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Government and Economy

Timid Investment.. leads Japanese Companies to Success !?

Yasuaki Mutoh
professor at Waseda University , Faculty of Sport Sciences.

Reason for contribution to profits by equity method affiliates

It is an interesting phenomenon amongst Japanese listed companies that the percentage of earnings from equity method affiliates has been increasing recently in the profit-and-loss calculations on a consolidated basis. Apparently, such a trend is observed more frequently in global corporations, suggesting that overseas equity method affiliates contribute significantly. I call these direct investment activities by Japanese businesses "timid investment." If oversees entities are able to secure sufficient profits, they should be established as wholly-owned subsidiaries, but facts differ. This is because I refer to their behavior as "timid." I believe that if parent companies decrease their controlling interest, additional profits can be created.

Why? Because investment by local investors facilitates their involvement and efforts in management. Wholly-owned subsidiaries function under the control of the Japanese parent companies. Subsidiaries are likely to produce more money if local investors are effectively and successfully involved in the establishment of logistic channels and matters related to government approvals while expecting profits.

This applies to both the executives of subsidiaries in addition to investors. In fact, a majority of local Japanese companies are not publicly traded. Incentives for their executives are not dividend or stock options but result-based annual income. If these incentives successfully stimulate motivation of the executives, corporate performances will increase. Otherwise, fixed annual income will be unlikely to motivate them. Within this context, the annual income of executives in local subsidiaries of the group that produce successful results is higher than those of the parent company based in Japan, even the president.

Attitudes of local executives are sufficiently different from Japanese counter parts. Generally, Japanese employees work for the company on a long-term employment basis, although the situation is currently changing moderately. Mentality is identical between board directors who joined the company from the beginning of their career and employees. When posts or roles are assigned to them, they pay maximum efforts to contribute to the company even though their income is fixed. Why? Because the results achieved promise them the next post. Even if such promotion is not the case, many Japanese employees work hard. In overseas subsidiaries, controlling interest of the parent company is comparatively low and annual income of some executives is higher than the presidents of the parent companies. This suggests that overseas subsidiaries employ a mechanism for profit, which is based on motivation different from that of the Japanese.

Diverse Merits of Timid Investment

Timid Investment has other merits. For instance, when the share percentage of local investors is set below that of Japanese companies, local stockholders will no doubt seek their dividends. However, if their share were over half, there is a high possibility that they will re-invest part of the interest in anticipation of receiving greater dividends in the future based on the assumption that the absolute value of dividend is sufficiently large.

Another merit is the little risks involved. Diversified investments reduce risks. As business investments are based on business strategies, it may not be necessary to treat them in the same way as the diversified investments of stocks. However, because, investments in companies are a form of stock investments, such investment style of Japanese companies reduces risks. Distributing investment resource of the same amount means that business investments can be diversified.

Birth of New Group Management Styles

The drawing breaks down the business management of group companies according to their investment ratio (power of domination) and business management style. The basic style of group management has been American style in the second quadrant of the illustration. By establishing 100% subsidiaries which are under the complete business control of parent companies, penetration of strategies is realized.

In contrast, most Japanese companies do not own 100% of group company shares looking back at the history of the country (quadrant I). Some of these reasons are lack of capital, customary for subsidiaries to list, and so on. Japanese parent companies have instead controlled the human resource of group companies to realize penetration of business strategies. In the sense, business management is centralized in the parent company, Japanese companies actually resembled American companies.

Recently, an interesting phenomenon is the buying of European and American companies by Indian companies (group companies). Indian companies own 100% of their shares, and management had left to current management teams at home. Top officials at the original European and American companies which have now becomes subsidiaries are promoted within the corporate group if they are successful, earning high income. This means not only are the companies bought, but so are the personnel that come with the companies. Such styles are based on the fact that the business and management know-how of subsidiaries is absent at the investing side (quadrant III).

The Timid Investment of Japanese companies lies in quadrant IV. Share percentage is small, and management also respects the local subsidiaries. Although Japanese companies remain quadrant I in Japan, they are IV in overseas (Of course some have 100% subsidiaries offshore, so not all are applied), interestingly they seem to be making use of the two sides appropriately. Quadrant III and IV can be called new styles. Although the behavior of Japanese and Indian companies has been acknowledged as the basic principle of group management, changes are being sought. The behavior of Japanese and Indian companies is being sought towards the basic principle of group management.

Yasuaki Mutoh
professor at Waseda University , Faculty of Sport Sciences.

Profile

Born in 1955
Graduated with master's degree from University of Tokyo, Graduate School.
Served as head researcher at Mitsubishi Research Institute, Inc. before assuming current position as professor at Waseda University , Faculty of Sport Sciences.
Currently holds concurrent position as director of Japan Professional Football League (J League) and chairman of Business Advisory Committee.
Specializes in management and sports management.

Publications

Holdings Company Management Facts (2nd edition) Nippon Keizai Shimbun 2007
Management Today PHP Editors' Group 2007
What is Fund Capitalism Toyo Keizai Shimbun 2005
Sports Finance Taishukan Shoten 2008
Management of Pro Sports Club Toyo Keizai Shimbun 2006, amongst others
(All of the above written without coauthor)