A Clash of Capitalisms: Foreign Shareholders and Corporate Restructuring in 1990s Japan

TLDR

Foreign portfolio investment in 1990s Japan intensified a clash between stakeholder‑ and shareholder‑based business systems. The study examines how foreign investment drives convergence of business systems, institutional change, and corporate governance in Japan. Analysis of 1,108 firms shows that foreign institutional investors replaced domestic shareholders, weakening stakeholder capitalism, prompting downsizing and asset divestiture, but their influence was limited in firms deeply embedded in local financial and corporate networks.

Abstract

This article examines the clash between stakeholder- and shareholder-based business systems resulting from an increase in foreign portfolio investment in the Japanese economy during the 1990s. An analysis of 1,108 firms between 1991 and 2000 shows that as foreign institutional investors, who were more interested in investment returns than in long-term relationships, replaced domestic shareholders, one fundamental pillar of Japan's stakeholder capitalism began to crack. Japanese firms began to adopt downsizing and asset divestiture, practices more characteristic of Anglo-American shareholder economies. The influence of foreigners, however, was weaker in firms more deeply embedded in the local system through close ties to domestic financial institutions and corporate groups. Thus, foreign investors were influential primarily in firms less embedded in the existing stakeholder system. This research contributes to debates on globalization and convergence of business systems, institutional change, and corporate governance systems.