In order to move forward with globalization, Japanese companies must open up their closed labor market, an undertaking equivalent to a “cultural revolution” to overturn Japan Inc.’s human resource management style, a German scholar specializing in Japan said at a symposium in Tokyo.

Franz Waldenberger, a professor of Japanese Economy at the Japan Center and Munich School of Management at the Ludwig Maximilian University of Munich, delivered a presentation at a symposium on the global human resources strategies of Japanese companies, organized by the Keizai Koho Center on March 7.

“Japanese companies cannot continue to lag behind in globalization any longer,” Waldenberger said in the presentation titled “Expansion of global business and human resource management systems; theories and research findings on Japan Inc.’s challenges.”

He opened his presentation by saying Japan lags behind other developed countries in terms of globalization. Its share of global trade dropped to 4 percent in 2012 from 8 percent in 1990. The country’s share of outstanding direct investment into foreign countries also dropped to 4 percent in 2012 from 9 percent in 1990.

Waldenberger said this is puzzling because Japan has technological advantages. For example, Japan applied for the most global patents in 2011, filing for 32 percent of patents, followed by 29 percent for the U.S. and 11 percent for Germany.

The country also boasts a highly educated population and Japanese companies currently have large amounts of cash on hand.

“Japan has a lot of potential but is not making good use of it to achieve globalization,” Waldenberger said.

He argued that the slow pace of Japan’s globalization could not be explained away by Japanese uniqueness.

He also noted the irrelevancy of language barriers as people can learn languages if they need to.

He also challenged the notion that Japan’s unique culture somehow hinders globalization, saying that every country has its own culture and resists exchanges with other cultures.

The real obstacle is what he calls the “inner” labor market, or Japan Inc.’s way of hiring, training and promoting employees.

In an inner labor market, career paths to top management are based on lifetime employment. In other words, employee promotions are seniority based.

Waldenberger said an inner labor market exists to some extent in other countries, but Japan is different for the following reasons: 1) It runs deeper because Japanese begin their careers as new graduates, 2) It’s exclusionary because mid-career hires are discriminated against and 3) The “outer” labor market has not been developed.

“The inner labor market is a big hurdle for Japanese companies to overcome, because an inner labor market is unappealing to global talent,” he said.

Japan’s inner labor market does not provide foreign talent with a career path to top positions, he said.

If Japanese companies use local employees outside Japan, it can lead to difficulties in unifying corporate culture. This could also lead to a lack of loyalty from local employees. Japanese assigned to work overseas also tend to have a strong “home bias.”

“Because of this, knowledge transfers are not conducted smoothly and maximum synergy cannot be expected,” he said.

Japan Inc. has two choices to deal with the situation — changing their global business models to abandon globalization or opening up the inner labor market.

The first choice means Japanese companies will abandon foreign direct investment and expand globally by contracting with foreign companies. This choice will spare the need for them to hire many foreigners and implement human resources strategies to achieve globalization.

But Waldenberger said it is questionable if this approach will allow companies to actually expand into the global market.

Thus, he recommends opening the inner labor market, or providing equal opportunities for Japanese and non-Japanese to climb the corporate ladder.

To achieve that, Japan Inc. needs “very strong commitments from management,” he said. English should be the common language among management and foreigners should be appointed as board members.

Japanese companies should also start reducing reliance on hiring new graduates and hire experienced workers. Employees, rather than the companies, should take ownership of their careers, he said.

“This is almost a cultural revolution for Japan. The relationships between companies and their employees must change fundamentally. Diversity will become the norm.”

In conclusion, globalization is not a choice but a necessity for survival, he said.

“Opening up the inner labor market will lead to not only globalization but also lead to opportunities for women and the elderly,” he said.