Japan’s Corporate Challenge: Embracing Risk for Global Success

Japanese companies and their leaders’ risk-averse nature have led to missed growth opportunities in the global market. To overcome this, a fundamental enhancement and development of management personnel are crucial.

Entrepreneurship involves understanding one’s capabilities and taking on market and technological risks while developing unique strategies for creating new value and returns. However, a study by Yasuhiro Arikawa, an associate professor at Waseda University, in 2017 showed that Japanese companies ranked 26th out of 27 major countries in risk-taking and last in return on assets (ROA). This highlights the issue of low returns due to a lack of risk-taking.

Japanese firms face various challenges due to this risk aversion. They struggle with aggressive investment, cautious strategies in developing and emerging markets, difficulties in innovating business models and technologies, delayed timings in mergers and acquisitions (M&A), and the influence of societal conformity.

For instance, Japan’s cautious approach is evident in the African market, considered the last frontier. Japan’s direct investment in Africa in 2017 was only $87 billion, significantly less compared to countries like France, the Netherlands, and the USA.

A survey conducted by the author among Japanese business leaders highlighted reasons for hesitance in entering the African market, such as lack of local know-how and successful case studies. However, many of these reasons are solvable only by taking risks and acting in the market.

The inertia of existing businesses is strong in most Japanese companies. Only a few startups, specialized trading companies, and funds betting on Africa’s future show potential.

The lack of risk-taking among Japanese managers indicates a widespread presence of management talent incapable of generating corporate value. According to IMD’s World Competitiveness Ranking in 2023, Japan ranked lowest in senior managers’ international experience.

This decline in managerial ability is due to educational shortcomings, particularly in adapting to changing external environments. Despite the need for relearning due to globalization and digitalization, the number of Japanese studying abroad, especially in top U.S. universities for MBA degrees, has halved over a decade. This trend is contrary to the global growth of Executive MBA programs for working professionals.

The decrease in employees studying abroad is attributed to mergers and budget cuts in financial institutions, and inefficiency in utilizing the knowledge gained overseas. This trend indicates Japan’s delay in transformation.

Recent geopolitical challenges like the COVID-19 pandemic, the Ukraine conflict, and U.S.-China tensions have led to discussions about ‘deglobalization.’ However, globally, there’s an increase in professionals seeking to enhance their management skills in this global environment. Japan’s opposite trend over the past 20 years is detrimental to developing managerial capabilities.

The decline in managerial ability is not just due to less overseas education but also due to Japan’s strategy of catch-up through collective effort and its personnel development, which has become dysfunctional amidst disruptive changes. Times of significant change require leaders who can radically transform business portfolios, systems, and organizations, finding solutions beyond traditional methods.

However, most Japanese companies have lacked such leaders, partly due to the short tenure of executive appointments and societal norms prioritizing conformity and finding established solutions.

To break this cycle, Japanese companies need to cultivate managers with a deep understanding of the ‘essentials of management,’ the ability to perceive trends of the times, and an entrepreneurial spirit. This requires diverse learning environments, international educational collaborations, management experience in foreign subsidiaries, and practical learning in various countries. Providing these opportunities on the premise of allowing failure will nurture the ability to manage risks effectively.

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