Download The Theory of Innovative Enterprise

Innovative Enterprise and Varieties of Capitalism:
United States and Japan Compared
William Lazonick
Ford Foundation Conference on Finance, Business
Models, and Sustainable Prosperity
2012
© William Lazonick
Theory and History
In a discussion of the various tools of economic analysis in the
introduction to his posthumously published tome, The History of
Economic Analysis, Joseph Schumpeter (1954, 12-13) wrote (with his
emphasis): “Nobody can hope to understand the economic
phenomena of any, including the present, epoch who has not an
adequate command of the historical facts and an adequate amount of
historical sense or of what may be described as historical
experience”. By “historical experience”, Schumpeter meant the
ability of the economist to integrate theory and history. For theory to
be relevant to real-world phenomena, it must be derived from the
rigorous study of historical reality. That theory can then provide a
framework for the further study of a changing economy.
Theory and History
The construction of relevant theory requires an iterative
methodology: one derives theoretical postulates from the study of the
historical record, and uses the resultant theory to analyze history as
an ongoing and, viewing the present as history, unfolding process.
Through this iterative methodology, theory serves as an abstract
explanation of what we already know and as an analytical
framework for identifying and researching what we need to know.
The theory of innovative enterprise is both a product of the
comparative-historical study of economic development and a process
for the integration of new knowledge into a more rigorous and
relevant perspective on an evolving economic reality.
Comparative Capitalism: United States and Japan
• In the post-World War II decades, United States was the world’s
dominant economy, based on the combination of the
developmental state and innovative business corporations.
• Then in the 1970s and 1980s, Japanese companies outcompeted
US companies in industries in which US had been world leader:
cars, electronics, machine tools, memory chips, and steel.
• Many attributed Japan’s success to its “developmental state”; but
in terms of technology US was Japan’s developmental state.
• Then in the 1990s US had its “New Economy boom”, while Japan
had its “Lost Decade”, and the US business model was extolled.
• In the 2000s, however, Japan had much deeper innovative
capability than the United States, with a far more equitable
income distribution and much more employment stability.
“Japanese scholars don’t like the
term ‘miracle’. A miracle is
something that one cannot
explain. The reason why we study
Japanese history is to explain it.”
Kazuo Wada (leading historian of the
evolution of Toyota production system),
to Bill Lazonick circa 1993
In comparative-historical
perspective, Japan’s
“Developmental State” was the
United States.
In a talk that Lazonick attended on
comparative capitalism by Chalmers
Johnson in Tokyo in 1997, it became
clear that he accepted as valid as a
characterization of the United States as
depicted by the standard neoclassical
theory of the market economy.
Accessing market segments via product innovation
price,
cost
©William Lazonick
high income, price
insensitive
Supply curve t1
Entry through
product innovation
middle income, price
matters
low income, price sensitive
Supply curve t2
Demand segments
output (units of quality)
What is the source of high income demand?
For example: integrated circuits - military; jet engines - military;
calculators - engineers; orphan drugs – national healthcare system
Accessing market segments via process innovation
price,
cost
©William Lazonick
high income, price
insensitive
middle income, price
matters
low income, price sensitive
Supply curve t2
Demand segments
Entry through
process innovation
Supply curve t1
output (units of quality)
Key to the indigenous innovation strategies of developing countries:
e.g., Japan from 1950s, Korea from 1980s, China from 1990s
Explaining the “miracle”: Toyoda to Toyota
from Textile Machinery to Automobiles
W. Lazonick and W. Mass, “Indigenous Innovation and Industrialization: Foundations
of Japanese Development and Advantage,” Association for Japanese Business Studies,
Best Papers 1995, Ann Arbor 1995.
“Liberal Market Economies: The American Case”
Peter Hall and David Soskice, Varieties of Capitalism, 2001, p. 27:
“Liberal market economies [LMEs] can secure levels of overall
economic performance as high as those of coordinated market
economies [CMEs], but they do so quite differently. In LMEs, firms
rely more heavily on market relations to resolve the coordination
problems that firms in CMEs [coordinated market economies]
address more often via forms of non-market coordination that entail
collaboration and strategic interaction. In each of the major spheres
of firm endeavor, competitive markets are more robust and there is
less institutional support for non-market forms of coordination.”
Critiqued in Lazonick, “Innovative Business Models and Varieties of
Capitalism: Financialization of the US Corporation”, Business
History Review, 2010
LMEs: Ideological version of NEBM
In effect, Hall and Soskice accept the conventional ideology that, in
terms of the coordination of productive activity that results in
superior economic performance, the United States can be
understood as a “market economy” with a deregulated state.
There are a number of problems with this perspective.
•First, to view the United States as a “market economy” is to ignore
the role of powerful business enterprises in the economy’s resource
allocation.
•Second, the US government has always played a major role in
funding the physical and human infrastructure that permits U.S.
capitalism to operate at a high level of productivity.
•Third, if the deregulation of economic activity and the rise of
“flexible” capital and labor markets permit the characterization of
the United States as a “liberal market economy” over the past three
decades or so, this variety of capitalism may, in fact, be resulting in
inferior, not superior, economic performance.
Social conditions of innovative enterprise:
An analytical framework
Social Conditions of
Innovative Enterprise
Economic Institutions
Governance
Employment
Investment
reform
enable and proscribe
Strategic Control
Organizational Integration
Financial Commitment
embed
Industrial Sectors
Markets
Technologies
constrain
shape
Business Enterprises
Organization
Strategy
transform
Finance
Competition
challenge
©William Lazon
Social conditions of innovative enterprise
Under what conditions do strategy, organization, and finance result
in innovation? Conceptualize the firm as a social organization
characterized by a set of “social conditions” that influence
the way that strategy, organization, and finance are done
Why “social”? Strategy, organization, and finance reflect relations
among people in the economy who occupy different hierarchical and
functional positions and have different abilities and incentives
Why focus on “the firm” as a social organization?
1) In the modern economy, the firm is the critical unit of strategic
control over resource allocation to investments in innovation.
2) The modern firm employs lots of people (50 is a small enterprise
and 100,000 is not unusual), many of whom interact in collective
and cumulative learning processes that are central to innovation.
3) The modern firm cannot exist without substantial and sustained
funding; innovative strategy and organizational learning increase
the need for investment finance.
Institutions, enterprises, and sectors
in the innovation process
Governance institutions and strategic control: What are the rights
and responsibilities that govern the allocation of productive
resources (labor and capital) in the economy? Where in the
economy is control over allocation decisions located? What are the
social processes that monitor, sanction, and reform such control?
Employment institutions and organizational integration:
To whom does society provide education, training, and access to
research? Through what organizations? For what purposes? How do
people get jobs? Is a job at a point in time part of a process of
building a career over time? Are careers within or across firms?
Investment institutions and financial commitment:
How are financial resources mobilized in the economy for
investments in productive resources? From what sources? On what
terms? With what expected returns?
Social institutions and innovative enterprise
Do governance, employment, and investment institutions
enable or proscribe innovative enterprise?:
• Need to understand the evolving relation between social
institutions and organizations in specific contexts
Do institutions that support innovative enterprise in one
era constrain it in another?
• Need to understand how, when, and whether, industrial
and organizational change drives institutional change
A research agenda:
• Comparative-historical study of capitalist development
with a view toward constructing a theory of innovative
enterprise that explores (not ignores) historical experience
Strategy and organization within the firm
Strategy and Learning
Innovative Skill Bases
Who allocates resources?
Are they integrated
with learning processes?
Functional
Technical Specialists
Skilled
“Semi” Skilled
Unskilled
Production
Workers
Hierarchical Integration?
Middle
Broad skill base:
functional
integration
How broad and deep are
the skill bases that the
learning process requires?
Top
Executives
Managers
Deep skill base:
hierarchical
integration
Integration?
Technical Specialists
Office
Workers
Skilled
“Semi” Skilled
Unskilled
Research agenda: how do innovative skill bases vary in breadth and depth across
nations, industries, and enterprises at a point in and over time?
UK: 20th century legacy of Marshallian districts
Strategic control:
• persistence of proprietary control across British
industry; relative underdevelopment of managerial
organization
Organizational integration:
• control over work organization left with workers, even in
new industries (autos, electronics) in which, until 1960s,
unions not a force; administrative & technical specialists
segmented from top management decision-making
Financial commitment:
• problem of shareholders who demand payouts rather
than leave funds in the firm to finance growth
The US Old Economy business model
Strategic control:
• separation of ownership and control secured by the rise
of liquid stock markets and widespread distribution of
shareholding; precondition for managerial control
Organizational integration:
• career rewards: distinction between salaried managers
and “hourly” workers; hierarchical specialization &
hierarchical segmentation; national educational system
important for managers, especially higher education
Financial commitment:
• retentions (after stable dividends), bonded debt, stock
issues relatively unimportant
US managerial control confronts UK craft control
United
States
Executives
=Hierarchical
Integration
Specialists
XXXXXXXXXXXXXXXXXXXXXXXXXXXX
“Semi-skilled” workers
=Functional
Segmentation
Britain
Executives
XXXXXXXXXX
Specialists
Craft Workers
and Assistants
XXX =Hierarchical
Segmentation
The Japanese challenge
Strategic control:
• secured by stable-shareholding: career managers exercise control
over corporate resource allocation
Organizational integration:
• permanent employment: in-house training and career rewards for
blue-collar and white-collar male personnel; hierarchical and
functional integration that fosters organizational learning
Financial commitment:
• main-bank lending: retentions (with low dividends) highly
leveraged by state-supported bank finance
In historical retrospect, the Japanese perfected US OEBM; by the
1980s Japan were exporting not only higher quality, lower cost
products, but also innovative organizational practices (kaizen, JIT,
etc.).
Organizational integration and international competition
United States and Japan, 1980s
United
States
=Hierarchical
Integration
= Hierarchical
Interaction
Executives
?
?
Specialists ?
?
XXXXXXXXXXXXXXXXXXXXXXXXXXXX
“Hourly” Operatives
=Functional
Segmentation
Japan
Executives
Specialists
XXX =Hierarchical
Segmentation
Regular Male Operatives
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Females/Temporary Employees
German and Japanese
business models compared
=Hierarchical
Germany
Integration
= Hierarchical
Interaction
Executives
Specialists
Craft Workers
Japan
= Functional
Segmentation
Executives
Specialists
XXX = Hierarchical
Segmentation
Regular Male Operatives
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Most females and temporary employees
The French business model
France
PDG
XXXXXXXXX
Cadres
XXX =Hierarchical
Segmentation
X X X X X X X X
Techniciens
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Ouvriers
Institutions and
international competition: 1980s
Product
quality
Product
cost
High quality
Low cost
High cost
Japan
Germany
Italy France
Low quality
United States
(OE)
Britain
Adaptation and globalization in 1990s and 2000s
US Business models, old and new
OEBM
NEBM
Strategy,
product
Growth by building on internal
capabilities; business expansion into
new product markets based on related
technologies; geographic expansion to
access national product markets.
New firm entry into specialized
markets; sale of branded components
to system integrators; accumulation of
new capabilities by acquiring young
technology firms.
Strategy,
process
Corporate R&D labs; development
and patenting of proprietary
technologies; vertical integration of
the value chain at home and abroad.
Cross-license technology based on
open systems; vertical specialization
of the value chain; outsourcing of
work and offshoring for lower wages.
Organization
Secure employment: career with one
company; salaried/hourly employees;
unions; defined-benefit pensions;
employer-funded medical insurance in
employment and retirement.
Insecure employment: interfirm
mobility of labor; broad-based stock
options; non-union; defined
contribution pensions; employee bears
greater burden of medical insurance.
Finance
Venture finance from personal
savings, family, and business
associates; NYSE listing; payment of
steady dividends; growth finance from
retentions leveraged with bond issues.
Organized venture capital; NASDAQ
listing; low or no dividends; growth
finance from retentions plus stock as
an acquisition currency; stock
repurchases to support stock price.
The rise of the New Economy business model
Strategic control:
• control by managers secured by liquid capital markets;
may be owners but all strategic managers highly
specialized & experienced in particular industrial sector
Organizational integration:
• all salaried (not hourly), career rewards for motivation
plus stock-based compensation as recruitment/retention
tool; tap into global labor forces as highly educated labor
flows to capital, and capital flows to less educated labor
Financial commitment:
• venture capital reallocates money and people, funds
raised in IPO, retentions, little if any dividends and debt
The US New Economy business model
US-Based Operations
Global Operations
Executives
O
V r
e g
r a
t n
i i
c z
a a
l t
i
o
n
Global markets
sales
OEM
design
Specialists
Global labor
Contract manufacturers
Component producers
Machinery makers
Venture capital
Global labor
Japanese competition as catalyst to rise of NEBM
• In the 1980s the United States was confronted by a formidable
competitive challenge from Japanese companies in a number of
industries – automobiles, consumer electronics, machine tools, steel,
and microelectronics – in which US companies were world leaders.
• Japanese competition wiped out US consumer electronics industry.
• During the 1980s US car manufacturers attempted to learn from the
Japanese, but in the 2000s were still producing lower quality, higher
cost cars, and, not surprisingly, had lost significant market share.
• In machine tools, US response to the Japanese from the 1990s was the
emergence of export-oriented small- and medium-sized enterprises
producing for specialized niche markets.
• In the steel industry, the innovative response of the United States was
the emergence of independent minimills, using electric arc furnaces
and scrap metal.
Japanese competition as catalyst to rise of NEBM
The most critical, but ultimately successful, US response to Japanese
competition was in the semiconductor industry.
By the middle of the 1980s, the Japanese had used their integrated
skill bases to lower defects and raise yields in the production of
memory chips, forcing major US semiconductor companies to
retreat from this segment of the market.
Intel, a leading innovator in the US semiconductor industry, averted
bankruptcy by shifting from memories to microprocessors, in which
the company had been engaged since the early 1970s.
Led by the Intel microprocessor for the IBM PC and its clones, US
companies became world leaders in microcomputers and chip
design.
Indeed, the IBM PC and its “Wintel” architecture laid the basis for
the rise of NEBM, which by the 2000s had relegated OEBM to
history in the ICT industries.
What about Japan’s business model?
Is the “institutional triad” still intact?
•Stable shareholding and strategic control
•Permanent employment and organizational integration
•Main bank lending and financial commitment
The extent of stable shareholding has declined significantly: Will
shareholder value ideology take control?
Permanent employment has internal flexibility through shukko
(temporary) and tenseki (permanent) transfers of personnel – but a
hollowing out of blue-collar jobs and more use of “part-time”
workers – less employment stability at 2nd and 3rd tier suppliers
Main-bank lending less important – indeed, in Choose and Focus
(2008, 107) Ulrike Schaede argues “the main bank of the postwar
period is fast becoming history.”
What about Japan’s business model?
nnnnnnnn
MSV-san goes to prison
In the last few years, dividend yields have risen.
Stock buybacks in Japan
Financial Times, November 5, 2012
“Japanese payouts increased despite outlook”
Japanese companies are returning more money to shareholders in
spite of a darkening economic outlook and subdued earnings
forecasts, in a sign of more shareholder-friendly approaches to
capital management by these notorious cash-hoarders.
Just over halfway through the second-quarter earnings season, many of
the companies to have reported so far, including Ricoh, the office
equipment maker, and Nippon Meat Packers, have softened the impact
of lower than expected profits by announcing plans to increase payouts
through buying back shares and increasing dividends.
Stock analysts have welcomed the trend , which comes as the world's
third-largest economy hovers on the brink of recession amid weak
conditions in the vital export markets of China and Europe.
Stock buybacks in Japan
Financial Times, November 5, 2012
“Japanese payouts increased despite outlook” continued
Listed Japanese groups have long been known for their high gross cash
levels, which as a percentage of total assets are about two-fifths higher
than those of companies in the US, and four-fifths higher than those in
Europe .
"A lot of people claim that Japanese companies are really poor at using
cash," said Shun Maruyama, head of equity strategy at BNP Paribas in
Tokyo.
Total buybacks in the current fiscal year to March are expected to top
Y2tn ($25bn), on Goldman Sachs estimates, which would represent a
fivefold increase from the year ended March 2009, when dividends and
buybacks bottomed in the wake of the Lehman Brothers collapse.
Dividends may rise to about Y5tn, from Y4tn in 2009.
Survey on Open Market Repurchase Regulations: Cross-country
examination of the ten largest stock markets
Jaemin Kima, Ralf Schremperb, Nikhil Varaiyaa
“Disclosure requirements, in particular, are quite strict, compared to the
U.S. In Japan, repurchasing firms are required to file detailed
information of their repurchase activity with the stock exchange. Such
information includes how many shares they plan to buy back, when to
buy back, and which securities firm to hire. Also, once the repurchasing
firms execute buyback transactions, the firms have to submit a detailed
report to the stock exchange at the close of a trading day. With respect to
insiders’ trading activity in conjunction with share repurchase trading,
the guidelines set forth by the Tokyo Stock Exchange go to great length
to explain “the matters of attention” for insiders. For example, (1) an
insider who is in a position to make a firm’s share repurchase decisions
should not trade his own holdings of the firm’s shares while a buyback
program is underway, (2) a repurchasing firm should establish trading
rules for insiders to avoid conflicts of interest, and (3) if there is any
potential conflict of interest, the public should be informed of it.”
Regular employment in Japan
Mandatory retirement age in Japan
nnnnn
Schaede: “main bank fast becoming history”
• no longer crucial for large firms
• banks interested in a client’s profitability, not longevity
• banks have reduced ownership stakes in companies
• new bankruptcy laws reduce main bank’s pivotal role in
orchestrating bailouts
• banks still important for small firms but “the breakup
of Japan’s rigid interest rate structure and waning
political influence in the small-firm-loan markets have
finally allowed banks to price loans commensurate with
risk.” (p. 108)
n
Composition of Japanese exports, 1995 and 2010
Japanese Exports by Principle Commodity, Year 1995
Japanese Exports by Principle Commodity, Year 2010
Total: 41,531 Billion Yen
Foodstuff
0%
Raw materials
1%
Others
10%
Total: 67,400 Billion Yen
Mineral fuels
1%
Foodstuff
0%
Chemicals
7%
Others
12%
Manufactured
goods
11%
Transport
equipment
20%
Source: Japan Statistical Yearbook 2012
Mineral fuels
2%
Chemicals
10%
Manufactured
goods
13%
Transport
equipment
23%
Electric
machinery
26%
Raw materials
1%
Machinery
other than
electric
24%
Electric
machinery
19%
Machinery
other than
electric
20%
Composition of Japanese imports, 1995 and 2010
Japanese Imports by Principle Commodity, Year 1995
Japanese Imports by Principle Commodity, Year 2010
Total: 31,549 Billion Yen
Transport
equipment
5%
Others
16%
Foodstuff
15%
Raw materials
10%
Electric
machinery
11%
Machinery
other than
electric
8%
Total: 60,765 Billion Yen
Transport
equipment
3%
Others
13%
Foodstuff
8%
Electric
machinery
13%
Mineral fuels
29%
Mineral fuels
16%
Chemicals
7%
Manufactured
goods
12%
Source: Japan Statistical Yearbook 2012
Raw
materials
8%
Machinery
other than
electric
8%
Manufactured
goods
9%
Chemicals
9%