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

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

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


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. Postcontractual 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?

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 nonJapanese 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-intime (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.

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.


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.

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


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

Industry Sector







ASIC Classification 2000-Food 2000-Textile and Furniture 3000-Paints, Plastics and Rubber 3000-Machinery 3000-Electrical 3000-Auto Parts & Components 3000-Instruments 3000-Cosmetics & Household TOTAL

1993 Australian Sample 3 1 3 4 4 5 --20

1997 Australian Sample 6 3 1 1 5 4 5 -25

Aggregate Australian 9 4 4 5 9 9 5 -45

1999 Thai Sample 5 9 6 5 17 10 -4 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


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 Product price Work organisation Management expertise After sale service Advertising & marketing In-house quality control SUBCONTRACT PRACTICES Keeping delivery dates Quality of inputs 3.7 (0.17) 3.2 (0.23) 3.1 (0.22) 3.1 (0.21) 3.4 (0.20) 3.0 (0.25) 3.7 (0.18) 3.8 (0.0) 3.7 (0.0) 3.0 (0.0) 3.0 (0.0) 3.3 (0.18) 3.1 (0.13) 3.3 (0.16) 3.8 (0.0) 3.5 (0.10) 3.0 (0.10) 3.0 (0.10) 3.3 (0.13) 3.0 (0.13) 3.5 (0.12) 3.9 (0.0) 3.7 (0.0) 3.1 (0.0) 3.1 (0.0) 3.1 (0.10) 2.8 (0.10) 3.7 (0.0)

3.3 (0.19) 3.3 (0.23)

3.3 (0.16) 3.3 (0.16)

3.3 (0.12) 3.3 (0.13)

3.7 (0.0) 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 Mean (SE) 3.7 (0.27) 3.6 (0.16) 3.4 (0.31) 3.5 (0.16) 3.6 1997 Mean (SE) 3.9 (0.0) 3.2 (0.24) 3.6 (0.15) 2.9 (0.19) 3.4 Aggregate Mean (SE) 3.9 (0.0) 3.5 (0.11) 3.4 (0.13) 3.2(0.13) 3.5 Thai Mean (SE) 3.7 (0.0) 3.3 (0.11) 3.7 (0.0) 3.5 (0.10) 3.6

Seek quotations Establish long term relationships Provide details of input to potential Suppliers, then seek quotations Always contact two or more firms Average Score

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.


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 Mean (SE) 3.5 (0.16) 3.3 (0.14) 2.5 (0.25) 2.6 (0.24) 2.4 (0.31) 2.9 (0.21) 2.9 (0.31) 2.7 (0.26) 2.3 (0.26) 1.6 (0.22) 2.7 1997 Mean (SE) 3.1(0.27) 3.5 (0.17) 3.3 (0.21) 2.9 (0.28) 2.5 (0.28) 3.5 (0.21) 3.4 (0.15) 3.0 (0.30) 2.8 (0.29) 2.7 (0.30) 3.0 Aggregate Australian 3.4 (0.13) 3.2 (0.14) 2.7 (0.17) 2.7 (0.16) 2.2 (0.19) 3.0 (0.17) 3.0 (0.18) 3.0 (0.18) 2.3 (0.18) 2.1 (0.17) 2.7 Thai 3.1(0.12) 3.1 (0.09) 2.6 (0.15) 2.5 (0.14) 2.3 (0.12) 3.2 (0.10) 3.1 (0.11) 3.1 (0.09) 2.1 (0.11) 2.2 (0.12) 2.7

Establish long-term relationship Visit the supplier regularly Transfer designs and drawings Transfer other technical know-how Transfer tools and machinery Advise on specifications/procurement Advise on quality control Advise on delivery times Advise on management Train operatives Average Score

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 postcontractual 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 postcontractual 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 postcontractual 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


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 3.4 (0.19) 3.5 (0.19) 3.5 (0.26) 3.3 (0.19) 3.1 (0.26) 3.4 1997 3.1 (0.23) 3.5 (0.17) 3.6 (0.14) 3.4 (0.23) 3.2 (0.26) 3.4 Aggregate 3.3 (0.12) 3.4 (0.10) 3.4 (0.12) 3.3 (0.12) 3.1 (0.14) 3.3 Thai 3.2 (0.11) 3.4 (0.08) 3.2 (0.11) 3.3 (0.10) 2.9 (0.11) 3.2

Form a long-term relationship Negotiate input price falls and rises Co-operate to improve quality Co-operate to improve delivery times Act in Japanese firm’s interests Average Score

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 2.8 (0.18) 2.8 (0.18) 2.7 (0.14) 2.3 (0.19) 2.5 (0.19) 2.7 1997 2.7 (0.17) 2.9 (0.22) 2.9 (0.15) 2.5 (0.27) 2.3 (0.24) 2.7 Aggregate 2.8 (0.11) 2.8 (0.12) 2.8 (0.0) 2.6 (0.14) 2.5 (0.14) 2.7 Thai 2.8 (0.0) 2.6 (0.0) 2.5 (0.0) 2.7 (0.0) 2. 7 (0.0) 2.7

Input price Input quality Standards & specifications Availability Reliability of delivery Average Score

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


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 AustraliaThailand) 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. Fortyfive 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 lowmedium.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.


Are Japanese MNEs Learning Organisations?

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.


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

Experienced Australian and Thai subsidiaries had been operating since 1988.


Large Australian subsidiaries were defined as those with more than 160 employees and large Thai subsidiaries with more than 800 employees.

Tests are available from the authors. Tests are available from the authors. Tests are available from the authors. Tests are available from the authors.





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

Tests are available from the authors.


Discussion Papers
1 2 3 4 The Multinational Enterprise: New research Agendas in International Business, Stephen Nicholas and Elizabeth Maitland, September 1998. Do Japanese Buyers Learn? A Longitudinal Study of Japanese MNEs’ Subcontracting with Australian Suppliers, Stephen Nicholas and William Purcell, October 1998. Industry Consolidation and Global Competition: Multiple Market Competition in the Tire Industry, Kiyohiko Ito and Elizabeth Rose, October 1998. Foreign Investment Motivations and Location Patterns: Korean Electronics Companies and the European Union, Sidney J. Gray and Sunghoon Hong, November 1998. 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. Genealogical Transformation of Resources: A Study of Japanese Service Firms, Elizabeth Rose and Kiyohiko Ito, January 1999. Incentives in the Location Decision by Japanese Multinationals in Singapore: A Comparative Study, Stephen Nicholas, Sid Gray and William Purcell, November 1999. Markets, Firms and Workers: The Transformation of Human Resource Management in Chinese State-Owned Enterprises, John Benson and Ying Zhu, November 1999. How Firms Grow: Clustering as a Dynamic Model of Internationalisation, Elizabeth Maitland, Elizabeth Rose and Stephen Nicholas, November 1999. Japanese Multinationals in Thailand: The Impact of Incentives on the Location Decision, Stephen Nicholas, Sid Gray and William Purcell, December 1999. Is the Integration-Responsiveness Framework Two-dimensional?: An Exploratory Study, Sunil Venaik, David F. Midgley and Timothy M. Devinney, March 2000. Decision Factors Influencing the Regional Headquarters Location of Multinationals in the Asia Pacific, John Holt, Sid Gray and William Purcell, March 2000. Japanese Tourism Investment in Australia: Entry Choice, Parent Control and Management Practice, William Purcell and Stephen Nicholas, May 2000.

5 6 7 8 9 10 11 12 13

Business Reports
1 2 3 4 5 Improving Subcontractor Relations: Lessons from Japanese Manufacturing MNEs and their Australian Suppliers, Stephen Nicholas and William Purcell, October 1998. Investing Overseas: Factors in the Overseas Investment Decision by Australian-Based Firms, Stephen Nicholas, Sid Gray and William Purcell, February 1999. Re-investing in Australia: How Important are Incentives and Tax Policy?, Stephen Nicholas, Sid Gray and William Purcell, February 1999. Cooperative Growth Strategies: Factors Influencing the Growth Strategies of Australian-based International Firms, Sid Gray, Stephen Nicholas and William Purcell, August 1999. Australian Firms in China: Strategies for Success, Stephen Nicholas, Elizabeth Maitland and Stephen Morgan, August 1999.

International Business Surveys
1 2 3 4 International Business Survey, November 1998. Survey of International Business Opinion, November 1998. Survey of International Business Opinion, June 1999. Survey of International Business Opinion, January 2000.


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