UC Berkeley UC Berkeley Electronic Theses and Dissertations Title Inside the Castle Gates: How Foreign Corporations Nagivate Japan's Policymaking Processes Permalink https://escholarship.org/uc/item/3q9796r6 Author Kushida, Kenji Erik Publication Date 2010 Peer reviewed|Thesis/dissertation eScholarship.org Powered by the California Digital Library University of California Inside the Castle Gates: How Foreign Companies Navigate Japan‘s Policymaking Processes By Kenji Erik Kushida A dissertation submitted in partial satisfaction of the requirements for the degree of Doctor of Philosophy in Political Science in the Graduate Division of the University of California, Berkeley Committee in charge: Professor Steven K. Vogel, Chair Professor John Zysman Professor T.J. Pempel Professor Stephen Cohen Fall 2010 Abstract Inside the Castle Gates: How Foreign Companies Navigate Japan‘s Policymaking Processes by Kenji Erik Kushida Doctor of Philosophy in Political Science University of California, Berkeley Professor Steven K. Vogel, Chair Multinational corporations (MNCs) are at the heart of today‘s global economy, but their effects on the politics of advanced industrialized countries have not been studied systematically. This dissertation analyzes the case of Japan, a country most likely to reveal foreign MNCs‘ influence. Japan developed for most of its history with an extremely low presence of foreign MNCs, but it experienced a dramatic influx from the mid-1990s, particularly in long-protected sectors at the core of its postwar development model of capitalism. The dissertation explains an observed divergence in the political strategies of foreign MNCs in Japan—disruptive challenges to existing policymaking processes and norms of government-business interactions, versus insider strategies, in which MNCs worked within established organizations and prevailing modes of policymaking. The core contention is that the corporate ―clock speeds‖ of MNCs strongly shape their policy strategies. Clock speeds, the relative rate of change in aspects such as product introduction, product processes, and corporate organization, differs systematically across sectors. By analyzing policy cases within the banking and securities, insurance, telecommunications, and pharmaceuticals sectors, this study shows that MNCs with faster clock speeds tend to pursue disruptive strategies, while MNCs with slower clock speeds tend to pursue insider strategies. This dissertation also shows how changes in Japan‘s model of capitalism enabled the influx of foreign MNCs and expanded MNCs‘ opportunities to exercise voice. Through an analysis at the national, sectoral, and firm levels over time, this study shows how Japan‘s post-bubble political dynamics created new possibilities for foreign entry and voice. The new opportunities to exercise voice were taken advantage of by fast clock speed MNCs, while slower clock speed firms benefited from existing policy processes. The dissertation finds that MNCs can simultaneously influence policy processes along two different time horizons for cause and effect. While disruptive strategies act as exogenous sources of change, delivering shocks to existing arrangements and processes, insider strategies can lead to incremental, but potentially transformative, change over time. 1 TABLE OF CONTENTS INTRODUCTION ................................................................................................. 1 PART I ENTERING THE CASTLE GATES: REGULATIONS, INSTITUTIONS, AND MARKET DYNAMICS ENABLING THE RISE OF MNCS IN JAPAN CHAPTER 1: THE RISING PRESENCE OF FOREIGN MNCS IN JAPAN ................. 18 CHAPTER 2: THE HISTORY OF JAPAN‘S STRATEGIC REGULATION OF MNCS 36 CHAPTER 3: THE EFFECTS OF JAPAN‘S MODEL OF CAPITALISM ON INWARD FDI AND MNCS ............................................................................................ 52 CHAPTER 4: MNCS AND JAPAN‘S NEW FINANCIAL SYSTEM: BANKING, SECURITIES, AND INSURANCE ....................................................................... 81 CHAPTER 5: MNCS IN JAPAN‘S NON-FINANCIAL SECTORS: AUTOMOBILES, TELECOMMUNICATIONS, PHARMACEUTICALS ............................................. 112 PART II INSIDE THE CASTLE GATES: POLITICAL STRATEGIES OF MNCS IN JAPAN CHAPTER 6: POLITICAL STRATEGIES ACROSS SECTORS ................................ 158 CONCLUSION ............................................................................................... 204 i For Cheryl, June, and Toshiaki Kushida ii Acknowledgements It is a privilege and an honor to be given the opportunity to write a note of gratitude to everyone who made this dissertation possible. Steven Vogel, for supporting my various interests while providing insightful guidance and feedback, all the while nudging me to finish this dissertation—graduate school turned out more fun than I would have thought possible; my decision to attend Berkeley to study with you was the right one. John Zysman, a wonderful mentor who opened more doors than I would have dreamed possible—the coincidental meeting that led me to BRIE has been the defining feature of my life at Berkeley, and it will continue to shape my career. T.J. Pempel, for incredible support, often at short notice, from all parts of the world, whose feedback and scholarship continues to shape my understanding of the world. Stephen Cohen, for valuable feedback and wonderful conversations at BRIE, and for co-founding BRIE, the institution to which I owe my career trajectory. Many others in academia helped me along the way. Professor Kyoji Fukao of Hitotsubashi University kindly accommodated me as a visiting scholar. Professor Toshihiko Hayashi and his ICT study group enabled me to visit Japan frequently. Professor Koji Hirao provided numerous valuable contacts, as did Ichiya Nakamura. Countless ministry officials and businesspeople in Japan took time out of their busy schedules to agreed to interviews and hold informal conversations. They are, in many ways, the main characters of this study. Professors Stephen Haggard and William Grimes provided valuable feedback at a panel at the American Political Science Association on earlier versions of the dissertation. I am also grateful to Phillip Lipscy and Kay Shimizu, friends whom I am now happy to call colleagues, for feedback on various segments of the project as I struggled to find the clarity in some parts. Finally, I owe heartfelt thanks to my parents, June and Toshiaki Kushida, and my wife Cheryl, whose unwavering support in all dimensions (even including proofreading) allowed me to pursue this career and lifestyle while finding enjoyment and fulfillment in the process. iii INTRODUCTION: Inside the Castle Gates If you are confronted with a fortified castle, there are a number of strategies you might employ to gain access. You might bring a battering ram to break down the gates. You might try to lay siege. You might try diplomacy and bring an envoy from your own kingdom, and you might search for collaborators on the inside. Or you might employ trickery or attempt a stealthy entry through an unobtrusive side door. Once inside, however, the game changes. You need new tools; a battering ram is no longer useful. Your objectives can change; a siege no longer makes sense, and diplomacy involves more than simply gaining access. Collaborators who helped you enter may no longer be unqualified allies. And trickery or continuing use of side doors becomes more risky, since you may be expelled. From the perspective of many foreign multinational corporations (MNCs), Japan‘s postwar political economy was the castle. While eager to absorb technology and expertise, Japan tightly restricted inward foreign direct investment (FDI). Even after the 1980s, when most formal policy restrictions had been lifted, Japan was an unusual market, with proprietary market conditions and distinctive economic characteristics. To gain market access and reshape the economic environment, some MNCs mobilized international pressure. Others used regulatory loopholes and Japanese allies to gain entry. Some enjoyed considerable success, but many failed. As a result, the image of the world‘s second largest economy persisted as a fortress largely closed to foreign influence. In the late 1990s, however, the castle gates opened. After a series of regulatory shifts, areas largely restricted to foreign entry, such as finance and telecommunications, were wide open. In fact, after a decade of slow or negative growth following the bursting of the economic bubble in 1990, parts of the castle had caught fire. In the late 1990s, crises swept through a number of previously protected sectors such as banking and insurance. Even in competitive manufacturing sectors, venerable firms such as Nissan were on the brink of collapse. Foreign firms were now invited inside the castle to put out the fire – to inject capital and management expertise to rescue Japanese firms. Foreign MNCs moved in quickly, taking prominent positions in core economic sectors. The largest influxes were in automobiles, banking, insurance, pharmaceuticals, securities, and telecommunications. This influx led to developments unthinkable ten to fifteen years earlier. Nissan was revived by a management team from French automobile firm Renault, with a Brazil-born Frenchman of Lebanese descent as CEO. American private equity funds took control of several venerable but bankrupt Japanese banks. Foreign life insurers dominated new markets, and Western investment banks introduced radical new employment practices. Foreign pharmaceutical firms became