Why has it been so diYcult for companies in liberal market economies to adopt the management and production methods pioneered decades ago in Japan? Both FS theory and what we have just seen of the diYculties of transplanting suggest that the problem may be that many countries lack institutional environments suitable for the new methods. But, then, if the new production methods are so much better, why do institutions not change to suit them?
It will help us in answering this question if we consider not only the diYculties faced by American manufacturers as they were overtaken by Japanese competitors in the late twentieth century, but also the similar diYculties which had confronted British manu-facturers when they were overtaken by the Americans in the late nineteenth and early twentieth centuries. In the eyes of many, the British failure to complete this transition was still hurting it a century later (Elbaum and Lazonick 1986).
William Lazonick (1991) gives a history of institutions, corporations, and industrial production systems in Britain, America, and Japan. His theoretical framework is consistent with the neo-Schumpterian/re´gulation approach: the leading countries of a particular period are those which developed institutions that match the needs of the period’s cutting-edge production systems. Technology moves on, but the institutions of the once-ascendant countries may fail to do so:
Because of vested interests and the ability to compete by making adaptive responses using traditional technologies and organizations, the very business institutions that formed the foundations for the rise to industrial leadership in one era can and do persist to pose barriers to industrial transformation within the once-dominant economies. (Lazonick 1991, p. 24).
Consider, Wrst, America’s replacing Britain as the industrial leader. Britain’s ascend-ancy was a period of factories using craft methods; its family-controlled companies, heavy on skilled labor and light on professional management, were the core of what Lazonick calls ‘‘proprietary capitalism.’’ A shift to American methods of mass produc-tion and professional management would have threatened both the capitalist families and the skilled workers. As a younger industrial country, America lacked both the long-established companies and the pool of skilled manufacturing labor; it was a relative blank slate on which Wnanciers and the professional managers they hired could create scalable, mass production companies, and what we know as managerial capitalism.
The growth of mass production required a Wnancial system geared to corporate engineering. Wall Street provided this, while the City of London did not. The City’s clients (the families controlling Britain’s established manufacturers) didn’t want it;
London Wnance bestrode the world in the late nineteenth century, and felt no pressing need to change its practice in this way; and between the good supply of skilled labor and the poor supply of managers, it is not obvious that establishing Taylorist mass produc-tion in Britain would have been a sensible Wnancial investment, even if both industri-alists and bankers had been willing. Deidre (ne´e Donald) McCloskey (1973) is among those arguing that the corporate decisions leading to Britain’s relative decline were quite rational choices for proWt-maximizing investors to make.
Neither the British education system nor the American one did much to train skilled industrial workers. In Britain, however, the existing stock of skilled workers was replen-ished by a system of on-the-job training: boys who had left school in their early teens joined industrial companies as apprentices. America started with a smaller supply of skilled workers. Its unskilled manufacturing workers were usually fresh arrivals from agriculture, and many were new to the US and the English language as well. The adoption of manufacturing practices that did not require many skilled manual workers came easily.
But America’s emerging industrial system needed managers and clerks; these, unlike factory workers, could not be found in the ranks of poorly educated farm laborers. The American state made its contribution to the development of managerial capitalism by providing education suited to the needs of corporate administration. Although school enrollments rose in all countries as part of the process of industrialization, they rose faster in the US: in the nineteenth century, US primary school enrollments were ahead of most other countries; by 1910, the leading European countries had almost caught up with the US in primary enrollments, but local governments in the US – both cities and rural school districts – had started building high schools at a furious pace. In 1938, over 45 per cent of 17-year-olds in the US were enrolled in secondary school, compared with 4 per cent in Britain; in the late 1950s, these Wgures had grown to 63 per cent (US) and 9 per cent (Great Britain) (Goldin and Katz 1997). The same pattern was repeated with postsecondary (college and university) education.13
Limited neither by the desires, competencies, and fortunes of a founding family, nor by a need for workers with specialized skills, American companies were scalable in ways
140 THE GLOBAL ENVIRONMENT OF BUSINESS
that British companies were not. Not only were they able to achieve greater economies of scale, but they were better able to organize, and make use of, industrial R&D.
American managerial capitalism was therefore able to best British proprietary capitalism both in production costs and in innovation.
From the late 1960s onwards, Japanese companies showed themselves similarly able to beat their American competitors. Lazonick calls the system they developed ‘‘collective capitalism’’; among its accomplishments is the production system discussed earlier in this chapter. Why did American companies not simply follow the Japanese lead?
Lazonick points again to interdependencies between the system of Wnance and produc-tion. Although the separation of ownership and control was, in Lazonick’s estimation, the key to giving American managers the liberty to build large corporations, the separation was not complete. America’s corporate managers remained ultimately ac-countable to Wnancial markets, and this accountability was expressed through a focus on short-term Wnancial results. A short-term Wnancial focus can make a company an unreliable partner, whether for other companies or for its own employees.
The teamwork within Japanese companies is built on the long-term incentives provided by the expectation of stable employment and gradual promotion together with the specter of early retirement for underperformers. The trust required for a collaborative relationship between companies in corporate groups depends on the conWdence that the relationship will not be sacriWced for the pleasure of the shareholders.
This analysis may be surprising to readers accustomed to thinking that accountability to a ‘‘principal’’ – that is, to the shareholders or the judgment of Wnancial markets – is essential for corporate eYciency. If Wnancial ownership is separated from control to such an extreme extent that the CEO doesn’t care about the share price, what keeps the CEO from getting lazy, or from stealing everything? To see the plausibility of the argument, consider that the Japanese companies that were held up as models were in highly competitive international markets. (Other Japanese companies, serving protected domestic markets, were – and are – far less eYcient.) While executives may not have been accountable to shareholders, they were responsible for maintaining the employ-ment and earnings of those working for their company and for other companies in their group. The objectives of stability and steady employment growth, subject to the constraints imposed by competitive product markets, discipline executives and yet allow them to focus on the needs of the community of employees in the long term.
Alternatively, we might regard managers of Japanese companies in the way Masahiko Aoki (1980, 1984) does: not so much controlling the Wrm, as acting as mediators in a bargaining relationship between workers and shareholders. This still leaves the Japanese Wrm far less responsive to shareholder and stock market pressure than its American counterpart, and so remains consistent with Lazonick’s theory.
The institutional conWguration that made this system possible is the one that emerged in Japan after World War II. Before World War II, Japanese industry was dominated by a few
large, family-controlled corporate groups, called zaibatsu: Mitusi, Mitsubishi, Sumitomo, and so on. After the war, the American occupation authorities removed the families – many were implicated in war crimes – and broke up the zaibatsu. Yet, within a few years, the groups had reformed – but without the families in control. The reformed group – now with a new label, keiretsu – typically included a bank, which all companies in the group dealt with;
companies bought shares in other companies within the group. New groups also arose, headed by new industrial companies – Toyota, Sony – which had not been part of the old zaibatsu. The new groups tend to be deWned by the supply chains of their leading com-panies, and so are sometimes called vertical keiretsu. The older groups typically include companies in several unrelated lines of business, and so are called horizontal keiretsu.
Managerial control of the horizontal keiretsu has been reinforced by government policies which minimize the eVective legal rights of minority shareholders. The vertical keiretsu, having been formed after the war, are often eVectively controlled by the founding families of the lead Wrms. Yet even these companies are constrained by the need to compete within the rules of the Japanese labor market. Japan has a negligible social safety net; in an urban industrial economy this leaves employers with a large responsibility for social insurance, provided mainly in the forms of stable employment, out-placement in the event of early retirement, and lump-sum pensions. The long-term incentive system provided by the combination expected long-term employment and gradual promotion together with the threat of enforced early retirement for under-performers, has until recently been underpinned by a collusive understanding between employers that they will not poach employees. Thus, within the Japanese system, even a large company that is shareholder-controlled must operate under rules and norms designed for collective capitalism.
The essence of Lazonick’s argument is that, however superior collective capitalism might be in terms of cost, quality, or innovation (and the last claim, in particular, is a contentious one), it is not coming to America anytime soon: American Wnancial markets and American shareholders are powerful actors who are not about to sacriWce their interests on the alter of long-run productivity growth.