Multinationals in Japan: Addressing the human capital challenge

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Despite Japan’s lack of growth in recent decades—a situation set to be exacerbated by its shrinking population—it remains the world’s third-largest economy, and one that no multinational company (MNC) can afford to ignore. MNCs operating in Japan can face a multitude of challenges, from sometimes seemingly impenetrable markets to unique business practices and opaque regulations.
One puzzle that MNCs must solve is how to attract, retain and get the most out of the local labour force. The successful integration of domestic management into international teams adds layers of complexity. As Japanese companies looking abroad for growth must learn to rely further on local management, so must multinational companies in Japan.
The aim of this report, written by the Economist Intelligence Unit and sponsored by British American Tobacco, is to assess how non-Japanese MNCs are coping with the challenges of hiring and retaining talented workers in Japan and integrating local management into their workforces. The report looks at the skills required by MNCs, whether local hires are fulfilling those needs and what the companies can do about it when they are not.
The findings are based on a survey conducted in November 2011 of 180 senior executives from multinational companies with operations in Japan. Some 21% of respondents were from the manufacturing sector, 19% from financial services, 12% from professional services, 11% from IT and technology and 7% from the healthcare, pharmaceutical and biotechnology sectors. The respondents were C-level executives and board members (32%), directors, vice-presidents, department and business unit heads (42%) and other senior managers responsible for hiring. Around half the respondents were from companies with global revenues of over US$5bn.

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Multinationals in Japan: Addressing the human capital challenge

  1. 1. Multinationals in Japan:Addressing the humancapital challenge An Economist Intelligence Unit survey Sponsored by
  2. 2. Multinationals in Japan: Addressing the human capital challenge Contents Introduction 2 Key findings 3 Conclusion 9© The Economist Intelligence Unit Limited 2011 1
  3. 3. Multinationals in Japan: Addressing the human capital challenge Introduction Despite Japan’s lack of growth in recent decades—a situation set to be exacerbated by its shrinking population—it remains the world’s third-largest economy, and one that no multinational company (MNC) can afford to ignore. MNCs operating in Japan can face a multitude of challenges, from sometimes seemingly impenetrable markets to unique business practices and opaque regulations. One puzzle that MNCs must solve is how to attract, retain and get the most out of the local labour force. The successful integration of domestic management into international teams adds layers of complexity. As Japanese companies looking abroad for growth must learn to rely further on local management, so must multinational companies in Japan. The aim of this report, written by the Economist Intelligence Unit and sponsored by British American Tobacco, is to assess how non-Japanese MNCs are coping with the challenges of hiring and retaining talented workers in Japan and integrating local management into their workforces. The report looks at the skills required by MNCs, whether local hires are fulfilling those needs and what the companies can do about it when they are not. The findings are based on a survey conducted in November 2011 of 180 senior executives from multinational companies with operations in Japan. Some 21% of respondents were from the manufacturing sector, 19% from financial services, 12% from professional services, 11% from IT and technology and 7% from the healthcare, pharmaceutical and biotechnology sectors. The respondents were C-level executives and board members (32%), directors, vice-presidents, department and business- unit heads (42%) and other senior managers responsible for hiring. Around half the respondents were from companies with global revenues of over US$5bn. Our thanks are due to everyone who took part in the survey.2 © The Economist Intelligence Unit Limited 2011
  4. 4. Multinationals in Japan: Addressing the human capital challengeKey findings• Many MNCs in Japan are not satisfied with their new recruits—and they must extract talent from a shrinking and risk-averse labour poolT he survey shows that only 54% of non-Japanese MNCs are satisfied with those they have hired over the past two years for managerial and specialised positions in Japan (Figure 1). Some 20% reportthey are unsatisfied or highly unsatisfied with their recent intake for these positions in Japan, whilethe remainder are neutral. This is far from a ringing endorsement, but it may not be surprising given that MNCs have to findtalent in an increasingly shallow labour pool. Although unemployment—even amongst well-qualifiedgraduates—has been climbing, this has not helped MNCs. Working for a foreign company or a start-upis still seen as something of a risk, and one that fewer in the labour force are prepared to take in thecurrent climate. If anything, worsening unemployment and concerns about Japan’s economic future haveincreased the appeal to job-seekers of large Japanese companies and public-sector employment. MNCstherefore face an even bigger challenge than usual in finding quality candidates to fill their managerialand specialised positions in Japan. The trend will not improve as the population ages and labour resourcesbecome scarcer.Figure 1: UnsatisfactoryHow satisfied has your firm been with the quality of new hires in Japan for managerial and specialised positions over thepast two years?(%)Highly satisfied 11Somewhat satisfied 43Neutral 26Somewhat unsatisfied 16Highly unsatisfied 4Source: Economist Intelligence Unit survey Worryingly, this risk-aversion is extending to new entrants to the workforce, with many new graduatesseemingly reluctant to seek international positions, learn foreign languages or generally expand theircareer horizons. In part this is because students fear that if they don’t join the traditional process of jobhunting at big Japanese companies before graduation (shushoku katsudo) their future prospects in thejob market will be greatly diminished. Although unemployment, hovering around the 5% mark, remainslow in comparison to most industrialised nations, the falling number of students who have job offersbefore they leave university continues to make headlines. Only 16% of respondents disagree with theproposition that the risk of losing out in the university job-hunting system makes graduates less likely toapply to international companies.© The Economist Intelligence Unit Limited 2011 3
  5. 5. Multinationals in Japan: Addressing the human capital challenge • MNCs see a gap between the skills and attributes needed for senior positions and those available in the workforce The survey results show quite clearly why many MNCs are not satisfied with the quality of their recent hires for senior positions in Japan. Respondents were asked to pick the three most important skills and attributes they look for when hiring for managerial and specialised positions in the country. Leadership (picked by 59% of respondents), technical knowledge (54%) and management expertise (47%) are the most sought-after skills, while the ability to collaborate with international colleagues (52%), problem- solving (42%) and self-motivation/initiative (31%) are the most important attributes—as they are likely to be for any comparable position worldwide. Respondents’ scoring of recent hires on these skills and attributes reveals some large gaps. On the skills side, only 32% of respondents are satisfied with their recent hires’ leadership proficiency, and only 34% are satisfied with their management capabilities (Figure 2). Technical skills are less of a problem: nearly 60% report satisfaction on this measure. Regarding attributes, only around one-third of respondents are happy with their new hires’ self-motivation and initiative, and only 40% are satisfied with their ability to collaborate with international colleagues—the most important attribute for MNCs hiring in Japan. Figure 2: The skills gap Skills and attributes sought for managerial/specialised positions in Japan (% respondents selecting in their top three) Skills Attributes Leadership skills 59 Technical knowledge 54 Management skills 47 Ability to collaborate with international colleagues 52 Ability to solve problems 42 Self-motivation/initiative 31 Satisfaction with skills and attributes (% respondents selecting “highly satisfied” or “satisfied”) Skills Attributes Leadership skills 32 Technical knowledge 58 Management skills 34 Ability to collaborate with international colleagues 40 Ability to solve problems 44 Self-motivation/initiative 36 Source: Economist Intelligence Unit survey4 © The Economist Intelligence Unit Limited 2011
  6. 6. Multinationals in Japan: Addressing the human capital challenge• Language skills remain a problem Figure 3: Speak for yourselfThe Japanese workforce, despite its many positive attributes, has never been Regarding your company’s new hires in Japan for managerial and specialised positions over the past two years, howrenowned for its strength in foreign languages. Language-related issues are satisfied are you with their English skills?the second most common shortcoming cited by survey respondents when (%) Very satisfied/satisfiedasked to compare their hires in Japan with those internationally. Although 42%a few forward-looking Japanese firms such as online mall Rakuten and FastRetailing (owner of the Uniqlo clothing chain) have grabbed media attentionby announcing that they would switch their official language to English, the Neutral 32%overall competency level in the workforce remains comparatively low. It is true that only one-quarter of companies report outright dissatisfactionwith recent hires’ English abilities. Conversely, however, only 42% report Unsatisfied/satisfaction on this score (Figure 3), perhaps illustrating why only a minority very unsatisfied 25%is satisfied with their new hires’ ability to collaborate with international Not applicable 1%colleagues. And unsurprisingly, more than half of the companies in the survey Source: Economist Intelligence Unit surveyreport that less than 10% of their international management team comes fromJapan. Although foreign companies face increasing competition for bilingual and multilingual candidatesfrom Japanese firms, which are themselves expanding overseas, the continued language skill shortagebodes ill for the economy and workforce as growth within Japan continues to slow. Nearly half of allrespondents agreed with the statement: “The primary problem with Japan’s workforce is a poor standardof English”, while only 21% disagreed (the rest offered no opinion).• MNCs must do more to help employees overcome skills shortagesDespite the shortcomings outlined above, a surprisingly small proportion of MNCs in Japan offer trainingto help remedy these problems. Only 35%, for instance, say they offer international managementtraining, while just 29% offer local management training (Figure 4). The situation for leadership trainingis somewhat better, provided by nearly half of respondents’ companies. Nevertheless, given that a“Reluctance to take responsibility” is identified as a principal shortcoming in management-level hires inJapan (cited by almost one-quarter of MNCs), it seems clear that there is more that they could be doing inthis department. Similarly, despite the widespread concerns over language skill deficiencies, only just over half ofrespondents offer formal training in English for their staff—though this was the most commonly providedtraining and development opportunity. Furthermore, only 30% of MNCs report that they are satisfied with the creativity of new hires, and“Limited creativity in overcoming challenges” is cited by 42% as a principal shortcoming of management-level hires in Japan compared with the rest of their global workforce—the single biggest concern. But only14% of companies say they offer change-management training to counter these tendencies, suggestingthat MNCs are not doing all they could to address the issue.© The Economist Intelligence Unit Limited 2011 5
  7. 7. Multinationals in Japan: Addressing the human capital challenge Figure 4: Spotty training Which of the following training and development opportunities does your firm offer employees in Japan? Select all that apply. (%) English language training 57 Training in your company’s corporate culture 53 Leadership training 48 Regular appraisal of international career opportunities 39 Technical training 39 International management training 35 Local management training 29 International conference/networking opportunities with industry peers 22 Change-management training 14 Other,please specify 1 Source: Economist Intelligence Unit survey • Japan’s workforce possesses greater technical skills and pays greater attention to detail than its international counterparts While it is commonplace to note the degree to which Japan’s workforce lags its international counterparts in terms of language ability, the areas where it outperforms are cited less often. According to the survey respondents, there are three core advantages of hiring in Japan compared to overseas: a greater Figure 5: Better on some scores In general, what are the principal advantages of management-level hires and/or other specialised workers in Japan, when compared with the rest of your workforce globally? Select up to three. (%) Greater attention to detail 43 Greater loyalty to firm and/or brand 39 Greater technical skills 34 Better ability to help build consensus for change 22 Greater willingness to take responsibility 20 Greater ambition to progress career 17 Greater creativity in overcoming challenges 15 Better formal qualifications 13 Greater language-related skills 8 Other,please specify 3 None of the above; there are no advantages 6 Source: Economist Intelligence Unit survey6 © The Economist Intelligence Unit Limited 2011
  8. 8. Multinationals in Japan: Addressing the human capital challengeattention to detail (picked by 43% of companies), greater loyalty to firm and/or brand (39%) and greatertechnical skills (34%). Only 6% did not perceive any particular advantages (Figure 5). Despite these positives—reflecting that the best aspects of Japanese corporate culture are also evidentin foreign companies’ local hires—the survey does reaffirm some commonly held conceptions about thecharacteristics of the Japanese workforce. More than half of respondents (54%) agree that “Comparedto international employees, those in Japan are more likely to prefer maintaining the status quo thanembracing change,” while nearly half agree that “Our employees in Japan are more inclined to wait forinstructions than to act on their own initiative.” While Japan may be stereotyped as conservative and slow to change, foreign firms do rate theirown local workforces as relatively flexible and quick to learn. More than half (53%) of MNCs describedbeing satisfied with their local workforce’s “Ability to learn quickly,” with only 16% saying they wereunsatisfied. Likewise, 43% reported satisfaction with local workers’ “Adaptability,” against 22% whichwere unsatisfied. Although 57% of respondents agreed that “Compared to international employees, those in Japan tendto take more time in making decisions,” the overall implication would seem to be that, given the righttraining and guidance, local hires can overcome many of the shortcomings identified by MNCs.• MNCs need to tailor their incentives to the local marketWhile a high salary is identified by MNCs as the most important single motive for attracting workersglobally, it is deemed only the fourth-ranked priority for attracting Japanese hires. Training anddevelopment locally, and then training and development internationally, are listed as the most importantFigure 6: Playing a different tune?Which of the following incentives do you believe are the most powerful to attract and retain the following groups of managerial orspecialised employees? Select up to three.(% respondents) Japanese employees International employeesTraining and development locally 41 22Training and development internationally 38 33Clear career path 38 40A higher salary 37 47A high degree of autonomy 19 35Intellectual stimulation 19 17Dedicated mentoring 19 8Better benefits (eg, housing, car, etc) 18 24Association with brand 14 4Direct access to senior management 12 17Source: Economist Intelligence Unit survey© The Economist Intelligence Unit Limited 2011 7
  9. 9. Multinationals in Japan: Addressing the human capital challenge factors in attracting Japanese candidates, followed by a clear career path. Benefits, such as housing and company cars, are also thought by MNCs to be more important in attracting workers globally than for their Japanese counterparts (Figure 6). Whether Japanese candidates are actually less concerned with monetary rewards, or just less inclined to display their mercenary tendencies, is open to question. Either way, MNCs should certainly examine whether the packages they offer in Japan are tailored suitably to attract the best candidates. Similarly, they should examine whether they are using best practices for motivating and retaining employees in Japan. While a high degree of autonomy is seen by MNCs as the third most important incentive for global workers, it ranks fifth for those in Japan. What is more important to Japan, it would seem, is mentoring: more than twice the proportion of respondents that think the provision of direct mentoring is crucial internationally think it is a priority for hires in Japan. The benefits of attracting and retaining the top candidates can be considerable. Company loyalty is probably the attribute most closely associated with Japanese workers, and this extends to those who work for foreign firms. Nearly 40% of respondents report that their Japanese hires show more loyalty to the firm or brand than workers globally, while fewer than 20% list it as a shortcoming of local management. • MNCs can use their image to attract top Japanese candidates Uncertainty about the economy has certainly made Japanese employees more risk-averse in their career choices. And although their motivations and priorities may be subtly different from those of their international counterparts, foreign companies often have an advantage in that they are perceived to treat employees more equitably than traditional Japanese companies. Meritocratic and talent-based remuneration and advancement can be powerful in a corporate culture that has traditionally placed more weight on longevity. Are MNCs in Japan using this image to their advantage? Asked about whether they make a particular effort to appeal to Japanese candidates on the perceived strengths of foreign firms (such as merit-based promotion systems and better careers prospects for women) when advertising vacancies, 59% said they did so. Some 14% think they have no particular advantages over domestic firms in these areas. However, this leaves 27% of foreign firms that are failing to take advantage of these differences when recruiting staff. The potential benefits of doing so are considerable. For instance, the situation for women in Japanese companies is still lagging behind that in global firms in nearly every respect. Only 10% of managers in Japanese companies are women, as compared to 46% in US firms. Female workers in Japan are also more likely than their global counterparts to quit their jobs when they marry, and less likely to return to work after having children. With Japanese women viewing foreign firms as less sexist than domestic companies, and a large pool of underutilised female talent existing in Japan, this would appear to be a big opportunity that is being passed up by a large number of foreign companies. Those same companies could also being be doing more to appeal to male and female Japanese candidates on their perceived strengths in areas such as better opportunities for international career development, performance-based evaluation and, where applicable, brand strength.8 © The Economist Intelligence Unit Limited 2011
  10. 10. Multinationals in Japan: Addressing the human capital challengeConclusionO ne in five multinational companies in Japan reports that they are unsatisfied with their local management-level hires, from one of the most conscientious and dedicated workforces in theworld. Only 54% report overall satisfaction. Clearly there are specific skill and attribute requirementsthat are not being met. Language remains a major issue, with nearly half of respondents describing it as the biggest singleproblem with the Japanese workforce. The other major shortfalls are in management, leadership andcreativity. The reasons for these oft-cited problems are in some senses deeply engrained in Japan’sbusiness culture and education system—issues that MNCs cannot hope to fix themselves (even if there isplenty of debate within Japan on how to do so; particularly when it comes to university education and theway in which large companies recruit graduates). Yet focusing on the negatives ignores the areas in which Japanese hires continue to stand outcompared to their global counterparts—particularly with regard to high levels of technical skills,attention to detail and loyalty. The findings also suggest that the MNCs, for their part, could be doingmore to address those shortcomings that do exist, and to make more of their own advantages to attractbetter quality candidates in the first place.© The Economist Intelligence Unit Limited 2011 9
  11. 11. Multinationals in Japan: Addressing the human capital challenge10 © The Economist Intelligence Unit Limited 2011
  12. 12. Whilst every effort has been taken to verify the accuracyof this information, neither The Economist IntelligenceUnit Ltd. nor the sponsor of this report can accept anyresponsibility or liability for reliance by any person on thisreport or any of the information, opinions or conclusionsset out herein.Cover image - Wai Lam
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