JAPANESE / US COMPARATIVE ADVANTAGE:
WIDTH AND DEPTH OF CO-ORDINATION
Hajime Oniki
Department of Economics, Osaka-Gakuin University, Osaka,
Japan
INTRODUCTION
There is a remarkable difference in the
overall performance of Japanese producers relative to American ones in the
1970-80s and in the 1990s.
Japanese corporations performed very well in producing automobiles and
electronic appliances in the 1970-80s, but they did quite poorly in producing
personal computers (PC) and information-telecommunications (IT) services in the
1990s. This chapter attempts to
explain the difference. First, a
brief summary of the growth of the postwar Japanese economy is given with
emphasis on the importance of strategic industries. The chapter then discusses the characteristics of the
process by which each product or service is created, produced, and improved.
To lay a basis for the analysis in this
chapter, we consider the co-ordination for production of workers of
corporations. Two measures will be
introduced to characterise co-ordination: width and depth. The width is the size of the range of
co-ordination activities; it may be expressed by the number of workers who
participate in the co-ordination in question. The depth is the average intensity of co-ordination
activities; it may be represented by the degree to which co-ordinating workers
understand each other. It is
pointed out that the relative importance of the width and the depth of
co-ordination differs depending on the characteristics of each product or
service. On the one hand, the
depth plays an important role in producing such goods as automobiles and
electronic appliances. On the
other hand, the width is more important in producing network-type goods such as
PCs, hardware and software, and IT services.
The chapter then compares Japanese
corporations with American ones with respect to the width and the depth of
co-ordination. On average, the
depth of co-ordination is greater in Japanese corporations, whereas the width
of co-ordination is greater in American corporations. Thus, the difference in the performance of Japanese
corporations between the 1970-80s and the 1990s came from the shift in the
strategic industry of Japan from automobiles and electronic appliances to PCs
and IT services. Comparative
advantage of Japanese corporations was changed in accordance with the
difference in the characteristics of co-ordination between the two
countries. The chapter concludes
with other explanations of the absence of comparative advantage in the PC and
IT industries in Japan.
Background
This chapter is a case study in the economic theory of organisation and information, in which Don
Lamberton played a pioneering role in the 1970s and 1980s (Lamberton, 1971,
1988, 1992). The theory emphasises
the importance of the flow of information to the functioning of various
economic organisations, such as firms, corporations, governments, nonprofit
institutions, and society as a whole (see Putterman and Kroszner, 1996; Buckley
and Michie, 1996). Co-ordination
is the form of work in economic organisations, and the flow of information is a
primary means of co-ordination.
This chapter presents an approach for characterising economic
organisations by distinguishing wide and deep co-ordination. The distinction is related to, but not
the same as, that of market and command, or that of centralisation and
decentralisation.
Japanese organisations, particularly
Japanese corporations, have drawn the attention of research scholars since the
1980s, because the performance of Japanese corporations in manufacturing,
especially in automobiles and electronic appliances, was high in the 1970s and 1980s. Attempts
were made to explain the source of the high performance of Japanese
corporations and the underlying structure of Japanese society was particularly
investigated (for example, Johnson, 1982, 1995; Aoki, 1988; Wolferen,
1989). It was pointed out that
Japanese style co-ordination, as was seen in tightly-formed workgroups, close
relation between labour and management, and lifetime employment, contributed
significantly to the high performance of Japanese corporations.
In the 1980s, the growth centre of the
economy in advanced countries was shifted gradually from manufacturing to the
PC and IT industries. This trend
has been studied by a group of social scientists, Don Lamberton being an active
leader in this research area (Lamberton, 1992a, 1993, 1995, 1995a). Recently, however, it was pointed out
in Japan that the growth of the Japanese PC and IT industries was far slower
than the growth of these industries in the US and in other advanced
countries. Research workers have
attempted to explain this observation, but no agreement has been reached as to
its cause (Kokuryo, 1997; Methe et al., 1997; MPT, 1996). The main objective of this chapter is
to provide an explanation of this observation from the standpoint of the
distinction of deep and wide co-ordination.
COMPARATIVE ADVANTAGE IN THE JAPANESE
ECONOMY
The role of strategic industries
The development of the Japanese economy during the postwar period depended
on the success of a small number of strategic industries. The Japanese economy, at each stage of
its development, was able to generate one or two strategic industries having
the capability of exporting goods to the world market. In the 1950s, the textile industry was
the driving force of the economy, and in the 1960s, shipbuilding became the
most important exporting sector.
The iron and steel industry was the source of development of the
Japanese economy in the 1970s.
Since the beginning of the 1980s, two industries (automobiles and
electronic appliances) have been contributing to the Japanese economy as major
strategic industries. What
industries, if any, will become strategic to the Japanese economy in the coming
age?
The determination of strategic industry
depends on the level of technological development, the skill and the cost of
the labour force, the availability of capital and money, and, above all, the
structure of the world trade market.
This is nothing but an application of the principle of comparative
advantage in the international division
of labour. Until the middle of the
1980s, the core of the development of the Japanese economy was in the
manufacturing sector, from which all of the Japanese strategic industries
emerged. The sectoral composition
in the overall economic trend was changed in the 1980s; the service sector,
particularly the IT-related industries, became the main source of economic
growth.
In the 1990s, the Japanese economy has
not been able to find a new strategic industry; it is merely riding on the
momentum from the past. A
significant portion of the two strategic industries of the 1980s (the
automobile and the electronic appliance industries) has moved to other East and
Southeast Asian countries.
Automobiles are still assembled in, and exported from, Japan, but a
large portion of the parts of automobiles produced in Japan is imported
today. Factories making electronic
appliances have also moved out of Japan, although products with high
value-added can still be produced competitively within Japan. It is clear that Japan is rapidly
losing comparative advantage in automobiles and electronic appliances; without
some new strategic industries, Japan will likely face a squeeze from the
international balance of trade. In
the worst case, the level of per capita GNP in Japan may start decreasing.
The PC and IT industries in Japan
The need for strategic industries has
long been recognised by MITI (the Japanese Ministry of International Trade and
Industry). For most of the
industries strategic to the Japanese economy in the past, MITI adopted
industrial policies, such as protection during the period of infancy and
promotion of research and development.
Most of MITIfs policies were successful and contributed greatly to the
growth of the Japanese economy.
As early as the mid 1960s, MITI
considered the computer industry (mainframe computers then) to be a potentially
strategic industry for the Japanese economy. MITI, together with NTT (then the NTT Public Corporation),
protected and subsidised the NTT family of manufacturers of telecommunications
equipment so that they might become competitive producers of mainframes. As a consequence, major computer
manufactures in Japan, such as NEC, Fujitsu, Hitachi, and Toshiba, survived
within Japan despite the world-wide dominance by IBM. Further, starting in the late 1970s, MITI also subsidised
research and development for LSI (large scale integrated circuits) by these
manufacturers. Consequently, the
productivity of LSI memories in Japan was raised significantly toward the
middle of the 1980s to the extent that trade frictions took place between the
US and Japan.
The personal computer industry was born
in the beginning of the 1980s.
During the fifteen years after its birth, the PC industry grew virtually
from nothing to the size of the telecommunications industry or of the broadcast
industry. As is widely known, the
PC is a child of the mainframe computer.
By the time the PC was born, the design and the operation of mainframe
computers had been well developed.
The distinction between hardware, operating systems, and applications
software had already been established.
The main objective at the time of the birth of the PC was how to create
a new type of computer smaller in size, and cheaper in value, than mainframes. The drive for creating PCs was promoted
by the emergence of LSI. In
particular, the advent of the MPU (microcomputer processing unit, or CPU:
central processing unit) was a key factor in the creation of PCs. Thus, at the time that the PC was first
marketed in the US, in European
countries, and Japan, the idea of the PC today was already there. In short, it was considered to be a
miniature of mainframes.
When the production of personal
computers started in the early 1980s, however, MITI adopted virtually no
industrial policy for the PC industry.
The Japanese PC industry was thrust into a competitive environment,
although MITI did not appreciate this.
Probably, MITI was too busy with the LSI industry to extend protection
to the emerging PC industry. MITI
may have considered LSIs an indispensable element in almost all industrial
activities, whereas the PC industry seemed to be just a branch application of
LSIs. Also, MITI may have adopted
no industrial policy for the PC industry because the PC was considered to be a
miniature of mainfranies, which were the core of computer products.
There was an expectation in Japan that,
because the future PC was considered to be a miniature of the mainframe, Japan
would receive comparative advantage from predicting PCs. Japanese corporations were well known,
by that time, for their capability in creating miniature products, such as
transistor radios and portable tape recorders. Although Japanese corporations might not be able to create a
new product or service from scratch, they were good at improving and trimming a
product which had been produced and sold in the market. The PC at the beginning of the 1980s
fitted this model perfectly. In
addition, the PC was considered to be similar to electronic appliances, for
which Japanese producers possessed comparative advantage. After all, the PC is a product made by
assembling electric and electronic parts, as electronic appliances are.
Today, we know that this expectation
did not materialise. Almost all major software products used in Japan are
imported from the US, though the minor changes of rewriting the language from
English to Japanese may be made in Japan.
Second, the operating system is the monopoly of the Microsoft
Corporation. Third, even in the
area of hardware, Japanese products barely compete with US ones. New ideas in designing hardware and
software seem to come exclusively from the US. The overall performance of the Japanese PC industry, when
compared with that of other manufacturing industries, such as automobile and
electronic appliances, is a disappointment to the Japanese. The objective of this chapter is to
pursue an answer to the question: Why was the performance of the Japanese PC
industry low relative to that of the American PC industry?
Computer software, telecommunications
services, and other IT products and services were also considered in the early
1980s to be candidates for strategic industry status. Computer software is a product close to computer hardware;
anyone who can produce computer hardware efficiently should be able to produce
computer software efficiently.
Telecommunications services can be viewed as an extension of computer
services, too. First, for
telecommunications, computerised equipment, such as smart terminals and digital
switches, is widely used. Second,
telecommunications networks combine computers (terminals). The properties possessed by computers
should, therefore, be shared by telecommunications networks. Third, a telecommunications network may
be viewed as a giant computer in which the functions are not concentrated in
one geographic location, but distributed and dispersed in many distant
locations. In the late 1980s and
the early 1990s, a great deal of effort was concentrated on producing
computers, software, and telecommunications services in Japan as efficiently as
possible. The quality and the
quantity of skilled labour devoted to producing them was remarkable. The outcome of these efforts devoted in
the PC and other IT industries, however, was quite different from the outcome
in the automobile and the electronic appliances industries.
CHARACTERISTICS OF PRODUCTS AND
SERVICES
Determinants of comparative advantage
We will attempt to explain the presence
and the absence of comparative advantage in Japan with such products as
personal computers, telecommunications services, automobiles, and electronic
appliances. This section is
devoted to comparing the characteristics of each of these products. In the standard economics textbooks, it
is stated that comparative advantage of a product is determined by technology
and factor endowments. Such a
statement may be appropriate to explain the difference in comparative advantage
at large. Examples include the one
between agriculture and manufacturing, or the one between lightweight
manufacturing and heavyweight manufacturing. Here, however, we are concerned with comparative advantage
of products classified into finer categories; say, personal computers and
electronic appliances. For such a
microscopic comparison, factor endowment, such as the capital-labour ratio, is
not important; the main determinant of comparative advantage should be sought
with some aspects of technology and management spelled out in more detail.
We need to consider technology and
management for creating and developing a new product, for constructing a
production system, and for improving the product and the production
system. The level of technology
and management appropriate for this kind of analysis depends on the quality and
the type of technology-oriented workers and how they are organised. It should be the case that some
difference in the characteristics between PCs and electronic appliances, on the
one hand, and the level of technology and management of producer corporations,
on the other hand, interact with each other to generate the presence or the
absence of comparative advantage.
Comparison of the structure of products
and services
Tables 1 and 2 list the products (and
services) we will examine in this chapter. We are interested in PCs and IT-related products, such as
telecommunications hardware/infrastructure and telecommunications
software/services, as they are candidates for strategic industries for the
Japanese economy in the future.
For the sake of comparison, we also consider automobiles and electronic
appliances, since Japan obtained comparative advantage in them in the
1980s. We also consider LSI (CPU
and memories), since Japan also obtained imperfect comparative advantage in LSI
memories in the 1980s, and LSI is an information-related product. Thus, we will consider eight products
altogether: telecommunications hardware/infrastructure, telecommunications
software/services, PC hardware, PC software, automobiles, electronic
appliances, LSI used as the CPU for PCs, and LSI used for memories of PCs. We are interested in finding the
presence of comparative advantages in Japan with automobiles and electronic
appliances in the 1970-80s, and the absence of comparative advantages with
telecommunications hardware/infrastructure, telecommunications
software/services, PC hardware, and PC software in the 1980-90s.
In general, a product has many
characteristics, such as physical properties, economic data, utility to users,
characteristics in the production process, and so on. @ We are concerned with those characteristics which have direct
relationships with the level of technology and management. @In particular, we will compare these eight products from two standpoints:
the structure of each of the products, and the characteristics of research and
development for each of the products. @In
addition, we also compare each of the products in terms of institutional
factors affecting free entry and promotion of competition. @In the second row of each of Tables 1 and 2 is entered the location of
comparative advantage for each of these products. @The US has comparative advantage in telecommunications software/services,
PC hardware and software, and LSI, particularly CPU.@ Japan has comparative advantage in automobiles and electronic appliances.
@Comparative advantage in telecommunications
hardware/infrastructure and LSI for memories is shared between the US and
Japan.
We first concentrate on the physical and the functional structure of each
of the eight products. @It is seen that the first
six products in Table 1 are produced by combining parts or assembling
components. @Telecommunications
hardware/infrastructure is a network system, which is composed of cables,
switches, terminal equipment, and so on. @PC
hardware is far smaller than telecommunications hardware/infrastructure, but it
is composed of components, too. @Telecommunications
software/services and PC software are software-type products.@ A software-type product is a collection of steps (for example, orders or
instructions) to be followed by computer hardware (in the case of PC) or by a
telecommunications network system (in the case of telecommunications services).@ Frequently, the steps composing a software-type product are grouped into
a set of subprograms. @Furthermore, sub-programs
are grouped into upper-level programs, and so on; the entire system possesses a
hierarchical structure. @Unlike telecommunications
hardware/infrastructure or PC hardware, the components of a software-type
product are combined not physically, but informationally. @As a consequence, as indicated in Table 1, the degree of flexibility of
the interface among the components of a product differs depending on whether
the product is assembled physically or assembled logically. @Software interfaces are flexible so that a portion of a product can easily
be changed or replaced. @The same is true with
telecommunications hardware/infrastructure or with PC hardware.@ The interface between their components, however, is less flexible; it
needs more work to replace a part of the hardware product than a part of the
software product.
Automobiles and electronic appliances are also produced by assembling
parts. @Needless to say, they are hardware products.@ In that sense, they are similar to telecommunications
hardware/infrastructure and PC hardware. @However,
the interface between hardware components is stronger with automobiles and
electronic appliances than with telecommunications hardware/infrastructure or
PC hardware. @It is rare, if not
impossible, to replace a part of an automobile with a different part except for
consumables, such as tyres and batteries. @One
could modify a part of an automobile, say, a steering wheel, if so inclined.@ However, such modification
or replacement is not common. @Certainly, it is not
intended when the automobile is designed. @In
the case of electronic appliances, replacing a part of the product does not
occur except when a part is broken. @As
a consequence of this, every part of an automobile or of an electronic
appliance is designed to wear out at approximately the same time.@ In contrast, a part of telecommunications hardware/infrastructure or a
part of PC hardware can be replaced or upgraded at the userfs convenience. @In summary, the degree of the flexibility of interfaces is highest with
telecommunications and PC software, second highest with telecommunications
hardware/infrastructure and PC hardware, and lowest with automobiles and
electronic appliances.
The last two products in Table 1, CPU
and memories for PCs, are produced in one piece; they are fabricated, not
assembled.@ Hence, there is no possibility of upgrading the CPU or
memories by replacing a portion, though upgrading is possible by replacing the
entire unit. @When a part of the product
is broken, there is no way to fix it.@
For this reason, we can state that, although LSI is produced for information
processing, it is structurally closer to automobiles and electronic appliances
than to telecommunications hardware/infrastructure or PC hardware.
Comparison of R&D for products and services
The characteristics of the structure of
each of the eight products are reflected in the way R&D is carried out.
This is summarised in the rows of Table 2. First of all, we compare R&D
investment for each product. For telecommunications hardware/infrastructure,
R&D investment is large, since the telecommunications network is large and
expensive and is extended to the entire country. For example, a switch for a
telecommunications exchange is shared by, say, one thousand subscribers, and
optical fibre can transmit one thousand telephone calls at the same time. It
pays to invest a large amount of money to develop a new type of
telecommunications switch. The R&D investment needed to develop a piece of
software or a service may not be as great as in telecommunications
hardware/infrastructure. The exact amount of investment, of course, depends
upon the function of the software and the contents of the service.
When it comes to personal computers,
the R&D investment for hardware and software is far smaller than that for
telecommunications, since the economic size of a telecommunications network and
the economic size of a PC are very different.@ In
Table 2, the R&D investment for PC hardware and PC software is indicated
respectively as medium and small. @Automobiles
need a large R&D investment, but a medium gestation period.@ R&D investment for electronic appliances is smaller, and its
gestation period is shorter, than for automobiles. @This comes from the fact that the average price of electronic appliances
is far lower than the average price of automobiles.@ LSIs are very small in size, but the R&D investment is large and the
gestation period is long, particularly for CPUs. @It
is reported that the initial design of a 32-bit CPU architecture was started as
early as the mid-1970s, 20 years before the shipment of Intel 486, the first
32-bit CPU. @Even for memories, R&D
investment is very high and the gestation period extends for several years.
CHARACTERISTICS
OF CO-ORDlNATION
Width
and depth of co-ordination
All of the products listed in Tables 1
and 2 are the outcome of sophisticated engineering and managerial efforts. @A single output relies on the co-ordination of a large number of workers,
professional and others. @For this reason, the way in
which co-ordination for production is achieved affects strongly the quality and
the price of each of these products. @We
attempt to explain the presence or the absence of comparative advantage in the US and Japan with each of these products in terms of the difference in
co-ordination between the two countries. @To
do this, we first describe the characteristics of co-ordination in the US and
Japan.
To avoid any possible misunderstanding
or confusion, let us clarify the meaning of co-ordination
used in this chapter. In general,
co-ordination in economic activities indicates the fact that goods and services
are produced by combining the labour of workers who have different skills. Thus, co-ordination always comes with
division of labour. A classical
example of co-ordination occurs in Adam Smithfs manufacture of pins. Today, co-ordination exists within a
large corporation composed of factories, headquarters, administration offices,
warehouses, and other branches engaging in various functions. Co-ordination
also exists between corporations.
Economic theory commonly states that sellers and buyers of a product
co-ordinate in the market; they are guided by the price of the product working
as a signal. In this chapter, we
deal with the co-ordination on the supply side of a market (co-ordination
between the producers of the goods), since our objective is to compare
comparative advantage between Japan and the US in a particular industry. Thus, we will talk about co-ordination,
e.g., between producers of PCs in the US and producers in Japan.
Co-ordination on the supply side of a
particular industry may be dealt with from a variety of viewpoints. Rather than attempting to list all of
the possible co-ordinations on the supply side, we will pick up those
co-ordinations which play an important role in the determination of comparative
advantage in the US and Japan. In
general, comparative advantage obtains when the product is supplied with high
quality and low price. Therefore,
we will concentrate on the co-ordination which is useful in bringing about
quality improvement and price reduction.
There are two areas of activities which particularly affect the quality
and the price of a product: R&D and production management. In the following, we will focus our
attention on co-ordination in these two areas of activity. Thus, we are going to compare
co-ordination in the US and co-ordination in Japan in R&D and production
management. In order to express
the difference in co-ordination between Japan and the US, we consider certain
attributes of co-ordination. We
are interested in the width of co-ordination and the depth of co-ordination.
The
width of co-ordination is the size of the range of co-ordination activities; it
is typically expressed by the number of workers who are directly or indirectly
involved in the co-ordination. For
example, when we consider R&D in designing a new type of LSI, the number of
workers comprising the team engaged in the development of the new type is the
width of the co-ordination. When a
telecommunications provider decides to purchase software in order to offer a
new type of service on its network, then the width is expressed as the total
numbers of workers participating in the teams of the software vendors which
could sell appropriate software to the telecommunications provider. When several software vendors compete
with each other and only one can sell a product to the telecommunications provider,
we still consider the size of the co-ordination to be the sum of the workers in
all of the software vendors which could sell their product to the
telecommunications provider.
The
depth of co-ordination is the average intensity of co-ordination activities; it
indicates how closely the activities for the co-ordination are combined. It may be called the strength, or the
density, of the co-ordination.
Roughly speaking, the depth of co-ordination is the amount of
information which needs to flow between the workers engaged in the co-ordination. For example, in a
team engaged in R&D for a new type of automobile, the design work needs a
lot of information exchange between the members of the team; thus, the depth of
such co-ordination is great. In reality,
the workers in such a team need to talk a lot to each other, need to pass and
receive many documents and diagrams, need to meet many times in conferences,
and so on.
The
attributes of co-ordination are not limited to width or depth. Co-ordination is a fundamental human
activity and has many characteristics.
In this chapter, however, we will limit our attention to width and depth
only, since these two are by far the most important in determining comparative
advantage in the products listed in Tables 1 and 2.
Comparison of co-ordination in the US
and Japan
Co-ordination within a large
corporation may, to some extent, be similar in the US and Japan. Such a corporation will typically carry
out its R&D with its own resources.
The development of a new product takes place largely within the R&D
department. In the case of
automobiles and LSI memories, a large team is formed within the R&D
department to develop a new model.
In the case of telecommunications software/services and electronic
appliances, multiple teams for developing a new product or service may be
formed in a corporation; in many cases, they compete against each other. From the standpoint of the corporation
as a whole, this pays even if only one of the teams succeeds.
Japanese
corporations are known for their lean production management. In many cases,
production activities are performed by a number of teams of relatively small
size; the number of workers on a production team is somewhere between five and
fifteen. The width of
co-ordination in such a team is limited, though the depth is great. Every member of the team knows
everybody else very well, not only what task each team member is assigned, but
also how each performs the assignment.
Thus, when a machine being used by the team breaks down, or when one of
the team members is absent for several days, it is possible for the team to
continue without significantly lowering the efficiency of the team as a
whole. Efforts to strengthen the
depth of co-ordination in such a team are made even outside work hours. For example, team members frequently go
out to dine or have a party together in order to get to know each other
well. The system of permanent
employment, which is common in Japanese corporations, helps develop deep
co-ordination.
Thus,
a prominent characteristic of Japanese co-ordination lies in its depth. The cost of having deep co-ordination,
naturally, is the width of co-ordination, which is usually small in Japanese
corporations. Since the workers in
a team tend to communicate intimately with a relatively small number of fellow
workers, a solid team is formed as a consequence, and it is difficult to form a
large team.@ In the typical case, Japanese workers do not communicate
with others outside their own team.
This characteristic of Japanese co-ordination may be viewed as a culture
or tradition of Japanese society.
Japanese people are educated from childhood to adapt themselves to such
an environment. Almost all of the
social structures in Japan are formed to support, and to be supported by,
Japanese-type co-ordination. In short, we can regard it as part of Japanese
culture.
In
general, co-ordination in the US, in contrast to that in Japan, can be
characterised by its width. In the
US, the importance of communication with fellow workers in teams is not as
great as in Japan. Instead, US workers spend more time and effort communicating
with workers outside their teams.
Again, this is part of the culture of American society. In this chapter, we accept this finding
as given and consider its implications.
First of all, labour mobility is higher in the US than in Japan; in
particular, there is less permanent employment in the US. There are workers in the US who
continue to stay in one organisation for a long time as a consequence of their
own choice and their employerfs choice.
There is certainly cost to the worker of moving from one organisation to
another, and also there is cost to the employer of replacing one worker with
another. In Japan, both the cost
of changing a place to work and the cost of replacing a worker are much higher
than in the US. The high cost of
moving and replacing in Japan may be a source of, and also a consequence of,
deep co-ordination. An implication
of wide co-ordination in the US is that the domain of procurement for a product
is wide. Thus, US corporations
purchase from suppliers outside their own organisations as well as inside. One could say that US producers are
more open than are Japanese producers.
EXPLANATION OF COMPARATIVE ADVANTAGE
Automobiles and electronic appliances
Japan obtained comparative advantage in
automobiles and electronic appliances in the 1980s, and the value of exports of
these products exceeded that of any other Japanese exporting industry throughout
the 1990s; they are the strategic industries of Japan at the present time. Automobiles and electronic appliances
have more similarities than differences according to the characteristics listed
in Tables 1 and 2. These products
are assembled from parts, and the interface between the components of a product
is strong for both of them.
Product-improving R&D is performed mostly within the
corporation. The difference
between automobiles and electronic appliances arises from the difference in
unit price. Roughly speaking, the
average price of an automobile is ten to twenty-five times greater than the
average price of an electronic appliance.
Consequently, the number of models supplied by a producer is far greater
with electronic appliances than with automobiles.
Both R&D and production management
in automobiles and electronic appliances fit Japanese-type co-ordination. The development of a new product is
undertaken internally by a team of workers co-ordinating closely; i.e., under
deep co-ordination. The average
size of an R&D team in automobiles is far greater than in electronic
appliances. In automobiles, the
overall design of a new model is determined by the time that the development
project is started, so that every R&D team responsible for the detailed
design of the model is supposed to be successful in its project. The exception to this is a basic
research team, such as one developing a new technology. In electronic appliances, when R&D
for a new product is started, multiple R&D teams are formed to investigate
diversified possibilities for development. Each team works more or less independently and perhaps one
R&D team out of ten succeeds. The reward to each of the R&D teams,
however, is not much different (except for an exceptional contribution).
Thus, the way R&D is performed in the automobile and the electronic appliances
industries is similar, despite the different average size of an R&D
team. An R&D team attempts to
co-ordinate closely to combine the efforts of each member of the team. Such an objective is most likely to be
achieved in Japanese corporations relying on deep co-ordination. Deep co-ordination in each team plays
an important role in integrating the work of the members of the team. A team does everything to design and
develop a new product. Different
members of the team design different parts of the new product. Without deep co-ordination, the
components of the new product would not fit together. A deeply co-ordinated team will achieve the best output from
the components.
In the production management of
automobiles and electronic appliances, too, the Japanese-type co-ordination
works very well. The production of
an automobile or of an electronic appliance starts with the production of each
of its parts. In many cases, parts producers in Japan are subsidiaries of the
automobile corporation and are closely controlled by it. Deep co-ordination is observed in the
relation between the parent and the subsidiary corporations. This is desirable since automobiles and
electronic appliances are produced in large quantities. Once a model is developed and designed,
and a production management system is established, the main objective is to
maintain a smooth stream of production from parts to the final product. Minor improvements for minimising the
damage from troubles in the production system and for cost reduction are quite
effective. In Japanese
corporations, such minor improvements are realised through deep
co-ordination. By exploiting the
advantage of deep co-ordination, Japanese producers of automobiles and
electronic appliances succeeded in model development and cost reduction in the
1980s to secure a large share of Japanfs total exports. Even today, Japan retains a comparative
advantage in automobiles and electronic appliances.
LSI: CPU and memories for PCs
Large scale integrated circuits (LSI),
as the name suggests, are produced in one piece as an integrated product. The ways in which CPUs and memories are
designed are the same, except that the degree of complexity of circuits is far
greater within CPUs than in memories.
A team with deep co-ordination should perform the design and the development
of LSI. Production management of
LSI, CPUs, and memories also calls for deep co-ordination. Once a particular model of CPU or of
memory is established and its production is started, the production line should
be managed and maintained by a team with deep co-ordination. For instance, maintenance of a
clean-air environment is vital in LSI production. Lack of deep co-ordination may lead to contamination of a
tiny portion of the product, leading to massive rejection of products. Minor and partial improvements of an
LSI production line are not inconceivable, but these would reduce the advantage
of large-scale production. The
production of LSI is similar to the production of information in that the
initial investment is very high but the marginal cost of production is low
since the production of each piece is done by copying the mother circuits. Such characteristics of R&D and
production management of LSI should fit with Japanese-type corporations, since
deep, rather than wide, co-ordination is called for. However, in reality,
the supply of CPUs for PCs has been effectively monopolised by the Intel
Corporation, a US producer. US
comparative advantage in producing CPU came not from the difference in the mode
of co-ordination, but from a technical monopoly. Intel started producing CPUs in the early 1970s and has
retained a monopoly on each successive CPU model until today.
Comparative advantage for producing LSI
memories has been shared by US and Japan since the middle of the 1980s. Initially, the US had a comparative
advantage in memories. In the
middle of the 1980s, MITI led major Japanese corporations, such as NEC,
Hitachi, and others, to promote intensive R&D for producing LSI
memories. These Japanese
corporations paid a great deal of attention to establishing and improving an
efficient production line for memories, thereby increasing the rate of
turnaround and decreasing unit cost.
The export of LSI memories from Japan to the US was increased
significantly in the middle of the 1980s; microchip trade wars took place
between the US and Japan. In the
middle of the 1990s, the US and Japan share comparative advantage in LSI
memories; they both export and import, and the trade balance in chips between
the two countries is somehow maintained.
Japanese corporations tend to produce ASICs (application specific
integrated circuits), whose characteristics lie between those of CPUs and
memories.
PC hardware and software
PC
hardware is a physical product assembled from components such as a CPU, hard
disks, a keyboard, a display, and others. Each component of PC hardware can be
designed and produced independently of others since the interface through which
a component is combined with other components of PC hardware is standardised
and predetermined. In other words,
PC hardware is a single product in the usual sense, but it is not a single
product in the following sense: PC hardware is a collection of components
(products) connected with each other systematically but loosely. In this sense, PC hardware is like a
network; a component may be replaced or upgraded as long as the interface
requirement is satisfied. In this chapter, we call such a product a
network-type product.
Historically,
the design of the PC was derived from that of the mainframe. In this sense, the PC is a miniature
descendant of mainframes. Since
Japan was successful in producing miniature products, such as transistor radios
and cassette tape recorders in the 1960-70s, it was expected that Japan should
be able to obtain comparative advantage in producing PCs. Actually, Japan did not. From the time the PC was produced in
large numbers in the early 1980s, i.e., the time the IBM PC was introduced and
dominated the business PC market, the US kept significant comparative advantage
in producing PCs. Until 1992,
however, the Japanese PC market was effectively separated from the US because
of language difference. In 1992,
however, thanks to significant technological progress, the language barrier was
removed and a rapid increase in the import of PCs from the US to Japan
started. The average price of PCs
in Japan dropped by 50 per cent within a year. Major Japanese corporations producing PCs have been
struggling to keep their market share in Japan by giving up most of the profits
they had enjoyed prior to 1992.
Since Japanese PC producers are large and they have diversified into
other computer-related products and communications equipment, they can afford
to do this.
Why
did the US achieve comparative advantage in producing PC hardware? The answer is the efficiency achieved
by wide co-ordination. The fact
that the PC is a network-type product, and not a product like automobiles or
electronic appliances in which the components are combined tightly, and does
not allow partial replacement or upgrading, made R&D based on wide
co-ordination very effective. PC
hardware producers in the US source their components not only within the US but
also world-wide. In the late
1980s, Taiwan became a base supplying efficient and inexpensive PC components
to US producers. In the early
1990s, Singapore, Malaysia, and other ASEAN countries joined. Japanese PC producers tried hard to
develop and produce their own parts for PCs. Because they lacked wide co-ordination, they ended up with
products far more expensive than the products from US producers.
Japanese
corporations, however, are still strong in producing certain hardware, such as
displays for PC. A display, in
effect, is an electronic appliance; it is in no sense a network-type
product. Japanese corporations,
having deep co-ordination, worked well in producing such products. The US has
greater comparative advantage in PC software. Whereas PC hardware is a physical product assembled from
components, PC software is an information product assembled from logical
components. Apart from this
difference, PC hardware and PC software are like each other in their structure
and in their R&D requirements.
Software can be replaced partially and upgraded almost freely. The design and development of a
software component can be achieved quite independently from the entire software
product, since, like PC hardware, the interface between software components
(sub-programs) and the main software is well established. Thus, software can be produced and
improved component-wise, making the presence of wide co-ordination very
effective. For this and other
reasons, Japan imports most major software from the US, and Japanese export of
software to the US is virtually nil.
Telecommunications
hardware/infrastructure and telecommunications software/services
When considering comparative advantage
in telecommunications hardware/infrastructure and software/services, we should
note that there are two major differences from the products we have been
analysing. One difference is that
telecommunications services cannot be exported or imported, since they are
provided on the spot by combining the productive factors located near the user
(there is an exception to this: international telephone services today may be
imported through call back services).
The second difference between telecommunications and other products is
that public regulation plays an important role in telecommunications. In this section, we limit our attention
to the implications for comparative advantage in telecommunications to the
characteristics of the product or service.
Telecommunications
hardware/infrastructure, when considered logically and functionally, is similar
to PC hardware. It is made of
physical components of a network-type product (system) for processing
(transmitting and exchanging) information. In other words, the telecommunications network is like a
very sophisticated and large-scale PC in which the components are located
separately but connected to each other.
Of course, the physical and the economic scale of the telecommunications
network is far greater than the PC, and the number of users of the
telecommunications network is also far greater. In spite of these differences in scale, telecommunications
hardware/infrastructure is structurally similar to PC hardware. In particular, a portion of the
telecommunications network can be replaced and upgraded freely. Such a partial improvement is a daily
matter in the operation of telecommunications providers. Since, however, a component of the
telecommunications network, such as local and long-distance switches or cables,
is large in scale and high in value, the component itself may be considered a
sophisticated electronic appliance.
In producing such a product, both wide co-ordination and deep co-ordination
may be effective. This is a part of
the reason why Japan possesses some comparative advantage in producing
telecommunications hardware.
Telecommunications software/services
are like PC software. They are
information products to be designed and improved logically. The reason that the US has comparative
advantage in PC software applies equally to telecommunications
software/services. As with
telecommunications hardware/infrastructure, telecommunications
software/services may not be directly exported or imported. In particular, Japanese telecommunications
providers, such as NTT, tend to design and produce telecommunications services
within the corporation. However,
past records indicate that most telecommunications services, such as tone-dialling,
call-forwarding, and caller ID services, were first created and offered in the
US; Japan followed, providing these services a number of years after they
became available in the US. Had
free trade prevailed in telecommunications software/services, it would have
been evident that the US had a definite comparative advantage. We point out that a portion of this
comparative advantage must have come from the presence of wide co-ordination in
the US. However, we lack an
analytical tool to determine what percentage of comparative advantage came from
the difference in the type of co-ordination, and what came from historical,
locational, regulatory, and other differences.
CONCLUSION
In this chapter, we attempted to explain the presence or the absence of
comparative advantage in IT-related products, such as PC hardware and software
and telecommunications hardware/infrastructure and software/services. Comparative advantage is partly
explained by the difference in the characteristics of co-ordination between the
US and Japan. Wide co-ordination
in the US suits network-type products.
Deep co-ordination in Japan suits non network-type products. Since PC and telecommunications
services, in fact almost all information-related products and services, are
network-type, the US naturally has comparative advantage. This is the main conclusion of the
chapter.
The determinants of comparative advantage, however, are not limited to the
characteristics of co-ordination.
In the case of CPUs, natural monopoly arising from technological reasons
is the main explanation for US comparative advantage. The same is true for PC operating systems. In the case of PC hardware, an
ineffective judiciary system in Japan prevented suppliers of compatible models
entering the market, thereby slowing down the development of competition. Furthermore, when the possible
reorganisation of NTT was being discussed in Japan, it was repeatedly stated
that NTT was uncompetitive because of excessive regulation imposed by MPT. We do not deny this. After all, comparative advantage is an
outcome of multiple and complicated economic and social factors. What I have been seeking in this
chapter is a determinant of comparative advantage which is common to all
information-related products and services, including PCs and telecommunications
services. If the main conclusion
of this chapter is accepted, then the following question arises naturally: Is
it possible to introduce wide co-ordination into Japanese corporations to
obtain comparative advantage in information-related products and services? And, if so, how can this be done? This is an open question which remains
to be investigated.
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-------,
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J., 1997, Information technologies and the transformation of Japanese industry.
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D. M., 1971, Economics of Information and Knowledge (Penguin,
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-------,
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-------,
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-------(ed.),
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--------,
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Table 1
Characteristics
of IT Products/Services in Comparison with Other Products (1): Physical and
Functional Structures
|
Products/Services |
Telecom
hardware/ Infrastructure |
Telecom
software/ Services |
PC hardware |
PC |
Automobiles |
Electronic appliances |
LSI: CPU for PC |
LSI: Memories |
|
Location of comparative advantage* |
JP, US |
US |
(JP) US |
US |
JP |
JP |
US |
JP, US |
|
Structure of products or services |
|
|
|
|
|
|
|
|
|
Assembled from components (?) |
Yes |
Yes |
Yes |
Yes |
Yes |
Yes |
No |
No |
|
Interface between components |
Weak |
Weak |
Medium |
Weak |
Strong |
Strong |
None |
None |
|
Standardized interfaces between
components (?) |
Yes |
Yes |
Yes |
Yes |
No |
No |
NA |
NA |
|
Upgrading component |
Possible |
Free |
Free |
Free |
Partially possible |
Almost impossible |
Impossible |
Impossible |
|
Need for balance between
components |
Low |
Little |
Low |
Little |
Medium |
High |
NA |
NA |
hJPh
indicates Japan, gUSh United States.
Table 2
Characteristics
of IT Products/Services in Comparison with Other Products (2): Research and
Development
|
Products/Services |
Telecom
hardware/ Infrastructure |
Telecom
software/ services |
PC hardware |
PC |
Automobiles |
Electronic appliances |
LSI: CPU for PC |
LSI: Memories |
|
Location of comparative advantage* |
JP, US |
US |
(JP) US |
US |
JP |
JP |
US |
JP, US |
|
Characteristics of R&D |
|
|
|
|
|
|
|
|
|
Size of R&D investment |
Large |
Medium |
Medium |
Small |
Large |
Medium |
Very large |
Large |
|
Gestation period |
Very long |
Medium |
Medium |
Short |
Medium |
Short |
Very long |
Long |
|
Pattern of R&D organization: |
|
|
|
|
|
|
|
|
|
Team / Individual |
Team |
Individual |
Individual |
Individual |
Team |
Team |
Team |
Team |
|
Centralized / Decentralized |
C/D |
Very D |
D |
Very D |
C |
Medium |
C |
C |
|
Pattern of emergence of new
products / services: |
Continuous and partially
innovative |
Continuous and innovative |
Continuous and partially
innovative |
Continuous and innovative |
Continuous improvement |
Innovative |
Continuous improvement and enhancing |
Continuous increase in capacity
and speed |
|
Causes preventing free entry and
full competition |
Remains of natural monopoly/
regulation |
Regulation |
Patents, copyrights (on bus, BIOS) |
Copyrights |
None |
None |
Technological monopoly |
Protection of circuit design |
|
|
|
|
|
|
|
|
|
|
hJPh indicates Japan,
gUSh United States.