See related story:
Is Japan about to ride an M&A wave, or flounder in just a ripple?
Japan should embrace transition to a postindustrial economy, which will require the nation to review its traditional way of doing business as well as its education system, professors from U.S. business schools told a recent symposium in Tokyo.
All advanced industrialized economies, rather than resist the trend, should recognize that their future is not in traditional manufacturing, they said. Meanwhile, emerging economies like China and India are not content with making low-end, labor-intensive products but are investing heavily in human capital to move up the value chain, they added.
Six professors from business schools in the United States took part in the July 14 symposium at Keidanren Kaikan, organized by Keizai Koho Center under the theme, “Management and innovation that increase corporate value.”
Edward Leamer, a professor at the UCLA Anderson School of Management, said the transition from an industrial economy powered by manufacturing sectors to a postindustrial economy started in the U.S. in the 1970s, when the share of manufacturing in total American jobs began to sharply decline. Today, the share is down to about 11 percent.
In the U.S., contribution to GDP of the sectors that represented the traditional work of high-school graduates — manufacturing as well as agriculture, forestry, fisheries, transportation and warehousing, etc. — fell from roughly 40 percent right after the end of World War II to about 15 percent in 2002, he said.
The decline, he noted, has been offset by the growth of postindustrial, intellectual service activities like finance, insurance, real estate, rental and leasing, education services, health care, information and so forth.
“So we’re not a society that builds things any more,” Leamer said. The question, he added, is how to change business organizations and societies from a focus on manufacturing “as a source of wealth creation.”
Leamer emphasized that the trend is not just limited to the U.S. but common to most other OECD economies — albeit to widely varying degrees — as measured by the share of manufacturing in total employment.
Unlike the U.S., the share of manufacturing in total jobs in Japan was relatively stable during the 1970s and ’80s but began steadily declining in the early 1990s, Leamer pointed out.
“That’s the point where Japan started to enter the postindustrial period. . . . That’s the point from which Japan has to solve a new economic problem” of how to create value in the intellectual services, he observed.
So far, the U.S. is the only country that appears to have made a successful transition to a postindustrial economy, Leamer said, citing labor productivity data as evidence.
During the period between the end of World War II and 1970 — when employment in manufacturing was rising — U.S. productivity or business output per hour was growing by 3.1 percent a year on average, he said.
Between 1970 and 1998, the annual productivity growth slowed to 1.7 percent because the transition to a postindustrial economy required difficult business, educational and social adjustments that took time, he said.
But U.S. productivity has since started picking up again and is growing at 3.4 percent a year — due largely to progress in information technology that pushed up the productivity of workers in intellectual service activities, he noted.
Leamer said one key feature of a postindustrial society is that it can create much greater income inequality among workers than during the 20th century industrialization, which tended to eliminate the gap between individuals.
That may partly be illustrated by the nature of a key tool in the postindustrial economy — personal computers — he said, as he posed a question, “Is a personal computer like a forklift or a microphone?
“A forklift allows you and me — no matter how strong you are — to lift the same amount with a little bit of training, so we get paid the same, because we’re equally good at operating the equipment,” he said. “That’s the metaphor for innovations in an industrial age. Most of the equipment in manufacturing had that character — it adds to productivity but tends to eliminate differences between individuals.”
On the other hand, a microphone does not help a man sing well if he cannot sing, Leamer said. But if the equipment is given to a talented singer, it could help the person record CDs and make a fortune, he added.
“It does not matter who drives the forklift, but it matters a lot who sings on the microphone, and it matters greatly who types on a computer keyboard. . . . The personal computer, which enhances everyone’s productivity, has a tremendous productivity improvement effect on the most talented individuals.
“The 20th century was a period of economic improvements at every level of income distribution, but the postindustrial economies of the 21st century will inevitably have much greater income inequality,” he said.
What does all this mean for Japan? Leamer argued that Japan should recognize that its future growth is not in manufacturing — although Japan will retain important manufacturing sectors in its global operations.
“You’ve got to start to create value in the postindustrial intellectual service activities. And as long as you cling to that myth that the 1990s was a macroeconomic disturbance, and now that macroeconomic policy is back to normal, that you’re going to get growth again, that’s denying the fact that fundamental adjustments have to be made,” he said.
Companies need to review the traditional way of doing business, he said.
“The hierarchical command-and-control enterprises work well in manufacturing, but not in postindustrial intellectual activities,” he said. “There’s a difference between Detroit and Hollywood. Detroit is a top-down, hierarchical command-and-control type of a community. Hollywood, where they create content, is a bottom-up relationship-based entrepreneur-type community.”
And most importantly, Leamer said, Japan and the U.S. need to recognize that the sources of wealth in the postindustrial age “are not the factories and equipment that they used to be, but they are human problem-solving abilities.” Therefore, he said, Japan will need an education system that shifts away from rote-learning to creation of graduates who can solve problems.
Roger Noll, a professor at the Stanford Graduate School of Business, pointed out that emerging economies like China and India have invested heavily in building human capital as a key component of their development strategy to move up the value chain.
“They see that education, research and development, and technology can be just as important for them as it’s been for (the advanced industrialized economies),” Noll told the symposium.
These countries have a “very long-term and farsighted” development policy of building higher education institutions “to make them world class in educating students and in doing basic research, creating national research centers that are oriented toward more practical applications of new knowledge in science and technology to business development,” he said.
“China is not just sitting on, making low-end manufacturing products,” he said, although labor-intensive manufacturing operations will continue to account for a large portion of employment growth in the country.
Noll said it is remarkable that growth in India, which has in fact not oriented itself much to exports of manufactured goods, is concentrated on businesses associated with medium to high-technology inputs.
“The Indian Institutes of Technology are world-class engineering education institutions. . . . (The U.S.) imports their graduates to run our Silicon Valley companies,” he said, adding that it is not surprising that Indian cities like Bangalore keep the IIT graduates for their rapid growth in information technology sectors.
“The newly industrializing countries are not only going to be producing textiles and shoes. They are going to be producing everything, and they are going to have a major say in almost all manufacturing sectors” because they see that as part of their overall economic strategy, Noll said. “They have the beginnings of human capital to nurture and they are expanding and developing it by major investments in research and development and higher education.”
This, he said, does not mean that advanced industrialized economies should pack their bags and let the emerging economies take over. While the industrialized countries should not resist the transition to a postindustrial period, they need to “make certain that aspects of what we are about that got us to where we are — our innovativeness, knowledge, flexibility and creativity — are nourished and supported so that they do not wither away,” he noted.
Heather Haveman, a professor at the Columbia University Graduate School of Business, meanwhile expressed doubts that Japanese firms will ever converge on the North American model of corporate governance, employment relations, technological standards and values despite the growing pressures of globalization.
Globalization will certainly increase competitive pressures on Japanese firms, she said. “You have to run fast (to remain competitive). . . . You have to innovate more, develop better products and services, and improve your production and distribution systems.”
But Haveman said that there is another type of pressure from globalization — to conform to a single set of standards to fit the environment in which one’s exchange partner companies, many of them foreign, operate — that may elude Japanese firms.
This is partly because Japan’s international trade network is simultaneously global and regional, she said. How can the North American model be the one on which Japanese firms will converge when Asia accounts for half of their global trade, she asked.
Another reason is that historically, the direction of influence between Japan and the U.S. in terms of corporate management has frequently changed — depending on the relative economic performance of one over the other, Haveman said.
When Japanese firms outperformed their American counterparts during the 1980s, the Americans imitated the Japanese model — as represented by such concepts as quality circles, just-in-time inventory control and a cooperative union-management relationship, she said. Then the direction of influence again changed when American firms started to outperform the Japanese during the 1990s, she added.