Comparative Assessment of Bailout Politics in the U.S. and Japan: Industrial Policy on Manufacturing Industries
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Comparative Assessment of Bailout Politics in the U.S. and Japan:
Industrial Policy on Manufacturing Industries
MUTSUMI YOSHIKAWA
Ritsumeikan University
Abstract
The Obama administration has saved General Motors and passed The American Recovery and
Reinvestment Act of 2009 which promised to invest 800 billion as an economic stimulus.
However, Obama’s failure in economic recovery and job creation are also a central criticism
from Republicans. Noting that, this paper investigates the relationship between Obama’s
economic policy and its influence to the domestic industrial structure and its job market,
followed by the comparison of the Japanese case and the lessons that Japan can take. The U.S.
case suggests that it is important to respond to the immediate needs to keep the popularity;
however they have to shift the economic structure gradually to adjust the economic trends.
1. Introduction
In 2008, the effects of the bankruptcy of Lehman brothers and breakout of sub-prime
loan crisis in the U.S. caused serious world recession. Even though the effect was not as severe
as the U.S. and Europe, Japan was not an exception. The unemployment rate went up and GDP
decreased world widely. In this economic confusion, President Obama was chosen as the 44th
U.S. president and people expected a lot from him. As soon as Obama went into his presidency
term in January 2009, he released The American Recovery and Reinvestment Act of 2009 and
decided to save GM by applying Chapter 11 bankruptcy. However, the effect was debatable and
the Republicans criticized his massive government spending as not effective at all in the
campaign for election 2012. Therefore, that brings the question of whether the Obama’s action
was effective enough or not. One of the reasons why the Obama’s action was not evaluated was
because the characteristics of industry have changed and they do not need workers as much as in
the past. Also, the spread of digitalization and automation were the main causes which
prevented hiring more people. Therefore, although President Obama was not able to lower the
unemployment rate until satisfactory level, they are at least saved some job positions in
Automotive industry and maintained productions with a fewer workers.
Meanwhile Japan has the similar economic situations and Japanese government is facing
an issue of whether they should save Japanese manufacturers, especially for the industry of
consumer electronics, such as Sharp and Panasonic. As the case of the U.S., these companies
have a lot of manufacturing plants all over Japan, especially in rural areas. Furthermore, the job
markets in those towns are usually heavily dependent on the plants. Therefore, the decision of
the government directly makes differences on their lives.
The reasons of choosing the U.S. as the comparison of Japan is that, economically, they
are facing the same problems, such as losing comparative advantages and experiencing
hollowing-out economy, against China and some other emerging economies. Also, in both cases,
manufacturing industry has served as one of the major national industries to export for a couple
decades. Therefore, the lessons will be convertible to Japanese current economic conditions.
1Noting that, this paper investigates the role of the government in the time of severe
economic recession and industrial shift by evaluating the case GM bailout by U.S. government.
The second part will introduce the case of Japanese manufacturing industry, especially on
consumer electronics. Then, the third part will be the comparison of the findings from both U.S.
and Japanese part. This section talks about the reasons of unstable economy with the
relationships with industrial change. Then, the last part brings the idea for solutions to revive the
economy which is improvement of entrepreneurship.
2. The Case of U.S.
2.1 The economic situations in 2008
When the President Obama got elected in 2008, the economy was in the worst recession
since the Great Depression in 1930s. Because the U.S. economy was dependent on financial
market, the corruption of the housing-bubble and sub-prime loan brought huge negative impacts
on the U.S. economy. Then, this negative impact spilled over to the real economy as the GDP
growth slowed down its speed for the first time since 1990. In addition to that, the
unemployment rate went up rapidly. In the past 20 years, the highest point was 7.8% in 1992,
and it continued decreasing until IT bubble in 2000. After the bubble burst, the rate seemed to
go up enormously; however, the increase was greater this time. The rate marked just below 10%
in 2011. As the data shows, the economy got damaged destructively and President Obama
carried all the hopes of citizens to solve these issues.
In order to respond to the hopes of U.S. citizens, President Obama performed a strong
leadership by taking Keynesian economic model and implemented policies, such as The
American Recovery and Reinvestment Act of 2009 which included tax reduction of the middle
class and small and medium-sized enterprise, and massive investments for public works.
Applying chapter 11 to save General Motors was one of the policies to prevent further economic
crisis1. Even though the subprime loan crisis brought negative impacts on the global economy,
only certain industries, such as finance and Auto industries, received help from the government
to avoid systemic risks.
2.2 The process of bailout legislation
The foundation of the governmental financial supports, which Obama is often criticized
as being too socialists, dated back to the term of the Bush administration. GM got emergency
loans under Automotive Industry Financing Program from the Emergency Economic
Stabilization of Act of 2008 which allowed U.S. Secretary of Treasure to spend up to $700
billion to buy distressed assets 2 . Actually, it was George W. Bush’s presidency term when
Lehman Brother went bankrupt and the negative impact of subprime loan crisis spread. The
incident lowered his disapproval rate which was already low. In 2008 February, his approval rate
went down to less than 30% and disapproval rate went up to 76%, which marked one of the
worst rates in history.
On October 3, 2008, Bush Administration launched a program called Troubled Asset
Relief Program (TARP) that allows U.S. government to purchase the assets or equity to create
stability in financial market, hoping that his approval rate would recover. In short, it enhances
1
Ro Odashima, "Economic Policy of Obama Administration," Jyoho Mirai, 34 (2009). NTT Data Institute of
Management Consulting, Inc., http://www.keieiken.co.jp/monthly/2009/0906-1/index.html.
2
Thomson Reuters, "TARP prefers injection of capitals, not buying troubled assets." (November 13, 2008).
Accessed December 15, 2012. http://jp.reuters.com/article/topNews/idJPJAPAN-34877320081112.
2the liquidity of the financial market by
purchasing the illiquid and troubled assets The Timeline of GM Rescue
which were sold during housing bubble. With Dec. 2, GM asked the congress for $18 billion
2008 loan to restructure.
the program, he provided $13.4 billion in 2008
Dec. 11, The $14 billion loans passed the House
to 2009 as a bridge loan3. 2008 but did not pass the Senate.
In December 2008, GM asked the Dec. 19, GM and Chrysler were granted $17.4
congress for loan to restructure. It passed the 2008 billion in government loans.
House but did not pass the senate. Then Bush Feb. 18, GM submitted new restructuring plans
administration decided to provide $14 Billion 2009 for further federal aid.
loans and stock purchase to GM through TARP, March 19, The Obama administration announced
with the conditions of submission of 2009 plans to lend up to $5 billion to U.S.
auto parts suppliers.
restructure plan and approval from Obama
May 27, GM offered to exchange bond debt for
administration. Then, after the presidency had 2009 stock was rejected by bondholders.
passed to Obama, he provided the financial aid June 1, GM filed for bankruptcy protection.
through TARP which President Bush had 2009
started; however, he decided to apply chapter April 21, GM completed the repayment of its
11 bankruptcy at last. Even though GM kept 2010 loans from the U.S. and Canadian
submitting restructuring plan to Obama government.
administration, they were not able to plan one with which government agreed at first. In
February 2008, GM presented a plan to Obama administration to get the financial aid however;
they were reluctant to approve it because it meant favoring union from the bondholder’s
perspective.
Then GM went bankrupt on June 1, 2009 and Obama administration injected additional
$30.1 billion. The restructuring plan, which government agreed, stated that US government
would hold 60 % of company’s share and Canadian government would own 12% of it. In other
words, it means the U.S. and Canadian government and United Auto Workers (UAW) get the
rights to go on the Board Member of the company. At the same time, the UAW gave up a health
and saving plan worth $20 billion in exchange for a 17.5% share of the company and over $8
Billion in debt and preferred stock. Then Obama decided to apply chapter 11 to GM and
purchase $30 billion stocks two days later of announcement.
After a year and half later, GM had an Initial Public Offering and it became publicly
traded again. Then, it sold 365 million shares of common stock for $33 a share. That raised
roughly $12 million and reduced the amount of federal ownership into half. In April 2010, GM
announced that the company had repaid all of it loan, however, it meant most preferred stocks
were chanced to common stock4.
2.3 Justification of GM rescue
Although the bad management of the company contributed a lot to the bankruptcy,
government was not able to let the bankruptcy happens because the economic risks are too
strong. The auto industry has created huge amount of profits and jobs, and the closure of the
plants influences directly on supply chains and local economies. In fact, GM closed 7 of their
plants, Chrysler closed 5 of them and Ford closed 4 of them from 2008 to 2011. That led
3
PoliGu.com, "Barack Obama on TARP and GM." (March 18,2011). Accessed December 15, 2012.
http://www.thepoliticalguide.com/Profiles/President/US/Barack_Obama/Views/TARP_and_GM/.
4
Ibid.
3immediate job loss and the employment for both motor vehicles and its parts went below one
million for the first time since 1990. In addition to that, all related industries, such as aluminum,
iron, copper, plastics, rubber, and electronic got negative impact. For instance, the auto industry
consumes about 13% of output of U.S. steel industry5. Therefore, the decline of auto industry
would make devastating effect on whole chains of industries.
Even though the main goal of the rescue was economic recovery, there were political
motivations in this program. Auto industry is able to make an influence on election because the
states where more motor vehicle manufacturing plants are more likely to decide the result of the
election. In 2012, Obama won the states around Great Lakes where the headquarters of Detroit 3
are and automotive industry is relatively active. On the other hand, Romney, the opponent, was
not able to win on Michigan State where he is from. The one of the reasons of his loss was that
he refused the necessity of financial aid to Detroit 3 and he rather preferred Detroit 3 to go
bankrupt with normal process which companies go through6. Therefore, he was not able to win
on Ohio which was also a key State to get elected.
Additionally, even though there was a time in 1970s and 1980s when the profits of
auto industry decreased, its presence was iconic to U.S. society. Therefore, the bankruptcy of
GM has negative impact not only economically but also culturally and saving GM means more
than creation of jobs: it means saving national assets from foreign companies.
2.4 The evaluation of the bailout program
Even though there are both arguments which believes GM rescue was successful or not,
the report from White House acknowledged it created jobs and Obama’s plan worked well to
revive automotive industry. In fact, although GM had to cut some workers, GM became
profitable and avoided fatal consequences which would have caused massive job losses and the
closure of plants on its supply chains. Thus, the financial aid from the government saved not
only plants of GM and Chrysler but also the ones on its global supply chain.
However, other people dissatisfied with this plan because it not only gave the financial
aid to GM but also asked the companies to revise their management which led cutting the
number of workers. Therefore, even though the plan aimed to save GM to secure jobs, GM had
to decrease the number of workers to create efficiency. This trend is common world widely and
the increase in productivity made it possible to reach the same production level with fewer
people. Since auto industry is highly competitive with international rivals, such as Toyota and
Honda, improving technology to reduce the cost of production is a key to stay profitable. As a
result, auto manufacturing and its part lost 3.9 million jobs from 2000 to 2008, which is the level
even prior to the Lehman Brother’s bankruptcy while improving the output by 60%7. Therefore,
applying new management let the GM profitable; however, they had to lessen the number of
workers as the trade off.
In addition to that, there was a concern over its sustainability because the demands of the
car were created intentionally. After the subprime loan crisis, because many households lost
5
ibid
6
James, Frank. NPR, "Record GM Profits Could Make Romne'ys Anti-Bailout Message A Harder Sell."
(February 16, 2012). Accessed December 15, 2012.
http://www.npr.org/blogs/itsallpolitics/2012/02/16/146977723/record-gm-profits-could-make-romney-anti-
bailout-message-a-harder-sell.
7
Platzer, Michaela D., and Glennon J. Harrison. Cornell University ILR School, "The U.S. Automotive
Industry: National and State Trends in Manufacturing Employment." (August 3, 2009).
http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1671&context=key_workplace.
4their assets, they were reluctant to spend money. Thus, there was a threat that car companies
cannot improve their sales. To overcome the situation, in June 2009, the government launched a
Car Allowance Rebate System program, so called cash for clunkers, to stimulate the demand of
car sell8. In this plan, the government offered $3,500 to $4,500 to people who buy a new car and
returning an old inefficient car. According to the report from White House, 35% of people who
bought a car said they would not have bought them without this program9. Therefore, the car
sales went up because the program encouraged people to purchase new cars. However, once they
bought them, several years will take to purchase another one. Thus, the stable increase of car
sales in the U.S. was questionable.
The elements creating different evaluation
The different opinions of the evaluation exist because the job market was unstable and
the impact of the 2008 recession varies depending on their social class. The unstable
unemployment rate created uncertainty in individual level. According to the Gallup research, the
unemployment rates repeated up and down from January to September 2011. In fact, in 2010,
the highest rate was 10.9% and it went down to 8.9% in July. However, it went up 10.3% in
March 201110. Therefore, it was difficult to judge if the job market was recovering or not.
Figure11
Also, the issue of full-time and part-time job contributes a lot to create this instability
within the market. According to the Wall Street Journal, a million jobs were created in part-time
8 The program did not last long because of lacking money and complicated process to dealers.
9
The New York Times. "Car Allowance Rebate System." Times Topics. Accessed December 15,
2012.http://topics.nytimes.com/topics/reference/timestopics/subjects/c/cash_for_clunkers/index.html
10
Jacobe, Dennis. Gallup, "U.S. Unemployment Down Sharply in Early October." (October 17, 2011).
Accessed December 15, 2012. http://www.gallup.com/poll/150137/Unemployment-Down-Sharply-Early-
October.aspx.
11 ibid
5and contract workers’ positions while full-time position lost 700 thousand jobs 12 . Lots of
contract workers will be hired only for certain projects, and after it is over; they have to find
another job. The definition of unemployment means those does not work for any single day in a
week, and who are actively looking for a job. Thus, even though those people are not counted as
unemployed, their jobs are unstable and do not match with their skills. In short, the increase in
part-time workers and contract workers will decrease the unemployment rate, however, the
change in unemployment rate does not tell these situations. Therefore, the improvement in the
rate does not fully correspond with the satisfaction of people.
Another reason of unstableness in job market is the needs of workforce differ according
to the industry. The fact that the manufacture industry, which used to hold a lot of job positions,
no longer need the amount as much as it used be create misplacement in job market and people
feel that there is no job for them. According to the statistics from US department of Labor, the
number change in the job market was only -4.84%. On the other hand, in construction industry,
it was -22.4% and in manufacture industry, it was -14.2%. Furthermore, among these,
manufacturer for computer and its part was -11.80% while auto part and its related manufacturer
were -23.22%. Meanwhile, the decrease of employment was much smaller in other industry.
For example, in wholesale business, it was -8.24%, transportation and warehousing was -5.12%,
information was -9.30%, and finance and insurance was -5.93%. On the other hand, the area of
educational services, health care, and social assistance increased at the rate of 3.46%13. As the
data shows, the effect of the recession varied according to the industries and that creates the
asymmetric needs in the job market. In other word, those who have worked in manufacturing
industry and lost their jobs cannot find ones in the same industry. Therefore, the job seekers do
not have enough knowledge and skills to get new jobs in different field. That made it longer to
recover the unemployment rate.
Besides the private companies, this phenomenon is happening in public sectors.
Because of the deficit in state budget, the number of public school teachers and firefighters, and
civil servant was eliminated. According to the article from Wall Street Journal, private sector
created 4.3 million jobs in total while state government lost 450 thousand jobs14. Therefore, it
was difficult to improve employment rate just by looking at private sectors.
This decrease of the job supply on certain industries tends to affect more on people in the
middle. The research of Federal Reserve Bank of New York explained that when they divide the
jobs into three categories, such as low, middle and high skill. Low skill jobs include food
preparation, Personal Care, Farming, Health Support and Building maintenance. High skill jobs
include legal, computers and math, engineers and architects, and management. The others will
be middle skill. The growth rate differs according to the groups. For example, from 1980 to
2009, the growth rate in high skill was 100%, and low skill was 110 %, while middle skill was
46%15. Therefore, it shows that the number of jobs in the middle skill decreased a lot while low
12
Casselman, Ben. The Wall Street Journal, "It's Good Work if You Can Get It—and Especially if You Can
Keep It." (July 6, 2012). Accessed December 15, 2012.
http://online.wsj.com/article/SB10001424052702303684004577511014173561108.html.
13
U.S. Department of Commerce, "Bureau of Economic Analysis: Gross-Domestic-Product-(GDP)-by-
Industry Data." (December 13, 2011). Accessed December 15, 2012.
http://www.bea.gov/industry/gdpbyind_data.htm.
14
Liebman, Jeffrey B. The Wall Street Journal, "Jeffrey Liebman: Republicans Are Blocking Obama's Jobs
Plan." (June 21, 2012). Accessed December 15, 2012.
http://online.wsj.com/article/SB10001424052702303734204577464883344765926.html.
15
Abel, Jaison R., and Richard Deitz. Federal Reserve Bank of New York, "Job Polarization in the United
6and high skill jobs increased or changed little. In other words, people class people suffered more
with this economic crisis while people with higher income suffered less.
3. The Case of Japan
3.1 Economic situations in Japan after subprime loan crisis
Although Japanese banks suffered less than western banks with subprime loan crisis, the
negative impact of the financial crisis reached to Japan and the real GDP declined in 2009.
Because Japan is heavily depended on the demand of foreign countries, decease of GDP was
unavoidable. Meanwhile the direct effect to the job market was not as severe as the U.S. in
2009; rather it improved from previous years. However, the unemployment rate tends to get
higher over the last two decades and this level is still considered as problematic. In addition to
that, although the direct effect of subprime loan crisis on investment banks was minimal in Japan
compared with the western countries, it made Japanese yen stronger. It damaged the business of
export-oriented industries and led the decline of Japanese stock market. With the combinations
of economic stagnation after 1990, aging population and the negative effect of financial crisis,
Japanese economy has been experiencing the difficult time. Manufacturing industry, especially
consumer electronics, suffered the most because of the strong yen and emerging economies16.
The situation worsened in 2012, and Sharp marked net loss of 450 billion yen17 and Panasonic
marked deficit of 760 billion yen 18 in November 2012. Thus, as the case of the U.S.,
internationally well-known manufacturers are now facing bankruptcy in Japan and there is a
discussion whether government should support those companies even though it might not
economically efficient.
3.2 Enterprise Turnaround Initiative Corporation of Japan (ETIC)
There is a discussion whether ETIC should offer the same support to Japanese home
electronics companies as the U.S. government applied Chapter 11 bankruptcy. This is an
organization fifty percent governmentally owned and aiming to provide capitals to the
companies which still have margin to prosper. A Prime Minister, a commissioner of Financial
Service Agency, a Minister of Internal Affairs, a Minister of Finance, and a Minister of Economy,
Trade and Industry have the main authorities. It finances their assets by gathering
governmentally secured capitals.
This Act was first introduced on June 26, 2009, aiming to support local economy which
was suffering from the economic recovery gap with other regions after 2002 economic downturn.
Then, in order to solve this problem, they decided to support small to medium-sized companies
and the third sector19 which were providing jobs the most. However, the support to the third
sector was controversial because the central government believed that it should be solved by
States: A Widening Gap and Shrinking Middle." (November 21, 2012).
http://libertystreeteconomics.newyorkfed.org/2011/11/job-polarization-in-the-united-states-a-widening-gap-
and-shrinking-middle.html.
16
Ministry of Economy, Trade and Industry, "Japan's Manufacturing Industry." (July 2010). Accessed
December 15, 2012. http://www.meti.go.jp/english/policy/mono_info_service/overall/overview.pdf.
17
Nikkei Shimbun, "Sharp deficit of 450 billion yen." (November 1, 2012). Accessed December 15, 2012.
http://www.nikkei.com/markets/kigyo/gyoseki.aspx?g=DGXNASDC0100E_01112012MM8000.
18
Nikkei Shimbun, "Panasonic deficit of 760 billion yen." (November 1, 2012). Accessed December 15, 2012.
http://www.nikkei.com/markets/kigyo/gyoseki.aspx?g=DGXNASDC31005_31102012MM8000
19
This is a company which is invested by both the private and the public sector.
7municipal governments and the decision was left to vague. Then, in the middle of the decisive
process, the economy went into recession with the bankruptcy of Lehman Brothers.
After that, the objective of the program was reviewed and this ETIC decided to include
even large companies while their focus stayed as the small to middle-sized companies20. As a
result, they provided 350 billion yen to JAL, which had debt of 2,000 billion yen, and brought it
back to the private market in two years and 8 months. Even though this case brought lots of
criticism which pointed out uneven competition and breaks fair market conditions, JAL
succeeded to recover from bankruptcy. According to strategist, even though Sharp has 1000
billion yen worth of interest-bearing debt, JAL already paid back to ETIC 663.3 billion yen and
they have some room to take care of this case21. However some people oppose it because the
characteristics of the industry differ a lot. JAL had some role as public transportation and it is
almost only major internationally recognized airline company beside All Nippon Airlines (ANA).
On the other hand, Sharp is completely private company and there is a strong competition within
domestic market.
3.3 Economic impact of decline of manufacturing industry
The consequences of not providing immediate aid would be harsh on people living in
rural areas. The decrease of manufacturing industry makes huge negative effects on Japanese
society, especially on the employment of rural areas. It is because lots of factories locate on rural
parts of Japan and function as one of the main economic activities in those areas. For example,
Minokamo-city of Gifu prefecture, which locates central part of Japan with the population of
55,000 people22, lured a lot of manufacturing plants and received various advantages. In 2001,
Sony established the factory site to produce its electronic parts and about 2,400 people were
working there23. Not only at Sony, but 28 % of employee is working in manufacturing industries.
Because of the factory, the city became affluent and in fact, it was chosen as the top 10 best cities
of better living standard, according to Toyo Keizai News24. However, after the announcement of
closure of the factory, the mayor of the city has been struggling to find a way to provide stable
jobs.
Sony is not the only case and numerous major Japanese manufacturers such as
Panasonic, Sharp and Fujitsu are closing its factories. For another example, in Akita prefecture,
TDK Corporation, the electrical company decided to close 6 factories out of 15. Then, two of its
suppliers had to fire more than 400 people after hearing the news. Consequently, the number of
job offer decreased by 12 % and the unemployment rate, especially of high-school graduates,
increased 25 . Therefore, in those cities, decline of manufacturing industry deprives the jobs,
especially of young people, because the companies and its suppliers do not hire new workers.
20
Kato, Minehiro. "Overview of Enterprise Turnaround Initiative Corporation of Japan." Kanazawa University
Repository for Academic Resources. 32. no. 2 (2012): 135-156. http://dspace.lib.kanazawa-
u.ac.jp/dspace/bitstream/2297/30428/1/AA12393824-32-2-135.pdf
21
zakzak, "Rehabilitation of Sharp, referring the case of JAL." (September 18, 2012). Accessed December 15,
2012. http://www.zakzak.co.jp/economy/ecn-news/news/20120918/ecn1209181142001-n1.htm.
22
The population of people the age between 16 to 64 years old is 35,000.
23
Chuo Nippo, "Sony, Fujitsu, Sharp...closure of factories led economic recession in local community."
(November 14, 2012). Accessed December 15, 2012.
http://japanese.joins.com/article/091/163091.html?servcode=300§code=300.
24
Toyokeizai Online, "Ranking: Best cities to live." Last modified June 23, 2010. Accessed December 15,
2012. http://toyokeizai.net/articles/-/4536.
25
Yomiuri Online, "Harsh job hunting conditions for high school graduates, Akita prefecture." Last modified
8In addition to that, those plant sites take a huge part of creating better community. As
Minokomo-city was chosen as one of the best cities having better living standard in Japan, the
economic activities of large companies influence directly on the quality of living. In this survey,
the measures are divided into five categories, such as safeness, convenience, comfortableness,
affluence, and living standard and ranked considering with the number of medical institutions,
the size of the public parks, and the amount of tax paid. Interestingly, top three cities have
factories of large companies. For example, the number one city, Miyoshi-city locating next to
Toyota-city in Aichi, has some branches of Toyota. The second one, Nisshin-city, is also from
Aichi and locates closer to Miyoshi-city. Therefore, the people in Nisshin-city are able to
commute to Toyota-city. The third one is Narita-city and there are several companies which
associates with Narita airport26. Therefore, the economic activity of large companies highly
influences people there.
3.4 The Political impact of favoring manufacturing industries
As the problem of swing states is crucial, Japan has the similar situation so called, the
disparity between values of individual vote. Since some cities are more populated that others
and the difference is huge, the problem of disparity between values of individual vote occurs.
For example, in 2009, the registered voters for Senate in metropolitan areas, such as Tokyo,
Kanawaga, Osaka and Hyogo, the number exceeded one million people. On the other hand, the
number of registered voters for those who live in countryside, such as Tottori, Shimane, Kochi
and Fukushima is about 200 thousand people. It means the value of the votes of people who live
in countryside have 5 times more value than people in metropolitan cities.
Moreover, this is not just a fight between cities and farmland, but also the one between
service industry versus manufacturing industry, according to Mr. Noguchi Yukio, a Japanese
economist and a professor at Waseda graduate school. He said in metropolitan areas where the
value of the vote is small, the main economic activity depends on service industry. While in
those districts, where registered voters are less than 500 thousand people, such as Nagano, Gifu,
Fukui and Fukushima, the main economic activity is manufacturing27. Thus, people working in
service industry have less power to influence in terms of Japanese politics.
4. Comparison with the case of the U.S.
One of the points which Japanese case differs from the U.S. case is that in Japan, the
domestic competition is stronger. Contrary to the GM case, Japanese government is debating on
whether they should apply the bailout policy to this case or not and that is less likely to happen.
As Masahiko Shibayama, a Liberal Democratic Party legislator in the Lower House mentioned
that it requires “very thorough explanation” to apply because it might cause moral hazard in
consumer electronics industry28. In addition to that, Mr. Amari, who served as the minister of
labor, economics and industry, said one of the issues that Japanese electronics companies have is
Nov 28, 2012. Accessed December 15, 2012. http://www.yomiuri.co.jp/kyoiku/syuukatsu/snews/20121128-
OYT8T00315.htm.
26
Toyokeizai Online, "Ranking: Best cities to live." Last modified June 23, 2010. Accessed December 15,
2012. http://toyokeizai.net/articles/-/4536.
27
Toyokeizai Online, "Political message for manufacturers ." (March 12, 2012). Accessed December 15, 2012.
http://toyokeizai.net/articles/-/8767.
28
Yasu, Mariko. Bloomberg, "Sharp Is Seen Seeking Bailout After Record Loss Forecast." (November 5,
2012). Accessed December 15, 2012. http://www.bloomberg.com/news/2012-11-04/sharp-seen-seeking-
government-bailout-after-record-loss-forecast.html.
9a severe competition within domestic market and cannot invest to compete with foreign
companies. Then, if government decides to help one, it will destroy the whole nature of free
market and cause the moral hazard which makes other companies to think that the government
would help them when the business does not go well29. Therefore, in order to provide financial
assistance, they have to reorganize whole structure of the industry including the power balance
between companies and the relationships with the suppliers. In other words, in Japanese case,
the government has to be more careful to offer the aid comparing with the case of the U.S.
Although GM got financial aid from government, they are still facing the same problems
such as the decrease of jobs in a manufacturing industry and the loss of comparative advantages
against emerging economies due to the change in composition of industries. As the previous
section explained, the number of job supplies differs according to the industries.
One of the causes of this asymmetric job supply and instability in job market relate to the
development of technologies, especially on computing and data processing. With the progress,
the lives got more convenient; however, the installation of automated system and high-tech
devices fills up a lot of job positions, according to Hiroyuki Kishi, an economist and a professor
at Keio University. For instance, in the US manufacturing industry, the level of the production in
2000 and 2010 are almost the same, however the number of employment in 2010 is only two
third of its in 200030.
In addition to that, in service industry such as fast food restaurant, the number of jobs is
decreasing because some stores install high-tech devices instead of hiring more people. A case
study showed how efficient would be if a restaurant uses high-tech device instead of hiring
workers. In this case, an engineer at MIT created the touch panel device called Presto which
allows the customers to order their food from their table. The device costs only $100 per month
and if the restaurant opens for 8 hours per day without any day-off, it costs only 42 cents per
month 31 . Therefore, it would be a lot cheaper than hiring people and it would prevent
mishearing of the orders too. In fact, many Japanese fast-food chain restaurants are using this
system already and increasing the profitability. Consequently, technologies create efficiency but
at the same time, it lessens the number of the workers needed in a company.
Moreover, the service and high-tech industries need fewer workers comparing with
manufacturing company. In other words, if there are two companies, the manufacturing one and
the high-tech service one, the manufacturing one tends to create more jobs than the case of high-
tech companies. For instance, the comparison of GM and Apple proves that. In 1950, one of the
biggest companies in the US was GM. At that time, about 400 thousand people were working at
GM. On the other hand, Apple, one of the biggest companies in 2012, holds only 100 thousand
people32. Therefore, high-tech companies, which the U.S. is good at these days, create fewer
jobs than manufacturing. Unfortunate to the job market, the shift of industries is happening and
better technologies are taking over the market in developed countries.
The shift of the industries is unavoidable in free market economy and the comparative
advantage changes countries to countries over time. According to the Product Life Cycle theory
by Vernon and Wells which is based on the behavior of U.S. multinational corporations in 1950s,
29
Ohkubo, Yoshito. Bloomberg, "Sharp needs a plan in order to support." ( November 7, 2012). Accessed
December 15, 2012. http://www.bloomberg.co.jp/news/123-MD0DTU6K50YA01.html.
30
Kishi, Hiroyuki. Diamond Online, "Job loss of middle class." (February 10, 2012). Accessed December 15,
2012. http://diamond.jp/articles/-/16076.
31
ibid
32
ibid
10the function of the industry in the global market changes by the time passes. Therefore, it is
natural that one industry decreases while another one becomes the main industry of the nation.
In the theory, the market and the producer of the products are limited to domestic at the
beginning of the phase. A new product is introduced in highly industrialized countries because
they are able to invest into R&D. Then the company becomes profitable because of its new and
innovative technology. At that time, other industrial countries import some of its products
because they have enough capital to afford. The second phase is the time when the new
technology spreads to other countries. In this phase, the ones which start producing after the
highly industrialized countries catch up with this technology. Therefore, the competition gets
stronger and they start to export the products to developing countries. At the same time, the
highly industrialized country starts to operate foreign direct investments to open branches and
compete with other industrialized countries. Then, the technology spreads world widely and the
highly developed country does not have advantages in the market anymore. Rather, all
companies seek the least expensive way to produce and they shift their production to developing
countries where the labor costs are cheaper. As a result, in contrast to the beginning, the highly
developed country imports the products more than they export and have trade deficit at last. At
this point, if the industrialized countries want to be profitable with this industry again, they have
to spend a lot on promotion and differentiate the features. Otherwise, they have to stop
producing it33.
This theory explains the current situations manufacturing industry in the U.S. and Japan.
Meanwhile, some experts said that the process does not follow the order anymore; rather they
skip first two steps which are more undesirable to developed countries in terms of employment.
For example, Apple did not take the same steps of product life cycle theory. It invested in China
initially because Apple sought the speed and flexibility of the production. This phenomenon is
common and that creates the issue of howling-out economy in lots of developed countries as the
U.S. and Japan. Therefore, bringing manufacturing back is not reasonable because it contradicts
the economic theory and the U.S. and Japan need to focus on their comparative advantage, which
is service-based industry, to compete with other emerging countries34.
5. Lessons of GM and Solutions
5.1 Lessons of GM bailout
Lessons of GM bailout is that governmental support of manufacturing industry have
some limit; they were able to bring GM back to profitable and Obama was able to win over
swing states and reelected, however, the economic influence, especially on the job market was
not enough. After all, what government can do is to support financially or force companies to
create efficiency by cutting some workers, but they cannot change the trends of global industrial
shifts. Therefore, it is important to support the large companies in sustainable way and help
shifting the industry gradually at the same time.
In the interim, Obama also launched a program to support small business and start-ups.
Thus, U.S. government helped manufacturing to meet the urgent needs of U.S. citizens but at the
same time, they are aiming the long term goal which is the creation of new companies and
industries. Japan should take the same way because entrepreneurs will not only create jobs, but
33
Itaki, Masahiko, Osamu Ishida, Kimihito Sakurai, and Satoru Nakamoto. Understanding the global economy.
Tokyo: Toyokeizaishi Inc., 2010. 97-100.
34
Peterson, Peter G. "Has US Comparative Advantage Changed? Does This Affect Sustainability?."Institute
for International Economics. : 29-44. http://www.piie.com/publications/chapters_preview/47/3iie2644.pdf .
11also it will help bring innovation to the large companies. Even though start-up businesses take
important roles in the economy, Japan is far behind comparing with the situations in the U.S.
In addition to that, Japanese companies need to change their business strategies because
norms of the business are changing. Mr. Maeda, a professor at Aoyama Business School in
Tokyo, pointed out that it is the time when business model shifts. In his report, he explained that
Japanese business model in 20th century was catching-up model, which pursed the efficiency of
pre-existed operation. Therefore, Japan gained its advantages by lowering the cost and time of
the production, improving the quality of the product at the same time. However, in 21st century,
that model is no longer effective because of the emergence of BRICs and developed countries,
like Japan, cannot compete when it comes to speed and cost of production35. Hence, Japan needs
to have some system that can bring innovative action in timely manner. Then, entrepreneurs are
the one that can take the role.
5.2 The situations in entrepreneurship in Japan
Although many people agree with that opening business will bring positive effects to job
markets, a fewer entrepreneurs operate in Japan comparing with other industrialized countries.
According to the report from Global Entrepreneurship Monitor (GEM), even though the number
of entrepreneurs is increasing, Japan had one of the worst levels. The report from Ministry of
Economy, Trade and Industry also proved its low rate. In the report, they counted the percentage
of people from 18 to 64 years old who is preparing to start business or who just launched the
business and it said Japan got 4.3% and ranked 8th from the bottom among 42 countries while
U.S. got 9.61% and ranked 13th36. Therefore, entrepreneurship is not common and even if they
start one, it is also difficult to maintain.
5.3 The obstacles that prevent Japanese people to launch new business
Encouraging entrepreneurs is not a new strategy and Japanese government was trying to
support entrepreneurs by providing trainings at the chamber of commerce in several regions,
implementing tax–cut for Angel Investors, and strengthen business programs with universities.
One of the reasons why those programs did not work was fear against social risks and lower
social recognition of entrepreneurs in Japan. According to the research of Ray and Turpin,
behavior of Japanese entrepreneur process is greatly influenced by group and social recognition37.
It means that the evaluation and decision of friends and family member take a large place in the
motivation of starting business. As a result, while about 30% of the entrepreneurs have higher
academic degrees in the U.S., this situation is rare in Japan38. Lots of people who have Master
and Doctoral degree would seek the career in large corporations or governmental agencies
because those organizations are socially recognized.
Also, in this analysis, they referred the theory of high and low context culture by Hall and
people in high-context culture tend to have a close relationship with their family and friends
even when it comes to a personal decision. Therefore, they usually have collectivist culture. On
35
Maeda, Noboru. "The role of ventures from enterprises."Panasonic Technical Journal. 55. no. 4 (2010): 39-
44. http://panasonic.co.jp/ptj/v5504/pdf/p0202.pdf .
36
ibid
37
Suzuki, Kan-ichiro, Sang-Hoon Kim, and Zong-Tae Bae. "Entrepreneurship in Japan and Silicon Valley: a
comparative study." technovation. 22. (2002): 595-606.
http://www.data007.cn/Datas/文文/CIS文文/entrepreneurship in Silicon valley.pdf.
38
ibid
12the other hand, people in low-context culture tend to separate their personal issues from
relationships with others. Japan belongs to the former group and they tend to avoid risks. Ray
and Turpin believe that these cultural differences contribute a lot to the reason why there are
fewer entrepreneurs in Japan compared with the U.S.
The report also proved that from empirical research. He conducted a survey on 3000
Japanese entrepreneurs and 1500 entrepreneurs in Silicon Valley and he got about 13% responses
on each side. In the questionnaire, he asked them to rate the questions from 1 to 5; 1 as to no
extent and 5 as to a very great extent. The questions were about entrepreneurial motivation and
he found out that Japanese entrepreneurs are more society-orientated. For instance, he asked if
the following sentences were important when the entrepreneurs started business. In Japan, the
sentence, to win recognition of the company by the public is important, got higher average rate,
3.285 than to contribute to the welfare of the public and society, which was 2.532, or to develop
new technologies, which was 2.64239. Therefore, in addition to the cultural implication, the data
shows that Japanese entrepreneurs consider the social recognition of the company more.
At the same time, this survey pointed out that Japanese entrepreneurs have fewer
financial problems than ones in Silicon Valley. In the questionnaire, he also asked to rate if they
lack funds for capital expenditure or not. Interestingly, U.S. got higher rate as 2.628, which is
the highest among the other risks and obstacles, such as market risks or Human Organizational
risks. While Japanese entrepreneur rated as 2.02540. Thus, from the result, People in Silicon
Valley tend to face shortage of capital than Japanese entrepreneurs and social risks tend to
influence more than financial risks in Japan.
5.4 Proposal of solution
The solution of the issue is encouraging entrepreneurship within the companies. In fact,
in 1990s, there are cases which several small companies were established from the large
enterprises and succeeded their business even after they became independent. In these cases,
those entrepreneurs planned their business as a project within the company but decided to leave
there to launch it. Therefore, they are likely to have strong business connections with former
companies and tend to have win-win relationship41. Considering that, one of the solutions to
improve the entrepreneurship in Japan is cooperating with large companies because it will bring
win-win situations among large companies and small businesses. Large companies are able to
host an innovative sprit of entrepreneurs and entrepreneurs can use the resources such as a
distribution channel, brand image and capitals.
Furthermore, hosting entrepreneurs would bring innovation into the market that large
enterprises are often having hard time to do. One of the reasons why the U.S. still maintains
strong companies, such as Apple and Amazon, is that lots of employees from large enterprises
leave their workplace to establish new business which corresponds to the lowest part of the
market needs, which have not recognized by general markers. Then it will go up to the top part
of the market while other pre-existed large enterprises go out of the business 42 . This
phenomenon is not common in Japan, where they value life time commitment and seniority-
wage system. Traditionally, lots of people, especially, who have rich knowledge of the market,
39
ibid
40
ibid
41 Maeda, Noboru. "The role of ventures from enterprises."Panasonic Technical Journal. 55. no. 4 (2010): 39-
44. http://panasonic.co.jp/ptj/v5504/pdf/p0202.pdf .
42
ibid
13do not quit their companies. This can be also explained from the ranking of best innovative
companies in 2010 from Bloomberg Businesssweek article. On the list, there were three
Japanese companies, such as Toyota, Sony and Nintendo, all of them have long history as
company. While there were 12 U.S. companies on the list and 4 of them were established after
197043. Therefore, the author thinks Japan needs to have innovation by bringing entrepreneurs in
the market44. The main idea of the author is that large enterprises fail because of their excellent
decision making. In other words, the company listened to their customers and incorporated their
opinions in their R&D, then invested a lot to the technologies which realize the needs of the
customers precisely. At the same time, they prioritize the profitability when they decide which
departments to invest. Therefore, those large enterprises miss the chance to invest in the small
market, which could prosper in near future even though it is still small and does not have enough
profitability45.
In his book, he named this new technology as destructive innovation because this new
innovation takes over the pre-existed market and leads the large enterprises fail 46. Normally this
destructive innovation creates a new market, and for the first company which enters the business
will have the advantages as the pioneer of the market. However, that does not bring enough
profitability to the large enterprises because the new market is too small. For example, if the
company has the sales of $40 million and aim to grow with the rate of 20%, the company only
has to generate $8 million. On the other hand, if the company has the sales of $4 billion and aim
to grow at the rate of 20%, they have to generate $800 million. Therefore, for large enterprise, it
is less reasonable to invest in the new technology as the company’s major business47. Therefore,
Japanese company invested a lot to respond to Japanese market specifically while small
companies from Taiwan and Korea entered the market.
Conclusion
From the observation, saving General Motors was necessary to the US economy to
prevent fatal depression and it brought a positive impact on Obama administration politically
although the economic impact was less than they expected. Despite the huge financial aid to the
companies, they only managed to improve its profit but not the number of the jobs. Therefore, it
is understandable that the government gets a lot of criticism. However, even though the level of
recovery was less than expected, the effect should be evaluated because the improvement of
technologies lessened the number of people needed in the job market in manufacturing industry.
This industrial trend is common in Japan and Japanese manufacturing industries are suffering.
Even though, interfering market might bring positive effects to the government, it will less likely
to be applied in Japanese manufacturing case because the aid might cause moral hazard in the
industry. Yet, the high unemployment rate is problematic in the U.S. and Japan, and making
policies to overcome the situations is their primary role. Therefore, government should show the
43
Einhorn, Bruce, and Michael Arndt. "The 50 Most Innovative Companies." Bloomberg Businessweek, April
15, 2010. http://www.businessweek.com/magazine/content/10_17/b4175034779697.htm?chan=magazine
channel_special report .
44
Christensen, Clayton M., Schumpeter. edit. Tamada, and Yumi. tran. Izuhara. Innovator's Dilemma: The
Revolutionary Book That Will Change the Way You Do Business. New York: Harper Business, (2000). X
45
Christensen, Clayton M., Schumpeter. edit. Tamada, and Yumi. tran. Izuhara. Innovator's Dilemma: The
Revolutionary Book That Will Change the Way You Do Business. New York: Harper Business, (2000). 5-6
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47
Christensen, Clayton M., Schumpeter. edit. Tamada, and Yumi. tran. Izuhara. Innovator's Dilemma: The
Revolutionary Book That Will Change the Way You Do Business. New York: Harper Business, (2000). 16
14leadership to support creating jobs not only by providing financial aid to the dying important
industries, but fostering an innovative economy by supporting entrepreneurs.
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