The fractal Keynesian stimulus by CSR

10/04/2019

During the period of globalization and digitization after the 1990s, Japanese economy suddenly stopped growing due partly to multiplication of macroeconomic, industrial, financial and  demographic problems. Some part of its industries, mostly digital electronics sectors, if not the automobile, lost international competitiveness vis-a-vis Asian emerging nations.  Many of the Japanese manufacturing firms, facing the huge handicap of international wage rate gaps (typically $100 in China and  $2000 in Japan for rookie workers) desperately expanded its overseas production capabilities, which often meant threats of closing down or shrinking operations of their Japanese local factories.

Nowadays, about a quarter century after the beginning of this stagnant period, the international wage handicaps are much smaller (3-5 times those of China, against 20 times before), due partly to the rapid wage increase of emerging nations. The period of severe cost competition is gradually coming to an end. Many Japanese factories and firms disappeared, but many also survived. Japan’s manufacturing sector still occupies about 20% of its national income (GDP), a relatively large number for large advanced nations, and Japan’s trade surplus continued for most of this period. 

The author, an empirical researcher of technology and operations management and evolutionary economics, visited over 1000 firms and factories worldwide, including those of both large global companies and small local firms, analyzing their behaviors and performances statistically and clinically.  Our finding was that many of Japan’s local factories and firms drastically improved their physical productivity (e.g., 5 times in 5 years, 3 times in 2 years, etc.) to overcome the aforementioned wage gaps.

By increasing productivity, however, these surviving Japanese firms faced the situation in which, under stagnant domestic economy and high appreciation of yen, drastic productivity improvements caused significant reduction of the number of workers required from, say, 200 to 150 in the case of small local factories.  What is quite intriguing here is, however, that Japan’s  macroeconomic unemployment rate stayed fairly stable.  Even in the year of global economic crises, it increased only slightly from about 4% in 2008 to 5% in 2009-10.  What can explain this employment stability ?

Certain government policies to alleviate the unemployment shocks may be one factor. Based on direct field observations, my hyptohesis is that many local firms, particularly smaller ones, also tried to stabilize its own employment levels, even in the middle of recessions and intense global competition. In other words, whereas J. M. Keynes emphasized the role of the govenment’s full employment policies, we observed a kind of fractal structures in Japan, in which not only government but also firms and factories (or manufacturing sites) pursued their own stable employment policies. 

We observed many small firm owners and factory managers running around to create additional effective demands to compensate the job reduction created by the productivity improvement itself. Some were developing new products or new applications, while others voluntarily negotiated with their headquarters or main customers for new orders of their innovative products.

Why such behaviors?  My tentative answer is as follows: first, many of the local firms regarded stable employment as their corporate social responsibility (CSR) for the communities in which their factories and sites are located. Second, such a concept of CSR in local employment finds in part its origines in post-War industrial evolution, and in part in an industrial philosophy that existed in Japan for hundreds of years (« good in three ways »).  Third, there is an economic rationale behind such corporate behaviors of improving productivity and creating demands simultaneously.

Simultaneous pursuit of higher productivity and stable employment

First, we observed many Japanese local firms and factories that actually pursued their own survival and and stable employment simultaneously

Take the example of company S, founded in Japan in the 1950s. S has approximately 200 employees and produces technical textiles. S is one of the largest factories in the city of about 20 000 inhabitants. To compete with rival manufacturers in lower-wage countries such as China and Bangladesh, S has focused on complex, difficult-to-weave products, such as fabric uniforms with advanced technology. It has also made continuous efforts for building its manufacturing capacity (kaizen, etc.)and thereby increasing productivity on the shop floor, where 400 automatic looms are used. A skilled operator now handles 60 machines with reasonably high uptime ratios, indicating very high productivity that can compensate for the wage gap with emerging countries. However, in a low-growth country like Japan, it also means that around 50 workers become redundant when the factory reaches this level of productivity. 

Faced with this situation, the president of company S made an appointment with its largest customer, a major synthetic fiber manufacturer worldwide. S asked this customer to let his company produce a new carbon fiber fabric for automotive use, recently developed by the said customer. The contract was awarded to him, absorbing the redundant workforce and maintaining stable employment of around 200 people, even after the drastic improvement in the plant's productivity. There have been many other examples of simultaneous productivity improvements and demand creations like company S durng the same period in Japan.

A business philosophy behind the stable employment

Then a question arises : Why are these local manufacturers like company S was sticking to the idea of stable employment even in the middle of recession and intense global competition.  Indeed, these firms regarded stable employment as one of their corporate social responsibility (CSR) for the communities or regions where they are located. Stable employment was incorporated into these companies’ implicit or explicit values and conventions.  

One of the roots of such mentality underlying business philosophies that have been prevalent among Japanese merchants for hundreds of yeas is "being good in three ways". It is about being good for buyers (customer satisfaction), good for sellers (reasonable profit) and good for the community. This last dimension is expressed by the concern to maintain legitimacy for continuing trading businesses for a long time in regions away from their own home town. 

Even today, Japanese firms often refer to "being good to the community", which is reinterpreted into modern concepts of corporate social responsibility including stable employment, protection of the environment, water treatment (even if the company was the source of pollution fifty years ago), participation in local festivals, organization of factory visits for students from nearby primary schools, high school students taken on internships, etc. The perception of the production site as part of the community is so steeped in Japanese socio-economic history that in this language the terms "genba-oriented firm" and "community-oriented firm" are virtually used interchangeably. Entrepreneurs believe that gaining legitimacy in the community is a key factor in preserving the long-term survival of their business.

An industrial phenomenon that can be explained economically

Whereas an origin of these local firms’ stable employment policies may be Japan’s business philosophies such as "being good in three ways," we also argue that there are more universal economic logic behind it. 

Thus, we studied the economic model of this type of community oriented firm (COF). It can be a family business or a subsidiary of a multinational. It pursues (i) its own survival by achieving a target profit rate (profit margin), (ii) customer satisfaction by improving the attractiveness of its products and services, (iii) stable employment to contribute to neighbouring communities, (iv) and a better standard of living for its employees by increasing the wage rate at the same time.

Although we do not get into detail here, with the abovementioned model, we can show that, for a manufacturing firm that face price reduction due to intense global competition but still aims at its own survival by achieving the target profit ratio and stable employment at the same time, it is the necessary condition for it to increase physical productivity and to generate additional effective demands simultaneously.  Thus, for COFs in tough competitions, it is economically rational for them to increase productivity and generate effective demands simultaneously.  

A "home-made" full employment policy

When we think Keynesian recovery, we consider public spending policies. But the COF economic model shows us that the effective creation of demand can also pass through the efforts of companies for their own survival. Consequently, government policies aimed at maintaining employment could include a component promoting the COF approach. Our field studies suggest that there are already many cases of local companies acting as COFs. We need more systematic data collection and statistical analysis, including at the international level, to ensure greater model reliability. Our research already concludes that when there are many community-based enterprises, they contribute to the stability of society, even when government support for socio-economic stability is insufficient. Community-minded enterprises pursue their own full employment policies at their own level.

Edited with love, care and compassion by Aurélie Louchart

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Commentaires

Renato Dias Baptista
27/09/2018

L'articulation des idées est très intéressante. J'ai fait des recherches sur des questions culturelles au Brésil et en Bolivie et j'estime que cette modalité, ou cette extension de la responsabilité sociale, a un impact sur la culture locale. Je considérerai cette variable dans les études futures. Merci beaucoup. Prof. Renato D. Baptista - rd.baptista@unesp.br

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