Emerging Japanese Multinational Enterprises

M. Y. Yoshino

One of the most significant developments in the business scene in the last two decades has been the emergence of the multinational corporations. Until quite recently, this has been primarily an American phenomenon, but now a number of non-American firms, notably European and Japanese, are aspiring to join the ranks. Particularly, the pressures are mounting on major Japanese corporations, both on the domestic and international fronts, to increase their direct foreign investments, which up to this point have been negligible. For one thing, leading Japanese corporations are now confronted with the need to undertake defensive investments to meet the requirements of import substitution policies promoted by a number of developing countries. At the same time, with the rapid increase in the domestic wage level, a growing number of manufacturing firms with labor-intensive production processes are seeking to shift their manufacturing bases to certain developing countries in order to maintain their competitive viability in the world market. The apparel and electronics industries provide a good case in point.

There is another area in which Japanese foreign direct investment is growing. Japan's high dependence on foreign sources for critical raw materials is well known, but until recently the Japanese resource industries had relied primarily on straight purchase agreements with foreign suppliers without equity participation. With the rapid growth of demand for essential raw materials in recent years, it has become increasingly apparent that exclusive reliance on this method is indeed vulnerable; and with their eyes toward attaining a greater degree of stability and possibly

lower cost, major Japanese corporations in resource industries are undertaking investments in exploration and development of critical natural resources. While Japan's total foreign direct investment at the current level is no more than $3.5 billion, only a small fraction of that of the United States, it is nevertheless growing at a rapid rate, and according to a recent forecast prepared by the Ministry of International Trade and Industry (MITI), it will reach the level of $26 billion by the end of this decade.^[1] Indeed, there is a widespread view in the Japanese business community that transformation into multinational corporations will represent a major thrust for corporate growth in this decade.

American experience has amply demonstrated that transformation of a domestic firm into a multinational one requires major adjustments in the firm's organizational structure, strategies, and management styles. I have recently undertaken a study of how major Japanese corporations are making their initial efforts toward evolution into multinational corporations. The data for the study were gathered through intensive investigations of the thirty-five large Japanese manufacturing firms that have been most active in developing manufacturing abroad. These firms in total operated nearly two hundred foreign manufacturing subsidiaries in twenty-three countries. While the study has probed several critical aspects, this article will examine changes and adaptations that have been introduced in two important aspects of managerial functions—organizational structure and the decision-making process—as the major Japanese corporations have undertaken international expansion through direct investment.

The demands made on management by the establishment and maintenance of manufacturing bases abroad are different from and far greater than the demands of export operations. Comparatively, exporting is little more than the extension of domestic sales activities, requiring a minimum of adjustment in the organizational structure and management processes at the corporate level. This easy adjustment is particularly pronounced in a typical Japanese manufacturing firm because of the common practice of depending almost exclusively on trading companies for export operations. When, however, the firm establishes its manufacturing base abroad, it is, in effect, creating a microcosm of the domestic organization. Once the manufacturing subsidiaries are created, they must be supported, managed, and coordinated by the parent company. Moreover, those charged with the task of managing a foreign subsidiary abroad must, in essence, assume responsibilities for virtually all basic managerial functions, and furthermore, they face an environment substantially different from that facing managers of domestic operations. Indeed, this is the first time that Japanese management is compelled to leave the comfortable sanctuary of

[1] Sangyo^[*] kozo^[*] shingikai chukan^[*] toshin^[*] [An intermediary report by the council on industry structure] (Tokyo: MITI, 1971), p. 42.

a familiar and hospitable environment supported by a highly cohesive and homogeneous culture.

The Impact on Corporate Organizational Structure

In a recent study of 187 U.S.-based multinational corporations, Stopford has demonstrated the existence of three clearly identifiable phases in the evolution of organizational structure as a firm expands its international operations.^[2] In the first phase, when the international investment is still small, foreign subsidiaries enjoy a considerable degree of autonomy. The second is the phase of organizational consolidation, ushered in by the creation of a specialized unit in the parent company generally known as the international division to serve specifically the needs of international business. The international division is considered an independent part of the enterprise, not subject to the same strategic planning that guides the domestic divisions. According to Stopford, the continued growth of international business becomes so important to the corporation that it can no longer tolerate control solely in the hands of the international division. Pressures mount toward its dissolution, and eventually the international business is integrated into the mainstream of the corporate activities.

My study reveals that at least in terms of structural development, the Japanese corporations have followed a close parallel up to a certain point. Among the thirty-five firms in the sample, five were in the first phase of organizational development, and the remaining thirty were in the second phase; none was found to have reached the third phase. The fact that Japanese corporations are still in the very early phase in their development of international business through direct investment has afforded an excellent opportunity for firsthand observation and analysis of the forces leading to the creation of the international division, and of how, once created, it evolves and seeks legitimacy.

Forces Leading to the Creation of the International Division

In the initial stage of development, the motive for direct investment in most cases is a response to the import substitution program of the host countries. It is an ad hoc and often a reluctant response to a specific threat. As in the case of American corporations, the initial move overseas by Japanese corporations was not made as a part of a grand corporate design or strategy, but was based on an effort to counter a real or potential threat. By the time the third or fourth manufacturing subsidiary is established

[2] John Stopford and Louis T. Wells, Jr., Managing the Multinational Enterprise (New York: Basic Books, 1971), pp. 9–29.

abroad, however, pressure begins to build up within the organization which eventually leads to the creation of a group specializing in the company's international activities. Such pressure comes from several different sources.

In the initial stage, the responsibility for international business is assumed, usually tacitly, by the export department. This is reasonable because at this point foreign investment is no more than a mere extension of export activities, and, moreover, the export department is considered to have the necessary skills. If, for some reason, the export department is deemed inappropriate for this function, a popular alternative is the corporate planning group. The assignment is given to this group not because of strategic implications that foreign direct investment may have for the corporation, but mainly because in a number of companies studied, this is the group that is given an unusual and generally nonrecurring assignment that does not fit into any other existing department.

Under either of these arrangements, foreign investment activities are considered rather marginal and are typically carried out on a purely ad hoc basis as the need arises. But by the time a firm develops three or four manufacturing subsidiaries overseas, however small and insignificant they may be, it tends to generate new investment opportunities. Somehow the company becomes recognized in the business community as an organization interested in international business. Some of the new investment opportunities that come to the company's attention can be ignored completely, others may be dismissed with casual investigation, but there are always a few that must be given serious attention. This requires expertise, specialized knowledge, and, most important of all, management time and attention.

As the work load increases, the department to which international business is tacitly assigned begins to search for ways to rid itself of this evaluation responsibility. The group is likely to be already overloaded, and it is not anxious to divert its energy to an activity perceived as marginal. In addition to the evaluation of new investment opportunities, the established foreign subsidiaries, however small, need some support and attention from the corporate headquarters from time to time. Even at the minimal level this can become a burdensome task.

The second source of pressure lies in the established foreign subsidiaries themselves. At the very early stage, they typically enjoy a considerable degree of autonomy, granted not by conscious design, but as a result of indifference and lack of knowledge on the part of the parent company. It is autonomy implicitly granted by default. The relationship between the subsidiary and the parent company is likely to be ill-structured and, to the extent that the relationship exists, it places a heavy reliance on personal ties. In the course of day-to-day operations, however, the management of the subsidiary invariably faces a variety of problems for which it needs assistance, instruction, and support from the parent company. These needs

tend to be tactical in nature, but usually the response must be immediate if it is to be useful. To the great dismay and frustration of the subsidiary management, the parent company is not always responsive to its requests. Sometimes they are totally ignored, but at best the assistance may be delayed or perfunctory. After repeatedly experiencing these disappointments and annoyances, the managements of foreign subsidiaries come to feel a need for an organizational unit at the corporation that will serve as a communication link and a "friend at court" and that will lend sympathetic ears to their needs.

These forces converge in a climate already sympathetic to organizational fragmentation. The permanent employment system and senioritybased promotion practices commonly observed in large Japanese corporations require that individuals be given appropriate status and recognition commensurate with their seniority. Such practices exert strong pressures toward the creation of new sections and departments. During the past few years, however, this tendency toward new sections has been suppressed, though not always successfully, in the name of corporate rationalization; other means devised to accommodate the need for promotion possibilities have been far from satisfactory. Thus, when there is a well-justified cause for creating a new department, such as international activities, the opportunity becomes almost irresistible.

The foregoing represent pressures of a defensive kind. More positive motives are not entirely absent. One such powerful force is an explicit recognition that international business represents a major thrust for corporate growth in the future and that, in order to capitalize on such opportunities, it is essential to create a separate unit to formulate policies and strategies in this area and to coordinate the company's international business activities. Furthermore, more progressive management is well aware that international business needs specialized training, expertise, and knowledge, which, given the Japanese peculiar employment practices, must be nurtured internally. Most commonly, it is observed that the defensive forces exert a strong initial impetus toward the creation of the new unit, the implementation of which is facilitated considerably by the sympathetic organizational climate, with the last factor providing formal justification. Once created, how does the international division evolve with the growth of international business? How does it seek legitimacy?

Evolution of the International Division

Getting Established .—At its inception, an international division is likely to be small, with limited expertise, and its existence is overshadowed by the export department. The freshly assembled staff will have to learn to work as a team and must enhance its limited expertise in the new field. At the same time, the new unit must establish a close working relationship with other organizational units within the corporation.

The initial efforts of the newly created international division to establish itself in the corporate structure are complicated by several factors. For one thing, with the importance which a Japanese organization attaches to informal relationships for task performance, it becomes necessary for the new division to build appropriate relationships with other departments and divisions, and this is usually a slow process requiring painstaking efforts. Another complicating factor is the gap that exists in expertise and experience possessed by the established subsidiaries on the one hand and the new international division on the other. Clearly, the management of foreign subsidiaries view themselves as having knowledge, expertise, and experience in the international field superior to the newly assembled international division staff. The men in charge of foreign subsidiaries are, in a sense, the pioneers and are likely to have little confidence in the ability and judgment of the international division, and, generally, the staff of the newly established division is painfully aware of its own inadequacies. Moreover, established subsidiaries are obviously reluctant to give up the autonomy they have been enjoying prior to the creation of the international division, and resist any actions by the international division that might be interpreted as contributing to the erosion of their power.

For these reasons, the managers of foreign subsidiaries typically expect little from the international division. They view the functions of the new unit as no more than providing a communication link with the parent corporation and performing strictly routine service activities. Certainly, they do not expect policy guidelines in managing their operations. Under these circumstances, the international division has only a limited range of options. It is not in a position to assert itself to dominate the established subsidiaries. It would be sheer folly to do so. The most likely course of action by which the newly created division may win acceptance is maintaining a low posture, avoiding conflicts at all cost, and somehow in the process gaining a minimum of legitimacy to assure its survival. The major thrust of its activities tends to be service oriented. It eagerly processes routine requests coming from the subsidiaries, and attempts to provide whatever assistance in its view the subsidiaries might need. The relationship between the international division and the subsidiaries at this stage tends to be ill-structured and static, since the former has no power to impose an orderly relationship, and the latter, of course, feel no compelling need to establish a formal and exclusive relationship with the division. The initiative for interaction at this stage rests clearly with the foreign subsidiary. It will use the international division only to enhance its own goal, and as it sees fit.

One of the common initial tasks given the international division is to prepare reports on the company's international activities at regular intervals for corporate top management. This requires the collection of certain basic data from the foreign subsidiaries. At the very early stage of development, the international division is so weak that it often has

difficulty obtaining even the most routine data from the subsidiaries in the form required and by the deadline established.

The managers of foreign subsidiaries are likely to continue to communicate with various departments in the parent company through informal networks they had developed prior to the creation of the international division. Naturally, the latter is anxious to become the channel for all communications with the corporate headquarters, but it lacks power to instigate, let alone enforce, such a policy. Moreover, from the viewpoint of the subsidiaries, the circumstances are such that direct communication with relevant groups is more desirable. At this stage, the foreign subsidiaries themselves are likely to be still in an early phase of development as a mere extension and integral part of the firm's export activities. They perform only a minimum of manufacturing activities and naturally they receive almost all necessary component parts and raw materials from the parent company in Japan. Frequent communications are required to facilitate the flow of these materials, and they are likely to be channeled directly between the foreign subsidiary and a relevant group in the parent company, usually the export department. Likewise, in key dealings with the parent company such as negotiations on transfer prices for items supplied by the parent company, it is natural for the subsidiary to take up the matter directly with the export department. Thus, the existing informal communication links are likely to persist with the reluctant acquiescence of the international division.

Let us now examine how the international division attempts to establish its relationship with other corporate staff and line groups. The international division by its very nature must depend heavily on other groups in performing its functions since it possesses few technical capabilities of its own. For example, in evaluating a new investment opportunity, it must rely on the expertise available in several different groups, such as finance, marketing, planning, engineering, construction, and personnel. This high degree of dependence complicates its relationship with other groups, particularly at the initial stage, when the expertise and experience of the international division is limited and close cooperation from other groups is needed. But at this stage, the international business is so small and marginal that the international division cannot provide tangible incentives to those whose assistance is so critically needed. Thus, it must rely largely on their good will and personal relationships, or on their sense of organizational loyalty.

A common strategy followed by the international division in its effort to establish itself within corporate groups is quite similar to the pattern already observed—that is, to emphasize its service functions. It stresses its role as an agent to facilitate smoother flow of information between various corporate groups and the subsidiaries without usurping what may be considered their vested interests or prerogatives. It also attempts to assume much of the time-consuming and less rewarding activities that were

previously performed, albeit reluctantly, by corporate groups. For example, until quite recently, the proposal for a new investment had to be screened by the Japanese government, a time-consuming and frustrating process which no department or individual would relish. This is one of the first tasks that the international division takes over. An emphasis on service orientation avoids conflicts and reduces resistance from well-entrenched and powerful corporate groups, particularly the export department, which may look on the creation of an international division with a certain ambivalence.

Thus, at the initial stage, the international division is strongly service oriented, maintaining a low profile. Certainly at this stage, it plays a very limited role in the areas of policy and strategy formulation.

Quest for Power .—Entry into the second stage is predicated on the continued growth of international business. As it grows, the international division becomes increasingly dissatisfied with its secondary status. Once achieving a cohesive and well-functioning team, the division begins to search for opportunities to extend its control over the foreign subsidiaries. At this stage, there are usually two or three subsidiaries that were organized after the international division came into being, and it is likely that the international division is able to exert greater influence over them. But even with the older subsidiaries, the international division can seize on certain opportunities, such as a change in the management, to increase its control. New managers, if their experience in international business is limited, are likely to look to the international division for information, guidance, and support.

More subtle means of gaining influence are available. One is to lobby for desirable assignments for managers returning from abroad. The Japanese managers overseas, like their American counterparts, often experience certain career dislocations on their return. While continued employment is assured by the very nature of Japanese employment practices, reentry into the mainstream of the corporation may pose weighty problems, particularly for senior managers. Some are fortunate enough to have former associates or superiors in influential positions who have looked after their career interests during their absence, but not all can expect such benefits. The international division, though it may be limited in its power, can perform this career-watching function. In the best Japanese tradition, the demonstration of concern and effort is often as important as the results achieved.

The power of an international division is further enhanced as its capabilities to provide meaningful services and support for the subsidiaries increase. By this time, the core of the international staff has gained substantial expertise and experience in the field. They have been exposed to a wide variety of problems encountered by different subsidiaries. They have also had opportunities to gain firsthand experience by frequent field visits. They can anticipate problems that a subsidiary is likely to face

rather than merely reacting to the requests from the field. Also, by this time the division has enough internal competence to handle many of the recurring problems without referring them to other corporate groups. Even in those cases where outside assistance is needed, the international division can interpret the requests from the subsidiaries in terms that are meaningful to other groups to elicit a more relevant response. Moreover, it has developed sufficient organizational knowledge and personal contacts to be able to tap the right sources of information in the parent organization.

By this time also there emerges the increasing need for greater involvement of the international division in the management of foreign subsidiaries. As the subsidiary grows, it is likely from time to time to face such strategic problems as major expansion of production facilities, diversification into new products, friction with joint-venture partners, or pressures of various sorts applied by the local governments. These problems go beyond routine management, and certainly their solutions call for a competence not generally available in the export department. Also at this point, the once strong relationship between the subsidiary and the export department is becoming weakened or even strained. For a variety of reasons—including growing uneasiness felt by the local government or local partners concerning the subsidiary's continued dependence on the parent company for parts, components, or raw materials—pressures are exerted to reduce imports from the parent company. In addition, local management, including personnel sent from the Japanese parent company, becomes less satisfied with being a mere appendage to the export department and begins to seek its own identity. These developments will lead to a subtle shift in the subsidiary's organizational identification away from the export department and toward the international division. In this process, an informal coalition emerges between the international division and the subsidiaries against the export department.

These forces tend to facilitate consolidation of the international division's power, which has grown out of the secondary role of performing merely routine service functions. The international division now has standardized procedures whereby operating data are regularly reported to it by subsidiaries, and it can openly discourage direct communications between the subsidiary and other parts of the parent company. Persons sent overseas must first be transferred to the international division, from which they are then assigned abroad.

In this stage, however, the international division has not yet been totally successful in gaining a dominant position vis-à-vis the foreign subsidiaries. It has not been able to cast itself in the role of forming policy and setting strategy for international business. New investments are still made without specific policy guidelines and evaluation criteria, and the relationship between the subsidiary and the international division, though closer than that existing in the first stage, still is not well defined. Informal coalition

between the international division and foreign subsidiaries is of limited scope, applying chiefly in relation to the export department. The division's attempt to gain greater self-assertion is likely to introduce elements of conflict in its relationships with the subsidiaries, leading to jockeying for power. The subsidiaries, perceiving threats to their autonomy, become defensive. Also, another type of conflict is likely to appear. In acting as an intermediary, not infrequently the international division is caught in a position of having to arbitrate conflicting interest between the corporate groups and a subsidiary. When the division finds itself in the crossfire, its initial response is naturally to work out a compromise, but failing in this effort, it must take a stand. In this difficult position, the natural inclination for the international division, which is still searching for a greater degree of acceptance in the eyes of powerful corporate groups and operating divisions, is to apply pressure on the subsidiary to conform to the parent company's point of view. Under these circumstances, the foreign subsidiary, already uneasy over the growing power of the international division, is reinforced in its suspicion of the emerging role and organizational allegiance of the division. Thus, the relationship between the division and the foreign subsidiary at this stage can be characterized as fluid, unstable, and ambivalent.

Attaining Maturity .—Only at a third stage of its development, with the attainment of maturity, does the international division finally achieve its long-sought acceptance. Its relationship with subsidiaries as well as with other departments in the corporate headquarters has gained a considerable degree of stability. For the first time, it can exert a major voice in determining international policies and strategies of the company and play a central role in coordinating the activities of foreign subsidiaries. It has become much less vulnerable to pressures from the influential subsidiaries or from powerful corporate units and freer to take its own position toward either group without being overly concerned about the possible impact of its action on its relationship with other units.

To achieve this stage, the company's international business must have developed to a point where the following conditions at least are present. First, the firm's international business activities must have achieved a significant importance. The definition of "significant importance" is elusive. The relative importance of foreign subsidiaries in total company sales and profits is certainly a key consideration, but by no means the elusive one. The phrase implies that, however it is measured in the perception of corporate management, the international business does have a measurable impact on the performance of the corporation as a whole, and the corporate resources committed to international business have become considerable. With the growth of the international business, not only does the number of potential investment opportunities increase, but they tend to become more significant in size, necessitating formal systems of evaluation and screening.

Second, at least some of the subsidiaries have reached a state of maturity and have gone a long way toward achieving self-sufficiency. Their dependence on imported materials and components diminishes, and as a result their relationship with the export department approaches termination; conversely, their dependence on the international division increases substantially. By this time a subtle change in the parent company's point of view also takes place. No longer does it view foreign units as mere extensions of export activities, but as full-fledged enterprises that must be profitable on their own.

The third important development is the growing opportunity as well as the need for coordination and integration of activities among foreign subsidiaries. As the subsidiaries expand and mature, the potential benefits of such practices as product specialization and the crosshauling of certain products among several countries become increasingly apparent. The appeal of these benefits encourages the corporation to move away from a fragmented single-country approach and attempt some semblance of integration, at least among the more mature subsidiaries. Sometimes, such integration is forced on the subsidiaries by pressures from the host countries to export a part of their output. As the subsidiary becomes well established and begins to fill much of the local need, it is likely to come under increasing pressure from the local government to export its products to other countries. Since the overwhelming number of Japanese manufacturing subsidiaries are located in developing countries, such pressures indeed have serious implications for the operations. Here, the international division can perform a variety of useful functions from identifying promising markets, soliciting the assistance of the export department, and setting policies and programs for crosshauling of products, to actually coordinating and managing an integrated production system among several subsidiaries. Building and maintaining an elaborate logistic network does indeed require careful central planning and coordination.

Another element, though sometimes elusive, tends to increase a subsidiary's dependence on the parent company. The great majority of Japanese manufacturing investments are joint ventures in which at least one partner is a Japanese trading company. During the initial stage of development, partnership between the manufacturing firm and the trading company is mutually satisfactory, but as the subsidiary gains sufficient experience and expertise, and increases its self-sufficiency, the trading company's value to the joint venture diminishes substantially. Moreover, given the very ad hoc manner in which the partnership is formed in most companies at the time of market entry, a manufacturing firm is likely to have several trading companies as its partners in different joint ventures. Such arrangements tend to complicate any effort toward integration. Understandably, this changing relationship leads to strains and tensions between the two partners. Many of these conflicts can be resolved, or at least compromises can be reached at the local level, but

more serious ones must be negotiated through the parent company, and in these discussions the international division serves as a focal point.

By this time the international division's capacity to provide meaningful assistance to the subsidiaries is further enhanced by the wider experience of its personnel. For one thing, a number of the staff members in the international division have had at least one foreign assignment, giving them greater insight into problems of local subsidiaries. This increases the division's credibility with the subsidiaries as well as with other corporate groups. Moreover, the managements of foreign subsidiaries are partly staffed by personnel from the international division. Such interchanges of personnel contribute to improved communications.

Only when this third stage is reached does the international division achieve a position whereby it can exert strong influence in shaping policies and decisions in the evaluation of new investment opportunities and the management of established subsidiaries. The division can now openly claim to be the focal point of communication between the subsidiary and the parent company. It can establish and enforce a system of planning that reflects the views of both the division and the subsidiaries. Its suggestions to the foreign subsidiaries for possible improvement are now relevant and respected. And it can now claim to be the main transfer agent of corporate resources and experiences.

Of the thirty companies with an international division, only three such divisions were observed to have reached the third stage of maturity. The international divisions in the remaining twenty-seven companies were believed to be at various points of development in the second stage, which is telling evidence that international operations are still a comparatively recent phenomenon even in leading Japanese manufacturing firms.

The classifications we have proposed here are obviously crude and tentative, and the line of demarcation between stages is much less clear-cut than implied. Nevertheless, it gives a picture of how a new organizational unit evolves in the search for legitimacy. The international division is ostensibly created to manage and coordinate the firm's international activities and to serve as the focal point in the company for its international business, but the study has clearly demonstrated that only in the last stage of development can the division really fulfill this function.

The American experience has shown that even this stability is transitory. As international business gains in its relative importance, it becomes vulnerable to pressures from other interest groups in the corporation, which will finally be resolved in favor of some form of integration into the total corporate activities. As we shall see in the ensuing section, given the peculiarities of the decision-making process in large Japanese corporations, the international division in Japanese corporations is not likely to be as autonomous as its American counterpart even at the very mature stage. It would be interesting to speculate on the impact that the de facto integration achieved through the peculiar pattern

of decision-making will have on the viability of the international division. For example, an intriguing question to be examined by further research is whether or not such built-in integration implicit in the ringi system of decision-making would have a delaying effect on the dissolution of the international division.

Adaptations in the Decision-Making Process

Having examined structural adaptation of corporate organization to the growth of international business activities, let us now examine the extent to which development of international business activities has altered the traditional decision-making method in large Japanese corporations. During the past two decades, Western, particularly American, management concepts have been selectively adapted into Japanese corporations. But it is generally recognized that the very core of Japanese managerial practices, such as the decision-making process, has remained virtually unchanged. This is an area that is strongly culturally bound.

The Japanese decision-making process commonly followed in a large bureaucratic organization is known as the ringi system. The system is often described as the approval-seeking process where a proposal (ringi-sho ) prepared by a lower functionary works itself up through the organizational hierarchy in a highly circuitous, snail-paced manner; at each step it is examined by the proper officials, whose approval is indicated by affixing a seal, and somehow a decision emerges from the process. Such a description, while partially true, does not capture the essence of the system. It represents only a procedural aspect whereby the decision already reached is formally approved. The substance of the ringi system is far more dynamic, and this is the aspect that is relevant to the present consideration.

Indeed, the ringi system defies a neat and clear definition. It is characterized as a bottom-up, group-oriented, and consensus-seeking process. True, the ringi system possesses all of these elements, but its essence is found in the dynamic interaction of all of them. It operates in the climate of the traditional Japanese concept of organization, characterized by ambiguity and elusiveness, where the group rather than individuals constitutes the basic unit of organization, where the task is assigned to groups, and where the functions and the role of each individual member of the organization is virtually undifferentiated. The ringi system is also intricately related to the strong emphasis the Japanese have traditionally placed on implicit understanding. One such consequence is an aversion to explicit definition of organizational goals and policies, and their strong preference for dealing with each major decision on an individual basis as the need arises, evaluating it on its own merits. It is bottom-up in the sense that the need for decision is first recognized by those at the operating level,

typically the middle management. It is group oriented and consensus seeking in the sense that the various interest groups that may be affected by a decision as well as those that must implement it, all participate in the decision-making. A final decision emerges in this process of group interactions rather than being made explicitly by an individual who occupies the formal leadership role. This consensus-building process is carried out through informal means. Discussions, consultations, persuasions, bargaining, or arm-twisting are all carried on through rather subtle, informal, interpersonal interactions.

These dynamic but informal interactions, which characterize every stage of decision-making, are the very essence of the ringi system. From the very early stage during which a decision itself is being shaped, different ideas, and various alternatives, are explored, albeit very informally. Different interests are accommodated, and compromises are sought. At the same time, the process of education, persuasion, and coordination among various groups takes place. Thus, by the time the final decision is made, virtually all the major elements of decision-making except implementation have been completed. Another elusive element in the ringi system is the role of the formal leader. In this system the formal leader is not a decision-maker in the classical sense. In the Japanese organization, while the status of a leader is meticulously defined, his role in the decision-making process is little differentiated from that of other members of the organization. The leader participates with his subordinates in the decision-making process. Thus, the degree to which the leader's view is incorporated into a decision depends largely on how well he is accepted and respected by his subordinates and on the kind of relationships he enjoys with them.

For the ringi system to operate effectively, certain conditions must prevail. First, heavy reliance is placed on informal personal relations. Much of the discussion, negotiation, bargaining, and persuasion are performed through mobilization of personal networks. To make this possible, organizational and physical setting must be such as to encourage regular and frequent face-to-face interaction. Moreover, not only are such opportunities necessary for the process of making a specific decision, but more importantly they are essential to building in the first place and maintaining the personal relations on which the system is based. The need for frequent and close contacts is further reinforced by the very nature of interpersonal relationship in the Japanese cultural setting. Chie Nakane, an authority on Japanese social structure, characterizes the nature of the interpersonal relationship in the Japanese setting as local and tangible. She goes on to note that in order to build and maintain interpersonal relationships in such a system, frequent face-to-face interaction is essential.^[3]

[3] Chie Nakane, Japanese Society (Berkeley and Los Angeles: University of California Press. 1971), p. 136.

Another basic condition to make the ringi system effective is a strong pressure of shared understanding and values among participants. Moreover, they are expected to be totally familiar with the climate of an organization and to have unswerving loyalty to it. Since anything important is not likely to be explicitly defined, the participants in the system are expected to have a good feel for what is acceptable and possible within a given organizational context—how a decision is to be presented, who must be consulted, and how each must be approached. Moreover, communications often take the most subtle forms. In a system where individuals are bound to an organization for their entire working career, disagreements and conflicts on a particular issue must be managed in such a way as not to disturb any subsequent relationship. Communications under these circumstances must be subtle, discreet, and indirect. Participants are required to understand the implication of the most oblique cues. They must be able to read a real meaning into what for outsiders may seem to be a most casual comment. To be able to do so requires a strong sense of shared understanding and common interest.

In large Japanese corporate organizations, shared understanding and organizational commitment are developed in a most elaborate manner. It begins with the recruiting system and is reinforced through subsequent personnel practices. Young men are carefully selected from among the graduates of outstanding universities who have survived a series of rigorous screening processes, and who are already highly homogeneous in their ability, training, background, and values. On joining the company, from the very first day they go through the most intensive socialization process, during which they are indoctrinated with the value orientation of the particular firm. After a number of years, as they go through the well-structured advancement system, they develop a high degree of shared understanding and commitment. In the ringi system, there is no explicit control mechanism whereby the outcome of a particular decision is closely monitored and measured. The eventual outcome of a particular decision becomes known to virtually everyone concerned with that decision, and such knowledge becomes, no doubt, an important input in subsequent decisions proposed by the particular group. Through the presence of a shared understanding and organizational commitment, the participants can be reasonably certain that the decision, once made, will be implemented in the best interest of the organization.

My study reveals that virtually no change has been introduced in the decision-making practice in the international operations of Japan's leading corporations. The basic concepts and practices of the ringi system prevail, in spite of the fact that distance and physical isolation make the workings of the ringi system difficult and less effective. The relative absence of the essential prerequisites have not been explicitly taken into account, and no conscious attempts have been made to devise a different decision-making process for international operations. The authority and

functions of the management of foreign subsidiaries are no more clearly defined than are those of a domestic division. Given this ambiguity, the management of a subsidiary must have almost intuitive understanding of what types of decisions can be made at its discretion, and what must be referred to the parent company. A good criterion, of course, is that if a particular decision requires any significant commitment of the parent-company resources, it must be decided by the parent company, but in practice the question is infinitely more subtle. The subsidiary management must exercise considerable judgment, which, in turn, requires close knowledge of the climate of the parent company.

As is typical in domestic operations, the consideration of a decision in the international sphere almost always originates at the subsidiary level and follows a similar process. The subsidiary managers who are physically isolated and lack ready access to those who could affect the decision at the parent company are seriously handicapped in their participation in the process. Particularly difficult is the initial stage of exploration, perhaps the most critical phase in the entire process, during which views and reactions concerning a tentative idea are informally elicited from relevant groups. Given the very local and tangible nature of human relations in Japan, personal ties, painstakingly cultivated prior to a separation, are bound to suffer during a long absence, and their effectiveness is considerably reduced.

An important task of the subsidiary management is to arrest serious deterioration in personal relationships with relevant members of the parent company. This requires considerable attention and effort. For example, the renewal of personal ties becomes a central concern on trips to the parent company. Moreover, the subsidiary management devotes a considerable amount of time to private correspondence with former associates at the parent company to keep abreast of the climate of the parent company. The effectiveness of these efforts varies considerably among individuals, but they are at best only a poor substitute for frequent and regular face-to-face interaction. Thus, the subsidiary management is much less familiar with the prevailing climate of the parent company, its power relations, and any pending proposals that may have direct relevance to a particular decision soon to be proposed by the subsidiary. Also, it is understandably difficult to participate from a distance in the discussion, negotiations and bargaining necessary for the building of a consensus. Because of these factors, a longer lead time is necessary for the foreign subsidiaries to achieve this purpose. The exploratory stage is particularly difficult and time-consuming, since the subsidiary management has only limited opportunities for face-to-face discussions to assess the feasibility of a proposal, to size up the proper way of structuring and presenting a proposal to increase its chances of acceptance, and above all to obtain implicit commitment of support from relevant groups.

An intriguing question in this connection is the extent to which the

international division can serve as a surrogate for a foreign subsidiary in performing these functions. Here, the patterns vary. If the international division is perceived as weak (stage I), the subsidiary has little choice but to undertake much of the exploration itself directly with the relevant groups in the parent company. Under these circumstances, the division plays only a very limited role. In addition, at this stage, because of the general unfamiliarity with the foreign environment among the headquarters personnel, considerable educational effort is required, and the foreign subsidiary is in a much better position to perform this task.

If the international division is in the second stage of development, the situation can be more complicated since the relationship between the division and the subsidiary is fluid and even strained at times. The subsidiary may insist on assuming many of the functions itself, because it lacks confidence in the division's ability to serve as its surrogate. Also, the subsidiary managers, anxious to minimize their dependence on the international division, may wish to maintain their own ties with various departments in the company. At this stage also, the subsidiary is far from certain as to how much support it can obtain from the international division if conflict in points of view should arise between the subsidiary and a powerful corporate group, and therefore it is anxious to protect itself through direct participation. The international division, however, may resent the subsidiary's direct communication with the parent company and may have gained sufficient power to apply pressures to discourage such a practice. Against these considerations, some form of compromise emerges. Typically the subsidiary and the international division reach an agreement to "cooperate" jointly in the initial exploration. But there are likely to exist unnecessary duplications of efforts, both parties often working at cross purposes, giving rise to considerable tension and confusion.

In the third stage, the international division has attained sufficient power that its support becomes a critical factor in the decision process. Thus, one of the first essential steps for the subsidiary is to assess the views of the international division concerning a given proposal, and only after having received its support, and with its implicit understanding, can it approach other departments. The subsidiary management must also compete for higher priorities and for greater support within the international division among various proposals submitted by other foreign subsidiaries.

Another intriguing aspect of decision-making in international operations is that when an important decision is involved, all the available personnel resources of the subsidiary are mobilized to lobby for that decision. As the senior management of the subsidiary begins its discussion with relevant individuals and groups in the parent company, various staff groups of the subsidiary are also likely to begin their own informal exploratory discussions regarding the particular aspect for which each is

responsible. Typically, these men still enjoy personal contacts with their former departments in the parent company, and they are in a position to engage in informal educational efforts and lobbying for the project. No doubt, informal feedback from the respective units will be reflected in the proposal to assure their approval when it is formally presented. Informal lobbying, negotiations, and discussions will also help fill the informational gap as well as create a sympathetic climate in each group for the decision under consideration prior to its formal presentation. These activities supplement in important ways the efforts made by senior management. Given the cohesive and powerful ties that bind those who have had common experiences and similar organizational affiliations, the personnel of various units in the parent company, whether in a plant, product division, or staff department, are likely to demonstrate a special sense of allegiance to those in the foreign subsidiary they consider their counter-parts. Thus, the plea for support coming from these men tends to be much more effective in mobilizing support than a request routed from the international division or even from the head of the subsidiary. Since in the ringi system, every relevant department participates in the decision-making process and can support the decision with varying degrees of enthusiasm, it is vital to build a sympathetic climate within every unit concerned with a given decision.

As in the domestic situation, the process is gradually formalized only after considerable informal exploration, discussion, and negotiation, during which the tone of the decision is shaped. At this stage, teams may be sent to evaluate the proposal, formal meetings will be called, and technical advice is officially sought. While the inputs from these processes are vital to the refinement of a decision, they seldom alter the nature of the decision itself. Finally, a formal proposal is prepared and circulated for approval and confirmation.

Thus, Japanese management has extended the ringi system of decision-making to international operations with virtually no alterations. It was simply a matter of extending abroad a management practice found effective domestically. In fact, the ringi system is so ingrained a part of the Japanese managerial system that it is highly questionable whether even the slightest doubt has occurred to the Japanese managers concerning the desirability of extending it to their international operations. Surely, it has not occurred to them to examine the basic premises that made the ringi system effective in Japan. Moreover, it is impractical and inconceivable to devise another decision-making system just for the foreign subsidiaries when the major part of the organization is still managed by the ringi system.

The extension of the ringi system to management of foreign subsidiaries has, however, had several immediate as well as long-range implications. Looking first at immediate ones, it has created some practical difficulties for the managements of foreign subsidiaries, because it is they who must

somehow bridge the gap that is created by their physical separation and isolation from the parent company. This diverts their attention from the pressing needs of management of the local enterprise and is often a great source of frustration for them. Furthermore, the decision process can be extremely time-consuming when circumstances require rapid responses. This may result in serious competitive disadvantages for the subsidiary.

Perhaps the single most serious long-term implication of extending the ringi system to international operations is that it makes the participation of non-Japanese nationals in the decision-making process extremely difficult, if not impossible. For one thing, most of them lack skills in communication sufficient to enable them to engage in these rather subtle interactions. Even more basic is the absence of a shared understanding and credibility. Significantly, the Japanese nationals who are recruited in foreign countries are almost as seriously handicapped in this regard, and they are almost invariably relegated to secondary roles in the Japanese corporations abroad. Japanese management is a closed, local, exclusive, and highly culture-bound system, and the ringi system epitomizes it. Only those who have gone through the most intensive socialization process at the corporation headquarters for a sufficient period of time can meaningfully participate in the ringi system.

A closely related and fundamental implication is that the ringi system requires the management of the subsidiary to be heavily staffed by Japanese nationals from the parent company. Indeed, my research reveals that the Japanese subsidiary tends to have a far greater number of personnel from the parent company than similar subsidiaries of American or European corporations. Not infrequently, virtually all line and staff positions down to the middle-management level are filled by Japanese nationals from the parent company. The ringi system is not the only reason, but no doubt it is an important one. For one thing, the senior managers sent from the parent company are products of the ringi system and unfamiliar with any other system of management. The concept of formal delegation of authority is foreign to the Japanese managers, for they are the product of an organizational climate in which authority and responsibility are ill-defined and often implicitly assumed by subordinates in the traditional manner. Where authority cannot be delegated with any degree of explicitness, the participation of local nationals in the management process is extremely difficult.

A large complement of Japanese are also required for effective participation in the corporate-wide ringi system. The presence of representatives of key functional areas is highly desirable, if not essential, for effective communication and lobbying. The performance of such tasks by local nationals would be all but impossible.

The foregoing factors make Japanese foreign subsidiaries extremely vulnerable. For one thing, they are already under serious attack in a number of countries for their heavy dependence on Japanese nationals.

Continued reliance on this practice prevents Japanese corporations from having ready access to high-talent manpower resources in the host countries, and it will obviously place a heavy strain on the managerial resources of the parent corporation. This strain places an inherent restriction on the growth of Japanese corporations in the international field. Serious efforts are now being made in a number of Japanese corporations to replace Japanese managers with local nationals, but unless rather fundamental changes are made at the very core of the Japanese managerial practices—not only in the foreign subsidiaries, but also in the parent company—local nationals will always be relegated to a secondary status.

A bold forecast now predicts the rapid growth of Japanese foreign direct investment in the next decades, but the feasibility of attaining this growth depends, among other things, on one critical development: that the Japanese depart from their highly culture-bound managerial practices and evolve a system more relevant to other cultures. Is Japanese management capable of achieving such a basic adaptation?

The Japanese ability to adapt foreign concepts, institutions, or technology to the Japanese setting on a selective basis with a minimum of social disruption has been well demonstrated throughout the nation's history. This ability has been credited as a major factor responsible for the remarkable results achieved during the past century in Japan's rapid modernization and industrialization. Those who are familiar with Japanese practices in this regard are aware of the fact that the process goes far beyond stereotyped imitation. It is much more dynamic. What is now demanded of Japanese management is just the reverse of their time-tested practices. Can the Japanese achieve a similar success in adapting their system to accommodate heterogeneous cultural elements and make it relevant to diverse environmental settings?

The Japanese management system has evolved in a homogeneous, cohesive, and insulated environment and it is therefore strongly culture-bound. As a means for organizing and motivating people, it relies more heavily on culturally induced values and less on explicitly defined formal organizational mechanisms. This presents a striking contrast to the American pattern where, among other things, the need to cope with rather heterogeneous and diverse values gave rise to a management system which relies heavily on formal and explicitly defined organizational structures and control systems. Compared with the Japanese, the American system is less culture-bound, has greater flexibility, and has a considerable degree of tolerance for heterogeneous elements. It is not unreasonable to suspect that this has been a factor in facilitating the international expansion of American corporations. In contrast, the Japanese management system, which has been so effective within Japan, has only very limited tolerance for heterogeneous elements. Since the very strength of the Japanese system derives from the highly homogeneous and strongly shared values, the

introduction of heterogeneous elements to any significant degree is likely to be disruptive and disintegrative.

Japanese management faces a serious dilemma. In order to undertake major expansion internationally, the Japanese must bring about basic changes in their management system. The extent to which they can achieve such a feat is by no means certain. But, more important, in the process they may well lose those very elements which have made their system so effective internally. The optimist would cite the remarkable ability of the Japanese to achieve what appears impossible through their ingenuity and diligence; he would also point to the great success of the Japanese in selective assimilation of foreign institutions and technology. Clearly, however, what is demanded now of Japanese management is fundamentally different from the adoption of certain elements of foreign cultures into the tight and homogeneous cultural setting. The past offers no assurance in this regard, and the outcome is by no means certain.