How globalization drives institutional diversity: the Japanese electronics industry's response to value chain modularity

Journal of East Asian Studies, Jan-April, 2007 by Timothy J. Sturgeon

The failure of Japanese electronics firms to participate fully in the Internet-fueled growth of the global electronics industry during the late 1990s triggered a period of questioning among top executives. This article examines Japanese managerial responses to the organizational model "value chain modularity," which was deployed by the US electronics firms driving the creation of the Internet. While there were partial but significant steps taken in the direction of this new US model--increased specialization, outsourcing of low-end products, and shared factory investments in Japan--wholesale restructuring was resisted. This evidence is consistent with larger patterns of gradual institutional change in Japan. I argue that the result of this process will likely be increased, not diminished, institutional diversity over time. While globalization has accelerated the pace of change by opening new avenues for organizational experimentation and institutional layering, the drag on organizational change exerted by existing institutions slows the process enough to allow institutional and organizational innovations to develop into coherent systems with distinct characteristics. The result, inevitably, will be a uniquely Japanese approach to the challenges posed by globalization.

KEYWORDS: value chain modularity, institutional diversity, global value chains, lean production, electronics industry, Internet bubble, outsourcing, offshoring, organizational models, production systems

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Japan has long been a laboratory for examining the processes of institutional and industrial change. During the Meiji period (1868-1912) Japan shifted from a feudal to a capitalist mode of accumulation by imitating and adopting a range of "modern" institutions, manufacturing methods, and communications technologies that had been developed in the West. As Eleanor Westney has shown, the result was not a carbon copy of the West, but a distinctive system that remained deeply rooted to traditional Japanese culture. (1) After World War II, the political system was reordered into a Western-style democracy, but economic institutions--labor markets, industry organization, corporate governance, finance--all retained distinctly Japanese characteristics. Economic institutions in Japan were seen as much more supportive of long-term planning and group action than institutions in the West. The debate in the 1980s centered on the role that these institutional characteristics played in Japan's economic success, and how portable they might be to Western societies.

After more than a decade of economic stagnation in Japan after 1989, and an uneven recovery since, the focus of research has shifted. The very institutions that support long-term planning and group action are now seen, by some, as hindrances to the flexibility needed in the more dynamic and competitive age of economic globalization. Is Japan adapting, or adapting quickly enough, to the increased pressure for institutional change wrought by globalization? Moreover, can the changes we currently see in Japan be characterized by incremental adaptation or crisis and wholesale replacement of existing institutions? Is globalization driving convergence toward a common, global production system, or will institutional diversity persist, or even increase with time?

In Japan, the picture that is emerging from this research is one of substantial but controlled transformation. Institutional diversity is increasing as monolithic approaches to employment, industry organization, and finance break down. (2) Nevertheless, the shift to this new, more diverse structure is by and large being achieved through the functioning and gradual adaptation of existing institutions. An example is the institution of long-term, or "lifetime," employment and age-based pay for permanent workers in large Japanese corporations. During the long recession of the 1990s, traditional cost-cutting methods functioned well enough to protect permanent workers. Firms reduced their labor bill by cutting overtime and slowing wage increases for permanent workers, while shedding temporary and part-time workers, moving work to lower-cost offshore locations, and seeking price concessions from suppliers. Because robust rates of attrition were possible with an aging workforce and low rates of population growth, slow hiring of permanent workers and increases in offshore production in export industries did not dramatically increase the share of temporary and part-time workers in the labor force. (3)

Nevertheless, the share of temporary and part-time workers did increase in Japan, from 20.2 percent of the workforce in 1990 to 31.4 percent in 2004. (4) However, since 85 percent of these workers were part-time, (5) we need to question any assumption that temporary workers are broadly displacing the permanent workforce in Japan. The increase in "nonstandard" work could easily be due to other trends, such as increasing labor market participation by women. The apparent functioning of Japanese institutions in the face of extreme and protracted pressure has led most observers to highlight the processes of gradual institutional evolution over breakdown and radical change. (6)