The National Business Systems in China and

Japan
A comparative analysis of the national business systems in China and
Japan with a focus on their similarities and divergences

BSc Business, Asian Language and Culture

Asian Business Systems Take-home Exam

Nathalie Maria Madsen

CPR: 220594-2206

Hand-in date: 16th December 2015

STU count: 22.586
Total number of pages: 13
Copenhagen Business School 2015

Table of Contents:
1.0 INTRODUCTION .......................................................................................................................................... 2
2.0 THEORETICAL FRAMEWORK .............................................................................................................. 2
3.0 ANALYSIS ....................................................................................................................................................... 4
3.1 INDUSTRIAL RELATIONS ................................................................................................................................................ 4
3.2 VOCATIONAL TRAINING AND EDUCATION ............................................................................................................... 5
3.3 CORPORATE GOVERNANCE AND OWNERSHIP ......................................................................................................... 6
3.4 INTER-FIRM RELATIONS ................................................................................................................................................. 7
3.5 OVERVIEW .......................................................................................................................................................................... 9
4.0 DISCUSSION: SIMILARITIES AND DIFFERENCES BETWEEN CHINA AND JAPAN ........ 9
4.1 THEORY CRITIQUE ........................................................................................................................................................ 10
5.0 CONCLUSION .............................................................................................................................................. 11
6.0 REFERENCES .............................................................................................................................................. 12

1.0 Introduction
The Chinese and Japanese business systems have both experienced rapid change throughout
history to get to the system they are today. By using Hall and Soskices varieties of capitalism
(VoC) approach, I wish to analyze the current business systems within China and Japan
looking at specific aspects that build up their business systems. My hypothesis is that Japan will
be categorized as a CME, and China will be categorized as a hybrid however more like an
LME than a CME and I will be attempting to prove this with an analysis comparing the two. I
will then discuss the similarities and differences between the two nations economies both
historically in general and then through using the information gained in the analysis. My
motivation for comparing these two nations is the longstanding history between them and the
fact that China is economically following Japans footsteps, albeit two decades later. It would be
interesting to see if China will continue to do so or if the nation will lead a different path.

2.0 Theoretical Framework

Varieties of Capitalism is an approach elaborated on by many theorists, however, the version of
the framework that I will be using was put forth by Peter Hall and David Soskice in their book,
Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, in 2001. This
is also the book used as the reference for this chapter unless otherwise stated. According to Hall
and Soskice, the idea of system coordination and institutional complementarities take focus, and
if, in a business system, the institutions are synchronized correctly, the said nation will achieve
better performance overall and hereby receive a comparative institutional advantage. This
institutional advantage increases the chances of the national business system as a whole
surviving.
Within the VoC approach, Hall and Soskice determine two types of capitalist economies: liberal
market economies (LMEs), that uses on a more arms-length approach where competition,
hierarchies, and formal contracting are at the core of the business system and firm behavior is
heavily influenced by demand and supply conditions in competitive markets; and coordinated
market economies (CMEs), which is focused more on collaboration, relational contracting, nonmarket relations, and strategic inter-firm interaction.

In order to categorize an economy as either an LME or a CME, one must consider how firms
within that economy behave in terms of the five spheres: industrial relations, vocational
training and education, corporate governance, inter-firm relations, and employee relations. I will
give a short definition of each sphere, followed by a table that I have constructed below, which
differentiates LMEs and CMEs in each sphere.
Industrial relations: bargaining with: the labor force, representative organizations of labor, and
other employers over e.g. wages and working conditions
Vocational training and education: as a firm, securing a work force that has obtained
relevant/suitable skills; as a worker, deciding what education to obtain and invest resources in,
which has great influence of the skill levels/competitiveness of the nations economy
Corporate governance: how organizations are run, means of lessening problems that occur from
the separation of ownership and control within a firm to protect the interests of all stakeholders,
to improve performance, and to ensure that investors get an adequate return on their investment
(He et. al., 2015)
Inter-firm relations: the relationships a firm will create with other enterprises to ensure steady
supply and demand
Employee relations: the relationships a firm will create with its employees to avoid issues
ranging from employees information-sharing issues to ensuring cooperation between employees
Industrial relations

Vocational training and

education
Corporate governance

Inter-firm relations
Employee relations

LME
Higher rates of employment and
income inequality; less regulated
and more flexible labor markets
with weaker unions, less centralized
bargaining, less employment
protection (Blyton et. al, 2008)
Workers have general skills that can
be used to work at other companies
Firms rely on public information
about finances and short-term
capital, little/no role for employees,
strong reliance on external labor
markets
Competitive, at arms-length
More oppositional relations between

CME
Strong unions, collective bargaining
easier than in LME (Blyton et. al,
2008)

Workers have specific skills that are

tied to the firm/industry they work in
Firms rely on patient capital, firm
operations coordinated through
cooperative relationships between
actors
Collaborative
Cooperation with employees to reach

management and employees,

managers are the prime decisionmakers

major decisions

3.0 Analysis
As my hypothesis is that China will be a hybrid although more LME and Japan is a CME,
this analysis will seek to prove this using the aforementioned spheres of VoC.

3.1 Industrial Relations

China, on paper, has industrial relations that resemble a fairly European style: a union density
rate 41% (2012 statistic, vs. 26% in 2010) and a collective bargaining coverage rate of 39%
(2012 statistic, vs. 24% in 2010). (ILO, 2012) Although this number is growing, there are several
issues with the extent to which these unions represent the interests of the labor market. The
leading political party in China, the Communist Party China (CPC), has members that are
increasingly active within the labor market in China from holding personal stakes within
formally POEs to leading the main labor union organization in China (compared to Japan, where
union members are exclusive to the enterprise in question). Therefore, the labor unions may not
be of much help to workers, as they tend to side with management during employee rebellions
(such as strikes). (Witt and Redding, 2014) Furthermore, because of this misrepresentation of
labor interests within the labor unions, workers are not able to collectively bargain. Therefore,
although data shows this sphere in China seems like a CME, in reality, it tends to drift more
towards an LME because of the weakness of the unions and the lack of collective bargaining.
Japan has a relatively low union density in contrast to China, and unions are not as necessary in
Japan in order to ensure employee well being. Unions are seen as partners with the heads of
companies the general opinion in Japan is that the reasons firms exist is for benefitting their
employees, and therefore, firms take into account the interests of their employees without the use
of unions. (Witt and Redding, 2014) In terms of Japanese workers ability to collectively bargain
wages and other important details of their employment, the industrial relations provide a
decentralized bargaining structure in which bargaining takes place at the level of individual
enterprises not through unions. (Suzuki, 2013) This could be because Japan utilizes several

salary-determination structures such as the seniority system1 and performance-based pay.

Furthermore, the measured difference in the wage increase demanded by unions versus by
individuals within an enterprise is not significant. Although this does not completely signify a
CME, it is definitely not an LME because of the equal nature of the firms.

3.2 Vocational training and education

Chinas economy has in that past been one, which focused on being labor-intensive using
immense quantities of unskilled labor. However, this focus is slowly shifting towards one in
which the workers must possess some sort of technical knowledge in order to be productive
within a firm. Due to various policies implemented during a recent five-year-plan, China has
seen a rise in students passing skill certification exams (90.4% in 2014 vs. 70% in 2009). (The
World Bank, 2015) Furthermore, the Chinese government encourages vocational training via
government subsidies as well as a policy, which states that each student should obtain vocational
training for one year during their upper secondary education. (OECD, 2015) This is evident of a
CME business system because the worker will gain knowledge in his or her specific industry.
However, although there is a growth in the amount of graduates receiving vocational training, the
number has not increased as sufficiently as the number of graduates from general secondary
education, and the policy enforcement protocol in China is not strongly implemented, meaning
that workers may or may not obtain official vocational training for a specific job, despite
policies. (Hall and Soskice, 2014)
On the other hand, Japans education system is one based off of the U.S. model, meaning a
standard 12 years of general education, followed by the option to further specialize in a higher
education program. Compared to China (who had a 27% enrollment gross in 20122), Japan had a
relatively high % gross in tertiary school enrollment: 61% in 2012, which is the third highest in
Asia in 2012. (The World Bank, 2013) Furthermore, Japan is 18th worldwide concerning the
average length of schooling of adults. In terms of vocational training colleges and schools, they
are not very widely used in Japan. Firms will, however, invest in on- or off-the-job training, as
1

System of promoting an employee in proximity to retirement - allows older employees to achieve a

Most current data: 30% in 2013, however all comparative data was from 2012, so I chose that number to
stay consistent
2

Japans lifetime employment model makes it beneficial for both the employer and employee to
undergo extra training. (Witt and Redding, 2014) This is a CME quality, as the employee will
gain knowledge specific to the company and obtain skills relevant to their field of work.

3.3 Corporate governance and ownership

In China, the majority of firms in China are privately owned enterprises (POEs) (75% of all
Chinese firms in 2007 vs. 24% of all Chinese firms in 1998) that are mostly run as family
businesses or partnerships. (Witt and Redding, 2014) However, many of these POEs were
previously state-owned enterprises (SOEs), and continue to have economic relationships with the
previous shareholders, meaning that while the firms are technically privately owned, the state has
control. (He et. al, 2015) In terms of corporate governance, China has recently begun adopting
an Anglo-Saxon style of corporate governance, in which firms modify their strategies to the
demands of capital markets and, therefore, anticipate lower levels of firm commitment and
involvement with the workers and vice versa. According to VoC, this would indicate that China
is drifting towards the LME in terms of corporate governance. Furthermore, decision-making
within Chinese firms also resembles an LME, as decisions occur from the top-down without
including employees lower in the hierarchy (this may be due to the lack of trust in others because
of an absence of a legal system that enforces accountability in China). (Witt and Redding, 2014)
China is currently ranked as #48 in the global ranking of a nations willingness to delegate
authority, and as this is relatively low, it can be argued that this supports an LME business
system. (World Economic Forum, 2014) Furthermore, in order for China to be an LME, it would
have to have un-transparent corporate governance, which can be the case due to guanxi3.
Because the social relationships often utilized for business deals in China are behind closed
doors, this information is not passed on to the rest of the company, and hereby, the rest of the
employees are kept in the dark regarding decision-making. (Jackson, 2011)
Historically, in Japan, banks have owned the majority of firms; however, due to the recent
increase in foreigner shareholders (30.8% in 2014 vs. 18.8% in 1980), Japanese corporate
governance has slowly been forced to increase its focus on the interests of the shareholders,
which is representative of a CME business system. (Witt and Redding, 2014; Fujikawa, 2014)
3

The system of social networks and influential relationships which facilitate business and other dealings
6

Previously, companies in Japan had emphasized the importance of satisfying their employees,
the society and their customers; however, with this increase in foreign ownership, the structure of
the Japanese Company Law has changed in several aspects (among which are: the
implementation of US-style boards of directors, employment of outside directors, as well as an
increase in disclosure and transparency within a firm). Conversely, Japanese firms have found
ways around these new reforms in order to keep structure and governance as it was before (e.g.
via calling ex-board members executive-officer group and calling board meetings joint
meetings). One reform that has had an affect is the increase in outside directors (foreign
directors) within Japanese firms. In 2015, in 1st Section4 firms, 94% have outside directors, and
almost 50% of 1st Section firms have two or more outside directors (vs. 74% and 21%
respectively in 2014). (Tokyo Stock Exchange, Inc., 2015) The internal structure of Japanese
firms is hierarchical, meaning decisions run though several channels before being passed.
However, as opposed to Chinas top-down approach, decisions or ideas may come from the
bottom-up if proper consensus is reached. Lastly, employees are given the responsibility of
looking to improve the companys productivity this alone is in direct contrast with LMEs,
where employees are given little to no role. (Witt and Redding, 2014) This combined with
employees cooperation between management as decision-makers in the firm signifies CME.

3.4 Inter-firm relations

China has previously seen a great number of inter-firm collaboration in terms of transferring
knowledge on technology via joint ventures. However, after the relaxation of firms requirement
to partake in inter-firm alliances in 2001, as well as the rapidly increasing number of foreign
owners of enterprises in China, these alliances began to decrease and will mostly continue to do
so as China further relaxes its market access requirements (as foreign firms will be more likely to
collaborate with their origin country or other current partners rather than other Chinese firms).
(Witt and Redding, 2015) Furthermore, because of its weak intellectual property protection laws
and enforcement, domestic firms will have no use in collaborating with other firms, as they are
able to copy the technology and ideas deemed relevant for them. (The Economist, 2012)
Moreover, due to the high fluidity of workers in the labor market, information travels freely

Tokyo Stock Exchanges term for large companies

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through the firing and hiring of personnel. This seems to closer fit the LME competitive
company relationship rather than the CME collaborative one.
In contrast with China, Japan experiences a great deal of inter-firm relations so much that the
economy has been unofficially named a network economy. Japan has numerous types of social
networks within the economy: business groups5 (horizontal keiretsu), vertical keiretsu, R&D
consortia and a government-association-industry nexus. (Witt and Redding, 2014) In fact,
Japans prime minister, Shinzo Abe, is looking to encourage the increase of foreign shareholders
in Japan, which will directly contradict these business groups that have been a large part of
Japanese business systems for over 40 years. (Fronda, 2015) Although some economists deem
these keiretsu to be a declining part of the Japanese economy, others argue the opposite. The
presence of these business groups in Japan suggest a more collaborative approach to business,
which best describes a CME.

3.5 Employee relations

Employment relations are a contractual relation in the framework of which one party (the
employee) undertakes to perform dependent work personally for wages for the other party (the
employer) (Blanpain, 1998) As previously mentioned, China utilizes a top-heavy decisionmaking process, in which employees have little to no say. Due to the high power-distance that is
common in China, most decisions will be made by the company leaders, who will not consult
with the rest of the firm, as is typical in a superior-subordinate relationship. (Khairullah and
Khairullah, 2013) Because it makes management be the prime decision-makers, as well as
creates distant relationships between management and employees, Chinas employee relations
sphere most resembles that of an LME.
Japan, as I also have previously mentioned, has a different way of approaching decision-making.
There can be decisions made by the business leaders as there can be in all business systems
however, Japan also utilizes a special system called the Ringi System. This is the so-called

a business network composed of manufacturers, supply chain partners, distributors and financiers who
remain financially independent but work closely together to ensure each other's success
8

bottom-up decision-making and takes many employees opinions and ideas into account. (Vogel,
1985) This cooperation between management and employees is a quality seen in CMEs.

3.5 Overview
Industrial relations
Vocational training and
education
Corporate governance
Inter-firm relations
Employee relations

China
CME/LME
CME/LME

Japan
(CME)
CME

LME
LME
LME

CME
CME
CME

4.0 Discussion: Similarities and differences between China and Japan

Historically, China and Japans economies have both experienced rapid growth, and to this day,
they remain two of the three biggest economies in the world. However, growth is usually
followed by a slowing down and ultimately a decrease in growth or even a decrease in the
economy. In the past century, Japan has been through extreme losses and wins in terms of
international relations. During these encounters with other societies, Japan has been very clear
that the traditional society and economy stays as is without any Western influence. In fact,
even today Japan keeps ahold of the cultural aspects of its business system despite reforms and
other efforts to change aspects of the economy. An example of this is Japans reluctance to
change the structure of the boards within firms, as mentioned in chapter 3.3. Japans economy
continued to grow steadily until the Asian economic recession in the late-90s. China, on the other
hand, started growing at a later time and its GDP is still increasing substantially. The nature of
the growth, some can argue, mirrors Japans quick, steady, an economic boom two decades
later. Throughout history, an economic boom is usually followed by an economic bust due to
rising costs and interests rates6, which is what happened to Japan, and can be discussed is very
likely to happen to China at some point, which creates a very large similarity between the two
nations economies.
Through the analysis, China and Japan have more differences than similarities when it comes to
their types of business systems. The two nations do not have any spheres, which are exactly the
6

very simply put

9

same; however, there are a couple of spheres where it is difficult to ascertain the type of
economy LME or CME and therefore difficult to ascertain if the two nations are completely
different. An example of this is industrial relations. In the industrial relations chapter, China is
hard to place, as the statistics say that there are more unions than Japan and a growing bargaining
rate. Looking just at the numbers, this is evident of a CME. However, there are underlying
factors that make it vastly different from a CME structure like that of Japan. The main factor that
influences Chinas industrial relations is the role of state, which is something I will further
elaborate on in the following chapter. Therefore, although the nations a revealed to be
opposites using this theory, there may be aspects of the approach that are lacking, and hereby
creating an view of the economies that is not holistic.

4.1 Theory Critique

Although there are nations for which VoC theory is useful in order to describe the business
system, there are a several reasons it is difficult to apply to the nations mentioned in this paper.
One thing lacking in the approach is its lack of variety. There are two main types of economy,
and this approach is mainly useful for analyzing a business system that fits perfectly (or mostly
perfectly) into one of the two categories. However, both China and Japan have spheres in which
they are neither CME nor LME one may fit better than the other, but it is obvious that the
specific parameters do not describe either nation.
Another issue with the theory is that it ignores the role of the state. It suggests that changes in the
business system today are led by the firms; however, as we know China has a very central
government influence, it would be incorrect to say that adjustments to the business environment
rely solely on the firms within it. Although it may use more indirect rather than direct approaches
in making changes to a system, the state is still very much in play throughout Asia.
Lastly, according to the theory, institutional complementarity is the key to a productive and
successful economy; however, if one uses Japan as an example, this is not the case. Through the
analysis, Japan has been mostly consistent as a CME with each institution aligning well with the
other; however the nation does not experience much growth rapid or otherwise. This, again,
may come down to the fact that certain aspects are ignored or overlooked in this simple theory.

10

5.0 Conclusion
In conclusion, what kinds of business systems are seen in China and Japan? Based on the
analysis completed using Hall and Soskices varieties of capitalism approach, it can be
concluded that, while Japan can be considered a CME (most spheres were consistent throughout
the Japanese business system, with a few minor inconsistencies), China has both CME and LME
properties, as well as a few aspects, which are neither. In this case, China can be considered a
hybrid of the two, which is consistent with my hypothesis. The theory proved to be difficult at
times in accurately describing the nations economies, which was discussed in 4.1. Also found in
the discussion is that, although historically they have similar economic developments, China and
Japans economies have less in common than initially assumed. It would be interesting to further
investigate if China can assume the same fate as the Japanese economy, regardless of their
differing economy types.

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