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Business systems in Japan and China Essay


After the World War Two, Japan embarked on a journey of reviving its economy. The fast industralisation process is nothing short of spectacular. Japan’s basic infrastructure was basically destroyed in the war and she grew from a war-torn state to a world leading economy in a few decades. This requires good company and government governance, in order to achieve this result. Japan is also a major technology and export hub in Asia and she is currently the world third largest economy by Gross Domestic Product. (World Bank, 2014). Prior to the economic reform of Deng Xiao Peng, the Chinese government has total control of all the State Owned Enterprises (SOEs) under the communist system. It is a very highly centralized system that only the Chinese State government has power and control over it.(Laaksonen, 1988)

Under the reformation policy, individuals are allowed to trade and sell surplus products in rural area and small businesses are allowed in urban or city. This marks the start of the China’s Socialist market economy. As a result of the open door policy, Chinese economy grew from a third world country to the second largest economy of the world in less than four decades. (World Bank, 2014) Despite the great differences of these two economy, the fact that its governance and cultures are deeply influence by the idea of Confucianism. (Chan, 1986) Hereby, in this article, discussion will be separated into two parts that are based on the similarities and differences between the two business systems.


1. Keiretsu Vs Reform Policy

In Japan, Keiretsu formed the largest business group and its one of the key contributors to the Japan’s economy which usually employed Japanese style of management and system. Zaibatsu was the forerunner of Keiretsu which are family run and it is the main business system before Second World War. There are two types of Keiretsu: namely horizontally organized Keiretsu and vertically organized Keiretsu. In horizontally organized Keiretsu, capital and human resource are closely knitted together and cross directorships and holding of stock among group members are not uncommon. The cross-holding of stock among the top 6 corporate group was as high as 24% (Tokyo Business Times, 1989) in the late eighties. This allows the group to be very close and strong. Some of the examples of company with this structure are Mitsubishi and Sumitomo. (Okumaru, 1976).The governing of company are handed to professionals or agents to prevent dispute among group members. In vertically organized Keiretsu, it is formed by a huge parent company.

She has its own supply distributorships and suppliers. Every flow and operations of the company follows a top to down process so as to control inventories and manufacturing quality. Many small and medium sized enterprises in japan utilize this system. Some of the example of such company are Sony and Toyota. In 1979, China started her reform programme after the initiating of economic open door policy by Deng Xiao Ping. The state government vows to liberalise and modernised China’s key industry like agriculture, technology and defence. More autonomy are given to the State Owned Enterprise to manage their own division. For example: The State Owned Enterprises are given the rights to form their company structure in accordance to the needs of leaner production process or market maximization. Hence, workers are now able to choose and change job with respect to their interest and expertise. This highly promotes the effectiveness of the State Owned Enterprises. (Lichtenstein, 1993)

The state government also implements the use of Profit and Loss contract (yinkuibaokan) whereby a portion of the profits are contributed to the state government and the remaining profit can be kept by the State Owned Enterprise. China’s state government also undertake a few other methods to reform, this includes the downsizing of the State Owned Enterprises , setting up of stock exchange in Shanghai and Shenzhen and transformed some important industry to shareholding companies so that it can trade. All in all, this gives rise to the socialist market economy in China whereby capitalism way of managing the economy is enforced. 2. Developing its own industries Vs Foreign Direct Investment Ever since the Second World War, Japan has decided to become an export driven economy, and the Japanese have been fast to recover its economy by competing fiercely in the ever increasingly saturated market. The products they are churning out are of good reliability and they often undercut its competitors by a huge margin to win the contract.

As illustrated in the case of Hitachi at a sales presentation in 1985, Hitachi stressed to undercut its competitors severely. (Fallows 1993) Japan owed its rapid industralisation process to the huge domestic exports. The export ranged from the early days textile to automobiles and later on, high technologies products such as semiconductors. Japan invested heavily on research and development to create high value products to make it desirable to the world. As a result of the severe undercutting of competitors. Japan’s enterprise have to come out with several ways to enhance efficiency to ensure profitability. Toyota created a system called Just-In-Time (JIT) which emphasize on the redundancy of keeping live inventory. (Uno, 1987) It was first created in the 1950s and later slowly dispersed into the different industries and plants in Japan in the 1960s and 1970s. It requires close and collaborative relations with all suppliers for it to work.

However, with good implementation, it can ensure lean production with little slack and good flow process. This process brings about the envy of the industrialised world especially in the United States. Other industrialised nations tried to emulate the success of JIT, but not always with positive results due to the poor implementation. Japanese companies also used Total Quality Control(TQC) in manufacturing. It is first coined by Professor William Demming of New York City but it is the Japanese that utilize it.The ideas of Total Quality Control is to have no or little tolerance for rework. Reworking a product are deemed as a wastage of time. By adopting a do it once, do it well approach, further time and cost can be saved to make the production lean. After the 1979 economic reforms by the Chinese state government, the state government allow Foreign Direct Investment (FDI) to enter into Chinese market.

It is the movement of long term foreign financing that allows a shareholding of at least 10% of the State Owned Enterprises. This usually includes the transfer of technology and know-hows to the host country from the Multi-Nationals Companies (MNCs). As a result of the transfer of technology, the host country in this case the State Owned Enterprises will have gained insights on the production process. Hence, further research and development by the State Owned Enterprises is possible.

Also, in 1979, the state government created four Special Economic Zones (SEZs) in Guangdong and Fujian province to encourage the facilitation of Foreign Direct Investment that mainly foreign investment will stay in this four zones. The state government realizes that by creating four zones is not enough to open up the market. Therefore, in the 1980s wholly-owned foreign enterprises are allowed and also more east coast ports are opened up to encourage foreign trades and investment.

China State government viewed Foreign Direct Investment as a very important catalyst to improve its economy. Subsequently, foreign enterprises are given the same treatment as a State Owned Enterprise and the joining of World Trade Organisation in November 2001 makes a very huge milestone in China’s economic history. Due to rising manufacturing cost Japan industries, Japan has begun to pour Foreign Direct Investment into China to cut cost. As evidenced by (Kunii et al., 2002) , during the period of first six months of 2002 , Japanese firms concluded deals of $3.15 billion.

This goes to show the importance of Foreign Direct Investment for both countries in a win-win situation. Japan can benefit from the low production cost and China can benefit from the capital inflow and technology transfer. As of 2012, China is the leading Foreign Direct Investment in the world. (Perkowski, 2012).

3. Socialist Market Economy Vs Capitalist Market Economy

The socialist market economy is the only model that are used by the People’s Republic of China (PRC). It is based on the dominance of State Owned Enterprises and maintaining a free open market, its origins can be traced from the Chinese economic reforms introduced under Deng Xiao Ping. During the early stage of economic reform in China, socialism are deemed as the basis for the reform, and therefore has to adopt capitalist techniques to survive.

It is also known as the social capitalism despite adopting the free market system of capitalism. (Schweickart, 2006) Japan adopted the system of capitalist market economy which got its influence from her western counterparts. It’s a system that encourage free trading in the market in the forms of products, shares and commodities. Despite Japan uses Keiretsu in their business systems, it is still by large using a capitalist system. The need for consumption of luxury products and export of domestic shows the use of capitalist system. Similarities

1. Intervention of government bodies

Historically in Japan history since Meiji Restoration, Japanese government has always played a very important role in the industrialisation. To be able to play catch-up with the western nations, the government deemed the intervention necessary. It also enable the government to be strengthened through the lending of private funds and invest it in key industries such as shipbuilding, communication in the Meiji’s government. The intervention of government in financing benefited the big groups of zaibatsu and later on Keiretsu. After the Second World War, the Japanese government once again realised the importance of state support for the companies and economies to grow quickly. (Johnson, 1982) In recent times, Japanese government agencies such as Ministry of International Trade and Industry (MITI) and Ministry of Finance (MOF) have been actively participated in business by giving funds and supports to industry that are of utmost national interest.

On the other hand, big business can exert huge influence on the political scene by endorsing political candidate that are beneficial to the interest of the big corporation. With respect to Japan, Korean government intervention of chaebols (big conglomerate) are largely similar to Japan. In the earlier days, the Korean government invested heavily and provide financial aids to chaebols such as Lucky Goldstar and Samsung. With the strong backing of the government, these companies are able to flourish. (Song, 1990) By 1990s, the reforming of State Owned Enterprises especially small and medium state enterprises became a top priority for the Chinese state government.

After a carefully study by the state government, a new reform system formed under the name of “the Regulations for Transforming Managerial Mechanisms of the State Owned Enterprises’ ( Liberation Daily, 1992). This includes of fourteen kinds of power to instill self-management. Even though, it’s a move by the Chinese state government to liberalized State Owned Enterprises. But, government steps by steps intervention of the process is still very much needed. Especially, during the early periods of reforms, they are many uncertainties and fluctuations in the market that requires government intervention to ensure the reformations process is smooth and steady.

2. Confucianism Influence

All the major East Asian management system have been influenced heavily by the Confucian tradition. (Oh, 1983). This includes China, South Korea and Japan which has some olden Chinese co-relation. It does not only has heavy influence towards these countries culturally but also economically. For example: In Japan, huge emphasis is put on the seniority in both workplace or at home. Similarly, likewise for Korea. Respect are to be given to elders or person with high seniority. Individualisms and competitiveness are not part of the teaching of Confucianism.

In the economy of these East Asian countries, they are generally competitive and placed a lot of emphasis on individual actualization. Though, these countries are influence deeply by Confucianism, its more applicable to the management level which is at micro level. At macro levels, the government efforts and communitarianism could be the explanation for the competition in the world market.


In conclusion, this article has discussed about the similarities and differences between Japan and China. There are three main differences that are discussed in this article. Firstly, its Japan’s Keiretsu and China’s reform policy. Japan’s Keiretsu was the predecessor of zaibatsu and it’s the dominant force of Japan’s economy. Deng Xiaoping pushes for economic reforms and turned its communist economy to a socialist economy. Secondly, Japan invested heavily in the research and development of technology as to become world major exports nations. Through the process of undercutting its competitors, Japan’s enterprises utilize Just in Time process and Total Quality Management to ensure high efficiency and lean production cycle. On the other hand, China relied on Foreign Direct Investment to boost its economy.

In the process of Foreign Direct Investment, not only it creates jobs for the country but also learn about foreign technologies through technology transfer. Lastly, the Chinese employed a socialist economic models which is often referred as state capitalism whereby the government still practiced one party communism. Japan on the other hand, support a free trade market which is similar to the capitalist systems in the west. The article also discusses the importance of government or state intervention of the economy.

For Japan, the government provides good infrastructure and financial aids to industry that are deemed promising. In china, the Chinese state government slowly guides its economy through intervals of reforms to prevent the reformation for being too fast or slow. Lastly, Confucianism plays a big role in influencing the management style of Japanese and Korean organization but not so much in China State Owned Enterprises.

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