Approaches to the Localization and Governance of Business in China

ABSTRACT

China, which up until now, has been primarily utilized as a global production base by foreign investment corporations, has suddenly transformed into an important market for Japan. Japanese businesses are rushing to claim a portion of the newly emerging market, and as a working strategy, they are beginning to focus their strengths into assimilation initiatives: the dispatch of top-level administrators, the transfer of management authority to local branches, and the employment of local labor forces. The localization of management, the Japanese believe, will be a key factor to their success in the Chinese market. However, while this is sound thinking, if the Japanese strategy is not supported by a proper system of governance with, above all, a controlled monitoring apparatus, localization will merely result in technology outflow and illicit behavior. There are indeed some pitfalls to localization.

Generally speaking, there are three management models concerning the overseas stations of global companies: 1) the centralized decision-making model, 2) the de-centralized decision-making model, and 3) the network model. Surveys of the pioneering foreign investment companies in China showed that American and European companies have adopted de-centralized governance systems in their local operations. The head office hands over management authority to local managers, and meanwhile establishes systems for monitoring and calibrated ex-post assessments. In contrast, Japanese companies, neglecting to implement monitoring systems and ex-post assessments, depend on the "trust" of their dispatched managers. Korean companies are similar in that "trust" also plays a large role in their method governance, but unlike Japanese companies, they pursue a more de-centralized decision-making model based on the long-term residency of executive directors (and the ensuing transfer of management authority), they put emphasis on the assimilation of head office dispatches, and they promote the localization of their technologies.

It is not necessary for Japanese companies to change their dispatch practices immediately, but it is important that they adopt a system of governance that is committed to management goals and that includes both a strong monitoring system and a transparent, calibrated system of evaluation. Based upon the results of case studies, this report will lay down a framework for the assimilation of decision-making with the current system of personnel. In doing so, the following recommendations will be made: 1) the formulation of explicit guidelines for the transfer of management authority, 2) the setting of measurable goals and the commitment to these goals, 3) the establishment of a monitoring system that operates alongside the management process, 4) the establishment of a calibrated ex-post assessment, 5) the establishment of transparent incentives that accord with the governance system, and 6) the prioritization of steps in the localization process.