A rapid globalization of the world economy brings profound changes in the way of doing business. Companies face an increasing local and international competition and try to take advantages of the growing opportunities offered by the international markets. Following this trend, Japanese multinational companies have expanded the field of their business activities in different countries which has made them one of the top five foreign investors in the world during the 1990s. But it was not easy for Japanese firms to establish and operate subsidiaries abroad, particularly in countries that are culturally different from Japan. What determines the success of subsidiaries established abroad? Does market entry mode have influence on performance of Japanese subsidiaries? Which factors have impact on subsidiary performance?

In order to answer these questions, Dr Ogasavara explored the case of Japanese investments in Brazil. Although it is known to only a few number of people, the first international subsidiaries established by Japanese companies such as Toyota (1958), Pilot Pen (1954), Fujifilm (1958), and Yanmar (1957) were in Brazil. In addition, this country has been the focus of attention as an up-and-coming emerging market in recent years, particularly after the publication of a research study from economists at Goldman Sachs, which offers some positive observations about the BRICs economies (Brazil, Russia, India, and China) that could be the future powerhouses of the world economy. Further, only Brazil represents respectively 63% and 33% of the total number of Japanese subsidiaries established in South and Latin America. Moreover, according to a survey of Japan Bank for International Cooperation (JBIC), Brazil received special attention from the Japanese companies as a promising destination for overseas business over the long term. Most of the top ten countries for this survey are concentrated in the Asian region, except for the U.S. (developed country) and Brazil. All these points reinforce the attractiveness of Brazil as a country to conduct an academic investigation of Japanese overseas subsidiaries.

Dr Ogasavara used two main databases to collect subsidiary performance data: the editions of Anuário: Empresas Japonesas no Brasil (Yearbook: Japanese companies in Brazil); and the issues of Kaigai Shinshutsu Kigyou Souran: Kuni Betsu (Toyo Keizai Databank: Japanese Overseas Investments: by country). Additional subsidiary information was collected from various editions of Exame Melhores e Maiores (Exame Magazine - Biggest and Best), Valor 1000 (Value 1000), and Infoinvest Análise de Empresas (Company Analysis).

When companies decide to make a direct investment in a particular country, there are many ways to access this market. Firms can enter the new market by establishing a wholly-owned subsidiary, which gives full control of its operation. However, this requires starting from scratch, a high financial resource, and a high investment risk. A joint venture with a local partner is another way to enter a new market. By establishing an international joint venture, companies can share risks, resources, and acquire the market knowledge from the local partner. But there are high costs of searching for a local partner and a potential problem of cooperating with a partner from a different national culture. In addition, Japanese firms have the characteristic of establishing joint ventures with home country partners, which can be among companies of the same network group (keiretsu) or independent Japanese companies (non-affiliated firms).

The empirical analyses show that Japanese companies achieved a higher level of performance when they were established as joint ventures, with those partnerships formed only by Japanese partners (Japanese-Japanese joint ventures). This means that cultural differences can influence all aspects of collaboration, such as the knowledge management process and management style, which affect knowledge acquisition and transfer capabilities of the partner that is not familiar with the local practices. Further, the findings suggest that the higher performance of joint ventures formed among Japanese partners is not related to the affiliation relationship between partners (e.g., firms that belong to the same keiretsu group), but it is associated with a Japanese partner that has operational experience accumulated in the Brazilian market. This implies that as Japanese companies operate and learn in the local market, these firms build new capabilities, and consequently overcome the disadvantage of being foreign in the host country. Thus, the local knowledge becomes a firm advantage when it is uniquely developed or accumulated through its learning-by-doing process of operating in the host country. In addition, the results reveal that a higher performance is achieved by subsidiaries of firms that increase the number of investments in the target country; in other words, making subsequent investment decision in the local market. This suggests that subsidiaries of parent firms with sequential investment decision in Brazil are more profitable compared to subsidiaries of first-time investment firms. By increasing the firm’s network of subsidiaries in the target country, it allows the firm to have greater scale economies by sharing facilities, information, personnel, and other resources across subsidiaries, and consequently enhancing subsidiary performance.

A paper will be published in Japan and the World Economy by mid 2007 as a part of the results obtained from this research project.