China Research

Japan has a problem. The problem is called “Abenomics”. “Abenomics” is actually not “Abenomics”. It is “Ahonomics”. “Aho” is a Japanese word meaning “silly”, “stupid”, “idiotic” and so forth. You get the general idea. I have been trying to make the word “Ahonomics” catch on ever since I thought of it. Indeed I have succeeded to some extent since the word made it onto the short list for “The Word of the Year” award which is given out by a well-known publisher in Japan at each year-end.

“Abenomics” is “Ahonomics” for a variety of reasons. Let me focus on just one for this piece. It is targeted at the wrong problem. And it is applying wrong and dangerous tactics to solve this wrong problem.

The Abe government thinks that what the Japanese economy lacks is growth. This is wrong. For one thing the Japanese economy has actually been growing albeit very modestly for much of the past decade. Moreover, it is already a very large economy. It is also a mature economy with more than enough socio-economic infrastructure to keep it functioning smoothly. It is also a very rich economy. It really does not need to keep on growing faster to make ends meet.

Yet for all these accomplishments it is not a perfect economy. Far from it. It has one very pointed issue that needs to be addressed. This is the issue of what I would like to call poverty in affluence. Japan is immersed in all this affluence. Yet in the midst of it, we have growing numbers of people who are the working poor. Who suffer harsh working conditions. Who live highly precariously under short-term labour contracts whose terms are apt to infringe on codes of human rights protection. Recent figures have it that 16% of the working population in Japan lives below the poverty line. The countries with the lowest rate of poverty are Denmark and Sweden both with only 5.3% of the working population falling below the poverty line. Their low rates of poverty do them much credit. By comparison, for the Japanese economy with its maturity and affluence to have a poverty ratio that is three times as large as those of the Nordic nations is a very strange state of affairs.

Not only is this strange. It is scandalous. Not only is this strange and scandalous, it is also bad for the economy. Mr. Abe claims he wants to get rid of deflation in Japan. He will never accomplish this if he does not pay attention to this issue of poverty. With this many people living in poverty there is no way that Japan could ever get out of the deflationary cycle.

So how do you go about resolving this problem. The obvious answer is redistribution. Japan’s affluence is not being distributed properly. There is too much concentration of wealth. Japan’s rising Gini index indicates this. Policies need to be put in place which can redistribute the overall wealth in our hands in a more equitable fashion.

There are two very immediate ways in which this redistribution can be achieved. One is to raise wages. The other is to raise interest rates. Wage increases speak for themselves. People need to be paid more if they are to spend more. For the sake of fairness it has to be said that the Abe government has been working on this. But only through cajoling and bullying companies to raise headline wage rates. This would only drive companies to resort more extensively on short-term low paid labour.

For interest rates to start earning some money for ordinary small investors is also important. People’s deposits should reap soe interest for them. But this is not going to happen under a monetary regime which sticks with zero interest rates. Yet Japan’s monetary policy will never be able to stop the quantitative easing and the zero interest rates that go with it. This is because this great monetary easing is the only thing that is standing between the Japanese government and bankruptcy. Team Abe at the Bank of Japan has gone out of its way to turn the BOJ from a central bank into a spcialised money lender for the Japanese government. The BOJ might as well stop calling itself a central bank since propping up the government is all that they seem interested in these days.

Yet another name I have for “Abenomics” is “Dopingnomics”. It is an attempt to inject all kinds of questionable substances into the Japanese body economic so that it can start running at top speed again on the strength of very artificially pumped up muscles.

One wonders what all this is really in aid of. The suspicion deepens that it is all about “Fukoku-Kyohei”. “Fukoku” means a rich country. “Kyohei” means a strong military. Is there a hidden agenda here of building up a nation that can go to war again ? Indeed this agenda seems to become less hidden and more apparent by the day as Mr. Abe bulldozes his official secrets act through parliament.

 

 

 

 

 

 

Noriko Hama
Professor & Dean at Doshisha Business School, Kyoto

 

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– This is the big issue and partly a generational thing. Interest rates have been going down since the early 80’s. Younger people are just complacent about this, believing that interest rates always go down. Apart from that, there is a feeling of desperation in some areas. Los Angeles is an interesting example of this. People there seem to think that the real estate bubble will never end – or if it ends it will be at a much higher level than now.

These people worry that they can miss the chance of buying a house. They want to lock it in. They want to get the house and feel a sense of urgency. Many are borrowing very large amounts on flexible-rate mortgages because payments are affordable when interests rates are very low. They are not concerned about rising interest rates because they assume their incomes will be going up.

However, a lot can happen which people tend to forget. By the way, real interest rates are not really low in a historical perspective.

Buying a home is a very emotional decision, especially buying a home for the first time. Right now, the decision is what kind of house to buy. You could buy a depressing and affordable house, or a nicer one that will not be affordable when rates rise.

The importance of behavioral finance for financial markets is now widely accepted. However, a number of economists argue that behavioral finance now needs more support from psychological research.

What should be done?

– Much more can be done. I think we are just at the beginning. It is still at the frontier. The combination of economics and psychology is probably the most exciting area in the profession today. Mathematical economics has been dominating for some decades and has had an impressive development. But it has cut economics off from other sciences.

Meanwhile psychology, sociology. anthropology, political science and ecology are gaining momentum as factors driving economic behavior. These disciplines have to be combined with economics which is not easy to do. Academia needs more professional interaction. Especially professors have to promote this.

 

 

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As part of the Center for International Business Studies on Emerging Markets (CIBEM) at the Linnaeus School of Business and Economics, Kalmar, Sweden, my research concerns small and medium-sized enterprises (SMEs) entering and taking off from emerging markets. This note is based on a recent publication in International Marketing Review, where the aim was to conceptualize “entry node”, describe the entry node pattern of SMEs entering emerging market business networks, and determine how network nodes are associated with experiential knowledge.

The global marketplace has changed drastically during the last decades due to the opening up of formerly closed markets – such as China, India, former Soviet Union countries and several countries in Central and Eastern Europe. For Swedish firms, this has meant new business opportunities geographically close-by, but also in more distant emerging markets. As a result, increasing trade figures have been seen with emerging markets overall, and in Southern Sweden the EU-enlargement in 2004, when the Baltic States and Poland entered the EU, created a remarkable upswing in the number of registered importers and exporters.

Studying 203 small and medium sized enterprises (SMEs) in Southern Sweden that have entered the emerging markets of the Baltic States, Poland, Russia and China, it is seen that the entrance into these markets was made primarily during the last two decades, after these markets opened up. The firms tend to be traditional manufacturing firms that entered emerging markets in the later stages of their internationalization, following on domestic market experience and international sales to less distant market in terms of culture and language, for example, the Nordic countries, Western Europe and the USA. These mature markets are still the main export markets for the studied firms, even if the emerging markets are given increasing attention.

When entering foreign markets, knowledge is seen to be a key ingredient. It is acquired by learning by doing as a way to decrease uncertainty in a market and thus spur further commitment. Such experiential knowledge is either general internationalization knowledge that is applicable across markets, or market specific knowledge regarding the society, business network or customers in a specific foreign market. For emerging markets, being turbulent and different, prior research has shown that general internationalization knowledge is less useful as it has been accumulated in mature markets. Thus, the market-specific knowledge becomes more valuable for establishment and further internationalization in emerging markets.

Studies on foreign market establishments have focused foremost on the structural organization of the firm, in the form of the entry mode. For example, exports through an intermediary (agent or distributor) or through sales office in the foreign market. However, viewing foreign market entry from a network perspective, the establishment point into foreign market networks is defined as an entry node. This acknowledges recommendations to focus on the process of entry through relationship-building activities, rather than examining the entry as an isolated event, as is done when studying entry modes. In relation to the concept of entry node, the following assumptions are made regarding the entry situations of firms entering foreign markets:

(1)   Triad via the home market is the least committed entry situation, using an intermediary located in the domestic market as the entry node. Here, the firm has an indirect connection to the customer and thus no direct relationship with the foreign market. This means that no or very little market- or customer-specific experience and knowledge is gained.

(2)   Triad via the host market is a more committed entry situation, since, even if the exporter still has an indirect relationship with the foreign customer, it now holds a direct relationship to the market through a foreign intermediary. Depending on how this triad is organized, a varying degree of access to market-specific and possibly also customer-specific knowledge is gained.

(3)   Dyad from the home market is an even more committed entry situation since it permits a direct connection to the foreign customer from the home market. Experiential learning in the market and knowledge about the customer is gained directly to the extent allowed by the customer.

(4)   Dyad at the host market is the most committed entry situation, since the firm has committed itself to foreign customer relationships both by having direct relationships and by having invested resources in forming an establishment of its own in the foreign market, which then constitutes the entry node. The opportunities for experiential knowledge accumulation are the greatest in this entry situation.

When looking at the entry pattern of the studied SMEs, the main choice of initial entry situation was a triad via the host market, thus using an intermediary in the host market (113 firms). The second choice was a dyad directly linked to the host market (61 firms). Less used was the dyad in the host market, which includes the entry node of a foreign subsidiary (16 firms), or the indirect relationship of a triad via a domestic intermediary (13 firms). Thereby, 92 percent of the firms initially entered the emerging markets via nodes that correspond to the mode of exports, showing them to be trade, rather than investment, driven. After the initial entry, 70 percent did not change their entry node. These firms have an average of 10.3 years of market experience. But 30 percent did change their node between the time of entry and of the study. These firms have an average of 15.8 years of market experience. When making a change of node, 66 percent changed to a more committed network node, while 34 percent de-internationalized, taking a step back from the foreign customer.

The entry node pattern of the Swedish multinational SMEs then indicates a traditional internationalization pattern and supports previous findings regarding entry into emerging markets. Still, the sufficient number of direct relationships with foreign customers is surprisingly large, considering that the host markets are emerging and were entered under somewhat unstable conditions since the 1980s. However, this is in line with previous research into SMEs from this part of Sweden trading with emerging Baltic markets. A very small share of firms used the dyad in the host market, involving FDI, which supports the premise that SMEs tend to be more trade than investment driven in their internationalization. The smallest share of firms was found to use the low-committed entry node of home market triad, which is a fairly uncommon way to enter foreign markets today, as there are few trading houses left in the mature Swedish market. Regarding changed node connections after the initial entry the SMEs foremost adapted a more committed and direct node, which is also in line with traditional internationalization process theory. Most firms, however, continued to use indirect connections via an intermediary, which tend to be preferred in uncertain markets as it involves less risk and resources.

The type of entry node is confirmed to associate with the level of market-specific experiential knowledge held by the firms; more knowledge goes hand in hand with a higher commitment node. Thus, firms holding a dyad on the host market, in the form of a sales office or production unit, also had the highest level of knowledge. But as it is also the most resource-demanding type of node, it is seldom the initial entry node of SMEs. Instead, it is a preferred node when a firm wants to increase its commitment to the emerging market by changing node. When comparing the types experiential market-specific knowledge held by the SMEs, the highest levels concerned the business network, followed by societal and customer-specific knowledge. Thereby the business network knowledge is the most acquired and is suggested to be the most valuable kind of knowledge when operating in a foreign market.

The present findings have managerial implications in terms of how some entry nodes are better providers of experiential knowledge than others. As international relationship building drives internationalization, firms need to find the right international setup and connection to a counterpart that they trust and with which they can build a long-term and committed relationship. When Swedish SMEs entered the complex emerging markets of the Baltic States, Poland, Russia, and China in their later stages of internationalization, they could not apply prior experience gained from other international markets to these new emerging market contexts. Accordingly, a low-commitment node was the main choice for entry. However, SMEs should be aware that a direct customer relationship through a subsidiary in the foreign market is superior in terms of knowledge accumulation. When aiming for experiential knowledge, it should be acknowledged that, according to this study, the host market triad and the home market dyad do not differ significantly in terms of knowledge accumulation. This should be considered when taking the first step into a foreign market network. In addition, although it may be too demanding in terms of resources for the initial entry, a dyad relationship in the host market would be a preferable step for further internationalization in order to become an insider in the emerging market business network.

Source: Sandberg, S. (2013) SME node pattern and experiential knowledge in emerging markets. International Marketing Review. 30(2): 106-129.

The article is part of a special issue on SME internationalization and can be accessed via International Marketing Review:

http://www.emeraldinsight.com/journals.htm?issn=0265-1335&volume=30&issue=2

 

 

 

 

 

 

Susanne Sandberg
PhD International Marketing, Linnaeus University

Editorial board

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