Carla I. Koen. Comparative International Management

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in excess of that needed to fund all projects with a positive net present value (when dis-

counted at the relevant cost of capital). Free cash ﬂow should be returned to the

shareholders, since reinvestment in the ﬁrm would harm its value. Nevertheless, the top

managers are reluctant to surrender the free cash ﬂow, as this would reduce the resources

they control and the power they wield. Instead, they prefer to spend the free cash ﬂow on

wasteful projects, such as diversiﬁcation.

Apart from the pleasures of empire building, top managers have various motives for

choosing diversiﬁcation (Hoskisson and Hitt, 1990; Montgomery, 1994). Diversiﬁcation

and ﬁrm size are strongly correlated. The same goes for ﬁrm size and the level of compen-

sation of its top managers. As a result, top managers can use diversiﬁcation to boost their

compensation. The second motive is managerial entrenchment. Top managers may

choose particular diversiﬁcation strategies to increase demand for their own particular

skills. A ﬁnal motive is reduction of employment risk. Shareholders can ‘diversify away’

risks by holding a portfolio of stock of several ﬁrms. One ﬁrm’s bad ﬁnancial performance,

or even bankruptcy, is then compensated by the good results of another ﬁrm. In contrast,

for a top manager, diversiﬁcation of employment risk by being in charge of a number of

independent ﬁrms is not an option. However, diversiﬁcation of his or her ﬁrm into several

businesses can serve as a substitute.

In conclusion, agency theory does not represent a very positive view of diversiﬁca-

tion. Diversiﬁcation is used to promote the interests of top managers, at the expense of the

ﬁrm’s shareholders. On the other hand, in practice, various mechanisms are available

that serve to align the interests of shareholders and top managers. For example, top

manager compensation can be tied to ﬁrm proﬁtability by awarding bonuses or stock

options. Furthermore, if there is an effective market for corporate control, ﬁrms that are

performing poorly as a result of the wrong diversiﬁcation moves are taken over by com-

peting management teams, which then immediately replace opportunistic top managers.

Dominant logic

A dominant general management logic is deﬁned as ‘the way in which managers concep-

tualise the business and make critical resource allocation decisions’ (Prahalad and Bettis,

1986: 490). Grant (1988) and Goold and Campbell (1987) have made this concept more

tangible by translating it into administrative mechanisms like formulating and coordi-

nating business strategies, allocating resources to businesses, and setting and monitoring

performance targets for businesses. The dominant logic has to match the strategic charac-

teristics of the businesses, otherwise hidden costs ensue. Hidden costs encompass

inappropriate and tardy responses as a result of a lack of understanding of the businesses.

For corporate strategy, the implication is that the dominant logic of a ﬁrm’s top man-

agement team drives the portfolio of businesses that can be managed successfully. If the

top management team has a single dominant logic, the ﬁrm should either stick to one busi-

ness or diversify into businesses with similar strategic characteristics. Diversiﬁcation into

businesses with different strategic characteristics can only be successful if the top manage-

ment team adopts multiple dominant logics, which, in turn, at least requires altering the

composition of the top management team. In essence, this represents a break with the

more traditional notions of relatedness, which have emphasized similarities in end prod-

ucts or services, or the resources that are used to produce them. Instead, dominant logic

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involves a focus on similarities in strategic characteristics, such as the maturity and high-

tech nature of the businesses. This could then explain the success of some conglomerates

with small head ofﬁces with limited management capacity. Their businesses may appear

unrelated, but could, in fact, be strategically very similar. Moreover, dominant logic may

explain the failure of take-overs that, beforehand, seem to offer a large potential for syner-

gies. After the take-over, the businesses turn out to require different dominant logics,

which the top management team cannot provide.

Resource-based view

The ideas underlying the resource-based view originate from 1959, when Edith Penrose’s

‘The theory of the growth of the ﬁrm’ was published. Only after its rediscovery by

Wernerfelt (1984) did the resource-based view really start to take off in strategic manage-

ment. The resource-based view of the ﬁrm can be seen as a response to the dominant

inﬂuence on ﬁrm behaviour and performance that industrial economics assigns to the

industry. Instead, the resource-based view emphasizes a ﬁrm’s resources. Resources

include assets – such as plants, patents and cash ﬂow – and competencies, which repre-

sent the know-how to create a new asset or expand existing assets (Markides and

Williamson, 1996). If the resources possess certain characteristics, such as non-trad-

ability, non-substitutability and non-imitability, they can serve as the source of

competitive advantage for a ﬁrm.

Mahoney and Pandian (1992) discuss a number of applications of the resource-

based view to diversiﬁcation strategy. For example, the resource-based view can explain

the motivation for diversiﬁcation, the direction of diversiﬁcation and the performance of

diversiﬁcation. A ﬁrm can use its excess capacity in resources in a different industry,

leading to diversiﬁcation (Penrose, 1959), as already explained under transaction cost

economics, above. In general, tangible resources (e.g. machines) and intangible resources

(e.g. brand names) can only be used for a relatively narrow range of products or services.

Therefore, a ﬁrm with excess capacity in these areas chooses related diversiﬁcation. More

ﬂexible resources – in particular, ﬁnancial resources – can also be used for unrelated diver-

siﬁcation (Chatterjee and Wernerfelt, 1991). Finally, only if the resources that are used for

diversiﬁcation have the characteristics required for competitive advantage, will diversiﬁ-

cation increase ﬁrm performance. Excess ﬁnancial resources, for example, could easily be

returned to the capital market and then be made available to other companies. In con-

trast, excess tangible and intangible resources may be difﬁcult to trade across markets and

thus provide a more solid foundation for proﬁtable diversiﬁcation. This might help explain

the general pattern that has been found, in which related diversiﬁed ﬁrms outperform

single-business and unrelated-diversiﬁed ﬁrms (Rumelt, 1974; Palich et al., 2000).

Nevertheless, each ﬁrm has a unique bundle of resources. Therefore, the decision to diver-

sify, the direction of diversiﬁcation and its performance are highly ﬁrm speciﬁc, according

to the resource-based view.

Organizational learning perspective

The underlying premise of the organizational learning perspective is that organizations

can learn from experience, which translates into future actions and their success. The

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quality of learning improves as the degree of environmental diversity to which an organ-

ization is exposed and the frequency of actions that are undertaken increase, but is also

subject to organizational constraints (Barkema and Vermeulen, 1998).

The organizational learning perspective has not been established as an important

explanation of corporate strategy, but it does provide an interesting direction for future

research. For example, it could help explain why single-business ﬁrms are less proﬁtable

than related-diversiﬁed ﬁrms. Learning by single-business ﬁrms is limited, since they have

only a narrow pool of experiences to draw on. Moreover, the organizational learning per-

spective would predict that, for ﬁrms that have already diversiﬁed, further diversiﬁcation

would be more feasible and successful than for ﬁrms that have no experience with diver-

siﬁcation at all. As a ﬁnal example, it could help to understand why related acquisitions

are more successful than unrelated acquisitions (Bergh, 2001). Whereas the resource-

based view of the ﬁrm would relate this to the resources that can be transferred, the

organization learning perspective would point to the limited usefulness of a ﬁrm’s experi-

ences for unrelated activities. What is important to note, though, is that, according to

both the resource-based view and the organizational learning perspective, corporate

strategy and its success are highly ﬁrm speciﬁc, since they depend on, respectively,

accumulated resources and experiences, which are unique to every ﬁrm.

Strategic contingency theory

The ﬁnal explanation of corporate strategy is provided by strategic contingency theory

(Venkatraman, 1989). The underlying notion is that a ﬁt between a ﬁrm’s strategy, on the

one hand, and external and internal conditions or contingencies, on the other, increases

performance. Consequently, corporate strategy can be seen as a response to various

external and internal contingencies (Hoskisson and Hitt, 1990). Relevant external con-

tingencies are government policy and market failure. An important aspect of government

policy is anti-trust law. Through anti-trust law, policy-makers try to prevent large concen-

trations of power in an industry. If anti-trust policy is stringent and ﬁrms still want to

grow, they are forced to expand in a different industry and thus diversify. Market failure as

an incentive for diversiﬁcation has already been discussed under transaction cost econ-

omics, above. If markets fail, coordination of activities in different industries within a ﬁrm

is more efﬁcient. The ﬁrm then becomes diversiﬁed.

Examples of internal contingencies are low performance, uncertainty and risk reduc-

tion. If a ﬁrm performs weakly in an industry, it may ﬂee to a different industry, in an

attempt to improve results. Similarly, uncertainty surrounding future cash ﬂows that can

be earned in the current industry may drive a ﬁrm to a new industry. Finally, ﬁrms may

diversify into several industries in order to spread risks. As already explained under

agency theory, above, risk reduction is a suspicious reason for diversiﬁcation in the eyes of

the shareholders. However, for other stakeholders, such as the managers, it may be a valid

incentive to diversify.

The previous examples of contingencies suggest that the distinction between

external and internal contingencies is not always clear-cut. For instance, the internal

contingency uncertainty may actually be induced by external demand conditions. Also,

the ability to exploit market failure depends on internal implementation mechanisms.

Furthermore, some of the contingencies have already appeared as part of other theories.

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In sum, strategic contingency theory does not seem to be a very precise theory, but more

of a repository for various factors that have or have not appeared elsewhere. Therefore, in

contrast with most of the other theories discussed in this chapter, it has never become

widespread in studies of corporate diversiﬁcation.

In this section, we have discussed a number of universalistic theories that have been used

to explain corporate strategy. What makes these theories universalistic is that they do not

take differences between countries explicitly into account. However, they do not necess-

arily imply convergence of corporate strategies among various countries. They may

contain factors that are, and remain, different between countries. As an example, take

transaction cost economics. According to this theory, the rationale behind the diversiﬁed

ﬁrm is its ability to overcome market failure. Consequently, the corporate strategies that

are adopted by the ﬁrms in a country become dependent on the functioning of the

markets in that country. If the strength of the markets differs from country to country, as

has been claimed for the capital market, for instance, one should expect to observe dif-

ferent corporate strategies.

Particularistic explanations of corporate strategy

Institutionalism

Institutional theory, which is discussed in the introductory chapter and, more extensively,

in Chapter 4, is built on the idea that organizations are deeply embedded in wider insti-

tutional environments. This means that organizational practices are often reﬂections of or

responses to rules and structures in their environments (Powell, 1998). It is a matter of

debate how strongly national institutions inﬂuence the behaviour of ﬁrms. Whitley

(1992, 1994, 1997) believes this inﬂuence is strong, and that ﬁrm behaviour has to be in

agreement with the rules and structures of the stable institutional environment. Sorge

(1995) leaves room for behaviour that is not similar to the rules and structures of institu-

tions, because, in his approach, institutions are continuously modiﬁed by the behaviour

of ﬁrms in a process called non-identical reproduction (see Chapter 4). Clark and Mueller

(1996) suggest that large ﬁrms, in particular, are relatively autonomous to the national

institutions, because they function simultaneously in both a national institutional

environment and an international institutional environment. Since they function in both

environments, large ﬁrms can arbitrage between them.

As discussed in Chapter 4, Whitley (1992) identiﬁes several key institutions that

govern economic activities. The institutional environment constructed by these institu-

tions is or is not the same as a country. Some institutions, such as government policy, can

vary within a country. For example, the state of Delaware has corporate laws that differ

from those of most other states in the USA. Therefore, ﬁrms in Delaware face an insti-

tutional environment that differs from the ones in other US states. ‘However many of the

key institutions that structure economic relationships vary signiﬁcantly between nation

states’ (Whitley, 1994: 176). Among these key institutions, a difference can be discerned

between institutions that structure general patterns of trust, cooperation, identity and

subordination in a society, and those that are more directly involved in the economic

system and constitute the more direct business environment.

Because our aim is to focus on institutions that are able to explain differences in

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corporate strategies, we will focus on the latter institutions, which Whitley calls ‘proxi-

mate social institutions’. The three major categories these institutions can be divided into

are the political system, the ﬁnancial system and the labour system (Whitley, 1997). In

order to explain differences in corporate strategies between various countries, several

scholars (Mayer and Whittington, 1999; Kogut et al., 2002) have identiﬁed various insti-

tutional factors. These can all, except for one, be placed in one of the three categories

mentioned above, which have an impact on the decision of a ﬁrm to diversify.

Political system

Government policy can have a strong impact on corporate strategies. For example, anti-

trust laws can inﬂuence corporate strategy. Also, the willingness of a government to share

economic risks with private ﬁrms is important. If government is willing to share economic

risks, ﬁrms do not have to cope with those risks on their own and a strategy of unrelated

diversiﬁcation as a way of hedging against economic risks becomes less likely (Whitley,

1997). Therefore, this might affect the direction of diversiﬁcation strategy that is favoured

in a country. In addition, tax laws can have an inﬂuence on corporate strategy, especially

on the level of diversiﬁcation. High taxes on dividends, in combination with lower taxes

on capital gains, can induce shareholders to stimulate ﬁrms to retain funds, in order to

invest these in other high-proﬁt industries. If the stock value increases, shareholders may

receive a better return than through dividends, because capital gains would be taxed more

lightly than dividends (Hoskisson and Hitt, 1990).

Financial system

The way the ﬁnancial system in a country functions can also have an impact on corporate

strategies, especially on the level of diversiﬁcation in a country. In Chapter 6, ﬁnancial

systems are discussed in detail. This chapter distinguishes between two types of systems:

a capital-market-based system and a credit-based system. In a capital-market-based

system, ﬁrms raise capital in a variety of ways, depending on costs and terms. So their

relationships with banks tend to be impersonal, short-term and speciﬁc to certain trans-

actions (Whitley, 1992). Banks and other ﬁnancial institutions concentrate on allocating

funds on a portfolio basis to a range of borrowers. Therefore, they are less concerned with

building a long-term relationship with a single customer than with the relative attractive-

ness of competing investment projects. In this system, it is less likely that banks and other

ﬁnancial institutions are willing to share long-term economic risks with client ﬁrms.

Consequently, ﬁrms will be more likely to try to spread their economic risks by diversifying

into other businesses. In a credit-based system, the situation is quite the opposite. Because

the capital market is not highly developed in this system, banks and ﬁnancial institutions

cannot trade ﬁnancial assets easily. This causes banks and ﬁnancial institutions to invest

in personal relationships with their client ﬁrms, since they depend on their success. Firms

are also motivated to invest in a personal relationship with particular banks and other

ﬁnancial institutions because they are dependent on their willingness to support invest-

ment plans as there is no highly developed ﬁnancial market, and banks and other

ﬁnancial institutions will only invest in ﬁrms they know and have conﬁdence in. This all

leads to a situation in which risk sharing between ﬁnancial institutions and ﬁrms is much

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more common than in a capital-market-based system. Consequently, ﬁrms will be less

likely to try to spread their economic risks by diversifying into other businesses.

Another aspect of the ﬁnancial system that can have an impact on corporate strat-

egies is the market for corporate control. When there is a highly developed market for

corporate control, it is easier for ﬁrms to undertake hostile take-overs and, thus, easier to

get access to other industries. Therefore, a highly developed market for corporate control

can lead to more diversiﬁcation. Nevertheless, it is important to note that a highly devel-

oped market for corporate control also makes it easier to break up conglomerates through

a hostile take-over and, by doing so, to end diversiﬁcation.

Ownership and boards are also mentioned as institutional factors that have an inﬂu-

ence on corporate strategies (Kogut et al., 2002). Ownership and boards have an inﬂuence

because important decisions, like corporate strategy, have to be approved by the owners

and the board members. When ownership is dispersed and weak boards have little inﬂu-

ence and power, it is easier for managers to act in their own interests at the expense of the

owners and give in to their personal motives to choose a diversiﬁcation strategy. These

motives, like managerial entrenchment, higher wages and reduction of their employment

risks, are discussed in Section 10.6.

Labour system

The labour system also inﬂuences corporate strategy. The way management development

is organized can inﬂuence the way managers rate different directions of diversiﬁcation

(Mayer and Whittington, 1999). This can be illustrated by an example given by Lane

(1995: 35–8), in which she points out the implications for corporate strategy of the tra-

ditional lack of technical and engineering skills of UK top managers. UK managers are

more ﬁnancially orientated and therefore supposed to prefer unrelated diversiﬁcation,

while the more technologically orientated German managers are assumed to favour

related diversiﬁcation. Therefore, the labour system might affect the direction of diversiﬁ-

cation strategy that is most common in a country.

Others

One institutional factor named by Kogut et al. (2002) cannot be placed in the categories

listed above. The existence of inter-ﬁrm networks has an impact on the ability of ﬁrms to

conduct a diversiﬁcation strategy. When a ﬁrm decides to enter a new industry, this may

threaten the position of incumbent ﬁrms. These incumbents may try to prevent the ﬁrm

from gaining access to the resources needed to enter the industry by calling in the help of

their network. If the ties between ﬁrms are strong, incumbents can successfully block the

entrance of new ﬁrms and make diversiﬁcation difﬁcult.

In sum, anti-trust laws, tax laws, the functioning of the ﬁnancial system and the exist-

ence of inter-ﬁrm networks inﬂuence the level of diversiﬁcation in a country, while the

willingness of governments to share economic risks and the way managers are trained have

more impact on the direction of diversiﬁcation that is favoured in a country. Research in this

ﬁeld is still limited, so more institutional factors inﬂuencing the level of diversiﬁcation, the

direction of diversiﬁcation, or both, might be discovered in the future. In addition, it should

be noted that some institutional factors in a country may favour diversiﬁcation, while

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others do not. Hence, it is important to take account of institutional complementarities (see

Chapter 4), and their effect on the level and direction of diversiﬁcation in a speciﬁc country.

10.4 Comparative Empirical Studies

So far, there have been only a limited number of studies of differences or similarities in

corporate strategies between countries that try to explain these differences or similarities

via national institutions. Three of those studies are discussed in this section. We start with

the study of Kogut et al. (2002), who look at national divergences in diversiﬁcation behav-

iour in France, Germany, Japan, the UK and the USA. Then we discuss the study of Mayer

and Whittington (1999, 2000) of corporate strategies and structures in France, Germany

and the UK. We end this section with a discussion of our own research about corporate

strategy in the car and steel industry in Japan, Germany and the USA.

Kogut, Walker and Anand

The study of Kogut, et al. (2002) consists of two parts. In the ﬁrst part, they examine

inter-industry diversiﬁcation patterns in France, Germany, Japan, the UK and the USA.

The study is limited to the 75 largest, domestically owned ﬁrms. The data are taken from

previous studies, conducted primarily in the 1970s, like the study of Dyas and Thanheiser

(1976) for Germany and France. These 75 largest ﬁrms are categorized by industry. Firms

are categorized according to their industries, because, according to Teece et al. (1994),

linkages in technological and market characteristics cause ﬁrms to diversify in a common

pattern across industries. Teece et al. seem to implicitly assume that these linkages are

constant in countries at an advanced state of market capitalism and, therefore, should be

robust to institutional inﬂuences. This leads to the ﬁrst hypothesis that is tested:

H1: patterns of inter-industry diversiﬁcation are similar across countries.

Kogut et al. pose a second, opposite, hypothesis:

H2: country-speciﬁc institutions cause different patterns of inter-industry

diversiﬁcation.

The country-speciﬁc institutions they mention are ownership, boards, inter-ﬁrm net-

works and government policy. We discussed the inﬂuence of these institutions on strategy

in Section 10.3. Kogut et al. conclude that large institutional differences exist between the

countries. For example, state ownership of key enterprises has been an important inﬂu-

ence in France, somewhat less in the UK, and even less so in Germany and Japan, though

different German regional governments have substantial interests in large enterprises like

automobile manufacturer Volkswagen and steel mill Salzgitter. In the USA, state owner-

ship of enterprises is almost non-existent. The empirical ﬁndings suggest that there are no

similarities in patterns of inter-industry diversiﬁcation across France, Germany, Japan,

the UK and the USA, and thus support the second hypothesis. Differences in country-

speciﬁc institutions cause different patterns of inter-industry diversiﬁcation.

In the second part of the study, Kogut et al. (2002) present two case studies that show

institutional inﬂuences on diversiﬁcation efforts. In 1967, Leasco, a US leasing company,

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tried to acquire Chemical Bank through a hostile take-over. The take-over failed due to the

fact that Chemical Bank was part of an inﬂuential inter-ﬁrm network that included the

banks that were supposed to ﬁnance the take-over bid. The network also included

members of the state assembly, which promptly banned conglomerate take-overs. So the

attempted diversiﬁcation by Leasco failed because the inter-ﬁrm network enabled

Chemical Bank to prevent the hostile take-over.

The second case study is situated in France. In 1969, the newly formed packaging

and bottling ﬁrm, BSN, undertook a hostile takeover bid for the 300-year-old chemical

and glass company St Gobain. On the board of one of the banks supporting the take-over

bid was a member of St Gobain, who managed to slow down the attack, until a white

knight was found in Pont-à-Mousson. Pont-à-Mousson was an old ﬁrm that had ties with

important families in the region, and which had already mediated in a ﬁght between the

families owning St Gobain. So the attempted take-over by BSN failed and St Gobain

merged with Pont-à-Mousson. Soon after, BSN expanded into food products instead of

glass making and eventually became Danone.

Kogut et al. (2002) conclude that institutions shape the possibilities that individual

ﬁrms have to realize the economic advantages of diversiﬁcation.

Conclusions to this section

Differences in country-speciﬁc institutions cause different patterns of inter-industry

diversiﬁcation. Institutions shape the possibilities that individual ﬁrms have to realize the

economic advantages of diversiﬁcation.

Mayer and Whittington

Mayer and Whittington (1999, 2000) come to a different conclusion in their study of the

strategy and structure development of the top 100 domestically owned industrial ﬁrms in

France, Germany and the UK in the period 1950–93. Strategy is measured using the

diversiﬁcation categories developed by Rumelt (1974), which were mentioned in Section

10.2. The ﬁrms are classiﬁed in a diversiﬁcation category every ten years over the period

1950–93. Mayer and Whittington also investigate three different institutions that are

assumed to inﬂuence strategy and structure development: ownership, management

control and management development. These institutional factors are indices of the

broader institutional frameworks of ﬁnance and management. The inﬂuence of these

institutions on strategy corresponds to the inﬂuence of institutions mentioned in Section

10.3. Exceptions are the inﬂuences of the institutions described under the categories pol-

itical system and inter-ﬁrm networks, which are not explicitly taken into account; the

same goes for the inﬂuence of boards. The way the institutions develop in the period

1950–93 is measured by the way the ﬁrms develop in terms of ownership, management

control and management development.

The institutional environment was found to remain quite different in the three coun-

tries over the period of time under investigation. Hence, following the institutional

approach, differences in strategy and structure development between French, German

and UK ﬁrms could be expected. However, the predictions according to the institutional

approach prove to be inaccurate. For example, it is not the professionally managed,

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capital-market-driven, ﬁnance-dominated ﬁrm of the UK that appears to be more like a

conglomerate, but the technically orientated, bank-backed German ﬁrm (Mayer and

Whittington, 1999: 951). The conclusion is that small differences in strategy and struc-

ture in France, Germany and the UK remain, but that these differences cannot be

explained by existing institutional theories.

Conclusions to this section

Over the period 1950–93, there are only small differences in strategy and structure

between ﬁrms in France, Germany and the UK, which cannot be explained by existing

institutional theories.

The car and steel industry

The third study concerns our own research in the US, German and Japanese steel and car

industries.

This study investigates the inﬂuence of national institutions on corporate

strategy development in those industries. It should be noted beforehand that these indus-

tries have a rather global character, which might inﬂuence the results; the results in other,

more multidomestic, industries could be different. The study takes almost all the insti-

tutional factors, mentioned in Section 10.3, into account for the USA, Germany and

Japan. The political, ﬁnancial, educational and inter-ﬁrm cooperation systems differ con-

siderably between the three countries, although there are quite a few similarities between

Germany and Japan.

The political system differs in the three countries. For example, in the USA, the gov-

ernment is, in most cases, not willing to share economic risks with ﬁrms, while this is

much more common in Germany and Japan. Germany also has a history of (partially)

state-owned ﬁrms, like the aforementioned Volkswagen and Salzgitter. In Japan, the inﬂu-

ence of the government on business is also more direct, especially through the role played

by the Ministry of International Trade and Industry (MITI). This ministry tries to coordi-

nate economic activity in Japan, and issues plans that state how the Japanese economy

should develop in subsequent years. Firms are encouraged to follow these plans through

a system of administrative guidance (Bernstein, 1997). This means that civil servants use

their power to favour ﬁrms that follow the plans and punish ﬁrms that do not. For

example, the Ministry of Finance uses its power to allocate ﬁnancial resources to ﬁrms

that follow MITI’s plans, and makes it hard for ﬁrms that do not follow the plans to get

access to ﬁnancial resources.

There are also differences in the anti-trust laws between the three countries. The

USA is known for its severe anti-trust laws and policy.

Until the end of the 1990s, the

Bundeskartelamt, which supervises observance of the German anti-trust laws, was not

very active. Subsequently, the European Union coordinated the anti-trust policies in its

member states, so a more active attitude was expected of the Bundeskartelamt. Japanese

anti-trust policy is not severe because the Japanese government does not favour strong

MULTINATIONAL CORPORATIONS: COMPARATIVE CORPORATE STRATEGY 459

The research is described in more detail in a working paper by the two authors of this chapter, on which the

synopsis presented here is based.

Remember the Microsoft case? This company was almost forced to split up because of alleged misuse of market

power.

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competition among Japanese ﬁrms, in order to give them a stronger position on the world

market, although, during the economic crisis of the 1990s, efforts were made to increase

competition in Japan.

The ﬁnancial system also differs between the USA, Germany and Japan (see

Chapter 6 for a more detailed discussion). Germany and Japan are characterized as bank-

centred, credit-based systems, while the USA has a more capital-market-based system.

Ownership is dispersed in the USA (Lorsch and Graff, 1996), while ownership is concen-

trated in Germany (Dietl, 1998). In Japan, ownership is concentrated in inter-ﬁrm

networks, like the keiretsu. The boards are relatively weak in the USA and Japan. In the

USA the CEO, who in most cases also acts as chairman of the board, dominates the board

and is able to control meetings. Many other board members are high-ranking managers

of friendly ﬁrms (Lorsch and Graff, 1996). Japanese boards are dominated by present or

former ‘inside’ senior managers and have relatively low inﬂuence on the corporate

decision-making process. In most cases, former high-ranking civil servants or the retired

company president are asked to become chairman of the board. This practice strengthens

the inﬂuence of the government on business strategy. German boards have the strongest

inﬂuence, in part due to their two-tier boards and the fact that the supervisory board is

totally made up of directors who cannot be members of the management board. So these

directors in the supervisory board, half of whom are elected by the owners and the other

half by the employees, are all outsiders and can, therefore, limit the power of the manage-

ment board.

The last aspect of the ﬁnancial system that is discussed is the market for corporate

control. This market is highly developed in the USA. Hostile take-overs are common practice

and seen as an efﬁcient way to deal with agency conﬂicts (see Section 10.3). The situation is

quite different in Germany. Not so long ago, hostile take-overs were unthinkable. It was not

until 1989 that the ﬁrst German hostile take-over took place. Hostile take-overs are also very

rare in Japan, and are almost seen as a crime (Tachibanaki and Taki, 2000). However, the

Japanese economic crisis in the 1990s made hostile take-overs more common.

In addition, the way management development is organized differs between the

three countries (see Chapter 5). Most US top managers have a ﬁnancial background and

have attended a business school. They do not have a real commitment to a speciﬁc product

or industry (Fligstein, 1990). German managers, on the other hand, mostly have a tech-

nical background, although young German managers increasingly attend business

schools (Lane, 1992). Japanese top managers mostly come from a couple of top Japanese

universities. Companies recruit students from these universities and develop them into

managers through an extensive job-rotation programme that may take three years. The

aim of that programme is not to make specialists of those future managers in one ﬁeld,

but to turn them into generalists (Deller and Flunkert, 1996). Due to the extensive job-

rotation programme, Japanese managers are aware of the know-how and speciﬁc skills

that are available in their company. Because of their awareness of these speciﬁc skills and

know-how, Japanese managers are expected to pay close attention to ﬁnding new oppor-

tunities to make use of them. Another interesting aspect is that Japanese companies

frequently exchange managers between companies inside a keiretsu. This strengthens the

inﬂuence of inter-ﬁrm networks.

Accordingly, the ﬁnal institutional factor in the USA, Germany and Japan is the role of

inter-ﬁrm networks. The USA is notable for the weakness of its inter-ﬁrm ties (Kogut et al.,

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