Japanese firms contribute significantly to China’s economy, with many subsidiaries employing thousands of Chinese employees. What managerial approach do these firms use to ensure both employee motivation and wellbeing, and harmonious Sino-Japanese relations? Prof. Keikoh Ryu, Keio Business School, shares his research and reveals the 3 ethical climates necessary to address this. From an interview by Prof. Adrian Zicari, ESSEC Business School, Council on Business & Society.

3 Ethical Climates: How Japanese companies approach responsible people management in China by Professor Keikoh Ryu.

Why is it important to study Japanese firms operating in China?

Studying Japanese firms operating in China is essential for several reasons. Firstly, Japan and China have significant economic ties, with Japan being a major investor in China. Understanding Japanese firms in China is crucial for comprehending this bilateral economic relationship and its impact on the global economy. Secondly, Japanese firms in China represent a blend of Japanese management styles and Chinese work culture. Examining how these firms operate can provide insights into effective cross-cultural management strategies and the challenges of integrating different business cultures.

At the same time, Japanese firms contribute significantly to China’s economy and have a notable influence on global markets. Indeed, studying these firms can offer valuable insights into market trends, consumer behavior, and economic policies in China and beyond. And lastly, studying Japanese firms in China can inform policy-making and strategic decisions both within these companies and at the governmental level. This includes decisions related to trade, foreign investment, and international relations.

In your work, you distinguish between three ethical climates: The Golden Mean style, social responsibility style and friendship-efficiency style. Would you elaborate on those styles and perhaps provide an example of each one? Is there some overlap between those styles?

Yes, the research identifies three types of organizational ethical climates in JFMEs: Golden Mean style, Social Responsibility style, and Friendship-Efficiency style. The “Golden Mean” style of ethical climate is derived from the idea of the golden mean, a concept of moderation in traditional Chinese philosophy, which has been incorporated into Japanese management practices. It combines a focus on balancing friendship and self-interest, team interest and profit. The resulting tension between self-interest and profit on the one hand, and team interest and friendship on the other has been shown to result in an effective leadership style and a positive ethical climate.

The “social responsibility” style of organizational ethical climate also prioritizes self-interest but is infused with a sense of altruism toward others and society at large. It has become increasingly prominent as the Chinese government’s focus has shifted from economic growth to social welfare. While over the course of reform and opening-up, efforts have been made to extricate the management and operations of enterprises from government oversight by focusing on macro-economic regulations, the Chinese government continues to intervene in the economic activities of Chinese enterprises, and it has an outsized impact on organizational ethical climate. At the same time, the tendency of JFMEs to prioritize corporate social responsibility is also a product of the historically fraught relationship between China and Japan, as they aim to overcome the reluctance that some locals may have to Japanese products. Only with a positive image, which comes from assuming greater social responsibility, can JFMEs thrive in the Chinese market.

As for the “friendship-efficiency” style, JFMEs in China tend to act like multinational corporations in terms of their focus on international operations and increased efficiency through localization. At the same time, however, Japanese leaders place great importance on the individual needs of their employees, and positively impacting the organizational ethical climate. In fact, prior research shows that leaders play a pivotal role in influencing the formation and development of an ethical climate, and organizations’ ethical standards are necessarily shaped by the psychological and behavioral makeup of their executives. This includes but is not necessarily limited to leaders’ distinctive approach to problems, the values reflected in their managerial practices, the ethical distinctions they make, as well as the way in which they manage employee expectations. Therefore, to the extent that the management practices of JFMEs tend to emphasize both efficiency and friendship, the “friendship-efficiency” style of the organizational ethical climate remains widespread.

In your work, you also explore the links between each ethical climate and job performance. Could you present your conclusions?

The study suggests that these ethical climates significantly impact job performance and organizational commitment. For example, the Golden Mean style positively influences normative commitment, while the Social Responsibility style enhances corporate image and perceptions of fairness among employees. The Golden Mean style significantly influences normative commitment in JFMEs, with an influence coefficient of 0.75, indicating a strong positive impact​; the style is characterized by a balance between employee satisfaction, team spirit, and fairness in wages. It fosters a sense of fairness and belonging among employees, contributing to a normative organizational commitment. The Golden Mean style blends a focus on team spirit and a caring organizational ethical climate with operational self-interest. This blend typically leads to a stronger commitment to organizational norms and values among employees.

As for Social responsibility style, the evidence in the SEM (structural equation modeling) regression data clearly shows that the observed variables associated with the social responsibility style of organizational ethical climate exert a significant positive impact on normative commitment, as well as on the measurement of the observed variables of social responsibility and organizational commitment. It is clear that the social responsibility style of organizational ethical climate can help JFMEs enhance their corporate image while encouraging normative commitment among employees by instilling in them a sense of fairness.

Moreover, the results suggest that the friendship-efficiency style of organizational ethical climate has a significantly positive impact on normative commitment with an influence coefficient value of 0.31. In addition, the following SEM regression tables reflect the significance of other observed variables, as well as the impact of the endogenous variables on the exogenous latent variables. The management philosophies of JFMEs are necessarily influenced by Japanese culture and are based on the belief that self-interest and efficiency should ultimately be grounded in altruism. As a result, the tendency of Japanese enterprises to place a special emphasis on employee and consumer satisfaction leads to the development of a friendship-efficiency style of organizational climate, under which loyalty is fostered through training, investment and the cultivation of an overall sense of belonging.

Your study took place before Covid-19. Would you imagine that the pandemic changed in anyway?

The COVID-19 pandemic has undoubtedly brought significant changes to many aspects of organizational functioning, including the impact of organizational ethical climates on job performance. The Golden Mean style emphasized balance, including employee satisfaction, team spirit, and fairness in wages, leading to a normative commitment to organizational values. The pandemic’s challenges, like remote work and health concerns, might have amplified the need for balance. Organizations may have had to adapt by placing greater emphasis on mental health, work-life balance, and effective remote work policies. This could lead to a deeper understanding and implementation of the Golden Mean style, potentially enhancing its positive impact on job performance.

The Social Responsibility Style typically focuses on the well-being of employees and the larger community, emphasizing ethical considerations in business decisions. Here, the pandemic heightened awareness of social responsibility, particularly regarding employee health and safety and community support. Companies that actively engage in protecting their employees and contributing to societal needs may have seen increased employee loyalty and motivation, potentially leading to better job performance.

The Friendship-Efficiency Style focuses on fostering strong interpersonal relationships and efficient work practices. As such, the shift to remote work might have challenged the maintenance of close interpersonal relationships, necessitating new strategies for team building and communication. However, the efficiency aspect might have been bolstered as companies streamlined operations and adopted new technologies to cope with the pandemic’s challenges.

According to the results of your study, would you have suggestions or advice to investors in China (coming either from Japan or from elsewhere)?

Firstly, it is important for investors to understand the cultural dynamics in China. Understanding and respecting Chinese cultural and ethical norms is crucial. Investors should be aware that local employees might have different expectations regarding organizational ethics, which can significantly impact their commitment and performance. As mentioned, the study highlights ethical climates like the Golden Mean style, which emphasizes a balance of employee satisfaction, team spirit, and fairness in wages. Investors should consider these aspects when shaping the organizational culture of their ventures in China.

And secondly, it is also necessary to ensure a balanced approach to management, focusing on employee satisfaction, fairness, and team spirit (The Golden Mean). This balance is crucial for enhancing employee commitment and job performance. Given the increasing global focus on social responsibility, investors should prioritize ethical business practices that consider the well-being of employees and the community. This could lead to better brand perception and employee morale. Moreover, develop strategies to foster strong interpersonal relationships while maintaining efficiency. This may include team-building activities, effective communication channels, and encouraging a collaborative work environment.

By focusing on these areas, investors can create a conducive work environment that aligns with local cultural norms and ethical expectations, thereby enhancing organizational commitment and job performance in their Chinese ventures.

Useful links:

• View Prof. Keikoh Ryu’s academic profile and publications
• Read a related article: CSR in Japan and the concept of Yoi-Shigoto
• Discover Keio Business School, Japan
• Apply for the international MBA exchange program.

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