are japanese comanies

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Discussion Paper No. 14 - June 2000

Stephen Nicholas

William R. Purcell

Tasman Smith

Rujirutana Mandhachitara

Australian Centre for International BusinessUniversity of Melbourne

and

Australian Centre for International Business

University of New South Wales

AUSTRALIAN CENTRE FOR INTERNATIONAL BUSINESS

Department of ManagementUniversity of MelbourneParkville VIC 3052 Australia

Phone: +61 3 9344-5340Fax: +61 3 9347-3770

Email: [email protected]

Web: www.ecom.unimelb.edu.au/acib/

and

School of International BusinessUniversity of New South WalesSydney NSW 2052 Australia

Phone: +61 2 9385-5802Fax: +61 2 9385-6440

Email: [email protected]: www.fce.unsw.edu.au/acib/


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Discussion Paper No. 14 - June 2000

ARE JAPANESE MNES LEARNINGORGANISATIONS?

SHORT AND LONG-TERM JAPANESE BUYERLEARNING IN AUSTRALIAN AND THAI

MANUFACTURING

Stephen Nicholas

Australian Centre for International BusinessUniversity of Melbourne

Parkville, Victoria, 3052, [email protected]

Tel +6139344 4725 Fax +61393473770

andEconomic Research Centre

Nagoya University

William R. PurcellAustralian Centre for International Business

School of International Business

University of New South WalesSydney 2052 AustraliaTel: +(61 2) 9385 5887

Fax: +(61 2) 9385 6440Email: [email protected]

Tasman Smith

and

Rujirutana MandhachitaraSchool of Marketing

Thammasat UniversityBangkok, Thailand

Australian Centre for International Business

A collaborative Centre between the University of Melbourneand the University of New South Wales

ISSN 1441-6093ISBN 0 7334 0732 3


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ABSTRACT

Japanese MNEs have been dubbed knowledge-creating companies. This paper tests

whether Japanese subsidiaries in Australia and Thailand learn from their subcontract

arrangements with indigenous suppliers, creating new knowledge that is disseminated

throughout the organisation. Integrating across internalisation-capability models,

agency theory and the learning literature, a model of knowledge creation in MNEs is

presented. Japanese parents transferred to Australia and Thailand firm-specific

capabilities, including pre and post-contractual subcontracting practices. Post-

contractual subcontracting practices, such as transfer of drawings and designs, advice

on quality control, specifications, management and delivery times and the transfer of

machinery and copying staff, were implemented at a rarely-sometimes level.

Statistical tests revealed that Australian firms evidenced no short-term learning in the

operation of subcontracting practices between 1993 and 1997. Long-term learning was

measured by comparing post-contractual subcontracting practices between experienced

Australia and Thai firms operating before 1988 with more recent arrivals. Our tests

revealed that experienced Japanese MNEs did not create new subcontracting

knowledge. The paper identified this lack of learning with the failure of Japanese

MNEs to build subsidiary-headquarter communication and information infrastructures

allowing data flows that ensured learning.

We would like to thank the Economic Research Centre, Nagoya University for providing aVisiting Research Fellowship for Stephen Nicholas during April-July, 1998. We acknowledgethe financial support of The Faculty of Economics and Commerce, University of Melbourne. JanUhlhorn and Jascha Zimmerman provided research assistance. The 1993 data were collected aspart of a joint research project on Japanese MNEs with David Merrett and Greg Whitwell,University of Melbourne. Gabriel Benito provided helpful suggestions.


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Are Japanese MNEs Learning Organisations?

1

INTRODUCTION

The Japanese firm has played a central role in the shifting research focus from knowledge

transfer to knowledge creation in multinational enterprises (MNEs). Dubbed knowledge creating

companies, Japanese MNEs economic prowess has been linked to their expertise at organisational

knowledge creation or the ability to create new knowledge and disseminate it throughout the

organisation. (Nonaka and Takeuchi, 1995) The special place of Japanese firms in management

research can be traced to the culturalist school that identified the success of the Japanese firm with

uniquely Japanese subcontracting practices, including information flows and quality assurance with

long-term suppliers. (Abegglen 1958, Clark 1979, Cole 1971, Pascale and Athos 1981, Ouchi 1982).

Learning and inter-firm knowledge creation were at the centre of these subcontract relationships. The

internationalisation of Japanese firms in the 1980s re-ignited interest in Japanese management,

particularly as to whether Japanese subcontract practice could be successfully transplanted into non-

Japanese environments. (Cole 1971; Koike, 1988; Gordon, 1985; Aoki, 1994; Florida and Kenney,

1991) The transfer of Japanese buyer-supplier networks overseas has been explored from a number

of perspectives. Non-Japanese firms imitate Japanese buyer-supplier organisation, including just-in-

time (JIT) and input quality control. (Roehl, 1989; McMillan, 1990; Nishiguchi and Anderson, 1995;

Helper, 1991; Sako, Lamming and Helper, 1998; Helper and Sako; 1993, 1995; Cusumano and

Takeishi, 1991; Richardson, 1993; Oliver and Wilkinson, 1988; 1992) Second, Japanese buyers might

transplant Japanese suppliers into the host economy, forming subcontracting relations with Japanese

transplants. (Lamming, 1990; Kumon, et al, 1994; Martin, Mitchell and Swaminathan, 1995; Martin;

1996; Florida and Kenney; 1991; Kawabe and Kamiyama, 1997; Cho, 1997; Gittelman and Graham,

1994) Finally, Japanese buyers might enter into subcontracting arrangements with local suppliers,

transferring Japanese supplier-buyer know-how to indigenous firms. This study focuses on the

transfer of know-how between Japanese buyers and indigenous suppliers, and whether Japanese

buyers create new knowledge from the transfer process.

Little research has been directed towards knowledge transfer between Japanese buyers and

indigenous suppliers, typical of a surprising neglect of empirical research on knowledge transfer

between independent firms. (Besman, Birkkinshaw and Nobel, 1999) There has been even less

research on knowledge creation within subcontract relationships. An emerging empirical literature on

knowledge creation has focused on knowledge creation internally (Szulanski, 1997) and through JVs

(Inkpen, 1997), mergers and acquisitions (Bresman, Birkinshaw and Nobel), and alliances (Simonin,

1999). Knowledge creation is a central constituent of Japanese subcontract networks. How buyers

set specification for suppliers, and how suppliers meet those specifications, defines Japanese

subcontracting. (Asanuma, 1989; Sako, 1992; Odaka, Ono and Adachi, 1988; Nishiguchi and Broofield,

1997) Japanese MNEs manage the subcontract network by structuring an incentive contract to align

the goals of the supplier and buyer. The contract involves information flows, which allow performance

monitoring, timely component delivery and quality control. Both parties learn to improve subcontract

practices.

Early studies of Japanese subcontracting with British suppliers found that indigenous suppliers

performed poorly on quality control, price competitiveness and delivery reliability. (Dunning, 1988;

Trevor and Christie, 1988; Oliver and Wilkinson 1988, 1992) More recent studies have confirmed the

preference by Japanese buyers to import inputs from Japan or to source from Japanese transplanted

suppliers. (Cusumano and Takeishi, 1991; Abo, 1994; Kumon, et al, 1994; Kumon, 1997; Kawabe and

Kamiyama, 1997; Abo, 1997; Itagaki, 1997; Cho, 1997; see Pickernell, 1997 for a contrary view.)

There has been little research on the dynamics of Japanese MNE-indigenous supplier relations,

including the speed of diffusion of subcontract practices and their success over time. This study

addresses these lacunae, examining both the transfer of Japanese know-how to indigenous suppliers


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and whether Japanese buyers learn from this knowledge transfer. Short and long-term knowledge

creation is studied for large and small Japanese manufacturing subsidiaries in Australia and Thailand,

with different levels of operational experience.

THEORY

Three strands of economic theory drive this paper. The dominant theoretical paradigm for

understanding knowledge transfer has been the internalisation approach. Parents transfer a set of

ownership advantages, related to process and product technology, marketing know-how, managerial

skill and brand name, to their subsidiaries. For Japanese MNEs, subcontracting practices, such as JIT

and quality control mechanisms, were identified as key ownership advantages. The costs of

transacting in the market meant that the rents on the parents firm-specific knowledge assets could not

be appropriated through market sale. The failure of the market to protect the firms property rights in

its ownership attributes meant it was more efficient to internalise the transfer of knowledge within the

MNE. (Casson 1979; Hennart 1982, 1991; Dunning, 1977)

Ownership advantages are a rather old-fashion word for a firms core competencies or

capabilities. (Prahalad and Hamel, 1990) Capability-resource models emphasise the failure of markets

to define property rights in nonimitable and non-tradeable firm-specific resources. (Barney, 1986;

Montgomery and Wernerfelt, 1988; Peteraf, 1993) The capability and internalisation models both

emphasise the failure to assemble or transfer a firms capabilities through the market. (Teece, 1982,

1986; Kogut and Zander, 1992) More recently, both internalisation and capability models have

identified a range of intermediate contractual arrangements, such as subcontracting, licensing,

franchising and alliances, which provide alternatives to hierarchy and markets as ways firms earn

returns on their capabilities. (Williamson, 1985)

Japanese subcontracting arrangements with indigenous suppliers are intermediate contractualarrangements that allow Japanese MNEs to earn rents on their firm-specific subcontracting

advantages. The parents buyer capabilities are transferred to Australia and Thailand, but Japanese

subsidiaries require complementary supplier assets from host country suppliers if their buyer

capabilities are to earn rents. These host country suppliers can be transplanted Japanese suppliers or

indigenous suppliers. To operationalise their core competencies and buyer capabilities, Japanese

subsidiaries structure long-run subcontracting relationships with host country suppliers that organise the

joint use of buyer and supplier capabilities. Our focus is on subcontract relations between Japanese

subsidiaries and indigenous suppliers.

The second strand of economic theory is agency theory that provides substantial insights into

the operation and organisation of parent-subsidiary and buyer-supplier relationships (Williamson 1985;Holstrom 1979; Carlos and Nicholas, 1993). Parents face potential agency costs from their

subsidiaries when they transfer subcontracting know-how. These agency costs relate to whether

subsidiaries use the transferred subcontracting know-how in the interests of the whole MNE or in the

self interest of the subsidiary. Subsidiaries face identical agency problems with opportunistic suppliers,

who may (mis)use the know-how in their own self interest at the expense of the Japanese buyer. The

Japanese parent builds control and monitoring systems that attenuate opportunistic behaviour on the

part of the subsidiary while at the same time providing sufficient incentives for the subsidiary to

maximise returns on the transfer of parent subcontracting capabilities. Similarly, the subcontract with

indigenous suppliers is a device for monitoring and protecting the subsidiarys know-how transferred to

indigenous suppliers. Embedded in the subcontracting practices and structured into the day-to-day

operations between the parties are monitoring and control mechanisms, such as routine informationflows on quality of components, delivery reliability and input improvements.


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The idea of routinised information flows link with the third strand of theory that draws on the

emerging organisational learning literature. (Leroy and Ramanantsoa, 1997; Huber, 1991; Inkpen,

1995; Kim, 1993) The most difficult capabilities to transfer are those which are tacit. Tacit knowledge

involves knowing how rather than knowing about. Knowledge which is ambiguous, difficult to

communicate and idiosyncratic, acts as the barriers to transferring knowledge from originator to user.(Grant, 1996; Kogut and Zander, 1992). Learning involves both knowledge creation, through repetition

and experimentation between Japanese buyer and indigenous supplier, and knowledge use so that tasks

can be performed better. (Levitt and March, 1988; Winter, 1987; Spender, 1996) Learning in

subcontract arrangements typically occurs through the social interaction of individuals. (Nonaka, 1994;

Spender, 1996) When tacit knowledge is created and transferred through communities of

interaction, individual and group know-how is transformed into organisational knowledge. (Kogut and

Zander, 1992; Spender, 1996) The analogy for the tacitness of individual knowledge for a firm is that

an organisation knows more than it can tell. (Po1anyi, 1962, 1966) Put another way, organisational

knowledge embedded in communities of workers is greater than that of any individual.

The organisation does not create knowledge, but provides the formal and informal routines,procedures, norms and cultures for knowledge creation and learning. (Hedberg, 1981; Huber, 1991;

Winter, 1987) According to David (1994)), firm-specific channels and codes for dealing with

information represent sunk organisational capital. Within organisations, individuals share common

codes of communication and common understanding of co-ordination procedures, which makes

possible joint inputs into problem solving and, as a result, collective learning. Learning is encouraged

when the firms organisational design allows frequent interactions between individuals and within

groups, allowing new information to be generated and experiments to be run. (Dosi, Teece and Winter,

1992). Operationalised in inter-firm patterns and routines of doing things, subcontract relationships

typically allow tacit learning through continuous improvement, transfer of plans and machinery, JIT and

labour training. (Nelson, 1991) While existing routines facilitate learning, learning is also a response to

challenges to existing routines. There is some a prior evidence for learning in subcontractrelationships. First, Japanese subcontract practice is routinised in the parent and subsidiary. Second,

the transfer of subcontract practices to Australian and Thai suppliers results in experimentation and

repetitive interaction, generating new data. Subsidiary work groups learn from repeat interaction and

continuous flow of information from suppliers. Through the Japanese subsidiarys codes and

information channels, these new data confront established belief systems of managers and workers.

Expatriate managers and headquarter staff assess the data generated from subcontract performance,

including input improvement, delivery reliability and component costs. The data and information arising

from worker interaction and manager monitoring is internalised, changing routines and behaviour that

can be measured in terms of subcontract practice outcomes. Following Inkpen (1995) and Leroy and

Ramanantsoa (1997) our analysis of organisational learning focuses on measured outcomes, reflected

in the changes in subcontract practices in the short-run and the long-term.

SAMPLE AND RESEARCH METHODOLOGY

We undertook three identical surveys of Japanese MNE subcontracting practices in Australian

manufacturing in 1993 and 1997 and Thai manufacturing in 1999. The Australian samples were

combined into an aggregate sample. The Australian samples were primarily drawn from the 1992 and

1996Directories of Japanese Business Activity in Australia . The Thai sample was drawn from the

1999 List of Members, Japanese Chamber of Commerce, Bangkok. The survey document was

designed in English, translated into Japanese and then independently back-translated.1

Japanese and

English questionnaires were mailed to the CEOs of each Australian subsidiary, together with a letterof endorsement from the Japanese Chamber of Commerce and Industry. A follow-up letter was


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mailed three weeks after the initial mail-out, enclosing another survey questionnaire. Follow-up

telephone calls were subsequently made to all non-responding firms. Mail surveys are difficult to

conduct in Thailand. Interview appointments were made by phone with 56 Japanese subsidiaries. A

copy of the survey was sent by post, then a face-to-face interview was held to complete the survey.

The population and sample characteristics are given in Table 1. As can be seen from Table 1,the sample firms were widely distributed across the manufacturing sector, using the standard

Australian industrial classification. Firms in the 3000 classification in Table 1 are those typically

associated with subcontracting practices in Japan. The 1993 Australian manufacturing sample was

broadly representative of the size distribution of the population, but the 1997 sample included more

large firms, with our respondents accounting for 30 percent of the population but 55 percent of total

Japanese manufacturing. To overcome the bias toward large firms, the learning results were analysed

for firm size. The response rate for Thai subsidiaries was 43 percent, and the firms were broadly

representative of the size distribution of the population. In order to assess changes, we conducted a

number of tests. T-tests were used to measure the difference in proportions; Kruskal-Wallis one-way

analysis of variance by ranks was used to determine whether the means from different samples are

from the same population; and Mann-Whitney U test was employed as a non-parametric version of anindependent sample t test. (Bryman and Craner, 1997; Siegel and Castellan, 1988) In the tests

reported in the paper, there was a small variation in sample sizes, since all firms did not answer every

question.

Table 1: Sample characteristics for Manufacturing Firms and Standard Manufacturing Classifications

Industry

Survey Mailing List

EstimateRespondents

Sector

Firms Employees Firms Employees

Response

Rate

(percent)

Employee

Ratios

(percent)

1993 94 AustralianManufacturing

53 26200 20 10187 38 39

1997 Australian

Manufacturing

84 31345 25 17144 30 55

Aggregate

Australian

Manufacturing

137 57682 45 27331 33 47

1999 Thai

Manufacturing

130 58143 56 28222 43 49

ASIC Classification1993 Australian

Sample

1997 Australian

Sample

Aggregate

Australian

1999 Thai

Sample

2000-Food 3 6 9 5

2000-Textile and Furniture 1 3 4 9

3000-Paints, Plastics and 3 1 4 6

3000-Machinery 4 1 5 5

3000-Electrical 4 5 9 17

3000-Auto Parts & 5 4 9 10

3000-Instruments -- 5 5 --

3000-Cosmetics & Household -- -- -- 4

TOTAL 20 25 45 56

Note: Australia-Japan Economic InstituteA Directory of Japanese Business Activity in Australia 1992 and

1996, Sydney; 1999 List of Members, Japanese Chamber of Commerce, Bangkok


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Transfer of Parent Capabilities and Subcontracting Practices

Table 2 scores the mix of tacit and explicit knowledge Japanese parents transferred to their

subsidiaries in Australia and Thailand. The capabilities comprise generic know-how, such as product

quality and price, in-house quality control, management and work organisation expertise, as well as

specific subcontracting knowledge, such as input quality control and delivery reliability. According tothe Mann-Whitney test, the only significant differences in the ranking of the capabilities and

subcontracting practices between Australian and Thai firms in Table 2 was in-house quality control

and keeping delivery times. There were no significant differences in the ranking of capabilities

between the 1993 and 1997 Australian samples, except in-house quality control that was ranked

significantly lower in 1997. This lower ranking in 1997 was due to recent arrivals in 1997 compared to

recent arrivals in 1993. There were only two significant differences across experience and size

between the samples. Experienced2

and large3

Thai firms ranked delivery reliability, and small and less

experienced Thai firms ranked input quality, higher than their Australian counterparts.4

These data

show that Japanese MNEs transferred a generic set of know-how whether they invested in Australia

or Thailand, which given the path dependent nature of a firms capabilities were slow to change both in

the short and long-term.

Table 2 Mean Score of the Competitive Capabilities of Japanese MNEs

(Mann Whitney U Test Significant at 0.10 in bold)

Australia

1993

Mean (SE)

Australia

1997

Mean (SE)

Australia

Aggregate

Mean (SE)

Thailand 1999

Mean (SE)

CAPABILITIES

Product quality 3.7 (0.17) 3.8 (0.0) 3.8 (0.0) 3.9 (0.0)

Product price 3.2 (0.23) 3.7 (0.0) 3.5 (0.10) 3.7 (0.0)Work organisation 3.1 (0.22) 3.0 (0.0) 3.0 (0.10) 3.1 (0.0)

Management expertise 3.1 (0.21) 3.0 (0.0) 3.0 (0.10) 3.1 (0.0)

After sale service 3.4 (0.20) 3.3 (0.18) 3.3 (0.13) 3.1 (0.10)

Advertising & marketing 3.0 (0.25) 3.1 (0.13) 3.0 (0.13) 2.8 (0.10)

In-house quality control 3.7 (0.18) 3.3 (0.16) 3.5 (0.12) 3.7 (0.0)

SUBCONTRACT PRACTICES

Keeping delivery dates 3.3 (0.19) 3.3 (0.16) 3.3 (0.12) 3.7 (0.0)

Quality of inputs 3.3 (0.23) 3.3 (0.16) 3.3 (0.13) 3.4 (0.)

Note: 1-no; 2-low; 3-medium; 4-high

There were significant differences in the reliance on subcontracting by Japanese subsidiaries

in Australia and Thailand. Japanese MNEs in Thailand sourced 8 percent of their parts and

components in-house, while 22 percent were manufactured in-house in Australia. Thai subsidiaries

imported 48 percent of their components and relied on Japanese firms in Thailand for another 19

percent of their parts. In contrast, Australian subsidiaries only imported 22 percent of their inputs, and

less than 1 percent of components were procured from other Japanese firms in Australia. Australian

suppliers accounted 57 percent of the inputs of Japanese suppliers, with 35 percent through contracts

of more than 3 years duration and the remaining inputs (22 percent) coming through shorter duration

contracts. In contrast, Thai suppliers only supplied 28 percent of Thai subsidiary inputs, with 16 percent

long-term and 12 percent short-term contracts. These data suggest that the operation of thesubcontract system will display significant difference in the two countries, and that learning outcomes


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are likely to be different.

In spite of the different reliance on subcontracting and on indigenous suppliers in

Australia and Thailand, Table 3 shows that Japanese pre-contractual sourcing practices were

reproduced with suppliers in both countries. Japanese subsidiaries sought quotations, contacted two or

more firms, provided details of the required input and established a long-term relationship with potentialsuppliers. The only difference in pre-contractual subcontracting behaviour between the Australian and

Thai samples was that Thai subsidiaries ranked contacting two or more firms for quotes significantly

higher than Australian subsidiaries. Contacting two or more firms was ranked significantly lower in

1997 than in 1993 Australian survey, but there were no significant differences across size or

experience for the Australian aggregate or the sub-samples (except contacting two or more firms that

was lower in 1997 than 1993). Pre-contractual sourcing did not vary across Thai subsidiary experience

or size.

Table 3 Pre-contractual sourcing By Japanese buyers in Australia and Thailand


1993

Mean (SE)

1997

Mean (SE)

Aggregate

Mean (SE)

Thai

Mean (SE)

Seek quotations 3.7 (0.27) 3.9 (0.0) 3.9 (0.0) 3.7 (0.0)

Establish long term relationships 3.6 (0.16) 3.2 (0.24) 3.5 (0.11) 3.3 (0.11)

Provide details of input to potential

Suppliers, then seek quotations

3.4 (0.31) 3.6 (0.15) 3.4 (0.13) 3.7 (0.0)

Always contact two or more firms 3.5 (0.16) 2.9 (0.19) 3.2(0.13) 3.5 (0.10)

Average Score 3.6 3.4 3.5 3.6

Note: Based on scale 1-4, with 1=no, 2=low, 3=medium, 4=high.

Short Term Post-Contractual Learning in Australia

While pre-contractual practices with indigenous suppliers replicated Japanese domestic

subcontracting practice, Australian post-contractual sourcing in Table 3 departed from Japanese

subcontracting practice. Overall, Japanese subsidiaries in Australia only sometimes implemented

Japanese subcontracting arrangements. There was reluctance by Japanese buyers to provide help with

input delivery and management practice or to transfer technical know-how, designs, tools and

machinery or to train operatives. Key elements of the Japanese subcontracting system were not

replicated in Australia. The Mann-Whitney tests in Table 4 show there was a significant increase inthe frequency in the transfer of drawings, advice on materials and training operatives between 1993

and 1997, but the training operatives and transfer of designs improved from low levels. Short-run

learning was patchy.


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Table 4 Post contractual relationship by Japanese buyers in Australia and Thailand(Mann Whitney U Test Significant at 0.10 in bold)

1993

Mean (SE)

1997

Mean (SE)

Aggregate

Australian

Thai

Establish long-term relationship 3.5 (0.16) 3.1(0.27) 3.4 (0.13) 3.1(0.12)Visit the supplier regularly 3.3 (0.14) 3.5 (0.17) 3.2 (0.14) 3.1 (0.09)

Transfer designs and drawings 2.5 (0.25) 3.3 (0.21) 2.7 (0.17) 2.6 (0.15)

Transfer other technical know-how 2.6 (0.24) 2.9 (0.28) 2.7 (0.16) 2.5 (0.14)

Transfer tools and machinery 2.4 (0.31) 2.5 (0.28) 2.2 (0.19) 2.3 (0.12)

Advise on

specifications/procurement2.9 (0.21) 3.5 (0.21) 3.0 (0.17) 3.2 (0.10)

Advise on quality control 2.9 (0.31) 3.4 (0.15) 3.0 (0.18) 3.1 (0.11)

Advise on delivery times 2.7 (0.26) 3.0 (0.30) 3.0 (0.18) 3.1 (0.09)

Advise on management 2.3 (0.26) 2.8 (0.29) 2.3 (0.18) 2.1 (0.11)

Train operatives 1.6 (0.22) 2.7 (0.30) 2.1 (0.17) 2.2 (0.12)


Note: Based on scale 1-4, with 1=never, 2=rarely, 3=sometimes, 4=usually.

Long-term Post-Contractual Learning in Australia and Thailand

Japanese buyers in Australia and Thailand ranked post-contractual sourcing arrangements the

same, with an average score of 2.7 (rarely-sometimes) in Table 4. The absence of different post-

contractual subcontracting practices by Australian and Thai subsidiaries is surprising for two reasons.

First, Japanese subsidiaries in Australia depended on indigenous suppliers, while Japanese buyers in

Thailand used both Japanese transplants and indigenous suppliers. The implication of higherdependence rates in Australia was a greater need to ensure supplier practices that complemented

Japanese buyers capabilities. Second, Australian suppliers possessed significantly higher skill levels

than Thai suppliers. This implies a lesser need for Australian subsidiaries to transfer buyer know-how

to their indigenous suppliers than would be the case in Thailand.

Experience and size are also likely to be significant factors impacting on the operation of

subcontracting practices. The theory section suggested that firms that have experimented or practiced

for a longer period of time will have a better chance of learning. (David, 1994; Teece, Pisano and

Shuen, 1997) Our tests revealed that experienced Australian subsidiaries did not implement post-

contractual sourcing arrangements more intensely than recent arrivals, except to establish long-term

relations with suppliers significantly more frequently5

. There were no significant differences in post-contractual practices by experienced and inexperienced Thai suppliers. To provide a further test of

learning by experienced firms, the Australian and Thai samples were divided into three experience

groups, those operating for more than 20 years, those operating 8-20 years and those with less than 8

years experience. Mann-Whitney and difference in proportion tests were run on two subsamples, with

the firms with 8-20 years experience deleted. The results revealed no significant differences for the

Thai firms between experienced and more recent arrivals. For the Australian firms with more than 20

years experience, the only significant differences were that they visited suppliers and established a

long-term relationship more frequently than recent arrivals. Experience did not promote learning by

Australian or Thai subsidiaries.

The theory also suggested that large firms learn faster if they have invested in moreinfrastructure and organisational capital than small firms. Size and experience were not significantly


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correlated in the Thai or Australian samples. Large Thai buyers established long-term relationships and

transferred tools significantly more frequently than small Thai subsidiaries, but other post-contractual

practices were not significantly different. Large Japanese subsidiaries in Australia rank their

implementation of post-contractual arrangements significantly higher than smaller subsidiaries,

including establishing a long-term relationship, visiting suppliers regularly, helping with quality control

and delivery times and advising on management. Learning by large Australian subsidiaries was partlyan industry effect. Taking the firms from the 3000 standard industrial classification in Table 1, there

were no significant differences between large and small firms in their implementation of Japanese

post-contractual subcontracting practices. It is these 3000 industrial classifications that Japanese

subcontracting are most prevalent in at home.

The Thai data allowed tests for difference in subcontracting practices between Japanese

transplanted suppliers and indigenous Thai suppliers. There were few significant differences. Japanese

buyers that were reliant on indigenous suppliers were significantly less likely to transfer designs and

drawing and coop supplier staff compared to subsidiaries reliant on Japanese transplants. Generally,

Japanese buyers and Japanese transplanted suppliers did not implement more Japanese

subcontracting practices than Japanese buyers and Thai suppliers.

Short and Long-term Learning by Indigenous Suppliers

There is indirect evidence of learning by indigenous suppliers. Table 5 reveals that Japanese

MNEs rated the co-operation of their Australian (3.3) and Thai suppliers (3.2) higher in executing

Japanese subcontracting practices than they scored themselves as implementors of Japanese

subcontracting arrangements (2.7 for Australia and Thailand in Table 4). There were no significant

differences in the post-contractual cooperation of suppliers in Australia compared to Thailand or

between suppliers in the 1993 and 1997 Australian surveys6. But, Australian and Thai suppliers

improved their performance in the long-run. Japanese buyers with 12 or more years in Australiaranked their suppliers post-contractual co-operation higher than more recent arrivals ranked their

suppliers cooperation7. Similarly, experienced Thai buyers ranked their suppliers significantly higher

than inexperienced buyers ranked their suppliers, especially improving quality and delivery times,

forming a long-term relationship and acting in the buyers interests.

Table 5 Post-contractual Co-operation by Australian and Thai Suppliers


1993 1997 Aggregate Thai

Form a long-term relationship 3.4 (0.19) 3.1 (0.23) 3.3 (0.12) 3.2 (0.11)

Negotiate input price falls and rises 3.5 (0.19) 3.5 (0.17) 3.4 (0.10) 3.4 (0.08)Co-operate to improve quality 3.5 (0.26) 3.6 (0.14) 3.4 (0.12) 3.2 (0.11)

Co-operate to improve delivery times 3.3 (0.19) 3.4 (0.23) 3.3 (0.12) 3.3 (0.10)

Act in Japanese firms interests 3.1 (0.26) 3.2 (0.26) 3.1 (0.14) 2.9 (0.11)


Note: Based on scale 1-4, with 1=never, 2=rarely, 3=sometimes, 4=usually. Mann-Whitney U

statistics are 5% two-tail tests.

Was Buyer Learning Necessary?

It would be an error to see the replication of Japanese domestic subcontracting practice as the

benchmark for successful subcontracting relationships in Australia and Thailand. The subcontractingsystem in Japan is the outcome of a path dependent process that Japanese firms may not recreate at


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home if given the choice (Odaka, Ono and Adachi, 1988; Nishiguchi and Brookfield, 1997). In

Australia and Thailand they were given the choice to build subcontracting practices from scratch by

selectively transferring key elements of Japanese practice to their overseas operations. If Japanese

buyers were satisfied with their suppliers, then the absence of improvements in the initial transfer of

subcontracting know-how should not be interpreted as a failure or a lack of learning. Did Japanese

buyers procure inputs satisfactorily under their subcontracting arrangements with their Australian andThai suppliers?

Japanese buyers were not satisfied with their Australian or Thai suppliers behaviour, scoring

average performance low-medium (2.7) in Table 6. Satisfaction with crucial supplier practices,

especially availability and reliability of delivery, were rated particularly poorly. There were no

significant differences in Australian buyers (dis)satisfaction with their Australian suppliers in Table 6

between 1993 and 1997, nor were there significant differences across experience and size.

Experience, measured by subsidiaries with over 12 years experience, was not significantly different

from recent arrivals for the aggregate Australian or the Thai sample. Table 6 also shows that Japanese

buyers ranked their satisfaction with suppliers the same, although Australia suppliers were ranked

higher for local input quality and local standards and specifications than their Thai counterparts. Thesignificantly different scoring of satisfaction in Table 6 was due to small and recent arrivals that

performed better in Australia than Thailand. Experienced and large Japanese buyer satisfaction with

suppliers was not significantly different across the two countries. Moreover, Japanese buyers in

Thailand who relied mainly on Japanese transplants did not rank their satisfaction higher than those

buyers that depended mainly on indigenous suppliers.

Table 6 Satisfaction with Australian and Thai Suppliers

(Significant at 0.10 in bold)

1993 1997 Aggregate Thai

Input price 2.8 (0.18) 2.7 (0.17) 2.8 (0.11) 2.8 (0.0)

Input quality 2.8 (0.18) 2.9 (0.22) 2.8 (0.12) 2.6 (0.0)

Standards &

specifications

2.7 (0.14) 2.9 (0.15) 2.8 (0.0) 2.5 (0.0)

Availability 2.3 (0.19) 2.5 (0.27) 2.6 (0.14) 2.7 (0.0)

Reliability of delivery 2.5 (0.19) 2.3 (0.24) 2.5 (0.14) 2. 7 (0.0)


Note: Based on scale 1-4, with 1=no, 2=low, 3=medium, 4=high. Mann-Whitney U statistics are 5% two-tail

tests.

Why Didnt Japanese Buyers Learn?

Australian and Thai subsidiaries did not improve their post-contractual subcontracting practices

with local suppliers, although there was dissatisfaction with the performance of suppliers. Without

transplanted Japanese suppliers as alternatives to indigenous suppliers, Australian buyers had an

especially strong incentive to improving the practices of Australian suppliers. In Thailand, indigenous

suppliers productivity and efficiency would have benefited from the better subcontracting practices.

Perhaps the most interesting finding is the failure of Japanese transplants to perform significantly

better or to implement subcontracting practices more intensely than indigenous suppliers in Thailand.

There were learning opportunities both in Australia and Thailand. Japanese subsidiariestypically formed long-term relationships and visited suppliers regularly. Continuous monitoring of


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suppliers by Japanese managers, including information flows related to quality, pricing and delivery

schedules, provided the opportunity for learning. Japanese expatriate managers had time to learn. In

the 1997 survey, expatriate managers spent a significantly longer period of secondment in Australia (on

average 5 years) than expatriate managers did in the 1993 survey (on average 3 years). Expatriate

managers average stay in Thailand was 5 years. Expatriate managers controlled the decision-making

and planning functions, including the chief executives (75-74 percent for Australia-Thailand), theplanning managers (44 -46 percent for Australia-Thailand) and other senior managers (38-43 percent

for Australia-Thailand). It was these managers who confronted subcontracting practices in Australia

and Thailand that did not meet the routinised and institutional norms characteristic of subcontracting in

Japan.

Further, learning should have been facilitated through information, data and control channels

between expatriate managers and headquarter staff. Except for phone, fax and e-mail communication

with superiors in Japan, which ranked 3.6 and 3.5 on a 4 point scale, there is evidence of the under use

of coordinating infrastructure. Regular written reports (3.2 for both Australia-Thailand) were ranked

lower than informal phone and email communication, and conferences in Japan (3.0-2.9 for Australia-

Thailand) and informal networking (2.8-3.0 for Australia-Thailand) were ranked still lower.Information flows using these channels were sparse and of poor quality. There is also evidence of an

under-investment in control, monitoring and coordinating infrastructure and routinsed information flows.

Only 23 percent of Japanese subsidiaries in Australia sought parent approval for sourcing decisions in

1993, while no subsidiary sought parent approval in 1997. In Thailand, only 13 percent of Japanese

subsidiaries sought parent approval for sourcing decisions, and 22 percent had no parent input. Forty-

five percent of the Australian respondents had no parent input in the decision to source inputs, and only

11 percent sought parent approval for sourcing inputs. Contrary to the theory, experienced and large

Australian and Thai subsidiaries did not differ significantly in parent sourcing approvals, communication

infrastructure or oversight mechanisms compared with recent arrivals and small MNEs.8

Japanese work organisation, including JIT, teamwork and in-house quality control supportedJapanese subcontracting practices. Subsidiary managers in Australia and Thailand were given a large

measure of autonomy over work practices. Sixty-one percent of Australian suppliers and half the Thai

suppliers sought no parent input into work organisation decisions. For Japanese subsidiaries in

Australia, 43 percent did not follow Japanese work practices, significantly higher than the 28 percent

of Thai subsidiaries that failed to follow Japanese work practices. Japanese MNEs did not provide the

personal interaction required to transfer tacit know-how. Personal visits by executives from Japan to

Australia (2.6) and Thailand (3.3) and from Australia (2.0) and Thailand (3.2) were ranked low-

medium.9

The data points to a failure to build intrafirm architectures that ensure supervisors in Japan

receive the information through internal firm communication and information channels required for

learning.

Of course Japanese MNEs were not devoid of control and monitoring mechanisms, nor was

subsidiary autonomy characteristic of all parent-headquarter relations. Headquarters tightly controlled

finance, product choice and range and technology. Fifty-one percent of Australian and 65 percent of

Thai subsidiaries sought parent approval for capital expenditure and 42 and 46 percent sought approval

for short and long-term financial decisions. Headquarters also tightly controlled explicit knowledge,

with 43 percent of Australian and 38 percent of Thai subsidiaries seeking parent approval on the

product range. Not all information flows to headquarters were deficient, but tacit knowledge transfer

was poorly supported by formal infrastructure and routinised information flows.


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11

CONCLUSION

This study analysed the transfer of know-how between Japanese buyers and indigenous

suppliers, and whether Japanese buyers create new knowledge from the transfer process. In Japan,

subcontracting involved learning between buyer and supplier. Japanese parents successfully

transferred know-how to Australia and Thailand and implemented a range of subcontracting practices.How buyers help suppliers meet part and component specifications, including JIT, quality control,

transfer of designs and technical know-how, and advice and training, operated differently in Australian

and Thai subsidiaries than at home. Post-contractual subcontracting practices were only implemented

rarely-sometimes both in Australia and Thailand. Our statistical tests revealed Japanese buyers did

not learn to deepen their subcontracting practices either in the short-run in Australia or the long-run in

Australia and Thailand. Japanese MNEs were not learning organisations.

There were two failures. First, expatriate managers confronted Japanese subcontracting

practices in Australia and Thailand that did not meet the routinsed and institutional norms

characteristics of subcontracting in Japan. These subsidiary managers were unable (or unwilling) to

implement higher levels of Japanese subcontracting practices with their suppliers. Second, Japaneseparents did not learn from their Australian and Thai subsidiaries. Organisations design formal and

informal routines, norms and cultures for knowledge creation and learning, reliant on sunk

organisational capital. Japanese parents failed to structure routinised subcontracting information flows

and to invest in the organisational capital that supports knowledge creation. Headquarter staff received

poor and inadequate quantities of subcontracting data, and exercised little input or monitoring of supply

decisions. Subcontracting practices also relied on Japanese work practices, such as JIT and quality

control. Work organisation was delegated to the subsidiary, with a failure to control or oversee

subsidiary work organisation by headquarter staff. The information from day-to-day interaction

between suppliers and Japanese buyers was not disseminated throughout the organisation. Japanese

MNEs in Australia and Thailand were not knowledge-creating organisations.

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* * * * * * * * * * * * * * *

We would like to thank the Economic Research Centre, Nagoya University for providing a Visiting

Research Fellowship for Stephen Nicholas during April-July, 1998. We acknowledge the financial

support of The Faculty of Economics and Commerce, University of Melbourne. Jan Uhlhorn and

Jascha Zimmermann provided research assistance. The 1993 data were collected as part of a joint

research project on Japanese MNEs with David Merrett and Greg Whitwell, University of

Melbourne. Gabriel Benito provided helpful suggestions.

1The survey was translated and independently back-translated by Japanese staff in the Japanese Language

Teaching Unit in the School of International Business, UNSW.

2Experienced Australian and Thai subsidiaries had been operating since 1988.

3 Large Australian subsidiaries were defined as those with more than 160 employees and large Thai subsidiaries

with more than 800 employees.

4 Tests are available from the authors.

5

Tests are available from the authors.

6Tests are available from the authors.


8 The only exception was large Thai firms that sought parent sourcing approval compared to small Thai

subsidiaries.



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DISCUSSION PAPERS & BUSINESS/ CONSULTING REPORTS

Discussion Papers

1 The Multinational Enterprise: New research Agendas in International Business,Stephen Nicholas and Elizabeth Maitland, September 1998.

2 Do Japanese Buyers Learn? A Longitudinal Study of Japanese MNEs Subcontractingwith Australian Suppliers, Stephen Nicholas and William Purcell, October 1998.

3 Industry Consolidation and Global Competition: Multiple Market Competition in the

Tire Industry, Kiyohiko Ito and Elizabeth Rose, October 1998.4 Foreign Investment Motivations and Location Patterns: Korean Electronics

Companies and the European Union, Sidney J. Gray and Sunghoon Hong, November1998.

5 The Transfer of Human Resource and ManagementPractice by JapaneseMultinationals to Australia:Does Industry, Size and Experience Matter?, WilliamPurcell, Stephen Nicholas, David Merrett and Greg Whitwell, December 1998.

6 Genealogical Transformation of Resources: A Study of Japanese Service Firms ,Elizabeth Rose and Kiyohiko Ito, January 1999.

7 Incentives in the Location Decision by Japanese Multinationals in Singapore: A

Comparative Study, Stephen Nicholas, Sid Gray and William Purcell, November 1999.8 Markets, Firms and Workers: The Transformation of Human Resource Management in

Chinese State-Owned Enterprises, John Benson and Ying Zhu, November 1999.9 How Firms Grow: Clustering as a Dynamic Model of Internationalisation, Elizabeth

Maitland, Elizabeth Rose and Stephen Nicholas, November 1999.10 Japanese Multinationals in Thailand: The Impact of Incentives on the Location

Decision, Stephen Nicholas, Sid Gray and William Purcell, December 1999.

11

Is the Integration-Responsiveness Framework Two-dimensional?: An ExploratoryStudy, Sunil Venaik, David F. Midgley and Timothy M. Devinney, March 2000.12 Decision Factors Influencing the Regional Headquarters Location of Multinationals in

the Asia Pacific, John Holt, Sid Gray and William Purcell, March 2000.13 Japanese Tourism Investment in Australia: Entry Choice, Parent Control and

Management Practice, William Purcell and Stephen Nicholas, May 2000.

Business Reports

1 Improving Subcontractor Relations: Lessons from Japanese Manufacturing MNEs and

their Australian Suppliers, Stephen Nicholas and William Purcell, October 1998.2 Investing Overseas: Factors in the Overseas Investment Decision by Australian-Based

Firms, Stephen Nicholas, Sid Gray and William Purcell, February 1999.3 Re-investing in Australia: How Important are Incentives and Tax Policy?, Stephen

Nicholas, Sid Gray and William Purcell, February 1999.4 Cooperative Growth Strategies: Factors Influencing the Growth Strategies of

Australian-based International Firms, Sid Gray, Stephen Nicholas and WilliamPurcell, August 1999.

5 Australian Firms in China:Strategies for Success, Stephen Nicholas, ElizabethMaitland and Stephen Morgan, August 1999.

International Business Surveys

1 International Business Survey , November 1998.

2 Survey of International Business Opinion, November 1998.3 Survey of International Business Opinion, June 1999.4 Survey of International Business Opinion , January 2000.


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