Moving to Japan, master the cultural differences
The effects of Japanese culture on the selection of an entry mode
when moving activities to Japan
Bachelor Thesis:
Organization & Strategy
Academic year:
2009-2010
Supervisor:
Xu ShaoYang
Student:
Teun Bekkers
ANR:
652796
Word count:
7.600
MANAGEMENT SUMMARY
In the pursuit of getting the best competitive advantage every company faces the challenge of
reducing cost. To do so, companies can go to foreign countries which have lower labor costs, more
knowledge, or a higher level of technology. When a Multinational Enterprise (MNE) moves activities
to Japan there are different entry modes to enter the country; Greenfield start-up, Acquisition,
Licensing and Joint Ventures, the first two being wholly owned subsidiaries and the latter two partly
owned subsidiaries.
To find what is the effect of the Japanese culture on the selection of an entry mode for a Western
country based MNE moving their production to Japan, the different kinds of entry modes need to be
defined. Afterwards the effect of culture on the selection of entry modes will be researched,
followed by applying the differences in Western and Japanese culture to the different entry modes.
Wholly owned subsidiaries as well as Joint Ventures both have some advantages and disadvantages,
the cultural gap between western companies and Japanese companies will always keep playing an
important role. To answer the question which entry mode a MNE should choose when moving part
of their production to Japan the MNE should first consider whether they are willing to give up part of
the control over the operations. If they are willing to do so I would recommend a Joint Venture with
a local partner in Japan. Especially when looking at the high cultural distance which has been
associated with low rates of Joint Venture failure, and the high failure of western managers in Japan
when entering a country by a Greenfield start-up or Acquisition.
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PREFACE
This thesis is written as a final assignment for the bachelor International Business Administration at
Tilburg University. I would like to thank the board for giving me the possibility of writing this thesis,
and I would especially like to thank my supervisor Shaoyang Xu, for guiding me through the process
of writing a thesis.
2
TABLE OF CONTENTS
Management Summary
1
Preface
2
Table of contents
3
1.
4
2.
Introduction
1.1 Problem indication
4
1.2 Problem statement and Research questions
5
1.3 Research methods
5
1.4 Academic and managerial relevance
6
1.5 Structure of the thesis
6
Entry modes
7
2.1 Identifying the different entry modes
7
2.2 wholly owned subsidiaries
8
2.3 Shared ownership
3.
11
Culture and Entry modes
13
3.1 The influence of culture on entry modes
4.
13
Culture in the work environment
15
4.1 Japanese Culture versus Western culture
5.
6.
7.
15
Entry mode selection
18
5.1 japanese culture and Wholly owned subsidiaries
18
5.2 japanese culture and shared ownership
19
Conclusion and recommendation
21
6.1 Conclusion
21
6.2 Recommendation
22
Reference list
23
3
1. INTRODUCTION
1.1 PROBLEM INDICATION
In the pursuit of getting the best competitive advantage every company faces the challenge of
reducing cost. To do so, companies can go to foreign countries which have lower labor costs, more
knowledge, or a higher level of technology. Dutch companies like maxi-cosy and Philips for example
buy parts of their products in Japan, because Japanese companies can produce quality products at a
low price. (Muskens, 2001)
When a Multinational Enterprise (MNE) moves activities to Japan there are different entry modes to
enter the country: Greenfield start-up, Acquisition, Licensing and Joint Ventures. Each of these entry
modes has different characteristics, some positive and some negative. “Identifying the appropriate
entry mode in a given context is necessarily a difficult and complex task. The choice, however, is a
critical determinant of the likely success of the foreign operation” (Davidson, 1982) (Killing, 1982)
(Root F. R., 1987)
With only a definition of entry modes it is still difficult for a company to enter a foreign country like
Japan. There are many more factors influencing whether a MNE can, should or would enter another
country, e.g. laws, competition, knowledge and culture. One of the biggest boundaries a MNE has to
face before deciding to move activities to Japan is the difference in culture. The difference in culture
does not only affect social life, but influences the way they do business as well. As (Brouthers &
Brouthers, 2000) explain in their research; “the cultural context helps to define profit potentials
and/or the risks associated with a specific market entry”, Trying to understand the Japanese culture
and how it influences the entry modes to Japan is of great concern, before making the final decision
about the entry mode to chose.
When searching for information about entry modes, the effect of culture on entry modes and the
Japanese culture there is no end to the amount of sources. All of the individual subjects have been
researched and have been published. One of the problems with these sources is that the difference
in the amount of entry modes and the definition of the entry modes. Another problem is that the
three subjects have not been combined together and therefore require a great amount of time to
apply in the business environment. This thesis will help Western MNE’s to make the move to Japan.
4
1.2 PROBLEM STATEMENT AND RESEARCH QUESTIONS
What is the effect of the Japanese culture on the selection of an entry mode for a Western country
based MNE moving their production to Japan?
To find an answer for this problem the different kinds of entry modes need to be defined. Afterwards
the effect of culture on the selection of entry modes will be researched, followed by applying the
differences in Western and Japanese culture to the different entry modes.
Research questions:
1. What are the characteristics of the different entry modes based on ownership level; Greenfield
start-up, Acquisition, licensing and Joint Ventures?
2. What is the influence of culture on entry modes?
3. What are the main differences between Western and Japanese culture focusing on the work
environment?
4. What is the influence of the differences in culture on the selection of an entry mode?
1.3 RESEARCH METHODS
Research design:
The type of research done for this thesis will be a descriptive research based on a literature review.
The main concepts to research are the different types of entry modes. The differences between the
Dutch and Japanese culture will be applied to the entry modes in an attempt to find which entry
mode fits an MNE best in order to move activities to Japan
Data collection:
Data collection will be done via, by the University of Tilburg recommended sources. In cooperation
with the Library of Tilburg University the department Organization & Strategy made an information
portal with information about general and 8 specific databases, referencing, and information about
the library itself. The link to this information portal is:
http://www.tilburguniversity.nl/services/lis/portals/bachelorthesisOaM/
The databases of interest are e.g. ABI/Inform or the Web of science. Key words for searching for
information in these databases will be “entry mode”, “culture”, or “Japan” The journals found in
these databases are of high quality and therefore useful for this research.
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1.4 ACADEMIC AND MANAGERIAL RELEVANCE
The academic relevance of this research is based on the fact that there is a lot of information about
the individual topics. There are papers about the different entry modes, about the effects of culture
on entry modes and on the Japanese culture (in the work environment), but none of these papers
combine all three of the subjects.
The managerial relevance of this research is found in the fact that companies try to move activities to
Japan, but it is difficult to find and combine all information about this topic. In this thesis they could
find the answer or advice to the question on how to move activities to Japan. The conclusion should
be applicable right away.
1.5 STRUCTURE OF THE THESIS
1. Introduction
This will give a brief introduction of the topic and the research.
2.
Entry modes
This chapter will describe the different kinds of entry modes with their characteristics.
3. Culture and Entry modes
This chapter will describe the influence of culture on entry modes and, if possible, the effect on every
individual entry mode; Greenfield start-up, Licensing, Joint Ventures and Acquisitions.
4. Western and Japanese Culture
This chapter will first describe the Japanese culture with the focus on the culture in the work
environment, followed by the influence the Western culture in this area.
5. Influence of Culture
This chapter will describe the influence of the differences in culture described before on the different
entry modes.
6. Conclusion and recommendation
This chapter will describe the conclusion of the research; the influence of the Japanese culture on the
choice of an entry mode.
7. Reference list
6
2. ENTRY MODES
2.1 IDENTIFYING THE DIFFERENT ENTRY MODES
MNE’s willing to migrate part of their operations to a foreign country can use different approaches;
many of which have been described in papers and many which still need to be researched. Anderson
& Gatignon (1986) classified seventeen different modes of entry, according to Agarwal & Ramaswami
(1992) only four of are commonly used in research concerning Entry modes; Exporting, Franchising,
Joint Venture, and Sole Venture/Greenfield start-up. Chen & Mujtaba (2007) found the entry modes
to vary in three different major aspects
a) Cost as resource commitment; the costs involved in the resources needed to acquire and/or
operate the new subsidiary. Looking at the four entry modes by Agarwal & Ramaswami
(1992), cost as resource commitment from high to low is: Greenfield start-up, Acquisition,
and then Joint Venture and with the lowest resource commitment Exporting.
b) Control as level of ownership; Control can be described as a firm’s need to influence the
operations of the new subsidiary. From high to low: Greenfield start-up and Acquisition first
then Joint Venture and with the lowest level of control Exporting.
c) Risk related to the level of resources committed and the complexity of the environment
entered; the risk a MNE takes by committing resources to the new subsidiary and the
complexity of the new environment in which the subsidiary is going to operate. Greater
control requires higher resource commitment and may raise the level of risk. From high to
low; Greenfield start-up and Acquisition first then Joint Venture and with the lowest level of
risk Exporting.
Research done by Pedersen, Petersen, & Benito (2002) shows one out of six companies switched
their entry mode within a five year period, and more companies would do so if switching costs were
lower or absent. This makes the correct selection and up to date knowledge of the different entry
modes essential to migrating operations to foreign countries.
Kogut and Singh (1988) and Hennart (1988) divide the different entry modes in two categories:
Wholly owned subsidiaries (wholly owned Greenfield subsidiaries and Acquisitions) and partially
owned subsidiaries (Joint Ventures).
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2.2 WHOLLY OWNED SUBSIDIARIES
“Wholly owned subsidiaries are companies which may have publicly traded preferred stock
and debt, but all of its common stock is owned by a parent company and is unavailable for
purchase. For a company expanding to a foreign country there are different methods to
acquire a wholly owned subsidiary; a Greenfield start-up, an Acquisition of an existing
company or a brownfield start-up (which can be described as a hybrid of the two mentioned
before.)” (Cheng, 2009)
To wholly own a subsidiary the common stock has to be owned by one company. For a Greenfield
start-up this can easily be done because the subsidiary is build up by the parent company, which
means they just should not sell their common stock. For an Acquisition this means the parent
company needs to buy all of the common stock from the selling party. A majority of stock does not
suffice; this does give control over the company, but does not mean the company is wholly owned by
the buying company.
“The choice of appropriate mode of entry into new markets is a key strategic decision for
international business. A Greenfield project gives the investor the opportunity to create an
entirely new organization specified to its own requirements, but usually implies a gradual
market entry. An Acquisition facilitates quick entry and immediate access to local resources,
but the acquired company may require deep restructuring to overcome a lack of fit between
the two organizations.” (Meyer & Estrin, 2001)
When starting up a new company the parent company has the opportunity to have design it
completely to their own wishes. Not only can the layout of the company and the location be
selected, personnel and management have to be installed and can be handpicked by the parent
company. This has the advantage of being completely adapted to their wishes, but does also mean
the complete supply chain has to be set-up, which takes up a lot of time, effort and money. When
acquiring an existing company the supply chain, personnel and management can still be intact and
can continue to operate, but if the parent company does decide to adapt this to their wishes an
Acquisition can also take up a lot of time, effort and money.
Greenfield start-up
Chen in 2006 describes a Greenfield startup as followed: “A Greenfield entry into a foreign market
involves the establishment of a new affiliate in a host country by another firm headquartered outside
the country, alone or with one or more partners” Brouthers & Brouthers (1999) say: A Greenfield
start-up is a company completely created by the mother company, without any bases of a previous
company. They researched the influence of institutional, cultural and transaction costs on the
8
percentage of ownership a MNE would desire in a foreign venture and also found that “organizations
which have developed strong intangible capabilities, especially in the areas of technology and
international operations, may be able to more readily leverage these capabilities through Greenfield
start-ups. Greenfield ventures appear to enable firms to more easily exploit these types of
competitive advantages, increasing market positions at lower costs than firms lacking such
advantages”. (Brouthers & Brouthers, 1999)
Acquisitions
The Acquisition entry in a foreign market is defined as the purchase of the stocks of an established
firm in the host country by another firm headquartered outside the country, alone or with one or
more partners, in an amount sufficient to confer control. (Cheng, 2009).
Hennart and Park (1993) did an empirical study about the choice between a Greenfield start-ups and
Acquisitions and concluded Greenfield start-ups are more commonly chosen by MNE’s when the
scale of the operation is relatively small. Greenfield start-ups offer less risk in terms of organizational
control and which makes it safer to operate. “They also choose Greenfields when they intend to
manufacture a product they already manufacture at home.” (Hennart & Park, 1993). Knowledge
about the production process is already known, thus the choice for a subsidiary with a high sense of
control is the logical one. For Industries characterized by very high or very low growth Acquisitions
are a better choice, since Acquisitions allow quicker entry, and they do not add to capacity. Two
other reasons they found to choose an Acquisition over a Greenfield start-up are: “that the target
firm represents a "bargain" for the acquirer, i.e., that the value of the assets acquired is lower than
their replacement cost. Another possibility is that the investor can leverage its firm-specific
advantages more effectively through an Acquisition than through a Greenfield entry.” (Hennart &
Park, 1993). Table one, on the next page, shows three special types of Acquisitions (staged, multiple
and indirect Acquisition) and their description, compared to Brownfield start-ups.
Brownfield start-up
Like mentioned before, the parent company in an Acquisition may choose to install new
management, personnel and/or supply chain. According to Meyer & Peng (2005) this has led to many
Acquisitions where foreign partners transfer more additional resources to the new venture than
those contributed by local firms, such that the local operations are entirely transformed. Thus,
Acquisitions after only a few years may resemble Greenfield projects. In some situations, notably in
emerging markets, the restructuring of an acquired company is so extensive that the new operation
resembles a Greenfield investment. We term such investment “brownfield”, and present it as a
hybrid mode of entry.
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Table 1: Different types of Acquisitions
Staged Acquisition
Multiple Acquisition
Indirect Acquisition
Brownfield start-up
Description
Purpose
Example
Initially acquiring only an
equity stake, and
gradually increasing
equity to 100 per cent,
possibly over several
years.
Acquiring several
independent businesses,
and subsequently
integrating them.
An Acquisition outside
the focal country with an
affiliate in the same
emerging economy.
Continued involvement
of previous owners that
are unwilling to sell
outright, or needed to
maintain legitimacy with
local stakeholders.
Build a strong market
position in a traditionally
fragmented market.
Carlsberg Okocim in
Poland, 1986e2004
The prime objective may
be outside the country.
The affiliate may
motivate the Acquisition,
but this is rare.
Equity stake in Baltic
Beverage Holding
acquired through
Carlsberg-Orka merger.
An Acquisition in which
the foreign investor
subsequently invests
more resources in the
operation, such that it
almost resembles a
Greenfield project.
Access to crucial local
assets under control of
local firms that are in
many other ways not
competitive.
Not observed in the
Carlsberg case
SOURCE: (MEYER & TRAN, 2006)
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Carlsberg Poland,
since 2001
2.3 SHARED OWNERSHIP
The most commonly used option to share ownership between two companies is a Joint Venture,
another method is franchising. With a Joint Venture companies combine efforts to run a company,
where with franchising a “license” is bought to use the franchisers’ brand name, experience,
marketing and market position.
Joint ventures
“A Joint Venture is a special mechanism for pooling complementary assets owned by separate firms.
In most Joint Ventures the parent firms combine part or all of their assets into a legally separate unit
and agree to share the profits from the venture.” (Balakrishnan & Koza, 2004). Joining efforts with
another company does, next to sharing the profits, also mean sharing control over the new
operation. Hennart (1988) explains in his research Joint Ventures, versus wholly owned subsidiaries,
are more efficient when two requirements are met:
a) Markets for the intermediate goods (know-how, raw materials, parts and components, etc.)
held by each party are failing. Working together can reduce costs incurred when selling
products from one partner to another.
b) Acquiring or replicating the assets yielding those goods is more expensive than obtaining a
right to their use through a Joint Venture agreement. So working together is less expensive
than buying (the right to use) the machines and producing them their selves.
One of the most significant problems a Joint Venture faces is the problem of opportunistic behavior.
Williamson describes opportunism as: an effort to realize individual gains through a lack of candor or
honesty in transactions. According to Williamson (1973) this can take one of two forms:
a) Strategic disclosure of asymmetrically distributed information by (at least some) individuals
to their advantage. When both entities in a Joint Venture do not get the same information,
they do not have symmetric information; the entity with the complete information can use
this to gain an advantage over the other entity.
b) Impossibility of extracting self-enforcing promises to behave "responsibly", where winners
of original bids acquire firm-specific experience which places them at a cost advantage in
relation to non-winners on subsequent rounds of negotiation. Having knowledge about
processes done by the collaborating company could offer possibilities to negotiate a better
contract in the next term.
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Hennart and Reddy (1997) show four reasons why to choose a Joint Venture over an Acquisition:
a) Indivisibilities, a partner’s desired assets are linked to its non-desired assets; this makes
Acquisitions costly, but does not cause problems for Joint Ventures. When a company is only
interested in (a) part(s) of another company an Acquisition has unwanted “byproducts”.
Parts of the company which are not needed can be sold, but this can be much less than the
costs made to acquire them. In a Joint Venture the unwanted parts will remain part of their
parent company and might even still be used by the parent company.
b) Management costs, when a foreign firm acquires a local firm, it acquires an existing corps of
employees, with their own routines and culture. Like mentioned before, Integrating such
employees can be difficult, particularly so if there are cultural differences between the two
firms.
c) Difficulties in assessing the value of the target firm, Joint Ventures are an efficient vehicle for
reducing these information costs because it makes it possible both to gather additional
information on the value of the partner’s assets and to rescind the relationship at relatively
low cost.
d) Governmental and institutional barriers, in some countries foreign Acquisitions are banned in
some or all sectors, or are made difficult legal restrictions on voting rights, cross-holdings
(Japan), and bank and family control.
Franchising
“In franchising the foreign entrant (the franchiser) receives royalties from the host-country
collaborator (the franchisee) and supply-chain markups.” (Erramilli, Agarwal, & Dev, 2002) The
franchisee buys the rights to open an already existing company (in a foreign country). In return for
the license which is bought “the franchiser typically leases its brand name, and provides marketing
support, technical advice and training, to the franchisee.” (Erramilli, Agarwal, & Dev, 2002). The
franchiser usually has little control over the daily operations within the franchisee’s company.
However, there are many exceptions within a specific franchising contract and the franchiser might
demand some strategic control.
Since franchising is not really an option for a MNE moving part of production to Japan, the main
focus further on in this thesis will lay on wholly owned subsidiaries and Joint Ventures.
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3. CULTURE AND ENTRY MO DES
Culture is hard to define, not only because there still is uncertainty whether human traits are learned
or genetically passed on for generations, but also because there are many different factors which
influence culture.
Hofstede (1980) describes culture as the homogeneity of characteristics that separates one human
group from another. Culture provides a society's characteristic profile with respect to norms, values,
and institutions that affords understanding of how societies manage exchanges. This shows culture is
important when companies move to foreign countries, since exchanges are important when trying to
set up and run a company. Different cultures will have to understand how to manage exchanges. Not
only the national culture should be considered, but also the corporate culture of the companies
involved.
Another discription of culture by Schwartz (1999) states: “At the national level, culture is an
aggregate of individual values. As personal experiences and shared societal values shape the views of
individuals equally, there might be variation in their value priorities. The concept of culture at the
national level attempts to capture the typical individual value priorities in a society, which reflect the
central thrust of their shared enculturation”. In comparison with Hofstede’s description, which states
everyone within a culture is the same, this leaves room to account for differences within one culture.
This chapter will show the influence of culture on the different entry modes.
3.1 THE INFLUENCE OF CULTURE ON ENTRY MODES
Kogut and Singh (1988) concluded in their research that entry mode selection is influenced by
cultural factors. When economic choice is compared for companies which operate in different
countries, cultural characteristics are likely to have a significant influence. According to Tihanyi,
Griffith, & Russell (2005) the study of principal differences in national cultures between the home
country of MNEs and their countries of operation, that is, cultural distance, has gained a broad
interest in international business research.
More and more researchers try to find the connection between cultural differences and costs and
success of companies moving to a foreign country. Cultural distance can be described as: the
differences in culture, national or corporate, between the foreign country and the host country. The
higher the cultural distance between the host country and the foreign country, the higher the
difficulty of working together with a company in that country, employees or managers from that
13
country. “Often cultural distance is one of the main reasons for a company to choose an entry mode
with low commitment, in order to avoid the biggest problems cultural distance can pose.” (Root F. R.,
1987) Kogut & Singh, (1988) also see a preference for Joint ventures over wholly owned subsidiaries
with high cultural distance. Bendix (1956), Lincoln, Hanada, & Olson (1981) show that manager will
choose an entry mode and a management (style) which has the lowest costs. Cultural difference
results in different organizational and administrative practices, employee expectations and increased
costs. They expect the more cultural distance between countries exists the more distant their
organizational practices.
Adapting to local cultural values that are transmitted through nations' political economy, education,
religion, and language may create an additional burden for MNEs operating in different countries
(Schwartz, 1999). Shane (2006) found that there is a linkage between economic and sociological
views of multinational corporations. While economic forces are probably of greater importance than
cultural ones in motivating direct foreign investment culture appears to have some explanatory
power. Barkema, Bell and Penning (1996) found that firms entering the global game of FDI face
cultural adjustment costs, especially when they engage in double layered acculturation such as in the
case of Acquisitions and majority and 50/50 Joint Ventures. “The majority of these studies have not
examined mode performance. Many of the normative studies that examine entry mode performance
contend that ownership-based modes such as Acquisitions, Joint Ventures and new ventures perform
poorly.” (Woodcock, Beamish, & Makino, 1994). Wilson (1980) in his study found there are different
patterns of Acquisition among countries with different cultures, he specifically exanimated American,
British and Japanese corporations.
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4. CULTURE IN THE WORK ENVIRONM ENT
Like mentioned before, culture has influence on the way people work together; the employeeemployee relationship, the employee-manager relationship, and the manager-employee relationship.
But how much do the Japanese culture and the Western culture really differ? “Japan is an Eastern
country equivalent to the U.S. in terms of economic status. Its capitalistic philosophy began as early
as the Meiji restoration of the late 1860s” (Christopher, 1983; Whitehill, Japanese management:
Tradition and transition, 1991), so in order to keep growing they will have to be able to work
together with western countries.
4.1 JAPANESE CULTURE VERSUS WESTERN CULTURE
Japanese and western cultures have evolved over centuries of history to what they are today. Over
the years one of the biggest influences on culture is the religion of a country. According to Dollinger
(1998) Buddhism and Taoism are the primary religions of the Eastern cultures. Moreover, “Japan is a
complex society combining Buddhism, Shintoism and Confucianism with the artifacts of
modernization.” (Dollinger M. J., 1988). Dollinger (1988) describes Japanese Confucianism as an
entity with four distinct themes:
a) Confucianism is a humanistic philosophy and the human being is regarded with dignity and
respect.
b) Confucianism inculcates the values of harmony with its concurrent emphasis on loyalty,
group and family identification, and the submergence of the individual.
c) Righteousness and the acts of righteous individuals.
d) There is the integrating theme of the morally superior person, the Chun-Tzu, who leads by
example and is devoted to the other Confucian values.
Western cultures are based on their history with the Judeo-Christian religion. The Protestant Work
Ethic epitomizes the Judeo-Christian emphasis on personal achievement and individual self-worth
(Stanford Wayne, 1989) Which is a fundamental difference with “Japan's 'familial' or 'group-oriented'
culture” (Florida & Kenney, 2007)
15
Like mentioned before, japan adapted to a capitalistic economy at the end of the 1860s. “Capitalism
has been described as a self-serving economic system where everyone looks out primarily for his/her
own self-interests, while socialistic philosophy teaches that the good of all is everyone's concern”
(Ralston, Holt, Terpstra, & Kai-Cheng, 2008)
FIGURE 1: A TWO BY TWO MATRIX COMPARING COUNTRY CULTURE AND IDEOLOGY.
SOURCE: (RALSTON, HOLT, TERPSTRA, & KAI-CHENG, 2008)
This figure shows a contrast between beliefs within Japan; “Japan has an economic ideology that is
more individualistic-oriented and a national culture that is more collectivistic-oriented” (Whitehill,
1991). Ralston et al. (2008) concluded that when they looked at their values, in terms of Hofstede's
(1980) initial analysis of the Individualism-Collectivism values construct – their dependent measure,
the United States scored highest on the dimension of Individualism, while Japan ranked lower than
the U.S. they still ranked high. Lincoln states that “Today the company is the dominant corporate unit
in Japanese society, but in times past similarly strong integration and identification with family,
community, and nation-state have been the norm.” (Lincoln & Kalleberg, 1985)
“A pervasive theme in studies of Japanese work life and organization has been the
extraordinary commitment, identification, and loyalty Japanese employees exhibit toward
their firms. Low rates of industrial conflict, absenteeism, and turnover combined with high
worker productivity and production quality have given rise to a worldwide image of the
Japanese as wholly devoted to the success of their companies. “ (Lincoln & Kalleberg, 1985)
The table on the next page shows some of the major difference between the Japanese culture and
the Western culture.
16
Religious influence
Focused on
Company loyalty
Job satisfaction
Absenteeism
Worker productivity
Quality
Economy
Japanese culture
Buddhism and Taoism
Group
High
Low
Extreme low
Extreme high
High
Capitalistic
TABLE 2: JAPANESE AND WESTERN CULTURE COMPARED
17
Western Culture
Judeo-Christian
Individual
Low
High
Low
High
High
Capitalistic
5. ENTRY MODE SELECTION
As described before entry mode selection is an essential part of the success of MNEs moving (part) of
their operations to a foreign country. Western and Japanese culture have some similarities but the
commitment of personnel differs quite a bit. This chapter will explain which entry mode fits best for a
western MNE when it wants to move part of its production to Japan.
5 .1 JAPANESE CULTURE AND WHOLLY OWNED SUBSIDIARIES
Japanese culture in the work environment does differ with Western culture, but this could have a
positive effect. Japanese are more devoted to the company they are working; this would mean they
need lower incentives to stay at the company (e.g. bonuses, days off), they are less likely to call in
sick and they have high productivity. For an MNE to be able to fully employ these factors in their
advantage an existing company in Japan, with personnel and (sub) management can be acquired.
According to Kogut & Singh (1988) the problem with integrating an already existing foreign
management with the management style required by the parent company is difficult. If a MNE does
decide to acquire an existing company it can still decide to change to current management by a
management they like. The problem with changing the management of a company is that there are
already many costs involved to the Acquisition of a company, changing management only increases
costs (e.g. training costs, interviewing costs). Studies done by Jemison and Sitkin on Acquisitions have
shown that post-Acquisition costs are substantial and are influenced by what they call the
organizational fit ("the match between administrative practices, cultural practices, and personal
characteristics of the target and parent firms" (Jemison & Sitkin, 1986) ) of the two firms. The New
management should be able to work together with the Western parent company, but should also be
able to work with their Japanese employees. For a Western MNE this would be a reasonable option.
Installing their own management and doing so preserving their specific management style should
prevent cultural difficulties between the headquarters and the subsidiary.
When a MNE decides to enter a country by building up their own factory there they avoid discussion
about integration and management style. “A wholly owned Greenfield investment avoids both the
costs of integration and conflict over sharing proprietary assets by imposing the management style of
the investing firm on the start-up while preserving full ownership.” (Kogut & Singh, 1988) This gives
MNEs the opportunity to pick their own management, which has a western management style or
they could even install managers from a western country. The problem with installing a Western
manager in Japan to avoid cultural differences between the parent company and the new subsidiary
is the cultural difference between the management and the employees. Studies done by Baker &
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Ivancevich, (1971) and Tung (1981) have shown that 20 to 40 % of the managers send out to run a
foreign subsidiary return early because they could not successfully manage their employees. Lannier
(1979) found even higher numbers of failed managers after he included managers which did not
return early, but which did perform below standard. Adams & Kobayashi (1969) found that 80% of
the managers were considered a failure by their headquarters. One study (Seward, 1975) even
suggests that 90% of the managers were significantly less successful in Japan than they were in their
previous assignment in their home countries.
In order to find out which option to choose to obtain a wholly owned subsidiary, Brouthers and
Brouthers (1999) were able to form a model which can be used to predict a firms’ choice between
Acquisitions and Greenfield start-ups in international expansion which includes institutional and
cultural variables, as well as transaction cost. Their work also “provides support for the perspective
that organizations which have developed strong intangible capabilities, especially in the areas of
technology and international operations, may be able to more readily leverage these capabilities
through Greenfield start-ups. (Brouthers & Brouthers, 1999). These are all non-cultural factors. If fact
Brouthers and Brouthers (1999) could not significantly prove cultural difference influenced the
choice between Acquisitions and Greenfield start-ups.
So, when a MNE decides to move part of their operations to Japan, the choice between a Greenfield
start-up and an Acquisition depends on the development of intangible capabilities, the costs made to
overcome cultural differences and the selection of management.
5.2 JAPANESE CULTURE AND SHARED OWNERSHIP
Park and Ungson, (1997) concluded in their research that high cultural distance has been associated
with low rates of Joint Venture failure. Stopford and Wells (1972) found that, when looking at the
core product of a company, Joint ventures were less likely to be chosen in comparison to wholly
owned activities. They also concluded the more experience a company has doing business in a
foreign country, the smaller the chance is they choose to enter the country with a Joint Venture. The
same applies for companies with a high marketing, advertising, research and development intensity,
they are discouraged to use Joint Ventures. For an MNE willing to move part of production to Japan,
but not going to sell their product in Japan, the intensity of marketing, advertising, research and
development does not concern the local partner, so a Joint Venture still is a good option, especially if
high cultural distance does not have a negative effect on the success of Joint Ventures.
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A Joint Venture with a company in a foreign country is an easy option to avoid difficult entry borders,
and difficulties between management and personnel. “A Joint Venture resolves the foreign partner's
problems ensuing from cultural factors, though at the cost of sharing control and ownership.
Unquestionably, a Joint Venture is affected by the cultural distance between the partners. But such
conflict should not obscure the original motivation to choose a Joint Venture because the initial
alternative of integrating an Acquisition appeared more disruptive than delegating management
tasks to a local partner. Of course, a Joint Venture may be troubled not only by the cultural distance
of the partners, but also due to concerns over sharing proprietary assets” (Kogut & Singh, 1988) This
study shows cultural differences are also a problem with Joint Ventures, not at the manageremployee level, but between management of the two co-operating companies.
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6. CONCLUSION AND RECOM MENDATION
6.1 CONCLUSION
The answer to the problem statement: “What is the effect of the Japanese culture on the selection of
an entry mode for a Western country based MNE moving their production to Japan?” is not as clear
as required to give a definitive conclusion. There are different questions a MNE should answer before
making the move to Japan:
a) Are there special circumstances like strong intangible capabilities, especially in the areas of
technology and international operations, which have a big influence on the choice of an
entry mode? MNEs with strong intangible capabilities are more likely to start-up a Greenfield
subsidiary.
b) Are they willing to share ownership? If it is a problem for a MNE to share ownership with
another company, the choice of entry mode is limited. A Joint venture would be best in this
case. Joint ventures largely avoid the cultural gap between Japanese culture and Western
culture. Since both cultures are capitalistic both companies should be able to work together
and define shared goals.
c) Are they experienced in Japan? If a MNE already has experience in Japan and/or with the
Japanese culture it should be easier to work around cultural differences and start-up or
acquire a company. The selection between the two wholly owned subsidiaries depends on
special circumstances like mentioned in section a)
Culture influences the selection of an entry mode. Wholly owned subsidiaries as well as Joint
Ventures both have some advantages and disadvantages, the cultural gap between western
companies and Japanese companies will always keep playing an important role. Dubin (1975) found,
in contrast to Joint Ventures, that there is an increase in the use of Acquisitions when cultural and
physical barriers between the home and host countries are low and the more experience the firm has
in the foreign market. For Japan and western countries the cultural barriers are significant, which,
according to Dubin, means most companies decide to start a Joint Venture with a local partner,
taking into account that there is little experience in working in Japan. Like mentioned before high
management failure makes it hard to have a wholly owned subsidiary, this can be avoided by starting
a Joint Venture with a local partner
The answer to the question; “What is the effect of the Japanese culture on the selection of an entry
mode for a Western country based MNE moving their production to Japan?” Japanese culture differs
21
in with Western culture at such a level that it is best to try to avoid having to adapt to Japanese
Culture. This can, most easily, done by joining efforts with a local partner in a Joint Venture.
6.2 RECOMMENDATION
To answer the question which entry mode a MNE should choose when moving part of their
production to Japan the MNE should first consider whether they are willing to give up part of the
control over the operations. If they are willing to do so I would recommend a Joint Venture with a
local partner in Japan. Especially when looking at Park and Ungson, (1997) who concluded that high
cultural distance has been associated with low rates of Joint Venture failure, and the high failure of
western managers in Japan when entering a country by a Greenfield start-up or Acquisition.
If a MNE is not willing to give up control, the choice between a Greenfield start-up and an Acquisition
depends on the development of intangible capabilities, the costs made to overcome cultural
differences and the selection of management. “Organizations which have developed strong
intangible capabilities, especially in the areas of technology and international operations, may be
able to more readily leverage these capabilities through Greenfield start-ups.” (Brouthers &
Brouthers, 1999)
For future research it is recommended to do an empirical study in Japan amongst Western and
Japanese managers as well as Japanese employees in a subsidiary of a Western MNE to find out
which factors according to them influence their success or failure in Japan. The results should prove if
the factors influencing the success are cultural factors or if they are only economic and strategic
factors.
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