capitalism, losses, like gains, are being broadly distributed across society. Japanese are all accepting lower wages and fewer working hours so as to keep as many people employed as possible. Strong firms are bailing out failing ones even when there is very little hope of resuscitating them. Communitarian capitalism, in essence, has become a system in which rooting out inefficiency is difficult, because it is perceived to be an attack on the community.
3. Counterarguments and Exceptions Inappropriate monetary and tax policies, over-investment, vested interests, obsolete institutions, and corruption undoubtedly contributed to a weakening economy and a slowdown in the high technology electronics industries over the past decade. This study suggests that there is an overarching explanation for the relatively simultaneous emergence of these problems across Japanese industries: deep-seated norms regarding long-term commitments to and equitable treat-
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ment of employees and suppliers, yokonarabi competition to minimize bank ruptcies, and preference for financial and technological self-sufficiency made it difficult for Japan to quickly adapt its capitalist system when the environment changed dramatically in the 1980s. That is, communitarian concerns con tributed to overly conservative macroeconomic policies, excess investment, out moded institutions, and corruption and continue to create problems as these norms become increasingly out of sync with economic realities. Others might dismiss the notion of Japan's system as communitarian, argu ing it has a liberal capitalist system in which market forces and free competition drive development and stagnation. Another objection to the communitarian ap proach might be the neoclassical and new institutional economics argument, with its rational choice variant, which suggests that Japanese citizens, like every one else, behave in ways that maximize their own narrow economic interests. This view, however, requires us to assume that every individual and organization is always operating to further their own interests. As we have seen, Japanese in dividuals and firms have repeatedly shown a willingness to suppress their imme diate economic interests for the broader interests of the community. The neo classical and rational choice views are not consistent with a system in which shareholders forgo profit to provide the broader community with jobs, and tal ented employees accept lower wages to subsidize those of their less competent colleagues. It also cannot explain the prevalent tendency for firms in the same industry to have similar dividends, prices, and R&D and product strategies, and for strong firms to restrain themselves to help weaker competitors survive. This analysis does not deny the role of economic and political self-interest in the emergence and maintenance of Japan's capitalist system. However, it suggests that social and developmental norms heavily impact how actors have perceived their interests. To be sure, not all firms subscribe to all the elements of the communitarian philosophy. Sony, Nintendo, Toyota, Honda, Canon, and Kyocera, for example, have resisted the .)lokonarabi approach and have tended to pursue strategies in dependent of other firms in their industries. It is no coincidence that these same firms have adapted to the new environment and have done well despite the na tion's economic malaise. In 2001 and 2002, they all had healthy returns on eq uity, most in the range of 5 to 12 percent; in contrast, the six electronics con glomerates all had negative returns, most in the range of -7 to -50 percent.5 As shown in chapter four, NTT DoCoMa, with its unique business model and in novative marketing, is an exception. However, its success is largely the result of 5 · Sony's was 0.6% and 5 . I % in 200I and 2002; Kyocera's was 3 . I % and 4. 1%; Toyota's 8.4% and 1 2.7%; Nintendo's I 1 .4% and 7.6%; Canon's 1 1 .5% and IZ%; and Honda's 1 4. 1 % and 1 6.2%; NEe's -55.2% and -6.9% in ZOOl and 2002 to Fujitsu's -44.8% and -17.4%. Toyokeizai, Inc. Japan Company Handbook, quarterly.
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NTT's high landline phone prices as well as specific cultural, demographic, and geographical conditions. DoCoMo was a new unit broken off from NTT in a new industry that was not dominated by foreigners. It was allowed to hire out siders to develop i-mode services. That effort has run its course and it is yet to be seen if it will succeed in the next stage of technology development. Nintendo too is an exception that proves the rule. Nintendo was an early entrant able to set its own standards. Many of these "exceptional" firms are in industries, such as autos and con sumer electronics, characterized by slow, predictable technological change, in which long-range planning for incremental changes remains critical to compet itiveness. In autos, for example, there are few radical changes in direction and it is possible to look ahead five years and plan for those changes. These exceptional firms also differ in at least five other ways from the conglomerates analyzed in this study, and these differences make them less deeply embedded in Japanese society and thus less impacted by communitarian norms. First, the most successful firms are, for the most part, relatively new firms run by their founders or their descendants. Sony, Nintendo, Canon, Kyocera, and Toyota have all had founders or their descendants involved in running the firm. This sets them apart from the rest of corporate Japan. 6 They are more likely to op erate in ways that enrich themselves. In contrast, the conglomerates this study fo cuses on-Fujitsu, Hitachi, NEC, Mitsubishi, Toshiba, and Oki-have long been run by managers, whose interests are allied with employees, not shareholders. Founders or their descendants manage these firms because most are rela tively new. Sony, Honda, and Kyocera are postwar firms. There are exceptions, such as Toyota and Nintendo, which are prewar firms; Canon was established in 1 937. In contrast, the electronics conglomerates at the core of this analysis all have prewar roots, some as far back as the Meiji period. Second, unlike the high technology electronics industries, which were heav ily dominated by foreign companies, the automobile, consumer electronics, and game software industries in which these exceptional firms operate have, for the most part, been new industries or industries not dominated by foreign firms. As a result, initial barriers to entry have been relatively low. New firms, such as Sony, were able to respond quickly to market demand after the war while the larger, older, conglomerates were busy coping with purges of their management, breakup of their zaibatsu, reconstruction of destroyed factories, and labor strikes due to the Occupation's initial encouragement of labor unions. Producing radios and televisions, for example, did not require heavy up front investments in capital equipment or R&D as in the computer and telecom munications industries. Profit turnaround was relatively quick, providing capital
6. Nakatani, ed., Koporeto gabanansu kaikaku, 24; Tsumori, Naze Nihon, 94-95.
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for the next round of investment. While citizens did not have money to fritter away after the war, by the 1950S there was a huge latent market for relatively in expensive consumer products such as radios. Barriers to entry were also low when Nintendo, Sega, and, somewhat later, Sony entered the new game software industry. Foreign firms did not dominate this new market. Kyocera was a first mover in the emerging semiconductor ce ramic packaging business. General Motors and Ford were booted out ofJapan in the 1 930S and their distribution systems were given to Toyota and Nissan, effec tively reducing their barriers to entry. A third key difference between these competitive, profitable firms and the large conglomerates that dominate the hardware, computer software, telecom munications, and semiconductor industries is that the former did not have close relations with the horizontal keiretsu, the main city banks, and the government.7 They lacked these ties because promotion of consumer products was not part of the national effort to catch up with the West. The state, keiretsu groups, and main banks were not interested in these firms. "Consumer electronics products were luxury items. Japan was poor so the number one priority was productive goods. . . . The feeling was that consumption was bad. So promotion of con sumer electronics would have been inappropriate given Japan's circumstances [okashii, yaru beki de wa nai]," explained a MITI official.s Lacking ties to the main keiretsu, the core city banks, and the state, these new firms had to acquire financing through nontraditional methods. Sony was able to get funding because Morita was fifteenth in line in a lineage of wealthy sake makers. When the company needed funds, Morita's father sold off ancestral land to provide it. Morita's family remains Sony's largest shareholder. Nissan and Toyota had government support initially but made enough profits in their highly protected domestic market to finance their operations. These independent firms have long been criticized for not abiding by com munitarian norms. Managers at firms such as Sony are not "real industry types of people. The leaders in the consumer electronics industry had no feeling of national purpose. They thought profit was more important. Traditional old in dustry people think about national interest first," explained a former MITI offi ciaJ.9 These market-oriented firms, a former Hitachi executive explains, were considered "wild companies that move quickly to the cheapest supplier" as op posed to traditional firms like Hitachi, NEC, and Fujitsu that are vertically inte grated and members of groups. to They have never been part of the technona7. Over time, as these firms grew and became very successful, some developed ties with the government and many created their own vertical keiretsu. 8. Interview, Apr. 7, 1 989. 9. Interview, Mar. 28, 1 989. 10. Interview, Apr. 3, 1989.
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tionalist agenda that has driven the conglomerates to pursue technological capa bilities to fill community needs rather than to provide shareholders with profits. Thus, Sony and Nintendo could ask foreign firms to make sophisticated micro processors to run their game consoles. They were outsiders and, like US. firms, were simply interested in making money. Fourth, these exceptional firms have been exposed to global competition from an early stage and have nurtured strong brand names. They have not been sheltered by the government, at least not to the extent that the telecommunica tions, computer, and semiconductor industries were protected. They are in in dustries highly sensitive to economies of scale and thus need to sell abroad. Ex cept DoCoMo, they are heavily dependent on overseas sales and profits. For example, over 70 percent of Canon's sales are abroad. In terms of profit, 70 per cent of Honda's profits come from overseas operations, while only 18 percent of Hitachi's profits and 27 percent of Toshiba's come from overseas. \I Due in part to this heavy exposure to global markets, leaders of these firms have generally had experience working in the U S. and have been quicker to adopt US.-style business practices. Fifth, Japanese firms doing well today have focused product lines. Though large, Canon specializes in a few categories of products and strives for synergy among them, such as the optical technology that underlies its success in cam eras, photocopiers, fax machines, and laser printers. Moreover, these firms have built up advantages based on incremental changes in manufacturing and are in industries where standards are not critical to success. They have focused on making sure their quality is good, their design okay, and their production huge. In contrast, the electronics conglomerates have made it a point of pride to main tain a ful l range of products even though many are not profitable. In sum, the most successful Japanese firms today are much less deeply em bedded in the norms and practices of communitarian capitalism than the major firms in the telecommunications, computer, and semiconductor industries. While they assure employees secure employment, they tend to be newer firms, owner-run, and more responsive to family shareholders. They tend to be in manufactured consumer products characterized by stable technological trajec tories and thus incremental changes can be carefully planned. They have fo cused product lines, strong brand names, and few ties to the government and the major industrial groups. Entering new industries not dominated by foreign firms, they enjoyed first mover advantages. They have been exposed to global competition for decades and depend heavily on foreign markets for sales and profits. As outsiders, they have been more willing to go against communitarian norms by hiring people mid-career, having younger people at the helm, asking II.
1, 2 1 .
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"Japanese Firms look Overseas for Growth, Black Ink," Nikkei Week(y, June 23, 2003,
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foreign firms for help when needed, and adopting more transparent corporate governance systems. These relatively rare exceptions prove the rule. Most firms in Japan's mainstream industries remain intricately intertwined with the institu tions and practices that emerged in the postwar period to shelter labor and cap ital markets, and prevent foreign influence and bankruptcies.
4. Continuity and Change
There have been strong threads of continuity in Japan's postwar capitalist sys tem but there has also been important change. It is difficult to evaluate change in a country, especially during times of crisis. Notwithstanding these difficulties, change can be assessed by looking at the three distinguishing features of commu nitarian capitalism highlighted in chapter one. First, is the state still actively managing markets or is it playing a more neutral umpire role, supporting rela tively fair and free markets? Second, is the private sector promoting continuity by shielding ailing firms or is it allowing them to go bankrupt? Third, do individuals want to move toward a system in which they are evaluated based on merit or do they continue to prefer the old communitarian system? As a society, would Japan rather maintain the low-risk, low-return model of communitarian capitalism or shift toward a higher-risk, higher-return model like that of the US.? These ques tions are addressed using data from the cases as well as examples from other in dustries. The Role ofthe State
The state has played the primary role in contesting norms, reshaping them to allow the market to determine winners and losers. The government has encour aged a greater degree of labor and capital mobility so that resources can be shifted from declining industries to new industries with growth potential. MITI has welcomed foreign firms into the software market, making it acceptable for firms and users to abandon their closed standards. It also took the lead in per suading the struggling chip makers that it was acceptable to merge their DRAM efforts, consolidate other operations, and move into Soc. MOF allowed Yamaichi Securities and the Hokkaido Takushoku Bank to fail in 1997. Since then, other banks, such as the Long Term Credit Bank of Japan (LTCB) and the Nippon Credit Bank (now Shinsei and Aozora banks respec tively) have been nationalized and later sold to investors. In 2003, the govern ment nationalized Resona Bank rather than bail it out. These actions show that, in sharp contrast to the postwar guarantee of all banks' survival, the government is willing to allow big banks to fail. The government is also openly encouraging foreign investment. In 2004 it
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took out huge ads in major US. newspapers and had Prime Minister Koizumi appear in television ads heartily welcoming foreign investment. Nagashima Nobuyuki ofJETRO, MITI's trade promotion arm, explained the logic of these efforts: "It's not the capital itself we need most. It's the new ideas, new business models and know-how that come with it."1 2 This is a major departure from past policies. However, the pace of reform is, for the most part, slow and, in many cases, inconsistent. Recent state-supported chip projects still focus on supporting all the struggling firms and encourage all of them to shift in a similar direction about the same time. NTT continues to support domestic suppliers, even though their products are more expensive and of lower quality, because it still sees its job as protecting members of the com munity. Moreover, the state is trying to salvage the banking sector without forc ing the necessary job cuts. When Ripplewood Holdings, a US. firm, purchased the remnants of the LTCB and made it into Shinsei Bank, the government did not complain because there were no other buyers. However, leaders have criti cized Shinsei's foreign owners for refusing to loan additional funds to several of its borrowers, thereby forcing them into bankruptcy. The bank was considered brash when it insisted that the government honor its promise to buy back loans that soured within three years of the acquisition. Shinsei is in the black while much of the rest of the industry is in the red, yet it is frequently scolded for not playing by the rules. When Nippon Credit Bank (now Aozora Bank) was sold off to investors, the government accepted a domestic firm's bid even though a foreign buyer bid ¥60 billion ($600 million) more. When Softbank, Inc., a domestic firm, announced it wanted to sell its 48.9 percent stake in Aozora Bank and a US. firm, Cerberus, which already held some shares, expressed desire to buy it, the government pub licly opposed the sale of another bank to foreigners. However, no Japanese buyer emerged and, in late 2003, Cerberus sealed the deal. In 2004, a Keio University professor called for the state to end its "financial socialism" (kinyu shakai shugi) and allow investors to take real risks and lose money. 13 The state-owned Devel opment Bank of Japan has also bailed out retail firms, such as Daiei, a chain of stores selling food and household goods. These actions demonstrate that deep seated commitments to national autonomy and to maintaining a cohesive com munity, though modified somewhat, have not been abandoned. The government, depending on stock market prices, also goes back and forth on accounting reforms that would lead to more bankruptcies. Mark-to market rules on shares, which require a firm to report changes in the market value of its stockholdings on its profit-loss statement, were implemented in
April 200 1 ; however, in early 2003, when the stock market hit 20-year lows, there was talk of suspending this rule to prop up share prices. This principle is supposed to be applied to fixed assets such as land, buildings, and.factories in 2005. Since it will hurt many firms, there was talk of delaying it; however, this talk has diminished since the market recovered somewhat in 2004.14 The gov ernment has also discussed further postponing the reinstatement of the "lim ited insurance" or what is called the pay off system-a ¥ I O million ($100,000) cap on insurance for bank deposits, which is planned for April 2005 . An im proving economic situation in 2004 reduced pressure for further delay, but so did the creation of new types of deposits that will still have full insurance; if users fully switch to these new types of deposits, the limited insurance system will become meaningless. I S Many other examples raise doubts about the state's willingness to consis tently create and support free markets. MPHPT clearly is not an impartial um pire regulating the telecommunications industry; it favors NTT in general and domestic over foreign firms more broadly. MITI is more involved in promoting the chip and software industries than it has been since the 1 970s. This return to the use of industrial policy shows the state is still determined to shape competi tive outcomes. To some extent, this may simply be MITI trying to maintain its power and relevance. However, strong industry support for these policies sug gests a continued belief that cooperative arrangements will be more effective than allowing the market to determine outcomes. The FTC, in charge of enforcing the antimonopoly law, has become more ag gressive, but its primary targets have been foreign firms such as Intel and Mi crosoft, raising doubts about its neutrality. While a 1 998 revision of the BOJ law made the central bank formally independent, and the Financial Services Agency (FSA), which monitors banks, was created as an independent agency when the financial crisis hit in the late 1 990S, MOF still heavily influences both of them. Being an objective umpire requires a clear differentiation between the state and the market and the state and society. It means embracing clear rules and letting the most competitive firms win, even if they are foreign and even if they drive other firms into bankruptcy. The state is moving toward playing the role of a more independent, neutral umpire. However, it still heavily manages markets through quasi-socialist regulations that bolster domestic firms, support employ ment, and minimize bankruptcies. It is thus premature to conclude that the state has fundamentally altered its role, although it has reshaped norms in ways that allow for more vigorous competition and greater openness to foreign invest ment, technology, and products than in the past.
1 2 . John R. Harris, "Jetro is Cutting the Red Tape and Rolling Out the Red Carpet," an ad vertisement, The Wall StreetJournal, March 22, 2004, A20.
14· "Corporate Books to Gain Clarity," Nikkei Weekly, Mar. 10, 2003, 2. 15· "Usuragu fuan tokenu keikai, peiofu taisaku genjo to yukue," Nihon keizai shimbun, May 5, 2004, 5 .
1 3 . " 'Kinyii shakai shugi' ni hadome 0," Nihon keizai shimbun, March 2, 2004, 25.
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The Private Sector: Managing Markets to Minimize Failure Corporate proclivity to promote continuity and minimize failure is also changing due to growing pressures from investors and increased global compe tition. Many firms now acknowledge the need to consolidate, restructure, and, in some cases, allow bankruptcies to revitalize the economy. They are thus join ing the bureaucracy in trying to reshape norms to make it more acceptable to buy and sell firms, collaborate with foreign firms, base pay on merit, and rely on foreign technology. That is, there is a growing consensus that to protect employ ment and promote economic vitality, it is necessary to allow behavior that used to be considered unacceptable. This had led to significant change. Merger and acquisitions activity rose from 0.4 percent ofGD P in 1990 to 3 . 3 percent of GDP in 1 999; it increased 25 percent from 2001 to 2002 and declined a bit in 2003, but jumped 20 percent in the first half of 2004 over the same period a year earlier.16 Direct foreign invest ment has also risen sharply, from $2.8 billion in I 990 to $10.5 billion in 1998 and $ 1 7.9 billion in 2002. 17 Since foreign investors do not buy into communitarian capitalist philosophies, they inject an important measure of market discipline. Bankruptcies of large firms are increasing and keiretsu ties, especially between banks and firms, are slowly unraveling. Most major banks have been involved in mergers. The DRAM operations of firms have either merged or been eliminated entirely. The computer firms have embraced foreign OS standards and NTT is also being forced to convert to global IP standards. Conversion to foreign-owned technical standards and the sharp acceleration of bankruptcies and mergers are significant changes. However, acceptance of global software standards was late in coming, and foreign firms were needed to spur the industry's shakeup. Only Ghosn of Nissan, a foreigner, was willing to break taboos to turn Nissan around. As in the past, it is useful to have foreigners first disrupt order; domestic firms can then follow in their footsteps but foreign ers get the blame. Most, if not all, mergers have been desperate last-minute acts aimed at preventing bankruptcy rather than strategic moves to harness syner gies. Mergers have never worked well in Japan on account of labor rigidity, close alliances between buyers and suppliers, closed standards, and enterprise-based unions. Since it is difficult to fire workers, and they cannot leave easily because there is not a market for mid-career employment, merged firms often are double doses of problems rather than solutions. Indeed, Resona Bank, the result of a 2001 merger of two weak banks-Asahi and Daiwa Banks-had to be national-
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ized in 2003. Few expect the numerous bank mergers and the merger of the var ious firms' DRAM operations into the Elpida Company to be very successful. These are unanimously viewed as moves to prop up losers in the hope of pre venting bankruptcy. While firms have begun to acknowledge the importance of allowing large firms to fail or be acquired, there are still glaring examples of what analysts call "zombies" (bankrupt firms) being bailed out. UF] Holdings, one of Japan's weakest banks (and a takeover target in Japan's first hostile bid by a domestic firm in late 2004), bailed out Towa Real Estate in late 2002 even though analysts expect it to take at least 32 years for Towa to build up a balance sheet acceptable by Japanese standards. IS Sumitomo Mitsui Bank has kept a major construction firm, Kumagai Gumi, afloat, funneling in billions of dollars despite the fact that Kumagai's debt is 80 times its market value. Construction companies employ 6·3 million people in a nation of 1 27 million citizens. "Construction served as a kind of social welfare project," says Sati) Takehiro, an economist at Morgan Stanley in Tokyo. 19 In 2004, when Daimler Benz, the largest shareholder of Mi tsubishi Motors, withdrew financial support after the firm was caught hiding se rious defects, Mitsubishi group firms rushed to help rescue it rather than let it fail. Evidence shows banks are continuing to lend money to their weakest clients at their lowest interest rates in the hopes of propping them up.20 Firms have been less enthusiastic than the state about reforms because of the implications for their workers. Yet, economic theory suggests that firms, under pressure from shareholders, would be the quickest and most concerned about modifying prac tices that hamper profits. Still, firms are beginning to drift from traditional practices. For example, in 2000, the major consumer electronics makers said they would tie bonuses to cor porate performance rather than follow the common practice of having uniform (yokonarabi) bonuses across the industry.21 In 2000, for the first time, city banks started to quote different dollar-yen exchange rates rather than all offer the exact same rate.22 Uniform life insurance pricing also started to collapse in 2000.23 In 2000, the 1bkyo Electric Power Company departed from the time honored tradition of changing rates in unison with the other eight regional elec tric power companies by announcing its own unilateral rate cut.24 Yet there are 1 8. '' 'Zombie' Firms May be Squeezing UFJ Dry," Japan Times, Nov. 21, 2002, 9. 19· Tim Kelly, '' 'Zombie' Construction Companies Inch Closer to Complete Collapse," Japan Times, Dec. 7, 2002, 3. 20. "NPL Paradox," Oriental Economist, Sept. 2003, 8. 21. "Gyoseki rendogata bonasu," Nihon keizai shimbun, Dec.
1 6. "M&As Featuring Japan Firms Skyrocket to Record in 2002," Nikkei Weekly. Jan. 20,
2003, 12; "M&A hanki de 1 000 ken kosu," Nihon keizai shimbun, June 30, 2004, I L 17. "Nihon no kuni, chiiki betsu tai nai chokusetsu toshi jisseki kingaku," http: //www . jetro.go.jp/ec/j/econ/jfdi.html.
II,
1999, 8.
22. "Yen doru soba kohyo chiine," Nihon keizai shimbun, evening edition, �1ay 24, 2000, 3. 23· "Seiho kakaku kyoso no jidai," Nihon keizai shimbutl, May 10, 2000, 7. 24· "Tepco Scandal Grounded in Clash of Roles played by Power Utilities," Nikkei Weekry, May 26, 2003, 7 .
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still strong tendencies toward similar strategies. For example, various collabora tive projects led all the chip makers to get out of DRAMs about the same time and all start making SoC for mobile phones and other consumer electronics products. The major software makers all shifted to Windows-based OS around the same time and are all involved in promoting TRON and Linux. In sum, firms, like the state, recognize the need to allow market forces to de termine corporate success and failure much more than in the past. They realize they need to pursue independent strategies to boost their performance; yet, they still feel uncomfortable breaking from the pack. Due to close ties with workers and suppliers, mainstream firms have tended to follow the lead of the bureau cracy and global firms, such as Canon and Sony, in changing traditional prac tices rather than leading the charge for reform. Once the bureaucracy and busi nesses have agreed on changes that need to occur, politicians have tended to follow and codify, in regulations and laws, new practices that have already be come acceptable. That is, the political system tends to play the role of legitimat ing changes that have already been accepted and put in place. Politicians rarely move ahead of society and push for innovations not widely accepted. Thus only after broad-based changes in norms will major political change occur.
Social Behavior to Promote Egalitarianism and a Sense of Community Most firms are moving toward merit-based pay. Researchers are being given larger bonuses for inventions, and educators are trying to encourage creativity. These moves contest deep-seated norms. Japanese are being told that the old adage, "the nail that sticks out gets hammered back in," no longer applies. Citi zens, however, are skeptical and remain uncomfortable with these changes, in part because they are reluctant to write evaluations of their workers. While many believe employees will get used to the system, the jury is still out. Nakatani Iwao, a prominent economist, argues that because there is contin ued support for the idea of egalitarianism, people are very cautious about the idea of competition, which may lead to inequality.25 "We have to get rid of the il lusion that we will all rise together and thus remain fairly equal. A class society should be okay. We need to accept a class society," explained a former high-level MITI bureaucrat.26 "The egalitarian mindset in Japan must change. If your pro ductivity is high, you should be able to get better rewards," explained a top ex ecutive of a government bank.27 "In the U.S., people accept and allow that there are rich and poor people. The question is whether Japanese people can allow
25. Nakatani, Nihon keizai. 257-6 1 . 26. Interview, June 25, 200 1 . 27. Interview, July 2, 200 1 .
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rich and poor. We probably can't do that," explained an economics professor at a major university.28 Failure and layoffs need to be made more acceptable. "People are beginning to realize that bad firms should be allowed to fail and have the resources reorga nized. The feeling is changing, but are we brutal enough to allow it?" explained a former MITI official now at the Fujitsu Research Institute.29 "We introduced work sharing as an emergency measure to maintain long-term employment," explained Sanyo's president; "in America and China it is possible to lay off workers [but not in Japan]. "30 President Mitarai of Canon says that due to cul tural factors and personal feelings, it is still not acceptable for Canon to head hunt top talent from struggling Japanese firms.31 In short, while the norms and practices of communitarian capitalism are in creasingly being challenged, the relatively similar timing and patterns of change across industries and society more broadly suggest that a redefinition of norms is critical to institutional and policy change. If actors were simply calculating the economic costs and benefits of their behavior and adjusting accordingly, we would see more diverse responses at different times. Norms are being reshaped not jettisoned. The system still works to maintain job security for those hired under that assumption and relatively egalitarian wages based on age. It still pro motes some technological standards that are not accepted abroad. It continues to work in ways that minimize bankruptcies and personal failure. Fukui Toshihiko, the BO] head, agrees that the system aims to minimize risk. Just before being appointed in 2003, he argued that Japan needs to get rid of its system of "safe capitalism" (anzenna shihon shugt). He said firms have gotten too accustomed to the seniority wage system, close bank-corporate relations, and cross shareholdings-that overall they have avoided risks by relying on each other for too long. "It is time for Japan to get rid of the system of 'safe capitalism'; with out experiencing pain, we cannot go to paradise. "32 Japan's capitalist system has been clearly undergoing major changes. These changes have accelerated since the late 1990S when the economic costs of main taining the status quo soared, threatening the existence of many large firms as well as the nation's financial stability. Norms are being contested, as is the way in which the interests of the community are defined. Do these reforms add up to 28. Interview, July I I , 2002. 29· Interview, June 30, 2004. 30. "Shiishin koyo yori choki oyo de kinchokan 0 motaseru," Ekonomisuto. March 2, 2004, 30• 3 1 . "Tettd shita seika shugi de shiishin koyo 0 tsuzukeru," Ekonomisuto. March 2, 2004, 28. 32. Interview in "Nihon byo, 'anzenna shihon shugi> dappi," Nihon keizai shimbun, Jan. I , 2003 , 3 ·
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fundamental change of the system, and if so, is this a move toward convergence with liberal capitalist systems? If change is minimal, does this doom the econ omy or might these arrangements be effective again when high technology in dustries enter a mature stage and the technological trajectory is again stable and clear? It is impossible to make definitive conclusions about the nature of the changes in and prospects for communitarian capitalism. Fifteen years ago, the U.S. economy was viewed as a basket case; yet, behind-the-scenes reforms helped position it for revival in the 1 990S, demonstrating the danger of such predictions. In Japan too, hard-to-see restructuring efforts and incremental modifications in practices and attitudes may, over time, result in dramatic changes. Still, as of 2004, change has been more incremental than radical. Some of Japan's deadwood is being swept away. Eventually, that could make room for the fresh new organizations that Schumpeter deemed critical. So far, however, the "creative" part of the creative destruction formula is not yet anywhere in sight. Few new firms are emerging to contest and replace the old order; and most of the firms forcing change are foreign. Other studies looking at Japan comparatively concur that while attitudes are shifting at an accelerated pace, Japan is by no means converging with the U.S. model and is reforming more slowly than other nonliberal nations, such as Ger many. One study concludes that Germany and Japan have neither converged with the U.S. model of corporate governance nor maintained their past models; rather, they are both developing hybrid models.33 One reason for slow reform is that the system worked very well for a long time. Another is that because Japan is so large, powerful, and isolated, it can resist external pressures. Perhaps most im portant, change is slow because it takes a long time to redefine what is considered appropriate behavior and for new norms to lead to concrete institutional change. In contrast, in Germany, liberalization and change are being required by the economic and political integration of Europe. South Korea, a relatively small and geopolitically vulnerable nation, had to reform its system as a condition of its bailout by the International Monetary Fund during the financial crisis of 1 997-98. Outside directors have been legally mandated, and audit and nomina tion committees to separate management of daily operations from oversight have been introduced there. These reforms still have a long way to go. For ex ample, despite efforts to reduce the clout of the chaebol-the industrial groups Korea created as imitations of Japan's zaibatsu-they continue to wield im mense power. However, many politicians and high-ranking executives have served significant jail time and have also paid large fines. One chaebol, Daewoo, folded and the Hyundai group was broken up. Powerful nonprofit organizations have emerged to pressure for more eorporate accountability. Even before the 33. Jackson, "Corporate Govemance," 261-305·
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23 1
crisis, Korea had already abolished the Economic Planning Board, its pilot agency for industrial policy, and started privatizing banks. It has been easier for South Korea to dismantle the developmental state template inherited from its occupiers, because it was not homegrown and thus not deeply embedded in its society. Change in Japan has been slow to come and when it has come, it has tended to be incremental. Citizens prefer to maintain the communitarian system but in creasingly believe they can no longer afford to. There is a sense of crisis about how to best adjust the system, and it may unravel altogether in the next few decades, unless the economy rebounds to healthy levels that allow firms to main tain these quasi-socialist policies. Japan is moving toward a hybrid system, intro ducing many practices common in the U.S. while preserving communitarian practices as much as possible. The goals remain the same: economic develop ment, national autonomy, and a stable social order. However, the means of achieving these objectives have changed. Greater openness to foreign invest ment and imports and more vibrant competition are now viewed as necessary for economic growth and national autonomy. There are great pressures on the system. Since the 1 990S, the notion of the community interest has gradually narrowed from sharing wealth broadly throughout society to supporting secure employment and large established firms. This gradual shift, together with other powerful forces, is undermining the strong sense of community. For over a decade the government has used sav ings and pension funds of citizens to prop up the stock market and bail out retail stores, banks, and construction firms. In the past, such behavior might have been deemed necessary to maintain overall social stability and order. However, fewer Japanese see their interests allied with those of the mandarins trying to salvage failing firms. There is growing anxiety that rapidly shrinking pensions and negative returns on savings accounts will seriously undermine the retire ment of a generation of baby boomers. As effort alone becomes less prized and merit wages and labor mobility in crease, loyalty between firms and employees will be undercut; a star system will most likely emerge; the gap between the rich and the poor will inevitably widen. This is already beginning. In 2004, 22 percent of workers were part-timers, double the level in 1990. Firms can no longer afford to offer new employees job security. As banks lend money based on risks, not just relationships, and firms buy supplies based on quality and price, close state-corporate and interfirm re lations are bound to weaken. These changes will continue to erode the sense of coexistence and prosperity for all and over time will likely lead to clearer dis tinctions and zero sum relations between the state and society, as well as be tween the state and the market. Accelerating the breakdown of the community is movement of investment and production offshore. In the 1990S, firms started moving production of
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simple products, such as televisions and toys, offshore, especially to China. This internationalization of production was slowed because of commitments to work ers and suppliers and because of a sense of technonationalism. So far, the move has helped cut costs as industries matured, but has not played a major role in spurring invention, innovative standards, or new business models. However, since Japan's conformist system strongly discourages entrepreneurship and in vention, research is increasingly being conducted and more sophisticated prod ucts, such as software and mobile phones, manufactured abroad. The very act of moving overseas, especially for high value-added products, is a direct affront to the norms of communitarian capitalism. Another factor undermining the communitarian system is the loss of legiti macy of its leader-the bureaucracy-as well as growing doubts about business leaders. Scandals have long plagued politicians. This did not disrupt social sta bility and order because the activist state, working closely with corporate lead ers, governed the system. However, nonstop scandals since the late I 980s involv ing bureaucrats and top business people have undermined the state's legitimacy and the trust so critical to a cohesive community.34 Morale of bureaucrats in the economic ministries has plummeted in the last decade along with status. Top students no longer choose to enter the ministries, and many young bureaucrats are looking for other jobs. Corporate employees are also under great pressure and talented ones are much more likely to answer calls from foreign headhunters than in the past. "Ten years ago, peoplc would say they would rather commit hara-kiri than work under a foreigner; this was inconceivable ten years ago, but now it has become more acceptable," said a former MITI official.35 The low birth rate and fear that foreigners will somehow undermine society is also exacerbating the crisis. The economic slowdown is occurring at a time when the population is aging. Currently there are five citizens to support each citizen over 65 , but by 2050, there will only be two people to support each elder. While leaders know foreign scientists and engineers, in addition to laborers, would provide a critical economic boost by counterbalancing the low birth rate, little progress has been made. Foreigners who have lived in Japan for decades and are fluent in the language are still treated as outsiders, making it unattractive to many foreign professionals. Even Japanese citizens have difficulty reentering their society after living overseas for a few years. Komai Hiroshi, a population expert at Tsukuba University, says Japan will not absorb the number of immi grants necessary to support its economy over the long run, which estimates put at 400,000 a year up through 2050. "In a quarter-eentury, we have only absorbed one million immigrants. The kinds of figures demographers talk about are
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unimaginable. Societies have always risen and faded, and Japan will likely disap pear and something else will take its place, but that's not such a problem. Greece and Rome disappeared toO."36 This study suggests that Japan is muddling through. The state, firms, and citizens are increasingly challenging norms, and communitarian capitalism is being adjusted to allow for more mobile labor, capital markets, and risk-taking in the hopes of boosting economic growth. There is significant change, but it is as consistent with communitarian objectives as possible. Economic action in Japan is still primarily social action. Intense insularity, the tight binding ofJapanese to each other through a com mon sense of a uniquely Japanese community where all are supported to mini mize failure, has helped Japan become the world's second largest economy. However, these arrangements, with their intricate set of rules, make it cumber some for the nation to change and become more fully integrated in the global community. The groupthink inherent in a system created just for insiders ends up producing leaders who tend to approach problems in the same way. This makes it difficult to conceive of thinking outside the box. It blunts awareness that bold risk-taking and failure are key ingredients of success. Some scholars are more optimistic about the economy. They believe Japan's strength in planning, learning, and incremental manufacturing improvements will have another day in the sun when current IT technology enters the mature phase and the technological trajectory beeomes more stable and predictable.37 While only the future will resolve this issue, this analysis suggests that Japan's current cost structure along with the strong manufacturing and research capa bilities of other nations such as Korea, Taiwan, and to a growing extent, China, make it unlikely that Japan will regain a healthy comparative advantage in the manufacturing of telecommunications equipment, advanced computers, and semiconductors when these industries mature and technological change slows. DRAM memory chips have a very stable trajectory, and Japanese firms have the capacity to produce good memory chips, but, due to high wages and lower-cost competitors, they are not able to turn a profit on them. Still, Japanese firms that are less embedded in the communitarian system and in industries where the teehnological trajectory remains clear and incremental advances are critical to competitiveness will likely continue to be competitive for the foreseeable future. Japan's expertise in plasma screens and electronic gadg ets will give it significant market share in sophisticated home entertainment sys tems, game consoles, and cameras. Japanese automakers too will likely continue 36. Howard W. :French, "Insular Japan Needs, but Resists, Immigration," New York Times,
34. Francis Fukuyama, Trust: The Social Virtues and the Creation of Prosperity (New York, 1995) ·
35. Interview, June 30, 2004·
July 24, 2003, A3 . 37. Kozo Yamamura, "Germany and Japan in a New Phase of Capitalism: Confronting the Past and the Future," in The End of Diversity? ed. Yamamura and Streeck,
I I 5-46.
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Reprogramming Japan
to be major global players. Many of these automobiles and consumer electronics products are likely to be manufactured overseas, but Japanese firms continue to have a competitive advantage in melding advanced manufacturing skills and technologies with simple embedded software. To revitalize its economy, Japan need not become a clone of the United States. America's virtually exclusive focus on shareholder rights that come at the expense of other stakeholders, such as employees and the broader community, is a model inconsistent with Japan's historical experience and values. Thus, Japan will likely not follow the American modeL Japan's emphasis on maintaining a strong social fabric at the expense of its own narrow economic and political self interests is not only legitimate, many would call it admirable. Still, Japan does need to allow its citizens and firms more independence so they can become more innovative and entrepreneurial. Stability, predictability, and order were natu rally coveted after a decade of mindless war, especially when the fighting contin ued for years after it was clear Japan would lose. However, in a different era, one characterized by rapid and unpredictable technological change, stability is stag nation. Yet Japanese are clinging to the current system and languishing together, even though, as during the war, it is clear they are losing the battle. Hopefully, leaders and citizens will stop history from repeating itself. Japan has the ingre dients necessary for a revival-money, educated and skilled workers, brains, and a relatively strong science and technology infrastructure. As a wealthier society, it can afford to accept more instability. The country needs a new social contract that offers a safety net for those who fail but also rewards those who succeed. It also needs a broader definition of community, one that includes immigrants and major trading partners.
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Index
Accountability, 52-53, 6 1
Bankruptcy, 5 5 , 1 00, 1 54, 223, 226-27
Advanced SoC Platform Group (ASPLA), 201-3
Banks, 1 , 2, 35, 223, 224-25; credit-based fi
Agency of Industrial Science and Technology lab (AIST), 199
nancial system, 35, 47, 54-56, 2 1 7- 1 8; for eign takeovers, 53, 224; main bank system, 5,
Ahmadjian, Christina L., 53
8, 37, 48--49, 50-54, 214; software industry
Aiso Hideo, 134, 163
and, 156-57. See also keiretsu ties
Ajinomoto, Inc., 44-45
Bell Labs, 76-77
Akigusa Atsuji, 97-99
Biggart, Nicole Woolsey, 4
Alliance capitalism, 48 Amakudari (retirement of public officials), 4 1 , 42-43, 49, 1 80; telecommunications indus try, 91-92, 93, 107, 1 1 1 , 1 1 9 Anderson, Philip, 24 Anglo-American model, 26, 52, 1 77, 207, 2 1 2, 230
Bonds, 77, 8 1 , 82-83, 94, 209
Bureaucracy, 25-26, 4 1 , 139, 2 1 I; telecommu nications industry and, 73, 85. See also Min istry of International Trade and Industry; in dividual ministries Business administration literature, 24 Byiidli shugi. See egalitarianism
Antimonopoly law, Japan, 57 Antimonopoly law, U.S., 1 1 , 12, 1 8 7
Calculator industry, 1 8 1-83, 209
Aozora Bank (Nippon Credit Bank), 53, 224
Calion, Scott, 1 72, 195-96
Apple, 1 52
Canon, 30, 2 1 9, 220, 228
Article 9, 74
Capitalism: as inappropriate term, 8--9; types
Association of Super-Advanced Electronics Technologies Development Promotion con sortium (ASET), 195, 1 96-97
of, 26-28. See also communitarian capitalism Capital markets, 47-56; contested norms, 50-54; wartime management of, 47, 48
Asuka Project, 1 98--200, 202
Cartels, 57, 58, 2 1 4
Asymmetric digital subscriber line (ADSL),
Catch-up stage o f development, 7-8, 1 1-12,
1 18, 1 2 1
1 5- 1 6, 29, 73, 92-94, 138-40, 2 1 3-14, 2 1 7
Atari, 1 6 3
Chandler, Alfred, 1 9
AT&T, 73, 75-77, 96, 1 1 3, 120, 1 60-6 1 , 2 1 3
Cho F ujio, 42
Bank for International Settlements (81S), 5 8
Coexistence (kyiison), 10, 1 5
Bank o f Japan (BOJ), 2 , 37, 48, 5 6
Commercial Code, 45, 5 1
Code division multiple access (COMA), 1 20
250
Index
Index Copyright law, 1 6 1-62, 1 7 1
Enterprise unions, 35, 40, 102, 1 03, 105, 1 54
Gow, Ian, lOS
importance of industry, 2 1 5-16; based on so
Corporate governance system, 48-53, 2 1 4
Entrepreneurship (start-ups), 5 5-56. See also
Granovetter, Mark, 4
cial norms, 21-22; benefits of, 1 28-30,
Corporate strategies, 58-65
1 74-75, 183, 203, 2 1 4; characteristics of,
Corporation, as stable family, 54, 76-77
Evaluation systems, 46
1 0- 1 1 , 208; conditions for, 1 1-12, 138-40,
Corporations, family-owned, 92-93, 1 32-33,
Evans, Peter, 27
Communitarian capitalism, 3; agreement about
1 39-40, 2 1 2; counterarguments and excep
165, 220
venture capital
Exceptional firms, 220-23
Grimes, William, 2 Grove, Andrew, 187 Haley, John 0., 21
tions, 2 1 8-23; defined, 6; historical roots of,
Council for the Export ofTVs, 59
Excessive competition (koto kyiiso), 1 5
Hamilton, Gary G., 4
6-10, 29; institutional change and, 23-28;
Courts, 38, 44
Exploratory Software Project, 1 7 1
Hardware industry. See computer industry
institutions and instruments of, 56-58; in
Cray Research, 187
Export-Import Bank, 5 6 . See also Japan Export
ternational environment and, 29, 33, 94,
Creative destruction, 4, 9-10, 23-24, 95,
97-99, 140, 184, 214-1 5, 217; market and in
Cross-shareholding arrangements, 47-49
shaping of, 10, 1 69, 1 78, 194-95; strengths
Cultural Affairs Agency (of the MOE), 1 6 1 ,
36-38. See also bureaucracy; capital markets;
1 62 Cusumano, Michael, 1 56
Failure, avoidance of, 1 5- 1 7. Sce also risk, so cialization of Fairness norms, 9, 1 1 , 1 5, 37, 39, 43, 1 2 9 Fair Trade Commission (FTC). 1 1 , 42, 59, 1 7 5, 225
catch-up stage of development; norms; pri
Hayashi Ryozo, 1 68 Hewlett Packard (HP), 1 26-27 Highly Agile Line Concept Advancement
204-5, 230
dustrial policies, 5, 7, 9- 1 1, 14, 2 1 6-17; re and weaknesses, 2 1 2-17; wartime roots of,
Bank
251
(HALCA) project, 199-200 High Speed Computing System for Scientific and Technological Uses Project (supercom puter project), 1 37-38 Hitachi, 30 n, 44, 75, 84, 89, 9 1 , 220, 222; com puter industry and, 1 32-38, 140, 143-44;
vate sector; state, role of; yokonarabi compe
Daini Denden (DDI), 107, 109
Family Computer (famicon), 1 63-64
tition
Dango bidding system, 58
Fifth Generation Project, 1 60
IBM industrial spy incident, 1 5 8-59; semi
Denden Kosha Information Processing System
Financial Services Agency (FSA), 225
conductor industry, 182, 1 85, 200-20 1 , 2 1 1 ;
Financial system: credit-based, 35, 47, 54-56,
software industry, 148, 1 53-54, 1 58-59, 1 63,
Community, breakdown of, 231-32 Companies as communities (kyodotai), 37 Compaq, 169 Competition. See yokonarabi competition Computer industry, 28, 1 2 5, 2 1 0; 1 960s and
(DIPS), 134, 1 3 5 Developmental state model, 25, 37, 3 9 , 206, 208-9, 234. See 41so communitarian capital ism
2 1 7-18; wartime changes, 36-37 Fiscal Investment and Loan Program (FILP), 57, 82-84
1 65-66, 1 73, 175; telecommunications in dustry, 1 2 1-22 Honda, 30, 2 1 9
Development Bank ofJapan, 224
Five-company rule, 59
Honoki Minoru, 1 3 5-36
1 9 805-1 9905, 140-46; communitarian capi
Diet, 26, 74, 75, 92-93
Hlrcign Exchange and f(lreign Trade Control
Horizontal (heikii) competition, 1 3- 1 6
talism and, 1 26-27, 1 39-40; conditions for
Digital Equipment Corporation (DEC),
1970s, 1 27-38; changing conditions,
Law of 1 949, 57, 1 30 Foreign Inve;;tmcnt Law of 1950, 57, 130
effective market intervention, 1 3 8-40; finan
1 26-27, 1 4 1 , 1 52
cial assistance, 1 28 , 132-33; Japan Electronic
Distribution prices, 59
i:« lreign takeovers, 9, 41, 52-53
Computer Company, 128, 1 3 1-32, 1 3 8-39,
Divided Sun: MiTi alld the Brea/rd(jwn q{in
H>rtune 500 rankings, 30
1 58, 2 1 6; mainframe industry, 1 27-29; New
dustrial Policy. /975-1993 (Calion), 1 95-96
IBM, 1 26, 1 28-30, 1 32-36, 1 3 8, 1 44, 1 60-63, 1 87-88, 196, 2 1 3 , 2 1 5-16; DOS/V, 1 69-70; industrial spy incident, 141, 1 58-59, 162,
Dividends, 64
Fujita Katsuji, 202
tectionism, 1 28-30; research and develop
DoCoMo (NTT), 1 14-16, 1 19-20, 2 1 9-20,
Fujitsu, 30 n, 33, 70-7 1 , 75, 84, 89, 99, 2 1 1 - 1 2,
222
Hynix, 201
Fuji Electric, 70-7 1
Series Project, 1 34; PC market, 1 44-46; pro ment, 128, 133-38; societal support for, 1 39;
House Lease Law, 5 8
2 1 5 ; unbundling of; 140, 1 52-55
220-2 1 ; computer industry and, 1 32-39,
IDO (Nippon Id o Tsoshin), 109 Immigrants, 233-34
state role in, 1 28-29; structure of firms,
Doko Toshio, 99
142-44; foreign acquisitions, 144; IBM tech
1 2 6-27
DOS/V, 169-70
nology and, 1 59, 162; semiconductor indus
I-mode services, 1 14-15, 2 1 9-20
DRAM chips, 33, 1 83-84, 186, 1 94, 200-201 ,
try and, 1 82-84, 187, 200, 202; software in
Inamori Kazuo, 42, 43
Consensus decision-making, 5, 9, 1 7, 27, 60-61 Construction industry, 58, 227
2 1 3 , 228
Consumer products, 220-21 Contestation of norms, 35-36, 173, 228-29;
Earth Simulator Project, 143
dustry and, 1 5 3-54, 1 59, 162, 1 65-66, 169,
Inayoshi Hideo, 200
1 75; telecommunications industry and,
Individual social behavior, 1 1 , 16-18, 208-9,
1 2 1-22
219
bank credit-based financial system, 54-- 56;
Economic decline, 1-5
Fukuda Hidetaka, 203
Industrial Bank o fJapan, 1 5 3
keiretsu and main bank system, 50-54; life
Economics field, 1 8-20
Fukui Toshihiko, 229
Information Network System (INS), 1 06, 1 2 1
time employment, seniority wages, and en
Education system, 35, 61-55, 1 7 3
terprise unions, 41-46; semiconductor in
Egalitarianism (byOdo skugl), 4-5, 1 1- 1 2, 37,
dustry, 1 93-98; software industry and, 1 67-71 , 1 7 5-76; state role, 223-25; telecom
Information Processing Promotion Association Gaiatsu (foreign pressure), 1 67-71
(IPA), 1 55-57, 1 7 1 , l72
39-40, 45, 134, 206, 2 1 2; social behavior to
Game software industry, 142, 1 63-66, 167, 221
Innovations, types of, 24--2 5
promote, 16-18, 58-65, 228-32
Gates, Bill, 173
Insider-dominated corporate governance,
munications industry and, 97- 1 0 1 , 104-7,
Electrical Communications Laboratory, 73
1 1 5 , 1 23-24
Electronics Industry Association of Japan, 192
General Agreement on Tariffs and Trade (GATT), 179
48-49, 5 1-52 Institutional and policy change, 23-28, 207-1 2 Institutions: capital markets, 47-56; econo
Convoy system (gosii scm/an hiishikl), 58, 64
Elpida l'li1emory, 200-20 1 , 227
Germany, 27, 39, 40, 45, 47, 49, 50, 208
Cooperation, 5
Employment security, 7-9. See also lifetime
Ghosn, Carlos, 4 1 , 226
mists' view of, 18-19; instruments of indus
Gordon, Andrew, 38
trial targeting policies and, 56-58; managed
Coprosperity (kyiiei), 1 0
employment system; wages
252
Index
Index
labor markets, 3&-46; outmoded, 2-3;
1 27, 1 29-30, 130, 1 34, 138, 144; develop
Management-labor relations, 3 9
Mitsubishi Motors, 227
wartime roots of communitarian capitalism,
ment of, 47-48; semiconductor industry,
Manchurian Incident, 7 2
Mitsui o.S.K. Lines Ltd., 52
1 78, 185, 192, 200, 204; software industry,
March, james, 2 1
Miyauchi Yoshihiko, 52
148, 1 53-54, 1 53-55, 1 62, 1 64-66, 1 75. See
Market-conforming industrial policies, 2 9 , 2 1 2,
Miyazawa Klichi, 99
36-38 Integrated circuits (IC), 133, 179-80; large scale integrated (LSI) circuits, 1 8 1 -83; very
also banks; suppliers
253
Miyoshi Shoichi, 68
2 1 6- 1 7
large scale integrated circuits (VLSI), 136,
Kijohii legislation, 1 57-58
Market Stabilization Association, 5 9
1 8 3-84
Kinkyu Teigen: Sofutouea Shijldai (Urgent pro-
Massively parallel (MPP) machines, 142
Monitoring mechanisms, 50-51
Matsumoto Tadashi, 205
Monopolies, 74-75, 94, 2 1 3 . See also Nippon
Intel, 177, 185, 1 86, 187, 189-90
posal: the new age of software), 168
Intellectual property laws, 44-45, 1 61-62
Kltahara Yasusada, 76
Matsushita, 85, 98, 1 32
Interests, influence of social norms on, 2 1-22
Klyomiya Hiro, 1 34-35
Matsushita Electric Industrial, 46
International environment, 29-30, 33, 52-53,
Monetary policy, 2
Telegraph and Telephone Morita Akio, 1 65
Kobayashi TaiyU, 1 36
Meiji period, 6, 36, 67-69, 72, 1 26, 220
Morozumi Yoshihiko, 57
94, 97-99, 140, 1 69-70, 2 1 4- 1 5, 2 1 7; semi
Kobayashi Takao, 38
Mergers and acquisitions, 226-27
MOS memory technology, 1 82, 183
conductor industry, 1 84-85
Koizumi Jun'ichiro, 4 1
Merit-based pay, 20, 43-44, 46, 1 72, 226, 228.
Motorola, 77, 1 77-81 , 1 88, 1 96, 200, 205, 2 1 3
International Telephone and Telegraph (ITT), 71 Internet, 1 1 8-23, 2 1 5 Internet protocol (IP) technologies, 1 14-18
Komai Hiroshi, 232
See also wages
Komiya Ryutaro, 8
Micron Technology, 1 9 1 , 200
Nagashima Nobuyuki, 224
ICyocera, 30, 42-43, 103, 1 07, 109, 165, 2 1 9,
Microsoft, 1 52-53, 170, 1 73 , 1 75
Nakamura Kunio, 46
Minamis3wa Akira, 205
Nakamura Shuji, 44, 45
220, 221
Inventors, 44-45, 1 7 1 , 209
Ministry of Communications
(MOq, 69,
Ishikawajima Harima Industries, 99
Labor costs, 4 1-42
Iwadare Kunio, 68
Labor markets, managed, 38-46
Ministry of Construction, IJ9
Labor Standards Law, 38
Ministry
Land, as collateral, 54, 1 56
1V1inistry of Finance (MOF), 2, 1 8, 34, 37,
japan, 1, 54; constitution, postwar, 74; global
of Education (MOE), 62,
Nakasone Yasuhiro, 1 0 1 , 105 Nakatani Iwao, 39-40, 228
7 1 -72, 73
Nasdaq, 55 1 6 1 , 1 62
National autonomy, 5, 8, 25, 47, 126, 207, 221-22; telecommunications industry and,
competitiveness rating, 1 ; gross domestic
Land Lease Law, 58
48-49, 56, 58, 97, 1 05-6, 1 34, 20 1 , 2 1 1 , 223,
product, 1 , 54; national debt, 101-2; postwar
Large-scale integrated (LSI) circuits, 1 8 1-83
225; tc\ccommunications industry and,
period, 6-7; slow response to economic de
Lawsuits, 44-45, 5 1
cline, 2-5; as socialist society, 8, 75
Layoffs, 41-42, 229
Ministry of Industry (MOl), 68, 69
Network externalities, 147, 165-66
japan Development Bank ( JOB), 56, 1 79
Leaders, mistrust of, 7
Ministry of International Trade and Industry
New common carriers (NCCs), 107-8, 1 10,
Japan Electronic Computer Company ( JECC),
Legitimacy, 22
(MITI), 1 6-17, 25, 34, 103, 1 1 2; accelerated
Liberal capitalism, 26, 2 1 8
change, projects and, 1 98-99, 202-3; ASET
Nihon Yusen ( Japan Mail Shipping), 48
and, 196-97; changes in centralized banking
Nikkeiren, 42
128, 1 3 1 -32, 1 3 8-39, 1 58, 2 1 6 japanese studies, 2 1
Liberal Democratic Party (LOP), 9, 26, 6 1 ;
japan Export Bank, 56. See also Export Import Bank japan Machinery Exporters Association ( JMEA), 59
japan l\'ational Railways,
101-2, 1 1 0, 1 1 2, 1 22-24
IOJ
japan Software Company (JSC), 1 53-54 Japan Telecom, 1 07-8
petition
1 19-20
NTT and, 77, 92-93; telecommunications
and, 54-56; computer industry and, 1 27-28,
1 940 system, 38, 72
industry and,
129, 1 34, 1 35-38, 1 39; creation of, 56; indus
Nintendo, 30, 48, 1 63-66, 2 19 , 220, 221
WI,
104, 106
trial targeting policies and, 56-57; response
Nippon Credit Bank, 224
computer industry, 142; contestation of,
to foreign and domestic pressure, 1 66-72;
Nippon Electric Company (NEC), 30 n, 33,
41-43; semiconductor industry, 193; soft
semiconductor industry and, 1 78-79, 188,
68-70, 75, 84-85, 89, 9 1 , 92, 99, 1 1 8, 122,
ware industry, 1 72; telecommunications in
1 93-97; software industry and, 1 53-54,
220-2 1 ; computer industry and, 1 32,
Lifetime employment system, 35, 38-4 1 , 23 1 ;
dustry, 9 1 -92
1 57-58, 168;VLSI project, 1 83-84
Japan Tobacco and Salt Monopoly, 1 0 1
Lincoln, Ed, 2
Ministry of Postal Affairs, 73, 74
Jasdaq, 55
Lincoln,james R., 53
Ministry of Posts and Telecommunications
Johnson, Chalmers, 25, 56, 208
Linux, 1 72, 173-74
Justice Department, 140
68, 70-71 Negotiated competition. See yokonarabi com
1 34-35, 1 37-38, 1 42-46; semiconductor in dustry and, 177, 1 82, 1 85, 1 99-200, 203; software industry and, 1 53-54, 1 63�70, 1 75
(MPT), 74, 75-76, 139, 2 1 0; interests,
Nippon Steel, 42
Lion Oil, 60
1 990-99, 109-12; telecommunications in
Nippon Telegraph and Telephone (NTT), 42,
Loans, 55-56, 1 3 1 , 1 32-33, 179
dustry and, 1 01-2, 104, 1 07-9
Kagono Tadao, 38
Lodge, George, 6
Katao Kazuo, 63
Logic of appropriateness, 2 1
Ministry of Public Management, Home Affairs, and Posts and Telecommunications
56, 66; 1996 compromise and 1999 breakup, 1 1 2-15; amakudari jobs and, 9 1 -92, 93; communications infrastructure and, 77-84;
Katz, Richard, 3
Logic o f continuity (keizoku n o rojikku), 1 2
Katzenstein, Peter, 2 1
Logic o f organization, 39
Ministry of Public Works, 68
Kawano Hirobumi, 1 61-62
Long Term Credit Bank, 53, 224
Ministry of Telecommunications, 73-74
sion of consensus on, 99-104; family of
Ministry of Transportation, 1 39
firms, 84-95, 100, 106; goals, 77; LOP and,
MacArthur, Douglas, 73, 76
Mirai Project, 1 98-200, 202
77, 92-93; partial privatization, 1985-1990,
Main bank system, 5, 8, 37, 48-49, 50-54, 2 1 4
Mitsubishi Electric, 30 n, 1 3 5 , 1 58-59, 200
8 1 , 84, 1 04-9, 2 1 0; postponement of Nippon
KDDI, 1 20 Keiretsu ties, 5, 8, 35, 50-54, 6 1 , 85, 208, 2 1 3-14, 2 21, 226; computer industry, 1 25,
(MPHPT), 1 I2, 1 15 , 1 I 6, 1 19-20, 123, 225
computer industry and, 1 33-34, 1 39; con struction budget, 7 8-8 1 ; creation of, 74; ero
254
Index
Index Political battles over social norms, 33-34
Safe capiralism, 229
Sino-Japanese war o f 1 894-95, 69
Political science literature, 1 9-20
Safety precautions, lack of, 5 1
Social contract, 7, 27, 206
curement process, 89-90, 97-98; question
Political system, 25-26
Sakamoto Yukio, 200
Socialist principle, 44, 224
ing of monopoly, 97-99; research and devel
Posen, Adam, 2
Sakamura Ken, 1 6 1
Social norms, 3-1 1 , 9-10, 129, 188, 206-7,
Kippon Telegraph and Telephone (:-.ITT) (cont.) breaku p decision, 1 990-99, 109-12; pro
255
opment, 85-86, 88; sales to, 9 1 ;
Posral savings system, 57
Samsung, 1 87-88, 203
semiconductor industry and, 1 82, 183-84;
Post Offices, 93
Samuels, Richard, 2 1
anism and, 16-18, 58-65, 228-32; influence
sources of capital, 82-83; as stable monopoly,
Predatory states, 27
Sato Takehiro, 227
on interests, 2 1-22; institutional and policy
74-75; standards, 1 00-10 1 , 1 1 5; views about
Press dub system (kisha kurabu), 58
Savings, 57, 209
change and, 207-12; political battles over,
future, 1 01 -4; VLSI project, 1 83-84
Price competition, 1 5
Scandals, 42-43, 5 1 , 98-99, 1 10, 232
33-34; reshaping of, 96-97, 1 04-7, 228-29;
Schumpeter, Joseph, 23, 74, 2 1 3, 230
social order, 58-59; telecommunications in
Nishi Yoshio, 1 9 1 Nissan, 4 1 , 53, 226 Noguchi Yukio, 15, 38 Nonliberal capitalism, 26-27
Prime Minister's Science and Technology Panel, 142 Private sector, 10, 1 2-16, 208, 226-28; focus on minimizing failure, 1 5-16
Science and Technology Agency (STA), 143 Sega, 164, 221
2 18; contestation of, 35-36, 41-46; egalirari
dustry and, 96-97, 1 04-7 Social science paradigms, 22-23
Seizon (norm of survival), 1 5, 37
Softbank, Inc. , 1 18, 224
Privatization, 56; of NTT, 8 1 , 84, 1 04-9, 2 1 0
Self-interest, 1 8-20
Software Engineering Center, 172
seizon (survival norms), 33-34; supra-organi
Product lines, 222
Sematech, 187, 197
Software industry, 28, 147, 2 1 0- 1 1 , 228; closed
zational, 6, 26, 207. See a/so communitarian
Profit, Japanese view of, 8-9, 37-38, 45, 54
Semiconductor industry, 28, 33, 177, 203-5,
capitalism; contestation of norms; social
Promotion system, 40
2 1 3 ; 1 9808, 1 84-87; 1 9905, 1 87-93; acceler
norms; yokonarabi competition
Protectionism, 2 14; in computer industry,
ated change, 1 98-203; ASPLA, 201-3; cal
customized software, 1 57 ; foreign and do�
culators, 1 8 1-83; communitarian capitalism
mestic pressure, 1 66-74; game software, 142,
Norms: fairness, 9, 1 1 , 1 5, 37, 39, 43, 129;
NTT DoCoMo, 1 14-16, 1 19-20, 2 1 9-20, 222
1 28-30; semiconductor industry, 178-79
NTT Holding Company, 1 1 5- 1 6
and, 1 77-78, 1 88-93, 203-4; consumer elec
capitalism and, 1 52, 1 55-56, 1 67, 1 74-76;
1 63-66, 1 67, 2 2 1 ; IBM industrial spy inci
Quasi-socialist system, 7, 75
tronics firms, I SO; contestation of norms,
1 93-98; DRAM chips, 33, 1 83-84, 1 86, 1 94,
I SO; Information Processing Promotion As
Rational choice theory, 1 9-20, 2 1 9
200-20 1 , 2 1 3, 228; dumping of chips,
sociation, 1 55-57; intellectual property laws,
Oboshi Koji, 1 14 Occupation, 47, 49, 56, 57, 72-75, 130, 206
standards, 1 56-57, 1 67-68; communitarian
dent, 1 4 1 , 1 58-59, 162, 2 1 5; imports, 1 40,
Offshore competition, 231-32
Regime shift, 2 6
1 85-87; integrated circuits, 179-80, 1 8 1 ;
1 6 1-62, 1 7 1 ; Japan Software Company,
Oil imports, 60
Renesas Technology, 200
market share, 1 87-88; merger into one
1 53-54; legislation, 1 57-58, 1 6 1 ; research and development, 1 5 9-60; server market,
Oi Saitaro, 69
Renters, 58
DRAM company, 200-201 ; patent infringe
Oki Electric, 68, 84, 92, 130, 1 35 , 220
Reregulation, 1 0 5
ment, 179, 185; research and development,
170; size of market, 148, 1 5 1 ; standards, 1 52,
Oki Kiraro, 68
Research and development: computer industry,
179, 1 82-83, 1 95, 1 98-203; standards,
1 7 1-72; suppliers, 1 62-63; vicious cycle,
Okimoto, Daniel, 1 9 1
1 28, 1 3 3-38; semiconductor industry, 1 79,
192-93, 1 97; systems on a chip (SoC), 1 94,
1 52-57; yokonarabi competition, 1 55, 173,
Okuda Hiroshi, 1-2, 42
1 82-83, 195, 1 98-203; software industry,
198-200; trade agreement with U.S.,
175
Okumura Hiroshi, 1 2
1 59-60; taking turns, 6 1 ; telecommunica
1 86-87, 2 1 1 ; U.S. pressures on, 179, 1 85,
Software Module Project, 1 55
Olsen, Johan, 2 1
tions industry, 85-86, 88; universities and,
1 86-87; VLSI projects, 1 83-84; yokollarabi
Software Production Technology Development
Open Source Software, 172
62-63; yokonarabi competition and, 23, 46,
Order, social, 58-59
60
Organisation for Economic Co-operation and Development (OECD), 39, 54, 179
Researchers, 44-45 Resona Bank, 226-27
Organizational logic, 6
Retirement. See amakudari
Oshima Tetsu, 76
Return on equity (ROE), 8, 9, 30-33, 49
Ostracism, 2 1 , 22, 209
Reverse-engineering, 12, 122, 1 3 6-38, 140, 1 83 Rincho (Second Provisional Commission on
Patent Law, 4 5
Administrative Reform), 99, 104
competition, 1 77, 1 95-96, 198 Semiconductor Industry Research Institute of Japan (SIRI) , 1 95, 1 96-97 Semiconductor Leading Edge Technologies, Inc. (SELETE), 195, 1 96-98 Semiconductor Technology AI.:ademic Research Center (STARC), 1 95 , 1 96-98 Shareholding, 8, 9, 128; cross-shareholding arrangements, 47-49; by foreigners, 52-53;
Program, 1 55 SlIkaiya, 49, 5 1 Son� 30, 85, 107, 1 44-46, 1 64-66, 1 7 3 , 178, 180, 2 1 9-22 , 228 Sony PlaySration, 1 64 South Korea, 27, 39, 40, 49, 208, 2 1 5, 2 1 7, 230-3 1 ; semiconductor industry, 1 8 7-88, 201 Sperry Rand, 1 30
Paternalism, 3 7 , 8 5 , 206, 207-8
Rising sun alliances, 200
Japanese view of, 45-46; wartime controls
Spring labor offensive (shunto), 40, 43
PC market, 144-46, 169; combination of hard
Risk, socialization of, 1 1 , 29, 2 1 3 , 2 1 7, 2 18;
and, 37-38
Stages of development. See catch-up stage of
ware and software standards, 1 52-53; foreign
NTT family of firms, 84-95; private sector
Sharp Corporation, 85, 165, 1 8 1 , 1 8 2
firms' share of, 1 69-70
and, 12-16; procurement system, 89-90;
Shimazu, Inc., 44
Pempel, 1: )., 3 , 26
semiconductor industry, 1 96-98; subscriber
Shinsei Bank (Long Term Credit Bank), 53,
Performance-based pay, 20, 43-44, 46, 172,
bonds, 77, 8 1 , 82-83, 94, 209; telecommuni
226, 228. See also wages
cations industry, 85-86
224 Shinto Hisashi, 99, 102, 1 1 0
Perry, Matthew G, 67
Rosen, David, 1 65
Siemens, Inc., 70, 76
Plaza Accord ( 1985), 30
Russo-Japanese war of 1 904-5, 69
Sigma Project, 160
development Srate, role of, 5, 10, 1 1-12, 25, 36, 208, 223-25; computer industry, 1 28-29; keiretsu ties and, 48; semiconductor industry, 1 84; software industry, 1 60-63, 1 6 7-72; telecommunica tions industry, 1 04-5 Statist tradition, 6
256
Index
Index
257
Stock market, 55, 224-25
norms and, 96-97, 104-7; state role, 104-5;
World War I, 70
ing, 5, 9, 17, 27, 60-61; education system and,
Stock options, 45
yokonarabi competition, 90-92, 102, 1 08-9
World War II, 126, 206
61-65; semiconductor industry, 177, 195-96,
Yamauchi Hiroshi, 165
technological advances and, 23, 219; telecom munications industry, 90-92, 102, 108-9
198; software industry and, 155, 173, 175;
Subscriber bonds, 77, 8 1 , 82--83, 94, 209
Television industry, 59
Suicide rate, 2, 22
Teleway Japan (TWJ), 108
Supercomputers, 1 37-38, 142-43
Tennessee Valley Authority (TVA), 73-74
Yen, value of, 30
Super High-Performance Computer Project,
Texas Instruments (TI), 1 78-80
Yokonarabi competition, 13-16, 35, 40, 46, 58-65,
1 33-34, 153, 180 Suppliers, 54, 85; software industry, 1 62-63; technology changes and NTT suppliers,
Tokyo Kaijo (Tokyo Marine Insurance), 48
1 20-21 ; telecommunications industry, 99,
Tokyo Stock Exchange, 1 , 55
100. See also keiretsu ties Supra-organizational norms, 6, 26, 207
Toshiba Corporation, 30 n, 45, 68, 98, 99, 220 Toyota, 30, 42, 48, 109, 219, 220
Suzuki Zenko, 98-99
Trade associations, S
System on a chip (SoC), 194, 198-200;
Trade balance, Japan, 30, 32
ASPLA, 201-3
Transaction costs, 18-19, 47 Treaty ofVersailles, 70
Taisho period, 36 Taiwan, 49
TRON (Real-Time Operating System Nu cleus) project, 16 1 , 173-74
Takemoto Toyoki, 205
Trust, 4, 7, 98-99
Takeuchi Hirotaka, 63-64
Tushman, Michael, 24
Tanaka Hisashige, 68 Tanaka Koichi, 44
Umezawa Shigeyuki, 202
Targeting policies, 56-58
Uncreative destruction, 205
Tarui Yasuo, 179
Unions. See enterprise unions
Technology, I I-12, 23, 184-85, 194, 216-17;
United States: antimonopoly law, I I , 12; trade
incremental change, 29-30; Meiji period, 67,
deficits with Japan, 96, 97. See also individual
72; reliance on foreign, 125, 126, 128, 141,
companies
15 8-59, 162, 2 1 5
Universities, 62-64, 173, 196-97
Telecommunications Council reports, 109-10
University of Tokyo, 69
Telecommunications industry, 28, 33, 66-67,
Unix, 160-61 , 172
1 23-24, 209-10; access fees, 1 08-9; big four companies, 84-85, 89-90, 92; changes,
Vector processing machines, 142, 143
2000-present, 1 1 5-18; communications in
Venture capital, 54, 156. See also entrepreneur
frastructure, 77-84; communitarian capital ism and, 93-95, 100-10 1 , 1 20-23; data com munications field, 100; demand for, 85, 87;
ship (start-ups) Very large scale integrated circuit (VLSI) proj ects, 136, 1 83--84
emergence of communitarian capitalism,
Video games. See game software
72-77; i-mode service, I I4-15; installation
Vogel, Steven, 105
fees, 82--83, 84, I I4, I I6, 209; international environment and, 97-99; internet, 1 1 8-23,
Wages, 21, 35, 39, 40; contestation, 41-46; in
2 1 5 ; internet protocol (IP) technologies,
ventors and, 44-45; pay cuts, 42, 1 1 5, 207;
I I4-18; job cuts, I I8-19; local phone service
performance-based (merit-based) pay,
market, 108, 1 1 3, 1 16; long-distance market, 1 07-8, I I3, I I6; mobile phone market, 109,
205-6, 210, 219, 227; consensus decision-mak-
Tokugawa period, 67, 69 Tokyo Electric Power Company, 227
43-44, 46, 172, 226, 228 Wang Computers, 152
I I 3, I I4; move toward deregulation, 101-4;
Wartime control of economy, 36-38
prewar and wartime roots of, 67-72; related
Watanabe Tadashi, 137-38
industries and, 86-89; remaining problems,
Weber, Max, 4
2000-present, 1 18-23; research and devel
Western Electric (WE), 68-7 1
opment, 85--86, 88; saving MPT's face,
Williamson, Oliver, 18-19
103-4, I IO, I I 3; size of market, I I7; social
Windows CE, 173
.1
Zaibatsu financial cliques, 47, 48, 49, 220
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