Discussion Paper No.

14 - June 2000

Stephen Nicholas
William R. Purcell
Tasman Smith
Rujirutana Mandhachitara

Australian Centre for International Business

University of Melbourne
and
Australian Centre for International Business
University of New South Wales

AUSTRALIAN CENTRE FOR INTERNATIONAL BUSINESS

Department of Management
University of Melbourne
Parkville VIC 3052 Australia
Phone: +61 3 9344-5340
Fax: +61 3 9347-3770
Email: acib@ecomfac.unimelb.edu.au
Web: www.ecom.unimelb.edu.au/acib/

and

School of International Business

University of New South Wales
Sydney NSW 2052 Australia
Phone: +61 2 9385-5802
Fax: +61 2 9385-6440
Email: acib@unsw.edu.au
Web: www.fce.unsw.edu.au/acib/
 Discussion Paper No. 14 - June 2000

ARE JAPANESE MNES LEARNING

ORGANISATIONS?
SHORT AND LONG- TERM JAPANESE BUYER
LEARNING IN AUSTRALIAN AND THAI
MANUFACTURING

Stephen Nicholas
Australian Centre for International Business
University of Melbourne
Parkville, Victoria, 3052, Australia
s.nicholas@ecomfac.unimelb.edu.au
Tel +6139344 4725 Fax +61393473770
and
Economic Research Centre
Nagoya University

William R. Purcell
Australian Centre for International Business
School of International Business
University of New South Wales
Sydney 2052 Australia
Tel: +(61 2) 9385 5887
Fax: +(61 2) 9385 6440
Email: w.purcell@unsw.edu.au

Tasman Smith
and
Rujirutana Mandhachitara
School of Marketing
Thammasat University
Bangkok, Thailand

Australian Centre for International Business

A collaborative Centre between the University of Melbourne
and the University of New South Wales

ISSN 1441-6093
ISBN 0 7334 0732 3
 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 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 Zimmerman 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.
Are Japanese MNEs Learning Organisations?

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

1
Are Japanese MNEs Learning Organisations?

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 parent’s firm-specific knowledge assets could not
be appropriated through market sale. The failure of the market to protect the firm’s 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 firm’s 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 firm’s 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 contractual

arrangements that allow Japanese MNEs to earn rents on their firm-specific subcontracting
advantages. The parent’s 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 subsidiary’s 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 information
flows on quality of components, delivery reliability and input improvements.

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Are Japanese MNEs Learning Organisations?

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 firm’s 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 subcontract
relationships. 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 subsidiary’s 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
1996 Directories 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 CEO’s of each Australian subsidiary, together with a letter
of endorsement from the Japanese Chamber of Commerce and Industry. A follow-up letter was

3
Are Japanese MNEs Learning Organisations?

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 an
independent 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

Survey Mailing List

Respondents
Industry Estimate
Sector Response Employee
Firms Employees Firms Employees Rate Ratios
(percent) (percent)
1993 94 Australian 53 26200 20 10187 38 39
Manufacturing
1997 Australian 84 31345 25 17144 30 55
Manufacturing
Aggregate 137 57682 45 27331 33 47
Australian
Manufacturing
1999 Thai 130 58143 56 28222 43 49
Manufacturing

1993 Australian 1997 Australian Aggregate 1999 Thai

ASIC Classification
Sample Sample Australian Sample
2000-Food 3 6 9 5
2000-Textile and Furniture 1 3 4 9
3000-Paints, Plastics and 3 1 4 6
Rubber
3000-Machinery 4 1 5 5
3000-Electrical 4 5 9 17
3000-Auto Parts & 5 4 9 10
Components
3000-Instruments -- 5 5 --
3000-Cosmetics & Household -- -- -- 4
TOTAL 20 25 45 56

Note: Australia-Japan Economic Institute A Directory of Japanese Business Activity in Australia 1992 and
1996, Sydney; 1999 List of Members, Japanese Chamber of Commerce, Bangkok

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Are Japanese MNEs Learning Organisations?

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 to
the 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 large 3 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 firm’s 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 Australia Australia Thailand 1999

1993 1997 Aggregate Mean (SE)
Mean (SE) Mean (SE) 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 the
subcontract system will display significant difference in the two countries, and that learning outcomes

5
Are Japanese MNEs Learning Organisations?

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 potential
suppliers. 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

(Mann Whitney U Test Significant at 0.10 in bold)

1993 1997 Aggregate Thai

Mean (SE) Mean (SE) Mean (SE) 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 3.4 (0.31) 3.6 (0.15) 3.4 (0.13) 3.7 (0.0)
Suppliers, then seek quotations
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 in
the 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.

6
Are Japanese MNEs Learning Organisations?

Table 4 Post contractual relationship by Japanese buyers in Australia and Thailand

(Mann Whitney U Test Significant at 0.10 in bold)

1993 1997 Aggregate Thai

Mean (SE) Mean (SE) Australian
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 2.9 (0.21) 3.5 (0.21) 3.0 (0.17) 3.2 (0.10)
specifications/procurement
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)
Average Score 2.7 3.0 2.7 2.7
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 higher
dependence rates in Australia was a greater need to ensure supplier practices that complemented
Japanese buyer’s 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 frequently 5. 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 more
infrastructure and organisational capital than small firms. Size and experience were not significantly

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Are Japanese MNEs Learning Organisations?

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 partly
an 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 surveys 6. But, Australian and Thai suppliers
improved their performance in the long-run. Japanese buyers with 12 or more years in Australia
ranked 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 buyer’s interests.

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

(Mann Whitney U Test Significant at 0.10 in bold)

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 firm’s interests 3.1 (0.26) 3.2 (0.26) 3.1 (0.14) 2.9 (0.11)
Average Score 3.4 3.4 3.3 3.2
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 subcontracting
system in Japan is the outcome of a path dependent process that Japanese firms may not recreate at

8
Are Japanese MNEs Learning Organisations?

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 and
Thai 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. The
significantly 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 & 2.7 (0.14) 2.9 (0.15) 2.8 (0.0) 2.5 (0.0)
specifications
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)
Average Score 2.7 2.7 2.7 2.7
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 Didn’t 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 subsidiaries
typically formed long-term relationships and visited suppliers regularly. Continuous monitoring of

9
Are Japanese MNEs Learning Organisations?

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), the
planning 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 supported
Japanese 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.

10
Are Japanese MNEs Learning Organisations?

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, Japanese
parents 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.

1
The survey was translated and independently back-translated by Japanese staff in the Japanese Language
Teaching Unit in the School of International Business, UNSW.

2
Experienced 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.

6
Tests are available from the authors.

7
Tests are available from the authors.

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

9
Tests are available from the authors.

13
AUSTRALIAN CENTRE FOR INTERNATIONAL B USINESS
DISCUSSION P APERS & BUSINESS / C ONSULTING 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’ Subcontracting
with 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, November
1998.
5 The Transfer of Human Resource and Management Practice by Japanese
Multinationals to Australia: Does Industry, Size and Experience Matter?, William
Purcell, 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 Exploratory
Study, 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 William
Purcell, August 1999.
5 Australian Firms in China: Strategies for Success, Stephen Nicholas, Elizabeth
Maitland 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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