Spurring the Kansai Economy - 立命館大学 to elements of the local business environment within...

©Institute of International Relations and Area Studies, Ritsumeikan University

Abstract

The article presents the results from an interview survey con-ducted at governmental institutions in charge of attracting foreigninvestors and at a foreign multinational that re-located their inte-grated business system within the metropolitan region, Osaka-Kansai. The value of receiving the collaboration of a “flagshipinvestor” for governmental promoters in charge of spurring thelocal economy has been presented. The results of the case study onthe multinational firm P&G showed that Kansai based operationsof foreign firms are not necessarily ‘pure sales subsidiaries’ as theimage of a branch economy would suggest, but can be fully inte-grated through the co-existence of upstream and downstream func-tions. It appears that foreign companies do not have to locate theheadquarters necessarily in Tokyo when successfully embeddingtheir corporation in the Japanese business environment whilekeeping a management-style that suits a foreign multinationalfirm.

Keywords:

Flagship investor, embeddedness, city marketing,international business environment, knowledge transfer

Spurring the Kansai EconomyEmbedding foreign corporations

SCHLUNZE, Rolf D.*

RITSUMEIKAN INTERNATIONAL AFFAIRS Vol.5, pp.17-42 (2007).* Faculty of Management, Department of International Management

e-mail: [email protected]

INTRODUCTION

Recently the Japanese government has undertaken increasing effortsto attract inward investment. Thus, foreign companies and their contribu-tion to regional innovation systems and the compositeness needed in theprocess of globalization have received more attention. According to theFukao Report, foreign firms even achieved higher productivity and prof-itability than their Japanese counterparts.1) Foreign business people havedeveloped a better understanding of Japanese customs and deeper rela-tionships with Japanese society.2) However, efforts of foreign firms to blendwith the Japanese business community seem to be progressing faster inthe metropolitan region Tokyo-Kanto than in other parts of the country.Very little is known about the local embeddedness of foreign companies inthe Osaka-Kansai area.

The dominant trends outlined in the literature on Japan indicate aneconomic environment characterized by an inability to attract foreign com-panies. Among the factors cited as contributing to the late and reluctantentry of foreign companies into the Japanese market are: non-transparentdistribution systems, high information costs, exorbitant site and invest-ment costs within the main metropolitan regions, as well as economic,political and cultural reasons (Karasawa, 1985; Kumar et. al.; 1988, 1993;Bukhari & Wurche, 1991; Dolles & Jung 1991; Schütte 1992, Beschorneret.al.,1993; Preis, 1995; Schwarz, 1995; Serapio & Shenkar, 1999).

A review of “Western” literature on internationalization of firmsreveals an emphasis on organizational structure, the international trans-fer of managerial resources and the basic internationalization capacity ofenterprises as they pertain to Western companies - predominantlyAmerican (Dore, 1973, 1986; Rugman, 1980; Dunning, 1981, 1988;Buckely & Casson, 1985; Buckely, 1987; Stening & Hammer, 1992; Clarke& Hammer, 1995). In contrast, Japanese authors have adopted a culture-based approach towards the analyses of multinational enterprises(MNEs). They also emphasize the impact of nation-specific managementstyle (Yoshino, 1976; Kumazawa, 1993; Yoshihara et.al., 1990; Yoshihara,1992, 1994). In addition, other authors have analyzed the international

RITSUMEIKAN INTERNATIONAL AFFAIRS18 【Vol.5

1) ACCJ : <http://www.accj.or.jp/document_library/FDI/1067586167.pdf >. (22 June 2004)2) Imagawa, G., “Gaishikeikigyo ni kiku nihon no shijoshoheki” [Market obstacles in

Japanese market for foreign companies], Nikkei Business, 6th June 1994, pp.126-129.

transferability of management systems of multinational corporations(Koike, 1988; Abo et. al., 1991; Abo, 1994a,b; Axcel, 1993; Culpan &Kucukemiroglu, 1993; Kenney & Florida, 1993; Itagaki 1997; Schlunze2000, 2002, 2003, 2004a,b). Recently within management science, and alsogeography, the embeddedness of MNEs has been discussed by severalresearchers (Phelps et. al., 2003; Hemmert, 2003; Schlunze, 2004a).Phelps examined key indicators of MNE embeddedness, such as corporatestatus and functions, R&D activities, supply chain and local purchases,skill and training demands and repeat investment, and access to the influ-ence of regional agencies on the embeddedness process. Their resultsshowed that embedded MNE’s operations are partially or fully integratedthrough the co-existence of up-stream (R&D) and downstream (sales andmarketing) functions.

Granovetter’s embeddedness approach (1985) is based on the centralprecept that all economic behavior is fundamentally socially embedded.The embeddedness school is fully discussed by Onias (1996) and dividedinto two groups: one centers on the network paradigm (Forsgren &Johanson, 1992), the other strongly follows the implications of the ‘newflexibility’ for organizational strategies and structures. Foreign firmsadjust to elements of the local business environment within their modes ofoperation. This adjustment is done according to their organizational formsand distinctive managerial attitudes and their firm specific attributes(Dunning, 1979). Schlunze (2004a) noticed that the degree of embedded-ness of European manufacturers in Japan differs depending on the loca-tional adjustments of managerial elements. The style of management doeshave locational implications and embodies, therefore, the potential for thelocal embeddedness. We can expect that the longer a subsidiary has beenoperating in Japan and the more integrated their organizational activitiesare, the more its behavior would be embedded locally. Other, theoreticalpropositions are that the process and degree of embeddedness is deter-mined by the process of location decision making of the foreign firm, theformation of foreign R&D organizations and their involvement in localinnovation systems, and the local adjustment of R&D management.

This paper presents the results from an interview survey conducted atgovernmental institutions in charge of inviting and “embedding” foreignfirms and at a foreign corporation that succeeded to implement an inte-grated business system in the Kansai area.

Spurring the Kansai Economy（SCHLUNZE）2007】 19

I. METHOD

Schoenberger (1991) proposed open-ended corporate interviews3) as aqualitative research method and as a valuable component of an eviden-tiary strategy in economic geography, since this approach tends to be moresensitive than other survey methods to historical, institutional and strate-gical complexity. Here, a corporate interview method seems to be particu-larly appropriate since Japan is concidered to be in a phase of globaliza-tion and industrial renovation. In such a period of economic and socialchange traditionally analytical categories and theoretical principles areoften not sufficient to grasp the emerging processes. Interviews offerunusual access to the often conflicting and shifting strategic logic and his-torical contingencies that underlie corporate decisions4). Although statisti-cal generalization cannot be made, the method permits analytical general-izations relevant to theoretical propositions (Yin, 2003).

Markusen (1994) presented a method for investigating the economicstructure and prospects of a region from key informant interviews. Hermapping technique can be expanded to incorporate history and dynamicchange. She found that methodologically, evidence to test newer theoriesof industrial location comes increasingly from qualitative data, especiallyfrom interviews of firms and other industrial and regional actors, such astrade associations, business service providers, and labor unions. Thismakes sense because the key focus here is the process of how the foreignfirm “embeds” in the local economy, through managerial adjustments andrelationships with governmental institutions, in charge of attracting for-eign investment. Data on such adjustment processes are impossible to findin secondary sources and difficult to evoke even in surveys. Interviews areuseful for probing corporate strategy and managerial adjustments asbehavioral phenomena of local embeddedness. Firms’ geographic strate-gies have been hypothesized to shape the character and vigor of regionaleconomic behaviors hosting them.5) A key feature of the recent debate iswhether firms have needs and loyalties which keep them anchored in the


3) The method of the qualitative corporate interview implies a not standardized format witha predominance of open-ended questions.

4) Schoenberger, 1991, p.1815) Markusen, 1994, p.479

region.6) Therefore this investigation focused on the multinational compa-ny, Procter & Gamble (P&G), which had relocated their business withinthe metropolitan region, Osaka-Kansai.

Markusen pointed out that effort on case study should not be underes-timated.7) To find the “right person” and undertaking cross check veracityis important for verifying the interview survey results. Thus, I inter-viewed not only the manager for external relations of P&G, but alsoreceived the co-operation of the director for Northeast Asia HumanResource Management (HRM) for this survey. I made an effort to avoidinterpretive mistakes by talking to different types of informants withinthe firm’s management and establishing correspondence on the topic ofconcern using e-mail. Additionally, interviews with representatives ofHyogo Investment Support Center and at the Division of InternationalEconomic Development at the Hyogo Prefectural Government were con-ducted. Interviewing multiple sources in this fashion often generated con-flicting data. Therefore, published material and internet sources wereused to cross check and improve the veracity given in the interviews.

A survey instrument was developed that attempts to map the role offoreign firms in the regional innovation system, not only from the perspec-tive of the foreign corporation but also from the perspective of governmen-tal institutions in charge of attracting inward investment. The locationdecision making process of foreign companies active in the field ofresearch and development, the availableness of research facilities andpotential research co-operation and the investment support scheme of thelocal government was investigated. It is difficult to predict future trendswith the interview approach, but within this study the needs and loyaltieswhich keep the company anchored in the Kansai region have been pointedout.

I attempted to present the analysis in a popular rather than abstractform, following Markusen’s plea for straightforward language and in thehope that practitioners in charge of spurring the Kansai economy as wellas scholars in the field of urban and industrial planning and Asian studieswill find the paper accessible. Therefore the interview results are broadlyfor describing governmental and corporate efforts to embed foreign busi-nesses and develop the local economy with them.


6) Ibid., p.4837) Ibid., p.481

II. RESULTS

1. Kansai economy and foreign investment8)

In January 2003, the prime minister announced a plan to double theinward investment in five years time. Japan started a policy of integratingforeign business in the domestic formation of industrial clusters and inno-vation systems by opening Invest Japan in May 2003. The government isimplementing 74 measures under the program for the “Promotion ofForeign Direct Investment into Japan” aiming at 1) reviewing administra-tive processes, 2) improvements in the business environment, 3) creatingfavorable employment and living environment, 4) improving local andnational structures and systems and 5) dissemination of information with-in Japan and abroad.9) As a matter of fact the METI10) representatives con-fessed that the Japanese government has started to be serious about theparticipation of foreign capital in Japanese industry just recently. Oneexplanation was that Japanese firms had been too worried about theirdomestic market shares, not perceiving the possible positive impacts suchas growing international business opportunities and increased interna-tional competitiveness. Japanese companies have been changing sincethey realized that the economy is globalizing and Japanese firms cameunder pressure to build alliances with their foreign competitors for theirsurvival in the domestic as well as the global market.

According to Toyo-Keizai (2004), only 8% or 258 of 3,244 foreign firmsare located in Kansai. The analysis of the distribution of foreign firmsshowed that 155 were located in Osaka, 73 in Hyogo-Kobe, nine in Kyoto,seven in Shiga and two in Nara Prefecture (See Figure 1). An exact list ofthe location of foreign firms with R&D activities does not exist. Accordingto JETRO’s list of foreign firms with R&D functions, not so many foreignaffiliated R&D establishments are located in Kansai.


8) Based on an interview with Mr. M. Ito, Mr. H. Hidetoshi and Mr. T. Uemura at the KansaiBureau of Economy, Trade and Industry (21 Oct 2003)

9) Promotion of Foreign Direct Investment into Japan. at <http://www5.cao.go.jp/access/eng-lish.jic_main_e.html>. (30 July 2004)

10) Ministry of Trade, Economy and Industry (METI), at <http://www.meti.go.jp/>.

Recently, more foreign companies have moved to Kansai directly andnot via Tokyo as was generally expected. Those companies came to Kansaivia their personal or business network. Previous cases show that the loca-tional decision making behavior of foreign investors is much influenced bythe existence of reliable local customers or clients. METI has no dataabout alliances or collaborations between Japanese and foreign companiesnor about the economic impact of foreign companies, but they expect possi-ble profits for local companies from the participation of foreign companiesbased on the outstanding example of the company, Renault, that intro-duced a globally oriented business system to the Japanese automotivemanufacturer Nissan.11)

METI is promoting an industrial cluster plan focusing on four high-opportunity growth sectors where industrial dynamics have been out-standing12). Software and IT related companies’ R&D is concentrated inTokyo, but the research and development activities of chemical, medical,machine and electronic industries are relatively decentralized in Japan.


11) See Heller & Fujimoto (2004), p.42.12) 4 High-opportunity Growth Sectors, at

<http://www3.jetro.go.jp/iv/cybermall/attractive/class23_attractive.html>. (30 July 2004)

Figure 1 : Distribution of foreign firms in the Osaka-Kansai metropolitan region

METI officials saw no evidence that IT related companies were invited asa part of governmental Information Communication Technology (ICT) poli-cy, but in fact the message to potential investors at the Website of Jetroasked for their participation in local ICT13) clusters.

In the context of the high-opportunity growth cluster strategy effortshave been undertaken to activate local advantages since the year 2000.Therefore, 19 projects have been started jointly with 36 universities,among them four projects in Kansai, but only a few foreign affiliated com-panies are involved. One explanation is that different departments atMETI are in charge of local industrial policy and foreign investment pro-motion. A lack of coordination makes it difficult to get foreign companiesinvolved in such projects in the initial stage.

In the past, professors at national universities had been prohibitedfrom taking a side job at private corporations, but this has been changed.The Japanese government has been convinced that cooperation betweenuniversity and industry is necessary to strengthen the international R&Dcompetitiveness of Japanese corporations and regions. Until now, foreigninvestment promotion has been conducted by local governments. By offer-ing financial support and providing the technological infrastructure, pre-fectures and cities try to form learning regions making possible the coop-eration of academia and industry. The hope is that foreign firms will alsobe attracted by the formation of high-technology clusters and learningregions.

To embed foreign companies favorably among others, such organiza-tions as the Hyogo Investment Support Center (HIS) or the OsakaBusiness and Investment Center (O-BIC) advise and support foreigninvestors individually. Their support scheme covers many areas but oftentheir measures are not very systematic. Recruitment of good research per-sonnel for foreign companies is seen as the biggest problem nationwideand the gap between the required personnel and the quality of local labormarkets is not only a problem for foreign firms. METI, however, fears thatmany foreign companies are not fully embedded in the Kansai area.Nevertheless, METI wishes to support foreign firms in this and otherareas and assist them by developing roots for their Japan business with along-term perspective.


13) From IT to ICT - Message to Investors, at<http://www3.jetro.go.jp/iv/cybermall/attractive/class23_att_ict.html>. (30 July 2004)

The biggest problem for the Kansai economy is its negative reputationof being a branch economy. Many of the larger corporations based inKansai did shift their headquarters to Tokyo, where corporate headquar-ters, financial and governmental institutions are concentrated. Comparedto the region Tokyo-Kanto investment and labor costs are lower in Osaka-Kansai. This metropolitan region is the second biggest regional marketwithin Japan. Served by a dense motorway network, several ShinkansenRapid Train stops and two international airports, the domestic as interna-tional accessibility are evaluated as excellent. Beyond that, there areindustrial clusters in the area of medical science and biotechnology emerg-ing. A large pool of potential venture partners among the SMEs concen-trated in Higashi-Osaka and Sakai exists. There are many good universi-ties that bear the potential of active alliances between scientific andindustrial organizations. Furthermore, Kansai is famous for its deliciousfood and kind people and the living environment is said to be excellent.Government agencies in charge of attracting foreign companies evokethese aspects of the Kansai area.

It is commonly perceived that Kyoto has not succeeded in attractingmany foreign affiliated companies. One popular explanation is that theentire area of Kyoto was developed as the old capital in the end of the 8th

century and needs to be preserved. Thus, it has been difficult to constructanything new in Kyoto City. Foreign companies that do not have afoothold in Japan yet may expect a delay of their business start when con-structing a new office or factory building in Kyoto. Consequently, compa-nies that established their own business close to Kyoto locate in theSouthern part of Kyoto Prefecture, in Nara Prefecture or even in ShigaPrefecture.

According to the foreign public relations manager of the KyotoResearch Park (KRP)14), the semi-conductor industry is advised to investin Kyoto, because there is a great potential of interesting partners amongthe semi-conductor manufacturers, such as Rohm Co., Ltd. Thus, Kyoto’sindustrial strategy aims to create a high-technology cluster in the semi-conductor industry. However, Kyoto’s efforts began just recently and areseen as far behind those of Osaka and Hyogo Prefecture that seem to besuccessful in attracting bio-technology related foreign direct investment(FDI). Elsewhere, the dominance of SME and therefore the “closed men-


14) An interview with Jeffrey Hensley from KRP was conducted at 15 October, 2003.

tality” of the industrial community of Kyoto was seen as an obstacle forforeign investors.15) In this context, the “quality of life” in Kyoto, whereeveryone is treated as a “newcomer” if not resident for more than threeyears, were characterized to be difficult for foreign business people.

Osaka developed in the 17th century as a castle town. The presenttownscape is the result of the continuous reconstruction of the buildingsand the renovation of the urban function. In this process, Osaka has expe-rienced difficulties developing sustainability and local identity. Further,alliances in the fields of R&D or new technologies are seen as most impor-tant for location decisions. For example, an American pharmaceuticalcompany’s first partner was Shionogi Corporation in Osaka. Also Bayer,headquartered in Osaka, built an alliance with Shionogi for selling theirpharmaceutical products in Japan.16) One possible explanation for Osaka’ssuccess attracting foreign pharmaceutical companies is that 30% ofJapanese pharmaceutical industry is located in Osaka. Therefore, a greatnumber of potential clients and partners for foreign companies can befound in Osaka. METI believes that foreign firms in Osaka expect co-oper-ation with Japanese universities. Thus, Ibaraki City has a tie-up withOsaka Prefecture and promotes Saito City as a new location for bio-tech-nology companies. Recently, this area of development has succeeded inattracting a Korean firm. To contact potential investors, Osaka prefecturehas overseas offices in Rotterdam, Singapore, Shanghai and San Francisco.

On the other hand, Kobe is a city in the Kansai area with a relativelyshort history but the city has been successful in preserving its historicalidentity in a way that suits international business more than its neighbor-ing cities. Kobe has flourished as a trading town since 1867 when itopened the first trading port. In 1868, a foreign settlement was estab-lished when the Hyogo Port was opened. The British civil engineer, J.W.


15) (1) Chiho Tainichi Toshi Kaigi (Conference of Inward Investment in Periphery) held inKyoto on 17 March 2004 organized by Cabinet Office, the Ministry of Foreign AffairsJapan, Kansai Bureau of Economy, Trade and Industry (METI), and Kyoto Prefecture. (2)NichiBei Tainichi Toshi Sokushin Seminar (Japanese American Inward InvestmentPromotion Seminar) held on 7th April 2004 in Kyoto organized by METI, AmericanEmbassy, Jetro, Kyoto Prefecture, Kyoto City Kyoto Chamber of Commerce and Industry,Kyoto Prefecture, Kyoto City Hall, and the Kyoto Foreign Investment Acquisition Office.

16) Shionogi Seiyaku to Bayer Seiyaku Mokisifurokisashin no kokunai hanbai de teiki.[Alience of Shinogi and Bayer to sell medicine for respiratory tract infection in the domes-tic market], at <http:// www.shionogi.co.jp/contents/ tousika/news/detail/031017.pdf> (30July 2004)

Hart, designed 22 hectares providing 126 lots with tree-lined streets and asewage system.17) Here, foreign merchants were prosperous in their busi-ness until the First World War. In the early 20th century the area was ren-ovated and became the urban center of Kobe with modern Western-stylemasonry buildings for the Japanese banks, trading and shipping compa-nies. Kobe Temporarily lost its position as an important domestic businesscentre during the accelerated growth of Japan’s economy in the 1960’s.More recently, urban and industrial policies have transformed the city intoan international platform for marketing, research & design activities ofdomestic and foreign multinational companies recently. Thus, in contrastto the cities mentioned, above the overall population (Flüchter, 2004, p.86)and also the foreign population is growing. The Division of InternationalEconomic Development of the Hyogo prefectural government conductedmeetings with foreign companies and listened to their ideas in order todevelop investment promotion strategies. In this process, the developmentof a local identity or image of Kobe as a fashionable Western-style urbancentre was decisive. According to Nakagawa (2003) the strong populationof younger women in the age 20-24 year-old age bracket in Kobe is out-standing in the Japanese urban landscape. With this population a youngand dynamic fashion market emerged in Kobe that attracts fashion-relat-ed consumer product manufactures with their marketing research activi-ties.

Since Kobe’s history in foreign exchange and recent efforts to attractmore FDI are evaluated as outstanding in the Kansai area, in the follow-ing section we focus on the city region Hyogo-Kobe and its strategies ofembedding foreign companies and spurring the local economy.

Hyogo-Kobe’s international economic development strategy18)

SpurringThe government of Hyogo succeeded in inviting forty life science com-

panies with the help of the Hyogo Investment Support Center (HIS). HIShas an important role in inviting foreign companies to Hyogo. The center,


17) Koura, Hisako, “Renovation of Historical Urban Centre,” Global Built EnvironmentReview, Vol. 2, Issue 1, (2002), pp.11-14. at<http://www.edgehill.ac.uk/gber/pdf/vol2/issue1/Three.pdf> (28 July 2004)

18) Based on the interviews with Mr. Mizuguchi from the Hyogo Prefectural Government,Division of International Economic Development (13 Nov 2003) and Mr. Wada from theHyogo Investment Support Center (HIS) (12 Nov 2003)

equipped with a special fund, was established for the purpose of economicrecovery after the Hanshin earthquake. HIS functions as a one stop ser-vice center for foreign companies. This center supports the establishmentof business operations covering administrative procedures and also offeredpersonal support for foreigners in Kobe, including lawyers or generaladvisers. The most used support was the administrative procedure toestablish an office in Japan, and introduction to private employment agen-cies. HIS conducted active investment promotion abroad and invited rep-resentatives of foreign companies that had been contacted during invest-ment seminars held at the Hyogo Club in Tokyo19). HIS seminars held inTokyo were an important tool in attracting new FDI. Foreign companieswho come to a business meeting in Tokyo were expected to be seriouslyinterested in doing business in Japan. Therefore, approaching foreigncompanies in Tokyo was viewed as a good chance to invite foreign compa-nies to invest in Kobe. Furthermore, they contacted companies during vis-its to industrial fairs. Because of the dynamic and active promotion activi-ties of HIS, the number of both inquiries and also investments increased.Seminars were regularly conducted to match foreign entrepreneurs withlocal companies in Hyogo-Kobe. They succeeded in inviting foreign compa-nies and the number of inquiries was increasing, but not so much in thefield of research and development. Most of the companies were not new-comers but expansion or reinvestment projects of companies already hav-ing a base in Hyogo or the Kansai area. Therefore, for successful acquisi-tion it was important to address foreign companies that already had apresence in the Kansai area.

HIS focused its acquisition activities on four industries: informationcommunication technology, biotechnology, medical care20), and environ-ment. These industries were identified by METI21) as high opportunitygrowth sectors. However, Hyogo Prefecture in fact did not succeed inattracting companies in every sector. They have not been able to attractenvironmental companies yet. Kobe, as a logistics center for foreign com-panies, was advertised through the example of automotive parts manufac-


19) Hyogo Club, Tokyo, at < http://members.tripod.co.jp/hgctyo/> 20) Beneath the emergence of a medical cluster, an important reason for the success of

attracting medical companies was seen in the general circumstance that it is relativelyeasy to conduct medical experiments with animals.

21) 4 High-opportunity Growth Sectors, at<http://www3.jetro.go.jp/iv/cybermall/attractive/class23_attractive.html> (30 July 2004)

turers. This company considered locating in Kobe, because the accessibili-ty by highway to their customers widely spread over Japan was mostimportant22). Independent of scale, every manufacturing company needs tothink about R&D. To promote R&D activities Hyogo Prefecture offersthree major projects that already attract Japanese SME as well as foreigncompanies:

1. The Kobe Medical Industry City Project is a mutual project amongindustry, university and governmental research institutes. Here, for-eign companies have already been involved.2. Harima Science City Park is the center of Nishi-HarimaTechnopolis and has the world’s largest third-generation synchrotronradiation facility. SPring-8 provides the most powerful synchrotronradiation currently available and attracts companies in the field ofnanotechnology.3. KIBC (Kobe International Business Center) is a highly subsidizedcore facility of the Kobe Enterprise Zone located on Port Island thatoffers office space, R&D laboratories, and space for warehouse, assem-bly and manufacturing activities within the same building for thosecompanies that want to achieve cost reduction by implementing inte-grated business concepts.

The government improved the research infrastructure and offeredvarious kinds of research facilities to foreign firms. They introducedJapanese research institutes and thus enable them to create alliances forresearch and development activities. A good economic base and goodaccessibility by train, road, air, and sea are the sales points of Kobe City.Further, they wish to create the best quality of life in Japan. Additionallythey offered incentives such as special zones and rental space. In conclu-sion, the government of Hyogo Prefecture came to the conclusion thatinfrastructure and services are most important factor for attracting corpo-rate R&D activities and therefore makes an effort to provide the best andmost modern infrastructure possible.

Through the invitation of foreign firms, the government of HyogoPrefecture focuses on such positive impacts for local companies as increas-ing product and marketing competency, increasing tax income and occu-


22) The customers are Nissan in Kanagawa, Toyota in Aichi and Mazda in HiroshimaPrefecture.

pied office space. Further, the hope is that direct and indirect employmenteffects will lead to economic dynamics that help to build up a cluster ofinnovative industries. Here, Hyogo Prefecture finds itself in strong compe-tition with Osaka with the acquisition of companies in the area of medicalscience and biotechnology.

Embedding

Among 316 R&D institutions in Hyogo Prefecture, 257 are privatecorporate R&D facilities and 12 of them belong to foreign affiliated compa-nies. Most foreign R&D establishments conduct applied research in Hyogoand basic research back in their home countries. However, some bio-tech-nology related foreign companies, such as the German pharmaceuticalmanufacturer Schering, joined with R&D activities in the Kobe MedicalIndustry Development Project.23) The purpose of this project is to developKobe’s growing health, welfare, and medical industry. Therefore, the Cityof Kobe is promoting research and development of advanced medical tech-nologies facilitating the creation of new industries by assemblage of med-ical industry businesses and organizations from Japan and abroad. Themajority of foreign companies that shift their R&D activities to HyogoPrefecture are multinational corporations with operations all over theworld. Most of them tend to have sales offices and manufacturing sub-sidiaries in Japan before setting up R&D facilities.

Often those companies that decide to invest already have a sales sub-sidiary or a joint venture partner in Japan. In most cases, Japanese sub-sidiaries or parent companies abroad are involved in their investment pro-ject. In most cases the Japanese managers handle the negotiations withthe local government but in some cases foreign management was involveddirectly.

The division of international economic development of the Hyogo pre-fecture deals with all kind of requests. Thus, they have been asked aboutthe guarantee system necessary for Japanese bank loans. Here, Japanesetop managers have to act as guarantors when the company borrows moneyfrom a bank. Foreign companies need to adjust to local business customsand practices. For example, Japanese pharmaceutical companies have aspecial trained sales staff, called MR (Medical Representative), who sell


23) Kobe Medical Industry Development Project, at<http://www.city.kobe.jp/cityoffice/06/015/iryo/index_e.html> (28 July 2004)

the products to, and keep in close contact with medical doctors.The most important factor of locational decision making is a very tra-

ditional one: cost. According to the U.S. Department of Labor, unit laborcost in manufacturing increased most in Japan24), but to avoid fixed assetsin buildings or land most foreign R&D establishments tend to use rentallaboratories. Another important factor for the location decision makingwas identified in the existence of industrial clusters and the infrastructureimportant to the foreign company’s R&D activity. Foreign companies areseeking for business chances through collaboration in research projects,but also the availability of capable researchers is a crucial factor. Theavailability of international schools is not a necessary location factor forforeign companies since they come for business and not for living.However, the City of Kobe is using the international schools as an impor-tant sales point for those foreign companies that intend to come with alarger “foreign workforce”.

The outstanding feature of the city-region’s investment support activi-ties are the joint efforts between Hyogo Governor, Toshizo Ido, and WernerGeissler, the former president of the American multinational P&G. on the“Hyogo-Kobe FDI Project” inviting managing directors of Tokyo-based for-eign affiliate companies, business consultants and staff of embassies toKobe. This collaboration between a municipality and a multinational com-pany was new for Japan.25) The project team adopted P&G’s “Consumer isBoss” spirit and shifted the investment promotion effort from “seller-ori-ented” to “consumer-oriented” activities. The team positioned the FDI pro-motion as “business strategy” and not a part of the administrative ser-vices. It utilized P&G’s marketing concept and methods, and featured thestrengths of Hyogo-Kobe “The 6 Bests” to brand the region as “the BestPortal Zone of Business in Japan”. For the purpose of inviting foreignbusinesses, the Prefecture Hyogo developed a promotional DVD entitled“Hyogo-Kobe, Best Portal Zone” and revised a leaflet now entitled “Hyogo-Kobe - Best Portal for Business in Japan”. The information is also avail-able on the Internet.26) Initially, the local government attempted to packeverything in, but it was expected that a professional business audience


24) Unit labor costs in manufacturing increased the most in Japan and Korea in 1999, at<http://www.bls.gov/opub/ted/2000/Oct/wk4/art01.htm> (29 July 2004)

25) Press release, Hyogo Prefecture, International Economic Development Division (18 June 2004) 26) Hyogo-Kobe, Best Portal Zone, at <http://www.hyogo-kobe.jp/>(10 January 2005)

would not keep watching for 25 minutes. It has been re-designed into a 7minutes only promotion video according to the advice and guidance of themarketing experts of Procter & Gamble. Thus, six outstanding benefitswere advertised: 1) administrative services, 2) incentives, 3) office facili-ties, 4) living standards, 5) convenient access and 6) safety. Additionally,new initiatives, such as the Hyogo-Kobe Knowledge Angels and theHyogo-Kobe Alumni Network, were created to satisfy the needs ofinvestors based on the “Investor is Boss” principle. The Hyogo-KobeKnowledge Angels is a program in which foreign-affiliated companies thatare already successfully operating in Hyogo-Kobe, such as Nestle, Eli Lilyand P&G engage themselves in supporting and communicating foreigninvestors’ needs and demands in various stages of their advancement tothe Hyogo-Kobe city-region. The Hyogo-Kobe Alumni Network was creat-ed to facilitate and promote the existing human network of those non-Japanese people that have relations and attachments to the Hyogo-Kobearea. Initially, it focused on graduates of international schools, overseasstudents and the ETP (EU Executive Training Program)27); the networkwill be gradually widened. The government of Hyogo prefecture hasalready started to spread the message of its “Leverage Business Strategyof a Global Company” for its foreign direct investment promotion by animage campaign abroad.28)

Since the multinational company P&G took a leading advisory role inthe Hyogo Prefecture’s investment support activities, we want to investi-gate in detail the firm’s efforts to embed their business in the Kansai area.

Case study P&G

P&G is a world wide consumer goods company that has on-the-ground


27) The author was invited to give a presentation about his research results during theBusiness Seminar in Hyogo-Kobe for ETP together with Mr. Akira Yamaki, the SectionChief of Nestle Japan Group, Mr. Masaaki Akagi, the Director of the InternationalEconomic Development Division, and Mr. Yutaka Uzaki, a Jetro IBSC Kobe advisor, atKIBC on 6th October 2004.

28) Governor Ido visited with a delegation of 23 business man and governmental officialsSchleswig-Holstein and other states of the Federal Republic of Germany in October 2004.See: Japan stellt sich in Schleswig-Holstein vor. Kieler Nachrichten (14. October2004),Wirtschaftstag Japan in Kiel: Schleswig-Holstein bei Japanern hoch im Kurs.Presseinformation, Ministerium für Wirtschaft, Arbeit und Verkehr des Landes Schleswig-Holstein (15. October 2004), Deutsch-Japanisches Treffen bei Sushi und Sake. KielerNachrichten (16. October 2004).

operations in over 80 countries with its corporate headquarters in theUnited States. In Japan, the first operation started in 1973. The owner-ship of the local affiliated company of P&G was initially a joint venturewith Japanese companies but was changed later to a subsidiary wholly-owned by the parent company in the USA. Today P&G Japan holds sever-al No.1 brands in Japan, employing 4400 people. In the headquarters andtechnical center in Kobe, there are 1400 employees, among them 300 areforeign nationals. This headquarters has regional coverage of Japan andKorea. P&G believes that Japanese consumers are very discerning andarticulate about their product needs; and their Japanese competitors arehighly capable in meeting their needs.29) The company strategy was tostrengthen itself within the Japanese market initially for the developmentof other overseas markets: developing products that satisfy Japanese cus-tomers and competing with Japanese competitors makes P&G strong glob-ally. The Japanese market requires high quality and Japanese consumersare known as very demanding. P&G products also needed to be more com-pact than in American shopping malls in order to meet Japanese con-sumers’ needs. P&G views the Japanese market as holding a great growthpotential. P&G hopes to find further business opportunities through inno-vation and being in touch with local consumers and customers. One impor-tant strategic consideration, which was a foundation of the P&G businessin Japan, was that a company that succeeds in meeting the consumerdemands in Japan can be successful anywhere in the world. Thus, theactivities in Japan were seen as an incubator for world market strategies.Their opinion was that business in Japan contributes to the global com-petitiveness, if the firm is capable to compete successfully with local firmsin the Japanese market.

Location decision making process

In the beginning of the 1970s because of governmental regulations,one-hundred percent direct investment was not allowed. Thus, P&G need-ed to have a joint venture partner to enter the Japanese market. Althoughone cooperator was based in Tokyo, they choose to establish their businessin Kansai because of two important partners: Daiichi Kogyo Seiyaku in


29) Procter& Gamble Far East, Inc. – Foreign/foreign affiliated companies in Hyogo-Kobearea /4th (Interview report with Werner Geissler), Issued in Nov. 2002, News on the HyogoInvestment Support Center in Kobe, vol. 14.

Kyoto and Itochu Trading in Osaka. P&G was based in Osaka for the first20 years of its operations, before shifting the headquarters to Kobe. Tokyowas recognized as a very large market but P&G customers and the net-work of their affiliated wholesaling companies are spread all over Japan.If governmental approval would have been needed frequently, Tokyowould have been the locational choice, but P&G’s main products then,such as laundry detergents, were not that highly regulated and so therewas no need to see officials of the central government often.

Since Procter & Gamble is not headquartered in the capital of theUSA but in Cincinnati, Ohio, there was no perception that the headquar-ters had to be located at the capital city in Japan.30) The P&G managerinterviewed argued that other companies often might lack geographicalknowledge when setting up a business in Japan and for this reason, Tokyois sometimes chosen as a location.

P&G was not growing very fast at its early stage and had to overcomeobstacles of a deficit of knowledge on Japanese consumer behavior andneeds. It took ten to 15 years to achieve sufficient knowledge about theJapanese market. Further, a structural change enabled the companies’marketing strategies to take hold and provide the desired success. At thispoint, the office space in Osaka became too small for the growth of thecompany. They conducted a feasibility study about alternative locations inthe late 80s. They were looking for a place where they could co-locate theheadquarters and increase R&D facilities. This action was based on thefirm’s long-term commitment to the Japanese market as well as on theneed to have an increasing number of employees working together in onelocation for organizational effectiveness reasons. They looked at candidatelocations nationwide. After completing the feasibility study, Rokko Islandin Kobe harbor, in front of Kobe City was chosen, fulfilling the criteria thebest. Tokyo was also considered but P&G concluded that Tokyo did notoffer the benefits that justified the higher costs and moving employeesfrom Osaka to Tokyo.31) One important argument against Tokyo was againthat P&G’s consumers and customers are all over Japan.

Kobe was favored for many reasons. Their decision criteria were tohave convenient domestic and international transportation access and asuperior urban living environment for both international and Japanese


30) Ibid.31) Ibid.

employees. Rokko Island was evaluated as meeting these criteria, since ittakes only 35 minutes by taxi to Shin Kobe Station a stop for theShinkansen Super Express train, and within one hour the KansaiInternational Airport can be accessed32). Further, the modern urban livingenvironment with immediate access to recreational areas was favored bythe foreign employees. Kobe does not only offer short commute and urbanamenities but also excellent facilities necessary for international residentsincluding churches, hospitals and homes where English can be used forcommunication. Another important reason was the existence of six inter-national schools, among them Canadian Academy33) and European SchoolKobe34), that enjoy a good reputation and assure their foreign staff ’s chil-dren an education similar to their home country. Kobe has been evaluatedby P&G as the best environment for both international and Japaneseemployees. Although Kobe is known as an expensive place in Kansai it isless expensive than Tokyo. Kobe’s image as an international city was seento match well with the corporate image of P&G. The brand image of“Kobe” is said to be a plus for recruiting. The president emphasized thatmany graduates who have grown up in Tokyo decided to join P&G and livein Kobe35).

P&G wishes that future foreign investors would receive more supportfor the purpose of enlarging the foreign business community in Kobe. The“multinational atmosphere” of Kobe adds value to the company and suitsits 300 foreign employees with 27 different nationalities as well asJapanese employees who enjoy the international atmosphere. Kobe is alsoseen now as a safe place since a large portion of the infrastructure andbuildings were rebuilt and reinforced after the Great Hanshin-AwajiEarthquake using the latest seismic safety technologies. Finally, Kobe canbe seen as important strategic base for the multinational’s global busi-nesses. The Asia Technical Center conducts R&D for the world market.


32) Until recently, Rokko Island had also a commuting speed boat connection to the KansaiInternational Airport. It is not clear why this connection was abolished.

33) The Canadian Academy was founded in 1913 and is the Kansai region’s largest interna-tional school. The language of instruction is English, the curriculum, American style. Theschool is located on Rokko Island where P&G located its headquarters.

34) The European School Kobe (previously named Deutsch Schule Kobe) started its Englishinstruction in September 2002, due to the fact that many German families went toYokohama where the largest German School is located.

35) See interview report with Mr. Werner Geissler.

R&D organization and management

Procter & Gamble had already started its R&D activities in Japan in1970s. Nowadays, R&D is conducted in the same building as the head-quarters. Research conducted during the initial phase centered on technol-ogy transfer and applied research, but to some extent development andmarketing research was carried out as well. Basic research was includedin the spectrum of research activities since the company co-located theheadquarter functions and R&D facilities on Rokko Island, an artificialisland in Kobe harbor. The purpose of having R&D facilities in Japan wasto establish an integrated system ranging from R&D to production36) andsales activity, promoting the transfer of technologies from the mother com-pany, obtaining the latest and most advanced R&D information in Japan,enabling the company to respond to the needs of the Japanese marketpromptly, and meet Japanese market quality level. The company conductsresearch in areas of R&D where world-class standards are met. P&G pro-duces new R&D results through exchanges with other R&D centersabroad. The company established an R&D base for Asia in Japan andstrengthened the relationships with Japanese universities and researchcenters for collaborative research opportunities. Thus, P&G collaboratedwith Japanese companies, universities and research centers, and conduct-ed exchange of technology and information nation-wide. It was empha-sized that there are benefits from all these factors mentioned above.

P&G employs 500 researchers and technicians at the TechnicalCenter in Kobe. The common language among Japanese and foreignresearchers and technicians is English. P&G employs and utilizes bothJapanese and foreign researchers and technicians. The self-assessment ofthe company’s R&D performance was that it is a success.

DISCUSSION

The study showed that within the Kansai metropolitan area, HyogoPrefecture succeeded in creating an international business environmentby offering advanced technologies and modern industrial space not only toJapanese but also to foreign corporations. Kobe’s international develop-


36) In Hyogo Prefecture P&G possess one factory located in the Akashi City, a second is locat-ed in Shiga Prefecture and a third in Tochigi Prefecture.

ment strategy aimed at creating an image as the best portal for businessin Japan. Initially, Hyogo Prefecture was conducting acquisition seminarsfor potential foreign investors in Tokyo. The hope was that foreign compa-nies might discover the Kansai area to be a more profitable location whenshifting their business out of price overheated Tokyo. In cooperation withmultinational companies, Hyogo Prefecture developed an area marketingconcept that aimed at attracting foreign affiliated firms, which had justopened representative offices in Tokyo, and facilitated as human networksfor the purpose of attracting foreign investors from abroad to Hyogo-Kobe.They developed a “leveraged business strategy” to attract and embed glob-al businesses into the local economy. The successful collaboration betweenthe marketing department of P&G and Hyogo Prefecture creating a newarea marketing concept with the objective to be of being a portal for for-eign business in Japan fosters a culture of international and knowledgeexchange. According to Smyth (1994), international city marketing pro-jects based on innovation do have a high risk profile: The more innovativeprojects are and the greater the geographical orientation is, the morerisky the venture. However, there has been no real innovative-internation-al project in Japan yet. The projects in the field of biotechnology and med-ical science described above were designed to attract investment fromJapanese companies but were “additionally” open to foreign investors.Thus, the dominant business culture remains still national and service-oriented; and therefore less risky. However, the marketing project ofHyogo-Kobe as an important portal for global business in Japan haspromise since it is harnessed by powerful political and economic struc-tures and the cooperation of foreign business people based in Kobe. Theresults of the case study on P&G show that Kansai based operations offoreign firms are not necessarily ‘pure sales subsidiaries’, but can be fullyintegrated through the co-existence of up-stream (Research, Design &Development) and downstream (sales and/or marketing) functions. Itseems that foreign companies do not have to locate the headquarters nec-essarily in the Tokyo-Kanto area when successfully embedding their cor-poration in the Japanese business environment while keeping a manage-ment-style that suits the foreign multinational. The international busi-ness environment of Hyogo-Kobe does comply with the global manage-ment-style of P&G. Initially, because two important partners were basedin the Kansai area, P&G located in Osaka. When growing market shares


made possible the implementation of an integrated business system, arelocation within the Kansai area was carried out with the purpose ofkeeping the developed business network and the proven local team. P&Gdid not undertake “restriction driven” investment when investing inJapan but restrictions challenged the company to build up a personneland business network that was interwoven with the local corporations.Even when those restrictions became obsolete, the network kept the com-pany in the Kansai area. After co-locating headquarters and R&D func-tions on Rokko Island in Kobe, P&G promoted positive images, such associal and economic aspects of the foreigners’ integrated working and liv-ing environment within Kobe City, and helped to utilize this local advan-tage for the assembling and embedding of foreign business in Kobe. Themutual interest of the Hyogo-Kobe project (or area) and such multination-als as P&G was to spur the local economy by activating a human networkof foreign business people. One important task was to embed the foreignfirms in the local business community in the most favorable way. Theresults imply that not by advertising a high concentration of foreign busi-ness but a high degree of local and managerial embeddedness for each for-eign investor, the city region Hyogo-Kobe can be expected to attract moreforeign firms. Thus, P&G did not attempt to assist the government ofHyogo-Kobe Prefecture in rebuilding a ‘miniature enclave’ that onceformed the foundation stone of Kobe’s success as an international harborand trading town, but facilitated its’ recent domestic and overseas link-ages strategically by an area marketing concept that aims at preparingand challenging the city region for an competitive participation in theglobal economy. Thus, we observed that next to “old spaces of internation-al trade”, as still visible in the ‘Old German trader’s house’, “new spaces ofglobal business” are visible in an integrated modern working and livingenvironment with Western-style office buildings and condominiums; andembodied in new P&G business towers and vitally circulating in newinternational platforms of technology and business exchange located onthe artificial islands in Kobe harbor as in the Nishi-Harima TechnopolisZone.

ACKNOWLEDGEMENT

This research work has been supported by a Grant-in-Aid for


Scientific Research from the Japanese Ministry of Education, Science andCulture (2003-04, No:15520509). Many thanks also to all governmentalofficers who have helped the author to broaden his understanding of theinward investment promotion in Japan. The author would also like tothank Mr. Teppei Uemura from METI for his kind assistance in the inter-view survey.

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