Masahiko Aoki is seeking to find win-win challenges for the mutually complementary economies of South Korea, Japan and China By Lee Won-jae, Director of the Hankyoreh Economic Research Institute Masahiko Aoki, a renowned economist at Stanford University, proposed the concept of “Japanese Firm” (J-firm). He visited Japanese factories in 1980-90s and found out that the governance and organizational structure of Japanese firms are different from traditional hierarchical companies, and those differences are sources of their stronger competitiveness over Anglo-American companies. He defined core characteristics of the Japanese Firm as (1) horizontal coordination between divisions leading to efficient process innovation, (2) hierarchical ranks between employees in terms of seniority, and (3) bank-oriented financial control. In these firms, the management are cooperating with employees in planning and innovation, while in Anglo-American companies only the management have the planning power and employees are directed to simply follow the plans. In his recent book “Corporations in Evolving Diversity,” Aoki now suggests a new concept ‘reciprocal companies’ or ‘RE-mode firms’ which have more transparent governance to outside shareholders but still hold reciprocal relationship between the management and employees at the same time. Also, he emphasizes that corporate social responsibility and co-evolution of corporations and the society. Aoki will give a keynote speech at ‘Asia Future Forum 2010’ on December 15-16 at Ritz Carlton Seoul. Inquiry 82-70-7425-5237. www.asiafutureforum.org Hankyoreh: How will the definition of ‘corporation’ evolve Aoki: It is hard to pinpoint common features which explain the success of Japanese, Chinese and Korean companies together. Obviously they operate in global markets, but they have been first growing in domestic markets of different developmental stages and embedded in different social and political milieu. So their strengths are different, they have different organizational architecture, and they are governed somewhat differently. My view is that the global corporate landscape is not necessarily becoming flat, but is evolving, and should be evolving, in diversity. How are Japanese firms evolving? There were cross shareholding across corporations up until twenty years ago. But in the last two decade share ownership of listed Japanese corporations have become as diverse as UK and US corporations. Now about 50 percent of shares of listed corporations are owned by individuals and foreign institutional stockholders. I understand that a similar phenomenon is beginning to enfold among better Korean corporations. Accordingly, the management style of major Japanese corporations whose stock ownerships are widely held become more open and transparent. Scholars of Japanese corporations now appear to agree that these corporations are exhibiting aspects of hybrids of diverse stock holding and traditional human resource management with due reform. But there are also less competitive corporations relying more on bank loans and traditional management, together with corporations practicing more market-oriented flexible human resource management. But they are not majority in terms of the number of employment. In other words, the old stereotyped view of Japanese corporations does hold anymore. Korean corporations transformed their way of management dramatically towards shareholder-centric after the country took IMF remedies in 1997. Some says, however, there is still too strong insider-controlled governance structure in Korean companies and it leads to corruption. On the other hand, others say this is too much shareholder-centric and it leads to the lack of job security. Which one would be more persuasive? As I argued above, I do not think that the combination of market monitoring of the management and better human resource management are not incompatible. Market can monitor if the management sustains good relationships with internal human resources essential for value production. In my recent book, I argued that we can find such examples everywhere, in the US, France, Germany and Japan. Many Korean companies including Samsung are still under family-control. Those families are in control of the whole group of companies with a relatively small percentage of shareholding. What do you think of family-centered governance? Family control was very prevalent in France too until some years ago, but the stock ownership have been dramatically dispersed in recent years as in the case of Japan. As corporations like Samsung are moving into a similar path, its management, even if family-dominated, are bound to be forced to listen to market opinion. If a corporation is run well even under family control, market will not be hostile to it. If not, then family control will be shaken by market pressure. It is that simple. Corporate social responsibility has been emphasized in Japan, Korea, and China. Recently, new issues including low carbon management, fair trade, and sustainable supply chain management are rising. What do you think of this new wave of socially responsible management in East Asia? Rising public concern with environments implies that de facto property rights on global commons are shifting from the corporate sector to the global community in general. Then corporations need to adjust themselves to such evolution. The fact that CSR expenditures are now beginning to be reflected positively by their share values implies that the market considers that such adaptation is vital for the survival of corporations. What do you see from East Asian economies? This year, East Asian economies including China, Japan, Korea, Taiwan, Singapore and Hong Kong will become the largest economic zone comparable to North America (the US and Canada) and surpassing EU in terms of GDP on a PPP basis. There are common historical legacies among East Asian economies in that market economies started to take off from rural economies dominated by small-land holding peasants. However, developmental paths from these similar initial positions have been diverse and different in time. How are they different? In China, still 40 percent of employment is in agriculture, which is comparable to the mid-70s in Korea. China still needs more transfer of employment from agriculture to manufacturing and services in sustaining the growth of per capita income and catch up with Japan and Korea. It will pose challenges for them as regards how to cope with associated problems of urbanization, income inequalities, environmental protection, building of universal public services and so on. Japan appeared to have responded to such problems fairly well in the past, but now facing unprecedented problem of aging which will inevitably slow down the growth of per capital income. The Korean economy is still sustaining vigor, because labor force is still relatively young, but aging is expected to proceed even much faster speed than Japan in coming decades. How should corporations in Japan, China and Korea evolve if they were to contribute to the world economy and lead international society? Because of these differences in the development stages and demographic factors, appropriate developmental strategies of East Asian economies may be mutually complementary. For example, China might need Japan’’s knowledge in social engineering and in turn can offer expanding markets to Japan and so on. Exploring such gains from reciprocity is the challenge that all of us have to face. Asia is different from the EU where the degree of maturities and institutions were more or less alike for integration. But if we somehow are able to manage to find ways to reciprocate each others, it would be also beneficial for the world economy as a whole. ----------------------------------------------------------------------------- Masahiko Aoki graduated from Tokyo University and taught and conducted researched at renowned universities including Harvard University. Aoki was the former head of REITI, a think tank of the Ministry of International Trade and Industry, and awarded the Japan Academy Award (1990) and International Schumpeter Award (1998). Aoki is currently a professor at Stanford University. Please direct questions or comments to [englishhani@hani.co.kr] [Nov.6,2010 ,Hankyoreh] http://www.hani.co.kr/arti/english_edition/e_business/447448.html