1. Hypothesis and Data
Japanese overseas firms have an international reputation for being slow to localize management arrangements. Slow localization itself is not necessarily to be condemned or criticized, as a firm's goal lies not in localization but in exploiting local circumstances to maximize profits. However, reluctance to localize may result in the management of Japanese-related firms being disadvantaged: they may be unable to attract capable people, or their most capable employees may leave. This difficulty in retaining capable employees further delays localization, and sets up a vicious cycle. To promote localization, host country governments may impose regulatory measures on foreign firms that would limit the free behavior of firms and may result in the loss of good business opportunities.
In addition to these potential disadvantages, slow localization increases labor costs, especially for Japanese expatriates, as many would be forced to extend their time in overseas subsidiaries.
As Japanese-related firms are probably aware of the disadvantages of slow localization, the question is Why do they seem reluctant to localize their management?
Before considering the background to slow localization, we should examine the assumption that Japanese-related firms have a localization policy. The policy depends largely on the Japanese share of stock in the firm, and despite any disadvantages, Japanese-related firms might actually be reluctant to become localized. If this is correct, the next obvious question is: Despite the negative impression given by their reluctance and the obvious disadvantages suffered, what makes these companies so reluctant to localize? Further, if they do in fact want to be localized as soon as possible, but cannot do so, what factors are preventing this?
While the causes of slow localization by Japanese firms have been discussed from various viewpoints, our hypothesis, at least as far as manufacturing firms are concerned, is that the slowness is partly related to their adherence to their efficient production systems. Japanese manufacturing firms in the automobile, electric, and steel industries are known for their management efficiency and assurance of high quality, despite continuing to suffer the effects of insufficient and delayed measures against the collapse of the bubble economy.
Characteristics of the Japanese production system in the manufacturing sector include: efficient, flexible, and high quality production; an intimate relationship between design divisions and production divisions; strict shop floor monitoring by supervisors; and well-trained workers. It would seem logical that Japanese firms adhere to transplanting such a production system to their overseas subsidiaries, as it is the only system they know, and it seems to promise good performance. However, this system requires well-trained managers, engineers, supervisors, and workers. Transferring the production system and training highly-skilled employees takes time. Thus, adherence to transplanting a production system could slow down the process of localization.
If the rate of localization is a result of this adherence, then the speed of localization depends on the rate at which the production system is transferred and highly-skilled employees are trained.
To sum up, our hypothesis is that Japanese firms may be slow to localize because of their localization policy. Further, this slowness may be due in part to their adherence to maintaining their own efficient production system. In other words, for these firms, localization is commensurate with the successful transfer of their production system.
In examining the hypothesis, we used data from 100 Japanese-related firms operating in Indonesia*.
2. Japanese Expatriate Ratio
First, we examined the average Japanese expatriate ratio. The ratio of Japanese expatriates to total employees is 1.8 percent. The ratio of Japanese division managers to total division managers is 34.3 percent. Two out of three, or 66.6 percent, of division managers are Indonesian nationals. The ratio of Japanese directors to total directors is 70.5 percent. The ratio of Japanese division managers and directors to total division managers and directors is 46.2 percent. It is difficult to judge whether these ratios are comparatively high or low, but one obvious feature is the much higher ratio of Japanese directors compared to the ratio of Japanese division managers.
3. Localization Policy
Let us then look at the localization policies of Japanese-related firms and consider whether they want to be localized.
The proportion of firms that do not plan to localize top management is 45.0 percent. It is understandable for Japanese-related firms to keep the ultimate management responsibility in the hands of Japanese expatriates. In fact, in firms with no policy for localization of top management, there is a very high tendency for the ownership of stocks to be concentrated in Japanese hands. For example, in firms where Japanese people hold less than 50 percent of the stock, only 17.4 percent have no localization policy, whereas in firms where Japanese people hold 50 percent to 75 percent of the stock, the ratio is 44.4 percent. In firms where Japanese people hold between 75 percent and 100 percent of the stock, it is 44.8 percent. In firms that are 100 percent Japanese owned, 76.2 percent have no policy for localization of top management.
Although many firms do not have a policy for localization of top management, few firms have no policy to localize divisions. In other words, they are willing to advance localization in the divisions. In fact, Indonesians have already taken responsibility for divisions in 50 percent to 70 percent of Japanese-related firms. Even firms with Japanese holding a higher share or 100 percent of the stock have a localization policy for divisions other than top management.
Japanese-related firms seem to be willing to advance localization in all divisions except top management. However, why is the percentage of firms practicing localization not higher than 50 percent to 70 percent?
To determine what affects the speed of localization, we use regression analysis on data collected from 100 Japanese-related firms. The dependent variable is the ratio of Japanese directors to total directors. Independent variables and their expected causal relations are as follows:
1) Length of operation
The longer the firm has been established, the lower the ratio of Japanese directors.
2) Number of employees
The larger the size, the lower the ratio of Japanese directors. This is because larger firms attract capable local workers more easily and have more director positions available.
3) Japanese share of stock
The greater the share, the higher the Japanese director ratio.
4) Top management localization policy
The less positive the company is in localizing top management, the higher the Japanese director ratio. For the analysis, we substituted the category variable for a numerical variable, that is, four for no top management localization policy, three for localization will take a long time, two for top management will be localized soon, one for top management is already localized.
5) Difficulties with production
The variable is a proxy variable that indicates the degree to which the production system has been transferred. The fewer the number of difficulties, the lower the Japanese director ratio. The variable ranges from zero (no difficulty) to seven (difficulties with all seven items, such as, for example, prompt trouble shooting).
6) Well-trained engineers
This variable is also a proxy variable. The more highly trained the engineers are, the lower the Japanese director ratio. The variable ranges from seven (unable to perform all seven tasks, such as production planning) to 28 (able to perform all tasks independently).
The results of the analysis, shown in Table 1, reveal very interesting facts.
First, neither duration of the operation nor company size have any significant effects on localization of director positions. It is often observed that Japanese expatriates decrease in number as time goes by. However, this does not necessarily mean that localization of management positions advances with the duration of operation. It should be noted here that the change in the number of Japanese expatriates is different from localization.
Second, the Japanese share of stock has a significant, positive impact on the Japanese director ratio. The higher the Japanese share, the higher the Japanese director ratio.
Third, the top management localization policy also has a significant, positive impact on the ratio. If a company has no localization policy concerning top management, the ratio of Japanese directors to total directors remains low. In other words, the localization policy for top management affects localization in the other divisions.
The fourth finding, and that of most interest, is that the variables that are expected to indicate the degree of production system transfer have a significant, positive effect on localization of director positions. The more difficulties with production there are, the higher the Japanese director ratio. In other words, the fewer the difficulties, the lower the Japanese director ratio and the higher the Indonesian director ratio. Moreover, the more highly the engineers are trained, the lower the Japanese director ratio and the higher the Indonesian director ratio.
To sum up, the more successfully the production system is transferred, the further localization is advanced.
The share of stock held by Japanese, the localization policy for top management, and the degree of the production system transfer are the main factors significantly affecting localization of directors in Japanese-related firms in Indonesia.
Of the three factors, the degree to which the production system has been transferred is a convincing factor. When production does not go well, the firm needs more Japanese expatriates. As Indonesian production engineers become better trained and the difficulties with production are reduced, localization of management is further advanced.
The influence of the other two factors does not seem to be as convincing as that of the degree of the production system transfer. Why is it that the higher the proportion of shares held by Japanese, the lower the Indonesian director ratio? Why is it that the more reluctant the company is to localize top management, the lower the Indonesian director ratio? Japanese-related firms might be cautious about localization without any pressure from Indonesians. For some reason, the policy for top management localization extends its influence to localization in other divisions.
If localization is to be advanced further in order to take advantage of good business opportunities and avoid government regulation, these two factors have to be considered. Length of operation does not automatically advance localization of management. It is not unexpected for host country governments to put pressure on Japanese-related firms to further localize, or to limit the positions that Japanese expatriates are allowed to take.
* For further details see Nakamura, Keisuke, ed. Management Comparison and Localization: Indonesia and Japan. Center for Japanese Studies, University of Indonesia, Jakarta: 2000. In addition to the localization of management at Japanese-related firms, this study compares the management practices and performance of 200 Indonesian firms and 100 Japanese-related firms.
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