| Notes: | For Figures 1-8, the definition of foreign-affiliated companies is different among surveys. See footnote 2. For the 19th survey, figures for services are not available. |
| Source: | Ministry of International Trade and Industry.[1] |
Vol.38-No.8 August 1,1999
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1.0 Introduction
The purpose of this paper is to survey recent trends of foreign-affiliated companies in Japan.
Japan has long ceased to be a target country that offers low labor costs. The manufacturing sector, the technology-intensive industries, and the tertiary industry provide more benefits for investing in Japan than do labor-intensive industries. Foreign investment in Japan comes, not only from the U. S. and Europe, but also from Asian and Latin American countries.
A study of the business activities of foreign-affiliated companies in Japan shows that the common pattern is to first establish a main manufacturing base, then to set up a sales and marketing system, and finally to establish a research and development division. Nevertheless, this pattern varies depending on which industry is the target for investment and where it is located. It has been widely discussed that the employment system and labor-management relations in foreign-affiliated companies are quite different from those of Japanese companies. Misunderstandings about possible company practices, such as sudden dismissal, make university graduates seeking jobs avoid foreign-affiliated companies in Japan.1
The plan of this paper is as follows: Section 2 contains an overview of foreign-affiliated companies in Japan. Section 3 compares human resource management in foreign-affiliated companies with that of Japanese companies. Section 4 considers a foreign-affiliated company model and the Japanese company model.
2.0 Trends of Foreign-affiliated Companies in Japan
If a foreign-affiliated firm is defined as a firm with a foreign ownership of 50 percent or more, then there are more than 2,500 foreign-affiliated companies in Japan. However, if the proportion of foreign ownership is only one-third or more, then there are over 3,000 foreign-affiliated companies in Japan.2
Figure 1 shows the distribution of foreign-affiliated companies by industry. It is clear that investment in commerce takes the largest share of foreign investments in Japan — about 50 percent in the last survey. In contrast, investment in manufacturing dropped to 33 percent and is expected to decline further. Investment in services has the third largest share of total foreign investment in Japan.
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Figures 2 and 3 show the national origin of foreign-affiliated companies in Japan. In all industries, North American capital and enterprises continue to make up the largest share. While the percentage of North American companies is decreasing gradually, Asian investment in Japan has been growing steadily. Over the past decade, the share of Asian investment has increased to more than 13 percent. Asian companies in Japan come primarily from Hong Kong and South Korea. Recent data show that investment in Japan from these two countries alone comprises one-third of the total investments from the Asian region. Enterprises from European countries, such as Germany, Switzerland, and the U. K., make up 40 percent of all foreign investment in Japan.
Companies capitalized at ¥100 million or less account for nearly 60 percent of the total; this percentage has increased gradually in recent years. Those capitalized at ¥1 billion or less make up around 90 percent of the total, indicating that foreign-capital firms tend to be smaller scale (Figure 4).
Companies that are wholly-foreign-owned subsidiaries have tended to account for more than half of all foreign-affiliated companies in Japan in the past decade (Figure 5), but their share has increased slightly. These companies are particularly outstanding in commerce and services, in which over 60 percent of all foreign-affiliated companies are wholly capital-owned subsidiaries. Joint-venture companies, in which the foreign concern holds a majority share (over 50%), have decreased to approximately 18 percent of all foreign-affiliated companies in Japan. Joint ventures that are owned equally by both the foreign and the Japanese parties have declined recently from about 23 percent to 19 percent.
Figure 6 shows the number of employees in foreign-affiliated companies in Japan. Firms with no more than 300 employees make up more than 90 percent of all foreign-affiliated companies. In addition, more than one-third employ no more than 10 employees, especially in the non-manufacturing industries. In contrast, the number of larger companies is growing in the machinery industry. Companies with at least 1,000 employees are frequently in the pharmaceutical and petroleum industries. The chemical industry has companies of every size. In general, however, foreign-affiliated companies in Japan tend to be smaller than their Japanese counterparts. Thus, it can be assumed that many of the problems confronting foreign-affiliated companies in Japan may be shared by small to medium-sized Japanese companies.
Figure 7 shows sales share of foreign-affiliated companies in Japan and all companies. In fiscal 1996, the sales of all corporations in Japan totaled ¥1,448 trillion, of which approximately 1.26 percent or ¥18.2 trillion was earned by foreign-affiliated companies with a foreign ownership ratio of at least one-third (31st survey). In the manufacturing sector, the percentage earned by foreign-affiliated firms was nearly three percent.
Figure 8 shows the share of employees of foreign-affiliated companies in Japan in all companies. In fiscal 1996, the total number of employees in all corporations was about 42 million, of which 230,365, or 0.6 percent, were working for foreign-affiliated companies. The number of firms and the sales share by foreign-affiliated companies remained about the same over the years involved. However, in manufacturing alone, foreign-affiliated companies accounted for 2.9 percent of total sales. In the oil products sector, foreign-affiliated companies accounted for 21.4 percent of total sales and employed 12.7 percent of the total work force in the country.
Among the foreign-affiliated companies, the U.S. and European companies, many of which are large manufacturing firms, have a large share of total sales, as represented by oil, electrical machinery and chemicals. U.S. companies have a gradually increasing share, and account for over 60 percent of total sales. European firms are next in importance, having sales of around 30 percent. Asian companies are growing rapidly from year to year, and are accounting for an increasingly large share of total sales. U.S. and European firms have a large numbers of employees on their payrolls.
Foreign companies have invested in Japan because of “the attractiveness of the growth potential of the Japanese market” and “logistical advantages of Japan as a base from which to expand into the rest of Asia.” The percentage of companies giving the first response has climbed from 40 percent to 80 percent in the 1985-1994 period, indicating the growing importance of Japan. The percentage of companies giving the second response has increased from 18 percent to a little over 30 percent in the past 10 years. Another reason was “to utilize Japan's advanced technologies.”
3.0 Employment System and Human Resource Management System of Foreign-affiliated Companies in Japan: Misunderstandings and Truth
The Ministry of Labour publishes a report on the Survey on Present Labor-Management Relations in Foreign-affiliated Companies. Figure 9, taken from the 1996 survey, indicates that the three most common problems confronting foreign-affiliated companies are “competing with Japanese companies” (23.2%), “securing personnel in Japan” (21.4%), and “achieving mutual understanding with the parent company” (20.1%). Non-Japanese executives in foreign-affiliated companies in Japan also pointed out that the most common problems they face in doing business in Japan were “high personnel costs,” “a shortage of qualified workers,” and “a wide range in abilities among Japanese staff.” (Survey conducted by the Study Group on Employment of Foreign-affiliated Companies in Japan.)
These outcomes clearly show that securing people and improving their abilities are major tasks for foreign-affiliated companies in Japan.
Moreover, the 1996 survey of the Ministry of Labour makes a very interesting comparison between foreign-affiliated companies and Japanese companies. First, Table 1 contains a comparison of human resource management between foreign-affiliated companies and Japanese companies. We can see that on the principle for recruiting and the personnel system, the same tendencies exist for the two types of companies. However, on recruiting and personnel, foreign-affiliated companies take more account of demonstrated skills than do Japanese companies. In foreign-affiliated companies, task distribution is more distinct, and these companies evaluate the abilities, attitudes and achievements of employees strictly by merit.
Second, Figure 10 shows the rate of employment adjustment carried out for the past two years. Although dismissals occurred in foreign-affiliated companies, the rate of obtaining voluntary retirees and dismissals in foreign-affiliated companies was 14.5 percent, compared with 11.7 percent in Japanese companies. On the other hand, there are distinct differences in “assignment to other companies,” “transfers” and “vacations.” The number of foreign-affiliated companies that carried out these employment adjustments were 18.3 percent, 38.4 percent and 32.2 percent, respectively. The corresponding figures in Japanese companies were 8.3 percent, 23.8 percent and 20.8 percent, respectively.
There have been misunderstandings or exaggerations concerning the employment system and human resource management of foreign-affiliated companies in Japan. Fuelled by media reports that a parent company's sudden decision to withdraw from Japan caused lay-offs, foreign-affiliated companies have acquired the social image that they promise less stable employment than do Japanese firms. However, it is a fact that few foreign-affiliated companies are in this category. Hence, it is a mistake to characterize them as promising less stable employment than Japanese companies.
Some studies have removed the misunderstanding about foreign-affiliated companies in Japan. Let me give two examples. First, examining the rate of newly-hired and separated employees in foreign-affiliated companies versus active labor mobility in foreign-affiliated companies: the rate of job separation for foreign-affiliated companies was 8.2 percent, whereas that for Japanese companies was 14.3 percent. Second, by estimating the rate of “survival” in a company for female university and junior college graduates, Higuchi (1993) pointed out that the rate of job retention is relatively high for foreign-affiliated companies (see Table 2).
4.0 Concluding Remarks: A Future Model for Japanese Companies?
It is well known that the Japanese economy is still in a serious situation. It is unavoidable for Japanese firms to implement employment adjustments, such as reduction of working hours, suspension of new hiring and mid-career hiring, personal transfers, outplacement, recruiting of voluntary retirees, and dismissals. In the past, it has been widely discussed that the employment system, such as long-term continuous employment and seniority-based pay, and labor-management relations in Japan, is unique compared with other industrialized countries. There are still many, even among the Japanese, who maintain this point of view. However, international comparative studies show that there are clear differences in employment systems and industrial relations among Western nations, and many countries exhibit similarities to Japan in these areas. It is incorrect to describe Japanese employment practices and labor-management relations as unique. The Japanese employment system and industrial relations are not completely different from those of most other countries. However, the employment system and industrial relations in Japan have certain individual characteristics. In other words, it is not true to describe employment practices and labor-management relations in foreign-affiliated companies as alien.
Figure 11 is useful for studying the relationship between Japanese companies and foreign-affiliated companies from the point of view of the retaining (or mobility) and the seniority-based (or performance-based) system. The horizontal line indicates whether labor mobility is active or not. In other words, it indicates whether companies maintain long-term continuous employment as a base. The vertical line indicates whether promotion and wage increases depend on seniority or performance.
It is commonly believed in Japan that sudden decisions made by parent companies of foreign-affiliated companies in Japan have caused lay-offs, and that employees often change their jobs, and are evaluated on performance only. Hence, foreign-affiliated companies are described as having active labor mobility and a merit-based evaluation system. Foreign-affiliated companies can be located in the southeast sector of Figure 11, for example 
. However, as discussed in Section 3, this claim is not true. Employees in foreign-affiliated companies do not have higher rates of job separation and job changes, and foreign-affiliated companies evaluate employees not only on their performance, but also on their seniority. So we move foreign-affiliated companies to the southwest area (
).
On the other hand, Japanese companies have acquired the social image that employees continue working for a long time and are evaluated solely on seniority. We can locate Japanese companies in the northwest area, for example 
. Nevertheless, this is an exaggerated image. They do not have a lower rate of job separation and job change, and they evaluate employees not only on their seniority but also on their performance, so we move Japanese companies towards the southeast (
).
Recently, owing to slower economic growth, changes in the employment environment have begun to make it difficult to maintain the traditional method, based on the length of service in Japanese companies. The companies cannot bear the burden of high labor costs and a shortage of positions available has been revealed. Consequently, the Japanese traditional human resource management system has begun to change. Many companies have introduced evaluation systems that match remuneration with results and performance over a short period. Moreover, some companies no longer give much credit to long-term continuous employment. The new business goals of Japanese companies are to foster their international competitiveness. This may shift downward, even to the southeast area. To what extent will shift? Until meets ? I cannot find an answer to this question. Nevertheless, they will come close to each other but will not meet, if they continue to compete internationally.
Notes:
| 1. | On the employment and human resource management system in foreign-affiliated companies in Japan, see Foreign-affiliated Enterprises Employment Research Group (1992) and Nemoto (1988). |
| 2. | The Ministry of International Trade and Industry has surveyed foreign-affiliated companies since 1967. The definition of a foreign-affiliated company was “a foreign ownership ratio of over 50 percent” until 1991, when the ratio was changed to one-third. The Ministry of Labour has surveyed labor-management relations in foreign-affiliated companies since 1971. It covered companies with a foreign-ownership ratio of over 20 percent in the 1971 survey, but this was changed to over 25 percent on the 1977 and 1983 surveys, and over 50 percent on the 1987, 1992 and 1996 surveys. |
Source:
| [1] | Ministry of International Trade and Industry. Gaishikeikigy-o no D-ok-o (Survey of Trends in Business Activities of Foreign-Affiliated Companies). Tokyo, 1967-1999. |
| [2] | Ministry of Labour. Gaishikeikigy-o no R-oshikankeitou Jittai Ch-osa (Survey on Present Labor-Management Relations in Foreign-affiliated Companies). Tokyo, 1971, 1977, 1983, 1987, 1992, 1996. |
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