a cautionary tale for emerging markets

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F ifteen years ago, Japanese compa-nies accounted for 141 of the com-panies and 35.2% of the revenues of

Fortune’s then brand-new Global 500 list. By 2000 their share of revenues had fallen to 20.8%, and by last year it had shrunk to 11.2%, with only 68 Japanese companies making the list. During the same period, U.S. fi rms’ portion of Global 500 revenues, which was 28.4% in 1995, grew slightly, to 30%. Firms from the European Union and Switzerland, meanwhile, increased their portion from 31% to 36%.

Much of Japan’s loss has been a gain for fi rms from emerging markets. Since 1995 companies from the BRIC nations (Brazil, Russia, India, and China) have seen their combined share of Global 500 revenues leap from 0.9% to 10.4%. But will those countries lose their edge in the years ahead, as Japan did? Or will they fi nd ways to re-main globally competitive and protect their share—as the U.S. and Europe have done?

To answer those questions, we first need to understand why Japan was un-able to continue the meteoric rise it saw in the 1970s and 1980s, because the new generation of emerging-country multi-nationals bears a disturbing resemblance to corporate Japan in the 1990s. Over the past quarter century, we have tracked the rise and fall of Japanese business, and our research reveals that the very factors that enabled Japan’s early success led to its later failure. What gets you to the top is not what keeps you there. The problem for Japanese companies is that they’ve been unable to transform the cultures and processes that propelled their early export-led growth into those needed for global leadership.

A Cautionary Tale for Emerging Market GiantsHow leadership failures in corporate Japan knocked its companies off the world stage by J. Stewart Black and Allen J. Morrison

September 2010 Harvard Business Review 99

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If the emerging giants are to avoid Ja-pan’s mistakes, they will need to dramati-cally change their business models, reduce their reliance on protected domestic mar-kets, learn to cope with increasingly diverse labor forces, and, most important, shake up their homogeneous leadership.

Devotion to The WayBecause Japan is a large, unvaried market, Japanese corporations were able to develop substantial asset bases that allowed them to achieve economies of scale and drive down costs while maintaining the high quality that finicky Japanese customers demanded. Over time this provided a pow-erful export value proposition, and by 1986 an amazing 95% of all goods sold by Japa-nese companies around the world were made in Japan.

In building these effi cient manufactur-ing platforms, Japanese fi rms created strong corporate policies, practices, thinking, and behaviors, which improved and reinforced their business models. These became so entrenched that when asked to explain them, company executives would simply

say, “This is the Toshiba, Toyota, Takeda, or Tomen Way.” Insiders understood The Way perfectly. It provided purpose, unity, and rules governing relationships and ex-pectations of behavior. Years of success re-inforced the correctness and even the supe-riority of The Way in each company. During one fi ve-year period in the 1980s, Harvard Business Review published no fewer than 36 articles praising Japanese companies or fretting about their power.

While their Ways helped Japanese com-panies grow exports, they hurt the fi rms’ new operations in foreign markets. Many Japanese executives assumed that the key to success abroad was replicating The Way in their foreign affi liates. To achieve

this, Japanese corporations typically sent large teams of experts in The Way overseas rather than hire executives with experi-ence in those markets. In fact, on aver-age they sent twice as many expatriates to foreign operations as their peers from the U.S., the UK, Germany, and France did. These expatriates tended to seek out local managers who were willing to learn and conform to The Way. As one Japanese executive told us, “I do not want to hire someone who is too American or German. They will simply not fi t our company and way of doing things.”

With such narrow hiring criteria, Japa-nese companies understandably made errors. Look at what happened in mobile telephony. Around 2000 the handset di-visions of Sharp, Panasonic, Fujitsu, NEC, Toshiba, and Sony tried to expand outside Japan. With the exception of Sony, which formed a joint venture with Ericsson, they all failed. In each case, Japanese expatri-ates tried to apply what had worked in Japan (and with arguably technologically superior products) in key markets such as the U.S., France, and Germany. They didn’t

ask for or listen to local insights. As a result they ended up foisting hardware-heavy, stand-alone fl ip phones with relatively few applications on consumers who didn’t like fl ip phones and who wanted more software features and PC connectivity.

Is it a risk? Many companies from today’s emerging markets are at risk of de-veloping Ways that will hinder their inter-national expansion. In China, for example, four of the 10 largest fi rms are banks that have built business models in which lend-ing decisions are based more on guanxi, or social and personal relationships, than on formal credit analysis. This works well in a system in which guanxi can be used to en-courage the repayment of nonperforming

loans but may be less eff ective in markets where such problems are resolved through formal legal processes. Russia’s emerging giants face a similar challenge. Of the eight Russian firms on the Global 500 in 2009, five were in natural resources, mostly oil and gas. These firms have built cultures and processes that leverage government relationships to play hardball with foreign partners in Russia while squeezing export customers. But their approach may back-fire as they expand into countries where giants like Shell and Total already have relationships with both private and state-owned organizations.

An Isolated Domestic MarketOver the decades, Japanese companies have faced little competition from foreign rivals inside Japan. Foreign direct invest-ment (FDI) in Japan was between –0.2% and 0.3% of GDP from 1970 through 1995. In 1976 the number of foreign fi rms in Ja-pan was 1,101; in 1995 it was 1,421—an in-crease of just 320 companies.

This domestic market isolation had its drawbacks as Japanese companies moved overseas. Competing primarily with for-eigners at arm’s length via exports pro-vides few insights into what capabilities are needed for direct “hand-to-hand” combat with them. For example, Japanese invest-ment banks such as Nomura had little idea of how to deal with the likes of Goldman Sachs, J.P. Morgan, and UBS in New York and London. In areas such as M&A, those competitors possessed a level of expertise and sophistication that was unknown in Ja-pan. As a consequence, Nomura struggled for more than a decade to capture signifi -cant market share outside Japan. Although the bank increased its foreign revenues, it continued to trail on the rankings of lead advisers. (Its late 2008 acquisition of Leh-man’s European, Middle Eastern, and Asia Pacifi c operations may help the bank eventually fulfill its ambitions of global leadership.)

Is it a risk? It certainly is. Until re-cently, Russia was also isolated, and al-though FDI in that country has reached

Japanese executives assumed that the key to success abroad was replicating the Toshiba, Toyota, or Takeda Way in their foreign affi liates.

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100 Harvard Business Review September 2010


nearly 5% of GDP—a level similar to the UK’s—much of the investment is in the ex-tractive industries. From 1975 to 1995, FDI in Brazil was less than 1% of GDP on aver-age. By 2009 that ratio had ticked up to only 2.2%. In 1990 there were 1,116 foreign fi rms operating in Brazil and, by 2000, only 1,196. Thus, for a signifi cant period of time, most of the country’s firms competed primar-ily against one another, in industries such as nuclear energy, health services, media, fi shing, mail and telegraph services, avia-tion, and aerospace. While Brazil is home to a few international players (notably Em-braer), it remains to be seen if Petrobras, Banco Bradesco, and Vale can take on the likes of Exxon, HSBC, and BHP Billiton out-side its borders.

China’s situation is more complicated. FDI in China increased from less than 1% to 5% of GDP in the 1990s, but from 2000 through 2009 the Chinese economy grew even faster. The FDI/GDP ratio actually shrank during that time, to around 2% of China’s by now nearly $4.8 trillion econ-omy. India has been perhaps the most pro-tected of the large emerging economies: From 1970 to 1990, FDI there was less than 0.1% of GDP on average, and Indian fi rms such as Tata Steel, Reliance Industries, Indian Oil, Bharat Petroleum, and Hindu-stan Petroleum had little direct exposure to competition with foreigners. While FDI

has grown dramatically since 1990, it is still less than 3% of India’s $1.25 trillion GDP.

A Docile Labor ForceWhen you’re working to standardize products and processes, improve quality, reduce defects, and cut costs, a homoge-neous and uncontentious workforce is a great advantage. Japanese labor is nothing if not homogeneous. The country has no significant subethnic groups or local dia-lects and very little immigration. Foreign-born residents made up less than 1% of the population in 1960 and, even 50 years later, constitute only about 1.7%. In comparison, foreign-born residents in Germany rose from 1% to approximately 13% over the same period. In the U.S., the percentage jumped from about 5% to 13%. Moreover, the union structure in Japan, which is enterprise-based in contrast to the indus-try-based and national union structures typical in the U.S., Canada, and Europe, has kept union interests aligned with those of companies.

But a uniform and cooperative labor force at home does nothing to prepare a company for managing the diverse and of-ten combative workforces in foreign coun-tries. For example, most Japanese compa-nies were not prepared for the diff erences in workplace norms regarding sexual ha-rassment or for the litigation that followed when laws were broken. Several Japanese fi rms ran into problems and had to pay big fi nes. In 1998, Mitsubishi Motors agreed to pay $34 million to settle charges brought by the U.S. Equal Employment Opportu-nity Commission, which concluded that more than 300 women had been sexually harassed at Mitsubishi’s Normal, Illinois, plant. Several other major Japanese com-panies have experienced sexual-harass-ment or other gender-related claims in the United States.

Is it a risk? In a sense. China is per-haps the closest to Japan in terms of worker homogeneity. Although China recognizes 55 ethnic groups, Han Chinese constitute more than 91% of the total population. Mandarin is not only the offi cial language

but also the primary language of more than 900 million of China’s 1.3 billion citizens. China has closed the door to immigrants over the past 100 years, and they make up only 0.1% of the population.

For the other BRIC countries, homoge-neity is less of a problem. While 99.8% of Brazilians speak Portuguese, the country has a rich history of immigration. From 1833 to 1933, nearly 5 million people mi-grated to Brazil. The majority were from Italy and Portugal, but sizable groups also came from Spain, Germany, and Japan. In India, though the Indo-Aryan ethnolin-guistic group constitutes 72% of the total population, the country has two official languages (English and Hindi) and recog-nizes 20 other national languages. Russia is perhaps the most diverse. Even though the Russian ethnic group accounts for 80% of the population, the country comprises some 170 other groups, and while Russian is the only offi cial language, 27 others are formally recognized. Like Brazil, Russia also has a long history of foreign immigra-tion. Today the country’s estimated 12 mil-lion foreign-born residents constitute 8.7% of its population—slightly below the level of immigrants found in France and far ahead of that found in Japan.

A Homogeneous Team at the TopJapanese companies’ ability to build strong business models and cultures owes a lot to cohesive and homogeneous leadership. For instance, at top exporter Matsushita Electric (now Panasonic) during the 1980s and 1990s, senior management teams were entirely Japanese. Virtually all those execu-tives had graduated from one of four uni-versities and then spent their entire careers at Matsushita.

In the 68 Japanese firms on the 2009 Global 500, nearly 98% of the listed cor-porate offi cers were Japanese. Only Nissan and Sony have increased the role of non-Japanese executives over the past 20 years. And arguably Nissan’s diversity was forced on the company about 10 years ago, when, as a condition for an infusion of cash by

WHO DOMINATES THE GLOBAL 500?

Corporate Japan, which accounted for the largest percentage of Global 500 revenues in 1995, has steadily lost ground.

40%

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France’s Renault, it was compelled to take a foreigner, Carlos Ghosn, as its chief op-erating offi cer and a year later as its presi-dent. Similarly, a fi nancial crisis inside Sony forced it to bring in a foreign CEO, British-born Howard Stringer, who had turned around its U.S. movie and entertainment operations.

European and U.S. companies have done a much better job of diversifying their leadership. When French retail giant Carre-four began a major international push in the mid-1990s, many members of its then mostly French top team had extensive ex-perience in Carrefour’s established foreign operations in Spain, Brazil, Portugal, and Argentina. Those executives led Carrefour’s expansion into Taiwan, Greece, China, Ma-laysia, Thailand, Korea, Hong Kong, Singa-pore, Indonesia, and Japan. The company was not successful in all its international efforts and has had to withdraw from or dial down some, including those in Japan. Still, as it expanded, Carrefour worked hard not only to identify and develop local lead-ership talent but also to move that talent around the world and bring it back to the home offi ce. By 2005, half the top leader-ship team, including CEO José-Luis Durán, came from outside France. Durán’s succes-sor is also a foreigner, Lars Olofsson, from Sweden. Under such leadership, Carrefour climbed from #95 on the Global 500 list in 1995 to #25 in 2009.

Our research suggests that if your com-pany’s international revenues approach 50% of the total, but fewer than 25% of your top leaders come from foreign markets, it’s time to get nervous about your fi rm’s abil-ity to make the leap from plucky challenger to global leader. In large European compa-nies, roughly 20% of the corporate execu-tives are not home-country nationals, and international sales represent 40% of their revenues. American fi rms are a bit behind. UNCTAD data show that on average, about 50% of the largest U.S. firms’ sales are in-ternational, and roughly 17% of their top executives are foreigners. However, many are in line with our 2:1 ratio. For example, IBM generates about 60% of its revenues

The four strengths that propelled the success of Japanese companies in the 1990s turned into weaknesses when the fi rms ventured abroad. Here’s how some of today’s emerging giants—and one Western rival—measure up in each risk factor.

Who Has the Highest Risk of Failing Overseas?

Devotion to The Way

Isolated Domestic Market

Docile Domestic Labor Force

Homoge-neous Senior Leaders

BrazilVale (CVRD)

Operations outside Brazil and large global competitors (such as BHP) keep Vale from getting too insu-lar in its way.

Major competi-tors did not make big FDI in Brazil until the past fi ve years, which means Vale has had limited direct battles with strong foreign competitors.

Eighty percent of all Vale employ-ees are Brazilian, but Brazil has a multicultural immigration history.

All are Brazilian, and few seem to have signifi cant international experience.

RussiaLukoil

Only 4% of Lukoil’s petro-leum reserves are outside Russia; however, a strategic partnership with ConocoPhillips (which owns 20% of Lukoil) is introducing some Western best practices.

The sector is dominated by Russian compa-nies. The Russian government has pressured foreign MNCs to reduce holdings.

While Lukoil’s employees are almost all Russian, they represent various ethnic minorities. The company peri-odically deals with trade union activism.

Decision making is dominated by Vagit Alekperov, Lukoil’s founder. All other man-agement com-mittee members are Russian nationals; only one has broad international experience.

IndiaReliance Industries

A heavy focus on domestic operations and exports, limited presence of foreign MNCs, and few local competitors reinforce The Reliance Way.

Major com-petitors (such as Shell and Exxon) have relatively small FDI in India, so direct battles have been limited.

The vast major-ity of Reliance employees are in India. Employees are somewhat diverse but lack power relative to labor in other countries.

All are of Indian origin, but several have signifi cant international experience.

ChinaHaier

Relations with government, competitors, and customers are unique and embedded, and will not travel well.

Seventy percent of sales are domestic. FDI in China has boomed in the past decade but still represents a small portion of overall economy.

Haier’s primarily domestic labor force is fairly homogeneous and lacks power compared with unions in the EU and other regions.

All are Chinese, and few seem to have signifi cant international experience.

FranceCarrefour

Carrefour has adapted many aspects of its product off erings and processes to fi t the diff erent consumer de-mands in various countries.

France is not as open as other countries such as the U.S. and UK but still en-joys substantial FDI infl ows and the presence of many foreign fi rms.

The labor market in France is eth-nically diverse (nearly 10% for-eign born), and France’s unions are some of the most forceful in the world.

The CEO is Swedish with signifi cant inter-national experi-ence (including work at Nestlé), and two-thirds of the top team are not French.

RISK

VERY LOWLOWMEDIUMHIGH

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THE GLOBE


outside the U.S., and nearly 30% of its top executives are foreigners.

Is it a risk? Undoubtedly. Many BRIC companies lack leadership diversity. Chi-na’s white-goods giant Haier wants to in-crease its proportion of international sales from 30% to 60% by 2015, but since it has a completely Chinese board and manage-ment team, we wonder how successful it will be. India’s third-largest firm by rev-enues is Reliance Industries, a petrochemi-cal company with sales of $31.8 billion, of which 62% comes from exports. All 13 of the company’s board members are Indian, although at least three do have 10 years or more of experience abroad. Brazil’s Vale earns more than 80% of its revenues out-side Brazil, but 80% of its employees are based in the country. Its entire executive team is Brazilian, as are virtually all the members of its board.

Priming Your Launch PadThere’s a limit to what companies can do to prepare for their launch as global play-ers. They certainly can’t do much to alter their local demographics or aff ect the com-petitive realities of their domestic markets in the short term. But they can take steps to ensure that when it’s time to go global, they have a leadership team that is more open-minded about strategy and business models and has experience dealing with diverse workforces. When we compare companies that took off after moves over-seas with those that fell back to earth, we see that the successes are set apart by their extensive use of three leadership develop-ment practices:

Early expatriation. Some companies, such as PepsiCo, help young high-potential leaders learn about talent, customers, and opportunities outside their home market by deliberately sending them out into the world on overseas assignments. Colgate-Palmolive has gone so far as to make interna-tional experience a requirement for young employees hired into its marketing func-tion. One caution: To save costs, fi rms may be tempted to send people abroad for short periods (six months or less). While this can

make sense for certain technical transfers, our research shows that it does not gener-ally broaden and deepen managers in ways that will help them make more-enlightened decisions about international challenges. If people know that they’ll be in a foreign lo-cale for only six months, they tend to stay in a kind of “home-country cocoon.”

Inpatriation. Because power will al-ways reside at world headquarters, you have to “inpatriate” foreign executives if you want to ensure that those in leadership positions know and trust them. And you have to bring in a good number of them. Phone, fax, videoconference, and e-mail interactions are not and will most likely never be rich enough to build strong trust. Rubbing shoulders works far better.

Nestlé is one multinational that recog-nizes this. Though the countryside sur-rounding the company’s headquarters in Vevey is very Swiss, the offi ce environment feels like the United Nations. Nestlé brings in people from around the world, from the most junior to the most senior, to ensure that top executives get to know the com-pany’s best talent. The inpatriated indi-viduals also build relationships with one another, which they can leverage wherever they end up.

Education. Successful competitors have serious global leadership develop-ment programs. Shell, for example, has teamed up with the Insead international management school to run a custom-designed, multimodule program focused on high-potential middle managers from every region. It includes individual assess-ment and coaching, challenging business projects, activities that keep participants connected even when they return home, and content designed to build global and cross-cultural competencies.

Other companies augment their internal development eff orts with public programs.

At Nestlé participation in the Program for Executive Development, run by the Swiss business school IMD, is a prerequisite for advancement to the senior ranks. Because people from a wide variety of companies and countries attend the program, it ex-poses managers to best practices and ap-proaches outside the world of Nestlé.

To get the benefits of both customiza-tion and exposure to people and practices outside their organizations, more and more companies are joining consortium-based programs, in which six or seven noncom-peting fi rms collaborate to design the struc-ture and content and commit to sending a certain number of participants each year. Sadly, these sorts of intense global devel-opment programs are not common in Japa-nese fi rms, and when they are conducted they’re often filled only with Japanese employees.

THE PARADOX of globalization is that ini-tial success can set up an organization to fail once it reaches the fi nal hurdle. Great performers who manage a team of people who think and act like them are rarely suc-cessful when the environment changes and their colleagues all look and act diff erent. Long-term commitments to develop and motivate talented people from all cultures and put them into meaningful roles are es-sential to the success of even the most mod-est global strategies. The world’s economy may be globalizing; that doesn’t mean it is becoming any less diverse.

HBR Reprint R1009J

Many BRIC companies lack leadership diversity. White-goods giant Haier has a completely Chinese board and management team.

J. Stewart Black ([email protected]) is the associate dean of executive

development programs in the Americas at Insead, an international business school in France, Sin-gapore, Abu Dhabi, and the United States. Allen J. Morrison ([email protected]) is a professor of global management at Insead. They are the authors of Sunset in the Land of the Rising Sun (Palgrave Macmillan, 2010).


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a cautionary tale for emerging markets

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