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 empirical evidence provided in this article supports this incrementalist view. Our research, primarily a series of semi-structured in-person interviews conducted from 2000 to 2004, (7) was designed to examine the responses of highly placed managers at eight of Japan's largest electronics firms to the events of the late 1990s and early 2000s, often referred to, with hindsight, as the "Internet bubble." This period was marked by the sudden emergence of new market opportunities for building the Internet and utilizing it to create products and deliver services. It was also a time when electronics manufacturing, long one of the "core competencies" of Japanese firms, was becoming more commodified. Outside of Japan, the electronics industry was being rapidly reformed into two broad groups of firms: on one hand, firms that conceived of and marketed products and electronic components, and on the other, firms that produced them on a contract basis. (8) These two trends strongly reinforced each other. First, the new market opportunities for services based on information technology (IT) decreased the relative importance of hardware (and by extension, manufacturing) in comparison with software and IT services. Second, the links between legally independent design and manufacturing firms were enabled by digital technologies, including the Internet.

The choice of managers of the largest electronics firms as research subjects might seem obvious, since these companies are large employers and are more deeply engaged in the global economy than smaller firms through exports, foreign investment, and head-to-head competition with foreign rivals. They are also more likely to be engaged in what Gary Gereffi, John Humphrey, and Timothy Sturgeon (9)--and others (10)--call "global value chains," the increasingly elaborate business linkages between firms located at great distance from one another. (11) The largest Japanese electronics firms both buy and sell components on global markets, and the demand for interoperability requires mutual adaptation to both de facto and open standards. All of these attributes suggest that the largest electronics firms in Japan would be a fruitful place to observe the impact of globalization on organizational and institutional change. (12)

This article examines the decisionmaking processes of managers who were reacting to financial pressures and rapid market changes that, in many ways, revealed deep weaknesses in the market and organizational strategies of their companies. Because of the sample of firms and qualitative methods employed, we cannot make claims about the overall trajectory of Japanese economic institutions or the organization of Japanese industries with absolute certainty. But our results fit with the findings of a broader literature on recent patterns of institutional adaptation in "coordinated market economies" in Europe and Japan. (13) Our findings suggest that there are limits to wholesale adoption of institutional and organizational innovations developed abroad. In Japan, these barriers are created by institutions such as lifetime employment and shared expectations that large firms engage in vertical integration and long-term, paternalistic relationships with suppliers. Substantial changes are nevertheless being made. The pattern is more one of institutional "layering" and increasing diversity than of institutional "displacement." (14) The "drag" on organizational change created by existing institutions slows the process enough to allow institutional and organizational innovations to develop into coherent systems. The result, inevitably, will yield a distinctively Japanese approach to the challenges posed by globalization. It is too early to tell what the precise contours of this new model will be, or how competitive it will prove in the long run. But it will not look like the new US production system; convergence, at least in its strong form, does not appear to be taking place.