Culture, meaning, and institutions: Executive rationale in Germany and Japan

Abstract

This paper contributes rare primary empirical evidence to one of the major research questions in the social sciences today, namely, the linkage between national cultures and institutional structures of national business systems. Drawing on the work of Redding, we explore the thinking, or “rationale”, of senior executives of leading German and Japanese firms about the ideal structure of the economy. We find considerable variation in rationale across the two countries and in comparison with the shape of the business system of the United States. Our study has implications for our understanding of the meaning of economic activity in different countries and of the evolutionary trajectories of national business systems. Journal of International Business Studies (2009) 40, 859–885. doi:10.1057/jibs.2008.81

Full text

Culture, meaning, and institutions: Executive
rationale in Germany and Japan
Michael A Witt
1
and
Gordon Redding
2
1
INSEAD, Singapore;
2
INSEAD, Fontainebleau,
France
Correspondence:
MA Witt, INSEAD, 1 Ayer Rajah Avenue,
Singapore 138676, Singapore.
Tel: þ65 6799 5253;
Fax: þ65 6799 5399;
E-mail: Michael.WITT@insead.edu
Received: 4 May 2007
Revised: 22 February 2008
Accepted: 25 February 2008
Online publication date: 23 October 2008
Abstract
This paper contributes rare primary empirical evidence to one of the major
research questions in the social sciences today, namely, the linkage between
national cultures and institutional structures of national business systems.
Drawing on the work of Redding, we explore the thinking, or ‘‘rationale’’, of
senior executives of leading German and Japanese firms about the ideal
structure of the economy. We find considerable variation in rationale across the
two countries and in comparison with the shape of the business system of the
United States. Our study has implications for our understanding of the meaning
of economic activity in different countries and of the evolutionary trajectories of
national business systems.
Journal of International Business Studies (2009) 40, 859–885.
doi:10.1057/jibs.2008.81
Keywords: rationale; culture; values; institutions; varieties of capitalism; comparative
business systems
INTRODUCTION
In this paper we provide evidence of fundamental differences in
the ways senior executives of leading German and Japanese firms
conceive of the ideal structure of their economies. In doing so, we
help fill an important empirical gap in our understanding of cross-
national variations in patterns of economic activities.
There is wide recognition of the presence of institutional
variations across nations in the field of international business
(IB), the business literature more generally, and streams of research
in related areas of the social sciences such as socio-economics
and political science. The main thrust of the existing IB literature
on institutional variations across countries has tended to fall
into three broad themes linking institutional variations to the
activities of multinational enterprises (MNEs) ( Jackson & Deeg,
2008): the role of host country institutions in affecting MNE entry
(e.g., Brouthers, 2002; Henisz, 2002; Meyer, 2001); the availability
of resources for MNEs in host countries (e.g., Wan, 2005); and
institutional distance between host and home countries as a
potential source of friction (e.g., Eden & Miller, 2004; Kostova, 1999).
In the business literature more generally, cross-national variations
in institutions and their interactions with firm strategy and the extra-
institutional environment have been a core component of the
research agenda in the literature on co-evolutionwithinorganization
science(e.g.,Lewin&Kim,2004;Lewin,Long,&Carroll,1999;Lewin
& Volberda, 1999; Volberda & Lewin, 2003). Similarly, works on
Journal of International Business Studies (2009) 40, 859 –885
&
2009 Academy of International Business All rights reserved 0047-2506
www.jibs.net

differences in institutional structures and attendant
variationinoutcomeshaveoccupiedanimportant
place in the literature on corporate governance
(e.g., Aguilera, Filatotchev, Gospel, & Jackson, 2008;
Aguilera & Jackson, 2003; Ahmadjian & Robbins,
2005; Buck & Shahrum, 2005; Crossland & Hambrick,
2007; Fiss & Zajac, 2004; Jackson, 2005).
In the related social sciences, research on institu-
tional variations across nations has flourished as
the ‘‘comparative business systems’’ approach in
socio-economics and the ‘‘varieties of capitalism’’
literature within comparative political economy.
One key thrust has been extensive research in
identifying and describing the key dimensions of
institutional variation across different capitalist
economic systems (e.g., Fligstein, 2001; Hall &
Soskice, 2001; Lazonick, 1991; Orru
`, Biggart, &
Hamilton, 1997; Redding, 2005; Whitley, 1999).
Another has been an increasing concern with the
implications of these variations in terms of out-
comes, at the level both of the economy (e.g., Hall
& Soskice, 2001; Quack, Morgan, & Whitley, 2000;
Rueda & Pontusson, 2000) and of the firm,
especially in the context of innovation patterns
(e.g., Boyer, 2004; Lehrer, 2000; O’Sullivan, 2000;
Vitols, 2002). A growing number of works have
further sought to shed light on processes of
institutional change within national institutional
configurations (e.g., Streeck & Thelen, 2005; Thelen,
2004; Vogel, 2006; Witt, 2006).
While most of these works focus entirely on
institutional variations, a number of them also
suggest that a full understanding of their origins
and evolution requires an in-depth understanding
of cultural differences. Hall and Soskice (2001: 13)
note that although much published analysis
proceeds from formal institutions onwards,
something else is needed to lead the actors to coordinate on
a specific equilibrium and ywhat leads the actors to a
specific equilibrium is a set of shared understandings about
what other actors are likely to do, often rooted in a sense of
what it is appropriate to do in such circumstances.
Their conception of culture is of ‘‘a set of shared
understandings and available ‘strategies for action’’’
(Hall & Soskice, 2001: 13) accumulating from
experience in a particular environment.
Fligstein (2001), inspired by Bourdieu (1977)
among others, presents a theory of ‘‘fields’’, or
organized social spaces in which collective actors
(such as CEOs and their board colleagues) produce
a system of dominance in their space. This entails
the production of a local culture that defines social
relations in such a way as to legitimate the power
structure. The ‘‘conception of control’’ that results
derives from the cognitive elements within that
culture that define social relations, and give mean-
ing to action. The end result is that
ideas of market orders are embedded within a particular
society and a government and reflect the society’s peculiar
history. The dominance of different groups in society means
that those rules tend to reflect one set of interests over
another ythere are national styles of ownership and
regulation. (Fligstein, 2001: 16)
Guille
´n (1994), in his comparative study of organi-
zational paradigms, identifies a key element as
‘‘elite mentalities’’. He argues that these enduring
modes of thought are interpretations of how the
world works, and that they dispose a group to
accept one particular organizational solution over
others. He makes a distinction between such a
mentality or ‘‘spiritual disposition’’ and an ideol-
ogy, the latter being more a legitimation of a
position of power (cf. also Mannheim, 1936). But
he argues that the two are connected in practice,
and a prevailing mentality will predispose a group
to select a particular way of expressing authority,
citing a correlation between Catholic humanism
and the human relations paradigm and its contrast
with Protestant inclinations towards scientific
management.
Whitley’s (1999) typology of business systems
also pays tribute to the role of shared beliefs about
authority, trust, and communitarian ideals, in the
forming of the six principal types of business
system he defines. Although he sees trust and
authority relations working as institutions, his
narrative accounts show the roles of cultural and
historical forces in their emergence.
Despite this recognition of the importance of
‘‘shared understandings’’, ‘‘available strategies of
action’’, ‘‘ideas of market orders’’, and ‘‘elite men-
talities’’, empirical work exploring these aspects of
national culture in depth is virtually non-existent,
with the notable exception of Guille
´n’s (1994) work
on models of management. There is a body of work
describing senior executive views about firm strat-
egy, governance and management ideals, social
responsibility, and environmental challenges (e.g.,
Calori, Johnson, & Sarnin, 1994; Hitt, Dacin, Tyler,
& Park, 1997), but there is a shortage of empirical
description of their views as to how economic
action should be conducted in ways appropriate to
the context of a specific society.
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
860
Journal of International Business Studies

The objective of this paper is to help fill this
empirical gap in the literature through an ethno-
graphic comparative study of executive rationale,or
the thinking of senior executives, about the ideal
shape of the economy in Germany and Japan. In
exploring this issue, we focus on thinking about the
institutional structure surrounding the firm, which
corresponds to the middle layer in Redding’s (2005)
business system model. An exploration of rationale
about the top layer of that model – which speaks to
questions of ownership including corporate gov-
ernance, networking among firms, and approaches
to management – is outside the scope of this paper.
Our findings suggest considerable differences
between German and Japanese executive rationale
about the ideal shape of the economy. These
conceptions also remain different from institu-
tional practice in the United States, with concomi-
tant implications for the ongoing debate on
institutional convergence.
In the sections that follow, we begin by laying out
the theory underlying our research. After a descrip-
tion of our data and method, we present our results.
We conclude with a discussion of the implications
of our findings for work on cross-national institu-
tional variations and research in the field of IB.
THEORY
The question of how culture and institutions link
up is not unique to the study of comparative
capitalism. Indeed, it is arguably one of the biggest
open questions in the social sciences today, with a
number of major research streams independently
arriving at essentially the same question. In addi-
tion to the area of comparative business systems,
which we have already addressed in the introduc-
tion by way of framing this paper, three streams in
particular are of relevance: convergence; economic
history; and culture and institutions. We review
these in order before laying out the specific theo-
retical foundations on which we have built our study.
Convergence theory
The original convergence theory (Kerr, Dunlop,
Harbison, & Myers, 1960) was written at a time
when the ascendance of Western-style, and espe-
cially the US, applied rationality in finance,
organizing, production and marketing seemed
assured. It seemed set to have the rest of the world
emulate it or fall under its influence. But Kerr
(1983) later published a highly significant revision
to the core idea, saying that convergence seemed to
have taken place to a degree, but had then stopped,
and that the converging systems then ran along
parallel lines at a distance from each other. This
revision came about because the earlier theory had
misjudged the significance of the culturally differ-
ent structures of meaning lying below economic
behavior. As he explained:
Convergence, overall, slows down as the imprint of
industrialism brings substantial uniformity in the areas
where it has dominant influence; as convergence in the
areas subject to bipolar solutions develops slowly; and as the
limits of conduct dominated by beliefs, not subject to
convergence, at least in the short run, are reached yThe
most impenetrable barriers to convergence are the power
and tenacity of the elites that lead the process, the
inevitable eternal conflict over the highest economic and
political goals, and the ingrained beliefs of the people. The
second of these is probably the most persistent among, but
also within, nations. (Kerr, 1983: 87)
At the time of writing Kerr was pointing to the deep
ideological divide between the communist and
capitalist worlds, and it has to be acknowledged
that that divide disappeared in large measure as the
Berlin Wall came down, bringing with it widespread
acceptance of capitalism as economic system and
thus arguably, on a fundamental level, a degree of
convergence.
Yet differences remain salient, even among
capitalist countries, at both the cultural and the
institutional levels. At the cultural level, a common
empirical finding has been the occurrence of cross-
vergence (Ralston, Gustafson, Cheung, & Terpstra,
1993; Ralston, Holt, Terpstra, & Yu, 1997), which
takes place
when an individual incorporates both national culture
influences and economic ideology influences synergistically
to form a unique value system that is different from the
value set supported by either national culture or economic
ideology. (Ralston et al., 1997: 183)
Similarly, empirical studies on institutional conver-
gence have identified a general pattern of hybridi-
zation, in which institutions transferred from other
institutional contexts are adapted and reconfigured
in the process of fitting them into the existing
institutional structure (Aguilera & Jackson, 2003;
Djelic, 1998; Pieterse, 1994; Vogel, 2003). Though
definitional inaccuracies lead to a tendency in the
literature to overestimate the occurrence of cross-
vergence (Witt, 2008) and possibly also of hybridi-
zation, the available evidence suggests that a high
degree of variety both in culture and in institutions
remains manifest and that different types of
business systems are competitive with each other
in world markets. It is this variety that needs to be
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
861
Journal of International Business Studies

explained, and in simple terms its basis is now
conceptualized as either (a) different philosophies
about the purposes and methods of economic
action (e.g., Biggart & Delbridge, 2004; Estevez-
Abe, Iversen, & Soskice, 2001; Fligstein, 2001;
Guille
´n, 2001; Sorge, 2005), and/or (b) different
equilibria in the combining of institutions (e.g.,
Amable, 2003; Crouch & Streeck, 1997; Greif, 2006;
Streeck & Thelen, 2005).
Economic history
Economic history takes many approaches to the
study of how societies emerge differently, and the
details of the various schools are beyond the scope
of this paper. Many scholars present accounts that
capture the full complexity of the process of
emergence (e.g., Braudel, 1982; Jones, 1981;
Landes, 1998; Marx, 1967; Toynbee, 1957). Others
might discern a particular theme within the com-
plexity, the classic example being Weber’s (1930)
explanation of the role of the Protestant Ethic. In
this category also lies Greif’s (2006) analysis of the
influence of individualism–collectivism, or the
findings on egalitarianism of Siegel, Licht, and
Schwartz (2007), the study of emerging political
structures by Moore (1966), or of capitalism per se
by James and Thomas (1994).
Of special interest because of their widespread
impact are (1) the work of Weber as a pioneer in
socio-economics describing the interactions of
ideal and material processes, and (2) the work of
North in a lifetime study of institutions, now
coming to terms with the additional and crucial
role of culture. We shall concentrate on these two.
The pioneering work of Weber (1922, 1927, 1930,
1964) in socio-economics is both rigorous and
diverse, but may be summarized as an exploration
of the penetration of Western societies by a distinct
and peculiar form of rationality, something also
noted by Gellner (1992: 136) as a ‘‘way of life’’, and
by Stinchcombe (1990: 313) as an ‘‘achievement of
civilization’’. This rationality takes the form of
‘‘scientific’’ thinking applied in the economic
realm, and rests on responses such as calculation
and respect for rational analysis, concern with
evidence, planning, organizing, standardizing,
and specializing. Such an organizing mentality is
not an invention of Western civilization, but was
built into the fabric of Western societies more
completely than in other cases, and at a time when
it would coincide with the development of science
and technology and the creation of new political
orders to disperse power in stable conditions. It
also, in its current forms, expresses distinct Western
heritages in language and modes of implementa-
tion. One of its expressions is the ‘‘science’’ of
management and organization, visible in the
‘‘instrument’’ of bureaucracy.
In order to appreciate the variety of possible
mental landscapes, and the societal origins of such
variety, it is necessary to examine more closely the
way the process works between the forming of a
relevant worldview and its connecting with action.
To do so Weber first put to one side a feature he
termed formal rationality. This represents calculation,
and because of the logics of mathematics and
algebra, it may be taken as a universal. He then
considered the other aspect of rationality he termed
substantive rationality. This is more directly connected
to action, to the substance of things, and its original
German adjective is ‘‘materiale’’. It is nevertheless a
mental state conditioning choices for behavior. It is
Schumpeter’s (1942: 130) ‘‘choosing mentalities’’,
which in his view are the result of a societal process
of refining out of options and shaping of choices.
Weber’s (1922: 85) definition of it is
the degree to which the provisioning of given groups of
persons with goods is shaped by economically oriented
social action under some criterion (past, present, or
potential) of ultimate values, regardless of the nature of
those ends.
We are here in the territory of decisions affecting
who gets what and why. It is the field in which the
merits and demerits of favoring shareholders over
others are weighed, the field of welfare philoso-
phies, of beliefs about employment and the sharing
of reward, of the ideals governing competition, of
social responsibility, of how a society’s economy
should function.
Weber introduced a further important distinction
to separate the value component, which is con-
cerned with ends, and the instrumental, which is
concerned with means, a crucial defining aspect of
the latter being deliberate planning. Thus: why and
how? Weber saw clearly that consciously planned
action that is instrumentally rational (zweckrational )
does not account for all economic behavior. Much
happens that is also value-rational (wertrational),
such as the traditional, the emotional, and the
ethical. The how cannot be separated from the why.
This brings into play the question of meaning – the
essence of culture (Berger & Luckmann, 1966;
Geertz, 1973). What it means to run a company –
when fully explored – reveals a mental landscape
full of answers to the question why?
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
862
Journal of International Business Studies

One final point, from Weber (1920), is the
acknowledgement that these ends and means do
not hold a monopoly over the shaping of action, as
the crucial feature of ‘‘interests’’, seen as economic
self-interest, will always intervene. Although Weber
assigned primacy to interests, in determining
action, and saw such interests as relevant to both
ideal and material issues, he nevertheless acknowl-
edged that ‘‘the world views, which were created by
ideas, have very often acted as the switches that
channeled the dynamics of the interests’’ (Weber,
1920: 280, cited in Schluchter, 1981: 25). The world
views, then, influence the channeling of the flow
of action. The why and the how account for much of
the what.
The theory of institutions as the basis for
economic growth owes much to the work of North
in economic history (North, 1990, 1994). In this a
society’s economy is seen as supported by a
scaffolding of order, based on ‘‘rules of the game’’,
and adapted to the evolution of such rules in a
coevolutionary process (cf. Lewin & Volberda,
1999; Volberda & Lewin, 2003). In more recent
thinking, North (2005) has incorporated culture
into his schema, and has done so because of two
shortcomings he notes in economics: it is not
designed to deal with change; and ‘‘understanding
is a necessary prerequisite missing in the econo-
mist’s rush to model economic growth and change’’
(North, 2005: ix), because as a theory of choice it
neglects to deal with the context within which
choice occurs. In this view, the uncritical accep-
tance of the rationality assumption is ‘‘devastating
for most of the issues confronting social scientists’’
(North, 2005: 5) and a major stumbling block to
progress. North is further unequivocal in stating
that
the immense variation in the performance characteristics
of societies makes clear that the cultural component of
the scaffolding that humans erect is ycentral to the
performance of economies and polities over time. (North,
2005: ix)
In his discussion of this cultural component he sees
it as accompanying a genetic component, and a
religious heritage that underpins the inference
structures of people. There is, in his view, a cultural
heritage of cumulative learning transferred through
generations (for a recent treatment of which – seen
as social axioms – see Bond et al., 2004), and
the institutionalizing of social life is achieved
by the attempts to reduce uncertainty within
the constraints of that heritage. The culture
explains – in a way that can be communicated –
what the world ‘‘is’’, and the institutions define
what people do about it. The great variety of
outcomes derives from the manner of this happen-
ing: who makes the rules; for whom are they made;
what are their objectives? Rational homo oeconomi-
cus may not be all that visible in the answers.
For North, the notion of intentionality stems
from the fact that human evolution, unlike that in
the animal world as seen by Darwin, is heavily
influenced by people acting consciously for a
purpose. To have intentions is to have deliberated
over why to do something, and to have thought
about the consequences of the behavior. This is not
to say that intentions and outcomes are neatly
aligned, as in reality they are in constant tension. It
is more simply to say that if you want to know why
people act, you should analyze their intentions as
they themselves conceive them. Within such con-
ceptions – and perhaps not easily expressed – lie the
informal norms that derive from the genetic
heritage. An example here is the tendency in homo
sapiens to behave cooperatively in the interests of
survival through concerted action. Equally potent,
and traceable to survival instincts, is territoriality,
the two primal drives balancing each other.
Culture and institutions
The theory of culture developed by Berger and
Luckmann (1966) argues that the process of socially
constructing reality is reciprocal between people
and their surroundings. Three processes occur:
externalization is when the person goes out to
experience the surrounding world and interacts
with it; objectivation occurs when sense is made
of that world via description; internalization
results when the socially constructed reality is re-
appropriated into the consciousness of individuals
and becomes their own reality. So, as society is a
product of people, people are themselves products
of society.
Primary socialization occurs in terms of basic
rules of membership of a human group. Secondary
socialization occurs as pluralism leads to differen-
tiation of action, and new social spaces emerge with
their own internal sets of meanings. In this view,
institutions form when habits and routines become
fixed. As human conduct comes under the control
of the institutions, the predictability of behavior
increases, and with it the potential for cooperation.
Behind the routines of the institutions lie ideals
and values. This is because the routines are
essentially controlling of behavior, and as such
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
863
Journal of International Business Studies

need to be seen as legitimate. The habits and
routines embodied in institutions were intended to
serve a purpose, and the purpose remains implicit
in the action, the latter being fixed in either rules
or roles. In a stable society, overriding ideals about
the meaning of behavior keep the whole structure
in balance (Sorge, 2005), with the accumulated
meanings allowing people to ‘‘make sense of’’ their
surroundings.
Theories of culture that focus on the construction
of shared meaning (e.g., Geertz, 1973) all pay
tribute to the causal significance of such mental
structures in accounting for societal behavior,
usually acknowledging the reciprocal nature of
such determinacy. What remains as a major
challenge in comparative studies of institutions is
the clear tracing of the patterns of this determinacy
(DiMaggio & Zukin, 1990). Our intention in this
paper is to contribute to efforts at such tracing.
The study of rationale among key economic actors
In the business system model proposed by Redding
(2005) (Figure 1), the lower set of three boxes is
designed to capture the description of ‘‘meaning’’ in
a society. This concept is fundamental to the
understanding of culture, and reflects the ‘‘social
construction of reality’’ perspective of Berger and
Luckmann (1966) and the echoing of Weber by
Geertz (1973: 5) in saying that ‘‘man is an animal
suspended in webs of significance that he himself
has spun’’. This viewpoint leads logically to a
science of interpretation in the understanding of
OWNERSHIP MANAGEMENT
NETWORKS
CAPITAL SOCIAL
CAPITAL
HUMAN
CAPITAL
RATIONALE AUTHORITYIDENTITY
Evolution and
growth of
forms of
order
Conditioning
by
values and
norms
Adjustment of
values and
norms
by experience
IDEATIONAL
LOGICS
(EXTERNAL)
MATERIAL
LOGICS
Structures and systems for coordinating economic behavior
and exchange. Firms and managing
Institutions: the humanly devised constraints that shape social
interaction, and provide a hospitable environment for
cooperative solutions to complex exchange. Forms of order
Culture: values, norms and socially constructed realities
that act as the bases for the societ
y
’s forms of order
Impact of
external ideas,
norms, values,
on features
and the
interaction of
features
Impact of
costs and
technology
on features
and the
interaction of
features
M E A N I N G
O R D E R
C O O R D I N A T I O N
STATE
KEY
HISTORICAL
EVENTS
Shaping of
patterns of
economic
exchange
behavior
Figure 1 Business system model, following Redding (2005).
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
864
Journal of International Business Studies

the culture effect, and it is just such an interpreta-
tion that is the basis of the research described in
this paper.
In the Redding model, three major categories are
used to capture the essence of culture in a society.
In simple terms these are
(1) the pattern of ‘‘reasons for’’ action, under the
overall rubric of rationale, seen essentially as sets
of purposes, intentions, or ends (and thus
North’s ‘‘intentionality’’) and their associated
sets of legitimate and appropriate means;
(2) the way in which a society makes sense of
identity and belonging in the lives of indivi-
duals; and
(3) the way in which a society makes sense of
authority.
For the purposes of the research reported here we
are concentrating just on the first of these three
components – rationale – and its role as a reciprocal
determinant in shaping institutions. But we
acknowledge in full that such focused attention
should not conceal the fact of extensive intercon-
nections with the other two major cultural ele-
ments shaping meaning. We choose to concentrate
on rationale because of the paucity of research
addressing the topic, in contrast with a very
large literature in cross-cultural studies addressing
identity through such variables as ‘‘collectivism’’,
and addressing authority via other variables describ-
ing values surrounding power (for a review of works
using Hofstede’s constructs of individualism/
collectivism and power distance, see Kirkman,
Lowe, & Gibson, 2006; cf. also House, Hanges,
Javidan, Dorfman, & Gupta, 2004; Trompenaars,
1998).
Building on the work of Weber as already
discussed, rationale encompasses the conceptions
about economic action in a society. We leave aside
the formal rationality carried in mathematics and
algebra as a universally available tool (albeit with
societally different proclivities to use it). We then
concentrate on substantive rationality, seeing it as
‘‘using criteria to choose courses of action’’. Within
this category, in order to keep clear the important
distinction, in both thought and action, between
ends and means, we then separate those two into
value rationality (ends), and instrumental rationality
(means). Our empirical work on the ideal shape of
the economy is an examination of the perceived
ends and preferred means for economic behavior in
specific societies.
In the center of the model is the layer of societal
order, the institutions. These are seen graphically
by North as society’s scaffolding (2005), the ‘‘rules
of the game’’ (1990). They have the function of
constraining and channeling action, but they also
foster the predictability of behavior and thereby
permit longer-term deliberation and commitment.
They work via both rules and roles. The Redding
model treats these by analyzing them over the three
categories that, while not exhaustive of the entire
institutional structure, are arguably the ones most
necessary to economic life:
(1) capital, and especially its sourcing and alloca-
tion;
(2) human capital, including knowledge, skill, and
the organizing of labor markets; and
(3) social capital and the workings of both personal
and system trust.
The model further incorporates an important role
for the state, and thus politics, in shaping and
maintaining the institutional layer, as well as the
formative impact of key historical events.
We recognize that the process of influence
running between the cultural layer of meaning and
the institutional layer of order is not one of simple
determinacy, but contains a reciprocal flow of
forces and is complex in the patterning of determi-
nacy. It is influenced by external features such
as new technology, or price changes, or market
structures changing, as well as the diffusion of new
paradigms of thinking across national boundaries.
The study of rationale is the study of people’s
‘‘reasons for’’ action. Our interest is in knowing how
the shaping of the institutional framework for
economic order in a society is affected by the
culturally determined sets of meaning in the
rationale. The enquiry is in company with a
number of research initiatives to investigate such
fundamental questions. Biggart and Guille
´n (1999:
726), for instance, discuss firms as expressions of
social order ‘‘imbued with the patterns of meaning
of the larger society in which they find them-
selves’’. These different ‘‘interpretive schema[s]’’ are
also pointed to by DiMaggio and Zukin (1990) in
their analysis of the social organization of econom-
ic life, when they advocate three research probes
into this territory: how do actors define their
interests; how does a society constrain the indivi-
duals pursuing those interests selfishly; and how do
people coordinate to mobilize their capacity for
cooperation, and to what ends?
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
865
Journal of International Business Studies

In our study, we focus on the rationale espoused
by senior executives. The potential for firms to
influence the shape of the institutional structure
of economies is well established in the business
literature and in related social sciences (e.g.,
Boddewyn & Brewer, 1994; Culpepper, 2001; Hall
& Soskice, 2001; Hirschman, 1970; Lewin et al.,
1999; Mares, 2001; Oliver, 1991; Pfeffer & Salancik,
1978; Van de Ven & Hargrave, 2004; Vogel, 2006;
Witt & Lewin, 2007; Wood, 2001). Within firms, we
focus on the rationale of senior executives, for three
reasons. First, of all the actors in the arena of
business decision-making, senior executives seem
to occupy the most crucial role in comparison with
other identifiable roles. This is because the decision
to allocate resources, and to change the organiza-
tion – as when strategic commitments are decided
upon – usually starts and ends with the manage-
ment board. Second, and related to this, is the duty
of senior executives serving on management
boards, in normal circumstances, to represent an
achieved consensus across a wide field of constitu-
ents and interested parties. Third, and analyzed
from the standpoint of the complex adaptive
systems theory that underpins our analysis, is the
contention that the most appropriate unit of
survival in such a system is the business unit
(Beinhocker, 2005): that is, the kind of strategic
business unit that senior executives become respon-
sible for, even if they do so across several such
units. It is within such units that the processes
of design experimentation occur and become
tested against similar competing units, in the
search for higher levels of control, predictability,
and growth.
DATA AND METHOD
Country selection
In this study we explore the rationale of senior
executives of major firms in two countries, Germany
and Japan. These two countries make for a good
starting point for a comparative explanation of
executive rationale because they are two of the
most prominent exemplars among advanced indus-
trialized nations of non-liberal market economies
(also known as ‘‘coordinated market economies’’,
or CMEs) (cf. Hall & Soskice, 2001; Streeck &
Yamamura, 2001, 2003).
We choose to focus on CMEs in this paper
because an analysis of executive rationale in them
is, in our view, more likely to produce important
new insights than an exploration of executive
rational in liberal market economies (LMEs), such
as the United States. LMEs achieve order in the
economy through markets, and especially the price
mechanism (Hall & Soskice, 2001). Their institu-
tional structures typically aim to support the ability
of markets to function, which suggests a limited
role for executive rationale in institutional design
beyond a basic consensus in favor of following
market forces. By contrast, CMEs establish order
through elaborate institutional structures that are
created through political processes and thus are not
necessarily market-conforming (Hall & Soskice,
2001). Consciously or unconsciously, these political
processes will be guided by mental models of what
the economy should look like (North, 2005). This
suggests that actors involved in the shaping of
institutions in CMEs, such as senior executives, are
likely to hold mental models of the ideal shape of
the economy that deviate from the market-oriented
orthodoxy likely to be dominant in LMEs. In other
words, while an analysis of executive rationale in
LMEs is unlikely to produce many surprises – the
basic logic of markets is well developed in the
economics literature – an exploration of executive
rationale in CMEs may reveal important new
information about the underlying causes of variety
in capitalism.
Qualitative research of the kind undertaken in
this paper typically trades off sample size in favor of
depth of detail (King, Keohane, & Verba, 1994).
Counter to popular perception, single cases can
generate important learnings (e.g., Guthrie, 1999;
Redding, 1990; Rohlen, 1974). At the same time,
comparisons involving two or more cases often
afford additional insights (King et al., 1994; Ragin,
1987). In the present case, for instance, studying
executive rationale in more than one CME could
illustrate not only how senior executives in each
country envision the ideal shape of the economy,
but also how similar or different these visions are
across countries. Conscious also of article length,
we consequently focus on two cases, Germany and
Japan. Among the CMEs, these countries stand out
as the two largest and arguably most important
economies, as well as a prominent pairing in
academic research on the contrasts between
CMEs and LMEs (e.g., Dore, 2000; Lewin & Kim,
2004; Streeck & Yamamura, 2001; Witt, 2006;
Yamamura & Streeck, 2003). Such pairing has often
been done because of their perceived similarities
(e.g., Albert, 1993; Boyer, 1997; Dore, 2000), and
this makes the research about their differences
more challenging.
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
866
Journal of International Business Studies

Data collection
Data collection involved ethnographic interviews
(cf. Spradley, 1979) with senior executives of major
firms, as used in Redding’s (1990) ethnography
of ethnic Chinese business leaders in East Asia.
These interviews took place between June 2002
and April 2003. Overall, we interviewed 34 senior
executives, 17 in each country. Appendix A lists our
interviewees.
All interviewees were male, which is consistent
with the virtual absence of females from top
management in Germany and Japan. For example,
data collected by the German government indicate
that in the fourth quarter of 2002 (approximately
the time of our interviews) only 1% of the members
of the management boards of Germany’s 87 largest
public corporations were women (Loick, 2005). For
Japan, a 1998 report from Corporate Women
Directors International showed that women held
only 0.2% of corporate board seats of 2396
companies listed on eight Japanese stock exchanges
(Corporate Women Directors International, 1998).
Our definition of ‘‘senior executive’’ varied
slightly to allow for the difference in governance
structures between Germany and Japan. In Germany,
we defined senior executives to include active or
recently retired management and supervisory board
members. In Japan, we defined senior executives
as active or recently retired management board
members. Key rationale for including recently
retired executives in the sample is that, in both
countries, these individuals tend to continue to
play influential roles in shaping economic and
political life for a substantial number of years. The
OECD (2006) provides a rough indication of the
possible scope for continued involvement by
estimating that in 2004 German males at the
average effective age of retirement could on average
expect to spend 18.9 years in retirement, and their
Japanese counterparts, 14.8 years.
In Germany, retired board members are often
active on the supervisory boards of their own or of
other corporations. They are thus in a formal
position to advise and to influence corporate
strategy. In Japan, retired board members often
stay on in the company as advisors. While this gives
them no formal role in influencing corporate
decision-making, the persistence of respect for
seniority (Witt, 2006) means the present senior
management team will take their input into
account. Furthermore, retired senior executives in
both countries often occupy positions in bodies
relevant to institutional change processes, such
as employers’ associations and government
committees.
In Germany, we defined as ‘‘major firms’’ those of
a size large enough to qualify in principle for a
listing in the MDAX index of the Frankfurt stock
exchange, which consists of the 100 largest listed
corporations. This was regardless of whether the
firm was actually listed or privately held. In Japan,
‘‘major firm’’ referred to firms belonging to one of
the six major business groups (Westney, 2001) and
firms of similarly large size.
We obtained access to our interviewees through
existing personal contacts and referrals. As is typical
for this type of qualitative research (e.g., Redding,
1990; Uzzi, 1997), the resultant sample is neither
random nor complete. This implies a risk of
sampling bias. While we cannot rule out this
possibility, we sought to minimize it by obtaining
our referrals through multiple, mutually indepen-
dent points. We further note that the company
backgrounds of our interviewees are well distribu-
ted among major industries in countries, thus
reducing the risk that our findings may be specific
to certain industries or sectors. In addition, as will
become clear later, our analytical methodology
provides a certain level of robustness against outlier
opinions by using the mode rather than the median
or mean to identify key categories in the executive
mindscape.
We obtained data from our samples of executives
through in-depth ethnographic interviews. The
interviews were semi-structured in format (cf.
Redding, 1990; Spradley, 1979): that is, they
combined a fixed interview schedule with flexible
order and leeway for interviewees to introduce, and
ourselves to further pursue, aspects not included in
the interview schedule. This format is particularly
useful for the kinds of exploratory research under-
taken here because it allows for the discovery and
pursuit of issues and ways of thinking not antici-
pated by us. The interview schedule, which is
reproduced in Appendix B, addresses two large
topic areas, namely the purpose of the firm and the
ideal shape of the economy. In this paper, we report
our findings concerning the latter.
In line with precedent (Redding, 1990), wherever
possible, we arranged for interviews to take place
over lunch or dinner and to involve pairs of
executives of similar status. The lunch or dinner
setting was selected to allow interviewees to discuss
in a relaxed atmosphere, with dinner offering
the additional benefit of taking place without
time pressure, as executives had no appointments
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
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Journal of International Business Studies

following dinner. Pairing the interviewees has the
advantage of deepening the discussing by allowing
executives to play off each other’s thoughts.
Interviewing two executives together has the
potential drawback of introducing conformity
pressures into the conversation that could induce
interviewees to express agreement with the state-
ments of the respective other interviewee even
when their views actually differ. We eliminated one
prominent source of such conformity pressures,
status differentials, by matching the status of paired
interviewees, taking into account dimensions such
as formal position, size of firm, and eminence in
the business community. During the interviews, in
line with ethnographic practice, we looked for
indications of conformity pressures, such as body
language; we found none that would have con-
cerned us. Further evidence allaying concerns
about conformity pressures emerged during the
analysis and will be discussed in the next section.
In Germany, interviews on average lasted about
1 h in the case of interviews with one individual
executive and about 1.5 h in the case of pairs of
executives. In Japan, the respective durations were
1 h and 2 h on average. These times are exclusive of
the time spent at the beginning and end on matters
such as greetings, introductions, and explanatory
remarks about the research project.
All interviews were recorded with the consent of
the interviewees, with the understanding that
interview contents are not for attribution. All
interviews in Germany were conducted in German.
In Japan, all interviews except one were conducted
in Japanese. The one exception was conducted in
English and involved an executive with extended
education in the United States; the choice of
English as the interview language was his.
Data analysis
Analysis of our data entails interpretative content
analysis of the interview data to identify the key
elements of the mental landscape of our intervie-
wees. In order to avoid loss of meaning in
translation, all analysis was performed on trans-
criptions in the original language in which the
interviews were conducted. We extracted all pro-
positions (i.e., statements with meaning related to
the research topic) contained in these transcrip-
tions. Given the exploratory ethnographic nature
of this study, we did not a priori impose coding
categories (labels to classify propositions with
shared meaning), but followed established
practice in ethnographic content analysis of letting
the coding categories emerge (Altheide, 1987;
Krippendorff, 2004; Redding, 1990). Overall, we
identified about 300 coding categories for the
German sample and about 470 categories for
the Japanese sample.
In non-technical terms, this means that we did
not approach the interviews with a preconceived
list of ‘‘buckets’’ (coding categories) into which to
sort the views of the interviewees (as expressed in
the propositions), but rather compiled two lists of
such ‘‘buckets’’ – one for Germany, one for Japan –
from the propositions, adding new ‘‘buckets’’ as we
encountered propositions requiring them. For
example, the proposition ‘‘the spread in income
levels in society should be as small as possible’’
might be assigned to a coding category called
‘‘equality of outcomes’’. Had we analyzed the
interviews on the basis of a preconceived list of
coding categories and, for some reason, not
included ‘‘equality of outcomes’’, we would have
missed the message contained in the example
proposition (and, it turns out, in our interview
data). We refined each list of ‘‘buckets’’ (one list
for Germany, one for Japan) by going over it
repeatedly to combine similar ‘‘buckets’’ where
appropriate.
We used salience of these categories among the
executives, as expressed in the number of execu-
tives referring to them, to determine the core
elements in the mental landscapes of both groups
of executives. Categories referred to by fewer than
40% of the interviewees were generally excluded,
unless their inclusion was essential for interpreta-
tion of the results. In the figures representing the
mental landscape of the interviewees, introduced
in the Results section, salience is expressed in terms
of size of the circle for a given category, with larger
size indicating higher salience, that is, a greater
number of senior executives each having offered at
least one proposition that falls in the given
category.
In addition, we assigned to each proposition a
value ranging from 3to þ3. A value of 0 denotes
a neutral statement about the proposition in
question, such as ‘‘I do not care whether there are
unions or not’’. A value of 1 is assigned to values
offering tentative support of a proposition, such as
‘‘I think there should be unions’’. A value of 2
denotes unequivocal support, such as ‘‘We need
unions’’. A value of 3, finally, is assigned to
propositions indicating that the speaker has under-
taken an action concerning them, such as ‘‘I
founded a union’’. Negative values are assigned
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
868
Journal of International Business Studies

for negating statements, following the same under-
lying logic. These values were averaged by category
to obtain a sense of the degree to which a given
category had positive or negative affect in the mind
of the interviewees. In the figures representing the
mental landscape of the interviewees, affect is
expressed in terms of the shading of the circle for
a given category, with lighter shading indicating
more positive affect.
In the figures, we further use lines to indicate
conceptual linkages as they emerge from the data.
In some cases, we find several categories to be
conceptually close and mutually related, forming a
sort of conceptual cluster. In an effort to reduce the
complexity of the figures, we use thick ovals around
the categories in these clusters to indicate that all of
the categories are linked with one another. Where
the data suggest that an outside category is linked
with all of the elements of the cluster, we draw one
line from that other category to the thick line
around the cluster. By contrast, where the data
support the presence of linkages from an outside
category to one or several, but not all, of the
categories inside a cluster, we draw individual lines
between the respective categories.
Coding reliability was verified by having research
assistants with the requisite language skills, but no
prior role in coding of the data, extract propositions
and assign categories to them. Each research
assistant received about 1 hour of explanations of
the coding process and a list of coding categories.
Each research assistant then coded a random
sample of the interview transcriptions, amounting
to 5% of the total length of all transcriptions of the
data from the respective country. For the German
data the percentage of intercoder agreement was
91.5%. This compared with an expected agreement
of 7.2% by chance alone. Cohen’s kappa (Cohen,
1960) is 0.91, well above the most stringent
threshold proposed in the literature of 0.75–0.80
(Banerjee, Capozzoli, McSweeney, & Sinha, 1999;
Popping, 1988). For the Japanese data, the percen-
tage of intercoder agreement was 86.4%, compared
with an expected agreement of 8.0% by chance
alone. Cohen’s kappa is 0.85, again well above the
threshold.
In analyzing our results, we revisited the question
raised in the previous section of possible confor-
mity pressures between paired interviewees and
their impact on our results. Our analysis suggests
that such pressures, if any, are likely to have been
minor, and insignificant for our results. First, we
find that paired interviewees vary in their expressed
views. In numerous instances, only one executive
refers to a given category, or the two executives
have altogether different views. Second, we recal-
culated our results under the worst-case assumption
that each time two executives interviewed together
both made reference to the same category, only one
of them really had a view on it, while the other
mentioned it only to conform. We find that the
categories we identified as most salient still remain
the most salient, that is, none of them would be
dropped from the figure. There would be only three
additions to the figures – one for Germany and two
for Japan – all of them just barely reaching the
lower threshold for being counted as core elements
in the mental landscapes.
RESULTS
Germany
Figure 2 shows the key elements in the thinking of
German senior executives about the appropriate
shape of the economy. We organize our discussion
of these findings around three large themes:
markets and the appropriate role of the state in
them; the ‘‘social’’ component of the German
notion of the ‘‘social market economy’’; and the
interplay of education, innovation, and innovation
and courage.
Virtually all executives expressed a preference for
a market-based economic order in which the state
provides a basic regulatory framework but other-
wise refrains from intervening in the economy. This
view mirrors the founding premises of the German
postwar economy. Postwar economic policy was
strongly influenced by the ‘‘ordoliberal’’ school of
economics associated with scholars such as Franz
Bo
¨hm, Walter Eucken, Hans Gromann-Doerth,
Wilhelm Ro
¨pke, and especially Ludwig Erhard,
who as economics minister presided over the
postwar German economic miracle. The ordoliberal
school emphasized the role of the state in establish-
ing and preserving economic order while main-
taining that state intervention in economic
processes, such as allocative decisions, should
be limited to exceptional cases (Siebert, 2005).
Since most of our executives attended university
during the 1950s and 1960s, it is likely that they
would have been exposed to strong doses of
ordoliberal thinking, both in academia and in
observed economic policy, during their formative
years.
Executives expressed their support of a market-
based economic order in a number of ways. Nine
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
869
Journal of International Business Studies

interviewees said so directly in statements such as
‘‘I would be in favor of a strongly market-oriented
economic order’’. More commonly, however, sup-
port of markets was expressed through rejection of
the existing economic realities in Germany, in
which the market is seen under threat by the
‘‘octopus state that crawls into everything’’ and
stifles the economy with rules and regulations.
Consistent with the ordoliberal view, executives
suggested that the proper role of the state in the
market economy was that of generating and
implementing a general regulatory framework:
[The state] should actually just create the framework
conditions in order to ensure the personal freedom so
everyone also has the chance to become involved in the
economic process to the best of his/her abilities and in the
best way.
1
Democracy is seen as the appropriate mode of state
governance in general and, in particular, for
arriving at a legitimate regulatory framework.
However, there was discontent with specific ele-
ments of the German variant of democracy, such as
the entrenched role of the political parties and rule
by consensus. No executive proposed an alternative
form of government.
Executives conveyed a clear sense that they
believed the German state was too interventionist.
Accordingly, 14 of the interviewees pushed for
liberalization in the sense of a retreat of the state
out of economic life – ‘‘less state and more free
development’’, as one interviewee put it. This not
only means that the state ‘‘concern[s] itself much
less with things that are better decided locally and
instead concerns itself a bit more with things
that only it can solve’’. It also implies a reduction
of taxes and an attendant decrease in the size of
the state, less bureaucracy, and especially deregula-
tion through ‘‘the abolition of hundreds of thou-
sands of laws that we here have introduced in
the past five years [as well as] simplification of
laws’’. Especially labor markets were seen in need
Figure 2 Mental landscape of the ideal shape of the economy, German executives. Each circle represents a salient category in the
thinking of the executives. Circle size is proportional to the number of executives referring to the respective category, and the lighter
the shading of the circle, the more positive the affect expressed for the respective category. The numbers in the circles show the
respective number of executives referring to the category and the value of the affect.
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
870
Journal of International Business Studies

of liberalization and deregulation; as one executive
put it:
[For the employees] I would really also like a bit more
market economy, which we do not have. A higher flexibility
here as well through very much deregulation, away from
the encrustation [with rules]. So we can have more hirings,
redundancies must be easier.
Reflected in this view, especially the last sentence,
is the notion that the German state had built up
‘‘an exaggerated arsenal of protective instruments
that only protect the employee but contravene
the interests of those who have no employment’’.
These measures make it very difficult to dismiss
employees, discouraging German firms from hiring
because they cannot reduce their headcounts easily
when needed, and thus contributing to high levels
of unemployment in the German economy.
This connects to the second large theme, namely
the discussion of the appropriate trade-off between
freedom and individual responsibility on the one
hand and social protection by the state on the
other. This debate is reflective of a long-standing
and historically grown tension between individua-
listic and communitarian values embedded in the
German postwar construct of ‘‘social market econ-
omy’’ (Siebert, 2005; Streeck, 1997), which seeks to
combine a market economy with a social safety net.
The desire for individual freedom is based not only
on the German experience with totalitarianism in
the Third Reich, but also the adverse economic
outcomes of heavy state intervention in the
economy during and between the two World Wars
(Siebert, 2005). In accordance with this view, a
majority of executives asked for ‘‘more individual
responsibility [Eigenverantwortung], more freedom’’.
In this view, individuals should take charge of their
own lives and take responsibility for the outcomes
of their actions. This is closely related with the
‘‘performance principle’’ (Leistungsprinzip), that is,
the notion that any gain must be earned through
one’s actions.
At the same time, there is a strong communitar-
ian streak in German society, expressed in Christian
social ethics that advocate the protection of the
individual by the community as well as in collecti-
vist ideas propagated by the socialist movement
(Streeck & Yamamura, 2001). While executives
generally affirmed the need for the state to provide
social security to the weakest members of society,
many seem to believe that the present system has
become too generous and expansive. Interviewees’
responses suggest a search for a golden mean that
reconciles both objectives, freedom and protection.
As one executive put it:
Of course there is a right to an existential minimum or to a
certain minimum standard, as we are a social constitutional
state. But in principle there also must be a certain individual
responsibility ywe are concerned here with a performance
principle.
And in the words of another executive:
The pendulum [of social solidarity] has in our case in the
last years, also the last decades, clearly gone in a direction
that stifles freedom, that stifles individual responsibility,
and that thus stifles the dynamics of the entire society.
A recurrent word in this context is Gleichmacherei,
which translates literally as ‘‘making equal’’ and
refers to efforts or the tendency to seek to attain
equal outcomes for everyone. While executives
were critical of equality of outcomes, a number of
executives also pointed out – often in explicit
contrast with the United States – that too much
inequality of outcomes was equally undesirable. In
the words of one executive, ‘‘we cannot turn back
the wheel so far as in the USA, to a state of early/
primitive capitalism’’.
The rejection of equality of outcomes, and thus of
a basic principle of socialist thought, as well as a
desire to reduce job protection of employees (as
discussed earlier) implies conflict with unions in
general and especially with German unions as they
exist today. At the abstract level of unions in
general, executives’ affect was overall neutral. Some
executives considered unions necessary to repre-
sent labor interests, others were indifferent, and
others still argued that they had become super-
fluous in the present day. Yet even those executives
who regarded unions in general as a good thing
took a dim view of German unions today, accusing
them of pursuing ‘‘class struggle’’ and express-
ing regret that one could not ‘‘shoot them to the
moon’’. An important bone of contention in this
context was the legal right of co-determination at
the supervisory board level. According to the 1976
law of co-determination, employees, and with
them the unions, have the right to fill half of the
supervisory board of incorporated firms with
more than 2000 employees (Siebert, 2005). Most
executives would like to see this law abolished. It
is noteworthy that, by contrast, the existence of
workers’ councils – another mandatory form of
labor representation, with roots dating back to 1891
(Guille
´n, 1994) – was not a contentious issue.
A third major theme emerged around the con-
structs of education, innovation, and initiative and
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
871
Journal of International Business Studies

courage, which also encompass ideas of entrepre-
neurship. This topic is consistent with historical
experience, in that many major German firms have
their origins in the entrepreneurial boom founded
on scientific breakthroughs in the second half of
the 19th century. Strong ties with German uni-
versities allowed these erstwhile startups to draw on
advanced technology and establish themselves
quickly as major players in world markets. For
instance, the rise of the German chemicals industry
owes much to scientific advances made at German
universities in the field of organic dyes (Murmann,
2003). One interpretation of executives’ advocating
stronger education, more innovation, and more
entrepreneurship is thus a desire for modern
German capitalism to return to its 19th-century
roots.
With 12 of our interviewees holding doctorate
degrees, it is not surprising that education occupies
a salient space in their notion of the ideal economy.
The education system is seen as ‘‘the key to the
success of the economy’’, with schools and uni-
versities intended not only to convey knowledge,
but also to ‘‘develop y[a] feeling for individual
responsibility’’ and to ‘‘contribute to the topic of
entrepreneurship in a decisive way’’. This bright
view of the importance of education stands in
contrast with the perceived present state of the
German education system. Probably reflecting
news of the poor showing of German students in
international comparisons of educational attain-
ment (OECD, 2003), executives expressed concern
that the German education system, once the pride
of the nation, was no longer competitive and in
need of a major overhaul. No concrete proposals
emerged about how to effect this overhaul.
The concern with education is connected to a
positive view of innovation in the economy. While
Germany used to be a world leader in innovation,
there was a general feeling that the German public
had become hostile to innovation, and the inno-
vative process was stifled by legal red tape, with the
result that ‘‘key experts today all emigrate to
Harvard, Stanford, or somewhere in Boston’’. Link-
ing back to the argument that the education system
should inculcate a sense of entrepreneurship,
executives also felt that in terms of innovative
capacity, ‘‘it would be of benefit yto return to our
origins and become as audacious as we have once
been’’.
In fact, two thirds of the interviewees believed
that a lack of courage and initiative was an
important shortcoming in the German economy
today. Key words in this context included ‘‘angst’’ as
well as ‘‘insurance thinking’’, the latter referring to
the German tendency to play safe and seek to cover
all the contingencies. One executive described how
his own father, who must have been in his 80s,
refused to buy new furniture because he wanted to
save the money, just in case – even in octogenarians
with wealthy children, ‘‘the courage for the future is
missing’’. To some executives, the root cause of this
angst lay in the stifling influence of state regulation
that ‘‘ruins our economy because it does not allow
initiative to develop’’, which provides a conceptual
linkage back to the topic of liberalization discussed
initially.
Japan
Figure 3 shows the key elements in the thinking of
Japanese senior executives about the appropriate
shape of the economy. We organize our discussion
of these findings around four large themes: the role
of the state in the economy; limits on market
forces; economic outcomes; and education and its
separation, in executives’ minds, from technology.
Executives expressed support of state leadership
in the economy while deploring the inability of the
Japanese state to provide it at the present time. The
notion of state leadership is consistent with
modern Japanese economic history, and especially
the ‘‘developmental state’’ period between the end
of World War II and the late 1970s. A state is
considered ‘‘developmental’’ if it seeks to accelerate
economic development by intervening actively in
the economy, typically through industrial policy
(Johnson, 1982; Komiya, Okuno, & Suzumura,
1988; Okimoto, 1989; Yamamura, 1986). Postwar
Japan was a paradigmatic example of this approach.
Building on control mechanisms developed during
the Pacific War, the Japanese bureaucracy took a
leading role in fostering economic development
(Johnson, 1982). To this end, government adopted
measures such as protecting rising industries from
foreign competition, offering access to capital and
raw materials, and coordinating R&D consortia for
firms to develop new technology jointly ( Johnson,
1982; Komiya et al., 1988; Okimoto, 1989; Sakakibara,
1997; Yamamura, 1986).
While the days of the developmental state are
over, the general notion that the state should
provide direction and leadership for the economy
has survived. In contrast with the days of industrial
policy, in which the bureaucracy arguably provided
much of that leadership (Johnson, 1982; Okimoto,
1989), the focus of expectations today seems to be
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
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Journal of International Business Studies

on politicians. Noting that ‘‘the problem holding
down Japan is basically a political problem rather
than an economic one’’ because ‘‘the political
leadership is incompetent’’, executives concluded
that ‘‘the country foremost needs top-down leader-
ship now’’. The absence of leadership in Japanese
politics was seen as a ‘‘terrible problem’’. This dire
view is particularly remarkable considering that, at
the time of our interviews, the country was under
the leadership of Junichiro Koizumi, who is gen-
erally seen as one of postwar Japan’s stronger and
more effective prime ministers. As we will discuss
later, an emphasis on equality of outcomes in
Japanese society is seen as one reason for the
relative lack of strong leadership.
The perceived absence of top-down leadership
gives rise to general discontentment with anything
government-related – the state, politicians, and
the bureaucracy – and an attendant desire for
political and bureaucratic reforms along virtually
all major organizational dimensions. In terms of
size, executives felt that reducing the number of
bureaucrats would be appropriate. In terms of
structure, executives advocated simplification,
arguing that ‘‘the government [is] too stymied by
separate organizations, not being able to get
together and change’’. In terms of policymaking,
executives identified a need to clip the wings of the
bureaucracy, whose status quo orientation is taken
to prevent change in the economy. And in terms of
government output, executives suggested that
politicians and especially bureaucrats were out of
touch with reality. As one executive put it:
That government and those politicians know much too
little about running an international company. Conse-
quently, the deregulation that is desperately needed by us
to increase international competitiveness does not occur.
Executives attributed this perceived ignorance in
part to reduced information exchange. For
instance, one executive complained that in the
light of strict limits on company hospitality for civil
Figure 3 Mental landscape of the ideal shape of the economy, Japanese executives. Each circle represents a salient category in the
thinking of the executives. Circle size is proportional to the number of executives referring to the respective category, and the lighter
the shading of the circle, the more positive the affect expressed for the respective category. The numbers in the circles show the
respective number of executives referring to the category and the value of the affect.
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
873
Journal of International Business Studies

servants introduced in the late 1990s, ‘‘because one
does not want to get arrested, one cannot even
have a meal with the bureaucrats’’. This is a
significant concern, because in Japanese society
meals and especially drinks provide the best setting
for open information exchange (Witt, 2006).
A second theme centers on the notion of limited
market forces. Executives showed only lukewarm
support of free market competition, underscoring
that ‘‘it is necessary to understand that there are
also limits to the market economy’’. This notion
that competition needs limits – and indeed, that
too much competition is dangerous – has a long
tradition in Japan. In the Tokugawa period (1603–
1868), guilds made sure that members did not
compete too fiercely (Hirschmeier & Yui, 1981). In
the 20th century, a brief period of relatively free-
market capitalism in the 1920s was followed by
government-led efforts at cartelization in order to
dampen the adverse impact of the world economic
crisis. Government encouraged, and later required,
firms to organize in industry associations, which
allowed competitors to fix prices and monitor
compliance (Schaede, 2000). In addition, govern-
ment policy after the war has consistently discour-
aged destructive competition (‘‘overcompetition’’),
has helped form cartels, and has at times punished
deviants disturbing what the bureaucracy consid-
ered orderly competition (Upham, 1991; Tilton,
1996).
The unfavorable view of unbridled competition
is also visible in executives’ opinions about the
need to increase flexibility in labor and wage
systems. Only a few executives raised this topic,
and those who did showed on average fairly low
positive affect for the topic. To these executives, the
difficulty of workforce reductions and current wage
levels meant a disadvantage in international com-
petition. While wage reductions in hard times are
common in Japanese firms and thus uncontrover-
sial, the notion of making redundancies easier is
remarkable because it suggests that international
competition is putting pressure on a central feature
of the postwar Japanese business system, lifetime
employment. Lifetime employment is one expres-
sion of the fundamental belief among Japanese
executives (as we will report elsewhere) that firms
exist to ensure the well-being of their employees.
To the extent that competition threatens this raison
d’e
ˆtre, it is not surprising that executives would
view it as needing limits.
This belief in limits to competition and the
historical role of the state in providing them is
reflected in executives’ views about deregulation
and liberalization. In general, executives tended to
argue that ‘‘deregulation is necessary’’ because ‘‘the
various regulations, social regulations, they are all
over-spec’’. At the same time, however, executives
cast a negative light on the idea of liberalization,
arguing that ‘‘it is extremely dangerous if you fully
liberalize’’. One executive remarked that he sup-
ported ‘‘not liberalization, but deregulation to some
extent’’. Given that the definitions of both terms in
the Oxford English Dictionary are virtually identical,
this would seem contradictory to English speakers,
and probably to most Western minds more gene-
rally. The contradiction is resolved by the realiza-
tion that the Japanese meanings of the two terms
differ from the English ones. The expression for
‘‘deregulation’’ (kisei kanwa) denotes, literally trans-
lated, a ‘‘softening of regulations’’ rather than their
abolition. Liberalization, by contrast, suggests leav-
ing matters to market forces and each firm and
individual, which in the Japanese – and, more
broadly, Asian – mind is tantamount to chaos and
thus undesirable. Consistent also with the desire for
the state to play a leading role in the economy, the
visible hand of the state imposing order is preferred
to the invisible hand of the market.
A third theme executives brought up pertains to
the question of economic outcomes and their
determinants. Executives expressed the view that
Japan was ‘‘too much of an equal society’’, a society
with ‘‘bad equality’’ (aku byoudou). Not only do
executives believe that the distribution of wealth is
too equal, but also that the implied emphasis on
‘‘fostering the middle class’’ was one reason why
‘‘there is no leader coming out’’. This reaction
against equality of outcomes is likely to relate back
to the youth of at least the more senior of the
interviewed executives. Until the end of World War
II, Japanese society was quite accepting of an
uneven wealth distribution. As one executive
pointed out, and others confirmed, a section chief
(kachou) in a firm belonging to one of the major
conglomerates (zaibatsu) of the time would receive
an annual bonus large enough to buy a villa. It
was only after World War II that the income
distribution flattened and many associated charac-
teristics of the Japanese economy, such as the
seniority system and lifetime employment,
emerged (Gordon, 1988; Hirschmeier & Yui, 1981).
At the same time, one must not mistake execu-
tives’ comments against equality of outcomes as an
unqualified endorsement of inequality. Executives
tended to be very negative about economic
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
874
Journal of International Business Studies

inequality and pay differentials in the United
States, and the very term ‘‘bad equality’’ suggests
that there is also a ‘‘good equality’’. Rather, execu-
tives called for a moderate increase in variation
through a system that links rewards more strongly
to individual performance. For most of the time
since the end of World War II, this linkage was
absent or very weak, leading to a state of ‘‘strange
equality [in which] though one’s work differs,
[outcomes] are equal all the time’’ in which ‘‘people
who have no ability get promoted because they
have seniority’’.
One explanation given for the present state of
equality, expressed by only a few executives but still
noteworthy, suggests that following World War II
the Japanese people mistook democracy as imply-
ing equality of outcomes. Unions, fostered by the
American occupation following the war as an
important democratic force, are seen as one of the
drivers of this development. Apart from this link
with ‘‘bad equality’’, executives generally perceive
unions as respectable and necessary in the Japanese
economy. Executives tend to view them as ‘‘one
wing of management’’ who ‘‘study more about
management than we [managers] do’’. Accordingly,
no interviewee identified unions as an obstacle to
necessary reforms inside firms.
A final major theme revolves around education
and technology. Executives tended to consider
education important, which is consistent with the
Confucian emphasis on education embedded in
Japanese society. This influence is visible in ele-
ments throughout the system, such as the stress on
rote rehearsal; competitive entrance examinations
for access to higher schools; and the tendency of
the top graduates of the top universities to become
civil servants. While executives generally main-
tained that ‘‘the educational level is high’’, they also
identified a number of areas requiring improve-
ments, including more emphasis on fostering
creativity; reintroduction of ethics classes; and
better English-language training. The emphasis on
language is related to a positive view of the
desirability of internationalization of Japanese
firms’ activities, a topic raised typically in the
context of executives’ describing their own achieve-
ments or those of other business leaders they
consider admirable.
A final salient element in executives’ thinking
about the ideal economy is technology. Its affect is
more positive than for any other element of the
mental landscape, with executives maintaining
that ‘‘technology is a terribly important thing for
a good economy’’ and that Japan was blessed with
‘‘really good advanced ytechnology’’. Remarkable
is the absence of a linkage with education, which is
consistent with the tendency of Japanese firms to
develop relatively much of their technology in
house: in 2003, firms accounted for 75.0% of all
Japanese R&D performed, as compared with an
OECD average of 67.3% (OECD, 2005). This is
related to the refusal of many Japanese universities
after the war to engage in research with direct
commercial applicability (Branscomb, Kodama, &
Florida, 1999; Hicks, 1993) – partially in response to
the role Japanese universities played in sustaining
the Japanese war effort, and partially out of
conviction that academia should not be sullied by
commercial concerns. Only in recent years have
firm–university links begun to revive (Branscomb
et al., 1999), a development that government has
sought to support through structural reforms of the
universities (Odagiri, 2006).
Present, by contrast, is an expectation of state
leadership in firm R&D on the grounds that ‘‘when
a firm develops new technology, it benefits the
country’’. Suitable measures are taken to include
‘‘giving tax exemptions and yputting up a
budget’’. This view is consistent with the practice
of close cooperation between state and private
sector in developing new technology in the context
of industrial policy ( Johnson, 1982; Samuels, 1987),
which has partially survived to the present day in
the context of state-sponsored R&D consortia
(Sakakibara, 1997).
Comparison of German and Japanese results with
each other
As mentioned in our discussion on case selection,
Germany and Japan are often seen to be similar in
structure (e.g., Albert, 1993; Boyer, 1997; Dore,
2000). Yet a direct comparison of the results for the
two countries suggests more differences than
similarities in terms of executive rationale. Simila-
rities are evident in views about equality of out-
comes and the performance principle, as well as
about the importance of education in general,
though there are important differences in the
details. Dissimilarities are salient especially in
thinking about the state and markets as well as
about unions. In this section, we elaborate on these
points.
Executives in both countries expressed dissatis-
faction with the level of equality in economic
outcomes, and generally supported a stronger
linkage of outcomes to individual performance.
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
875
Journal of International Business Studies

Both constructs had similar salience in both
countries, with negative affect for equality of
outcomes and positive affect for the performance
principle. In both cases, executives saw a connec-
tion between equal outcomes and union influence
in the economy.
Important differences emerge, however. In the
German context, the discussion of equal outcomes
was related to executives’ perceptions of the ill
effects of state intervention in the economy
through the social security system – the ‘‘social’’
in the ideal of the ‘‘social market economy’’ – and
the ideas of individual responsibility and the
performance principle. By contrast, in the Japanese
interviews, executives linked this topic to equality
in society in general as well as the employment
system. One interpretation is that this is a reflection
of the different ways in which the two societies deal
with the problem of surplus labor. While Germany
uses the social security system to support its large
numbers of unemployed, the Japanese approach
has tended to be to keep as many people as possible
employed, with annual promotions and raises
(within limits). Executives in both countries may
thus be responding to essentially the same issue –
economic rewards being given to individuals whom
they perceive as not really contributing to the
economy – though in the context of the way
the respective business systems have chosen to
provide a social safety net. Accordingly, state-
provided social security is not a salient element in
the mental landscape of Japanese executives. How-
ever, as we will propose in the discussion section,
this difference could also be related to variation
in the ends being served by higher inequality in
society.
A second similarity is visible in the appreciation
of education. Salience and positive affect is similar
for both countries. What differs again is the context
of the discussion. In the German case, executives
asked for major reforms, emphasizing connections
with innovation and the cluster of constructs
around individual responsibility, and thus the role
of education for entrepreneurship and technologi-
cal progress. In the Japanese case, the linkage with
technology and innovation is, as already discussed,
absent. Japanese executives seemed relatively con-
tent with the state of Japanese education, despite a
series of suggestions for improvement. Unlike in
the German case, Japanese executives saw a linkage
between education and internationalization, hin-
geing on the hope for improvements in English-
language training.
A first key difference is visible in conceptions of
the role of the state and the discussions around
deregulation and liberalization. German executives
essentially ask for a retreat of the state from the
economy to free up market forces, though they
envision a role of the state in providing a regulatory
framework as well as a social safety net. By contrast,
Japanese executives want the Japanese state to
reform itself so it can play a sensible leadership
role in the economy. Unlike in the German case,
the idea of markets is not in the picture, and the
relatively low positive affect for competition sug-
gests that Japanese executives eye it with some
suspicion. Similarly, German executives are con-
siderably more positive about flexibility and libera-
lization in the labor market than their Japanese
counterparts, with the latter describing themselves
as pushed into it by international competition
rather than by conviction.
Noteworthy in the context of the state is the
German support of freedom as an ideal and – with
some misgivings about flaws in its present shape –
democracy, both of which are absent in the
Japanese case. We hasten to add that this latter
point does not mean that the Japanese executives
oppose freedom and democracy; such views, if
shared by a substantial number of executives,
would have appeared as elements with negative
effect in Figure 3. It is, however, indicative of
differences in thinking about the state and its
relationship with the people. German executives
espouse an ideal of liberal democracy, centered on
individual freedom and citizen control of the state.
In the more collectivist context of Japan, by
contrast, there is less focus on individuals and their
freedom, and executives’ asking for state leadership
is at odds with the notion of citizen control of
the state.
Views about unions are strikingly different.
German executives tend to be very negative about
German unions as they present themselves today,
and barely neutral about the abstract idea of unions
as representatives of the labor interests. Executives
also see them as linked to numerous evils, such as
equality of outcomes and especially labor market
regulations. By contrast, Japanese executives view
unions as useful partners in management. This
difference is likely to be in part linked to union
organization principles, with industry unions in
Germany and company unions in Japan (Whitley,
1999). The latter organization principle is relatively
more conducive to an alignment of interests
between unions and their companies, especially
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
876
Journal of International Business Studies

when unions are integrated in the decision-making
processes of the company (Redding & Witt, 2007).
2
Comparison with the United States
In our discussion of case selection, we made a
distinction between LMEs, such as the United
States, and non-liberal CMEs, such as Germany
and Japan. Since no hard facts were previously
known about the underlying differences in execu-
tive rationale about the shape of the economy, we
made the conjecture that just as the institutional
structures of CMEs deviate from those of market-
based LMEs, the thinking of senior executives in
CMEs was likely to vary from LME-style economic
logic. To examine the extent to which this variation
is actually visible in the data, we briefly compare
the views of German and Japanese executives about
the ideal economy with the institutional structure
of the economy coming closest to the ideal of the
LME, that of the United States.
LMEs such as the United States tend to emphasize
the free interplay of market forces within a
clear regulatory framework provided by the state
(Dore, 2000; Hall & Soskice, 2001; Redding, 2005;
Redding & Witt, 2007; Whitley, 1999). The think-
ing of German executives goes in this general
direction, with an emphasis on freer markets
with less state intervention. Unclear is how far
executives would want these reforms to go. In
addition, as we have seen, these views are also
consistent with a return to the German model
of the 1950s and 1960s. Indeed, German executives
tended to cast their views about liberalization
and the state as a return to the German model
as it should be, rather than in the context of
copying the United States. By contrast, the thinking
of Japanese executives about markets and the
role of the state in them is inconsistent with the
US model.
The generally favorable views in both countries of
more variety in economic outcomes and a stronger
application of the performance principle seem at
first consistent with realities in the United States,
such as pay differentials within firms (Albert, 1993;
Dore, 2000) and income inequality in the overall
economy (OECD, 2007; Rueda & Pontusson, 2000).
However, executives in both Germany and Japan
explicitly referred to conditions in the United States
as undesirable. As already noted, German execu-
tives saw the idea of emulating the US system as a
regressive step torward a less evolved form of
capitalism. Japanese executives were less blunt,
but argued that US-style inequality meant instabil-
ity and was thus undesirable. So at least by intent,
executives in both countries would seem to prefer
more equality in outcomes, and thus less of a role of
personal performance, than they perceive to be
present in the United States. As discussed before, in
both countries less equality and more performance
orientation would also be consistent with patterns
in their own past.
In terms of the role of unions in the economy, the
views of German executives may be fairly aligned
with US realities, while Japanese views differ
considerably. The United States has generally been
inhospitable to the union movement (Hall &
Soskice, 2001; Whitley, 1999). German executives
tend to be fairly unhappy with German unions as
they are today and would not mind seeing them
weakened. While this goal may be consistent with a
preference for convergence with the US system in
this area, it is highly unlikely that the German
business community will succeed in attaining it, or
even decide to make a major push for it. The
societal coordinated nature of the German political
economy means that the unions are party to
decision-making about institutional change
(Witt & Lewin, 2007). Paired with prevailing
norms of decision-making by consensus, this
permits unions to block attempts at changing
institutions to their disadvantage (Witt & Lewin,
2007). In the Japanese case, with executives
viewing unions as a useful partner in managing
the firm, the business community is unlikely to
seek a radical change in the nature of the extant
union system.
A last point of comparison is the education
system and its linkage with innovation and entre-
preneurship, a theme that emerged in the German
context, but was absent for Japan. This pattern of
connecting education, especially at the university
level, with innovation and new ventures is con-
sistent with practice in the United States, especially
around Silicon Valley and the Boston area (Breschi
& Malerba, 2005; Saxenian, 1994). Yet in the
German case it is also in line with past experience,
as discussed, and the wish to strengthen the pattern
may be indicative of the desire to return to earlier
roots rather than to converge across systems. To
complicate matters further, one could even argue
that present US practice is modeled on earlier
German practice, given the influence of German
academia on the development of academe in the
United States – for instance, through large numbers
of academics fleeing to the United States during the
Third Reich – as well as the role of early German
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
877
Journal of International Business Studies

entrepreneurs in drawing on cutting-edge univer-
sity research (Murmann, 2003).
DISCUSSION AND CONCLUSION
Interpretation in terms of ends and means
As explained in the Theory section, the focus of this
paper is on substantive rationality, which comprises
value rationality (ends) and instrumental rational-
ity (means). While our interviewees did not express
their thinking in these terms, it is possible to
interpret executives’ views so as to arrive at a
distinction between ends and means that is con-
sistent with the underlying theory. Tables 1 and 2
show the results of our efforts at such interpreta-
tion. We introduce a further distinction between
primary and secondary means, with the former
being of a fundamental kind, such as an overall
principle for action, and the latter being of a more
grounded and actionable kind, such as concrete
steps to be taken (cf. Redding, 2005). The various
entries in the table are sorted to align, to the extent
possible, ends with associated primary and second-
ary means. Because of the complexity of the
linkages between the various ends and means, as
Figures 2 and 3 illustrate, the alignment expressible
in table form is by necessity imperfect.
The interpretation process involved minor rela-
beling of some categories as well as the addition of
further categories that executives did not explicitly
raise, but which we see as implied in their
elaborations. For example, German executives did
not refer to a knowledge-led economy, but their
treatment of education and its linkages to private
initiative, entrepreneurship, and innovation is
suggestive of a desire to build the economy around
new knowledge. Similarly, Japanese executives did
not expressly ask for hierarchy in society, but the
combination of their elaborations on Japanese
society being too equal in general and leadership
being desirable but lacking because of this equality
in society seems consistent with an overall desire
for vertical differentiation, and thus hierarchy, in
society. Our interpretations are by nature subjec-
tive, and while we consider the labels and distinc-
tions included in the table to be accurate and
consistent with executives’ thinking on the basis
of our immersion in the interview materials, some
readers may well arrive at different categorizations
and labels.
We will not take the reader through the tables
step by step, as doing so would involve much
duplication of the discussion already presented in
the Results section. However, one difference
between the two tables requires further explana-
tion. Table 1 shows the performance principle as a
primary means, and acceptance of larger inequality
in outcomes as a secondary means for Germany. In
Table 2, for Japan, this is reversed, with larger
inequalities in outcomes as a primary means, and
the performance principle as a secondary means.
This reversal is due to variation in the ends these
means serve. In the German context individual
responsibility is established, among others, by the
Table 1 Ends, primary means, and secondary means in executive rationale, Germany
Ends Primary means Secondary means
Rational efficiency of market
competition
Regulatory state Liberalization
Deregulation
Tax reform
Reduction of union influence Labor market reforms
Elimination of co-determination
Communitarian support of the weak Social market economy State social security
Less social security than today
Individual responsibility Performance principle Acceptance of larger inequality in outcomes
(though less than in the US)
Freedom Subsidiarity (local decision-making)
Democracy Political party reforms
State non-interventionist, but more
capable of action
Majority principle (rather than
consensus)
Smaller state
Knowledge-led economy Education Educational reforms
Innovation
Initiative and courage Entrepreneurship
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
878
Journal of International Business Studies

general principle of linking outcomes to perfor-
mance. Higher inequality is seen as an attendant
effect that needs to be accommodated. Conversely,
in the Japanese case, with hierarchy as the end, the
widening of inequality becomes a primary means.
One concrete tool of accomplishing such widening
would be the strengthening of the performance
principle within firms.
Implications for research on IB and variations in
national business systems
In this paper we have provided rare primary
empirical evidence speaking to the contention of
a large body of literature, as reviewed in the
Introduction and Theory sections, that institu-
tional variations across nations are related to
differences in underlying thought patterns. Speci-
fically, we have illustrated salient differences in the
ways in which German and Japanese executives
think about the ideal shape of the economy, in
terms both of ends and of means. At least in terms
of executive rationale, the similarities between
Germany and Japan seem to be smaller than parts
of the literature suggest (e.g., Albert, 1993; Boyer,
1997; Dore, 2000).
Our findings are consistent with the notion that
institutional variations across nations reflect
nationally contingent conceptions of ends and
means held by business leaders and possibly other
economic actors. This opens up the potential
for major theoretical innovation in our under-
standing of IB. If firms from different nations
pursue different ends, they may use different
means – such as competitive strategies – in response
to objectively identical situations. International
competition may thus in part be shaped by locally
contingent notions of firm objectives and appro-
priate tools for attaining them. Taking these
notions into consideration may help increase
explanatory leverage in IB research. Such research
would also be likely to make a direct contribution
to the larger theoretical issues we have laid out in
the Introduction and Theory parts of this paper, but
possibly also to our understanding of other theore-
tical issues such as the social construction of
concepts such as shareholder value. A first step
toward exploring these issues in details would
involve further qualitative studies similar to that
presented in this paper to explore the existing
variations in the meaning of business and the
economy.
It is beyond the scope of this paper to comple-
ment our demonstration of the presence of varia-
tions in thinking with conclusive evidence that
these variations have subsequently informed the
evolutionary trajectories of the two economies.
Such influence is subject to multiple causalities,
path dependence, institutional interdependencies,
and the complex interplay of a large number of
interest groups (Redding, 2005; Witt & Lewin,
2007). Given recent policy trends in both countries,
however, such influence seems at least plausible,
and thus a potentially rewarding avenue for further
research. In Germany, governments under chancel-
lors Schro
¨der and Merkel have initiated institu-
tional changes that are generally in line with
executives’ beliefs about the ideal shape of the
economy. The most prominent and encompassing
measure since completion of our interviews is
Schro
¨der’s ‘‘Agenda 2010’’, a large package of
Table 2 Ends, primary means, and secondary means in executive rationale, Japan
Ends Primary means Secondary means
Collaboratively developed society with
state providing direction
Political and structural reform Smaller and simpler state
Bureaucratic reforms
Societal coordination Communications state–private sector
Cooperation with unions
Controlled markets Limited competition Deregulation without liberalization
Hierarchy Larger inequalities in outcomes
(though less than in the US)
Performance principle (in firms)
Some weakening of lifetime
employment and seniority principle
Skills-intensive economy Technology
Education Education reform on several
dimensions
Internationalization Stronger English-language training
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
879
Journal of International Business Studies

institutional reforms aimed at producing a highly
competitive and dynamic economy by the year
2010. Changes include virtually all areas the
interviewees viewed in need of reform and were
pushed through against popular dissent, which
contributed to the electoral defeat of Schro
¨der’s
government in the 2005 federal elections. In Japan,
changes have likewise been largely consistent with
executives’ views. The Koizumi administration
initiated reforms in the political and bureaucratic
systems. Changes in tax law under Koizumi are seen
as a contributor to recent increases in inequality in
Japan, against which the Japanese public has
reacted strongly. The government has further
introduced educational reforms, aiming, among
others, to introduce more flexibility and room for
creativity in the education system. While these
developments are overall consistent with the view
that executive rationale matters in the shaping of
the institutional structure of the economy, further
in-depth research will be needed to establish more
conclusively what role the business community
actually played in bringing about these changes.
Assuming the existence of a connection between
executive rationale and institutional changes over
time, our results may also contribute new insights
into process and possible outcomes to the debate
about convergence or hybridization with, or diver-
gence from, the LME model embodied by the
United States
3
(e.g., Aguilera & Jackson, 2003;
Djelic, 1998; Dore, 2000; Kerr, 1983; Kerr et al.,
1960; Pieterse, 1994; Thelen, 2001; Vogel, 2003).
Our comparison with the United States suggests
that, overall, the thinking of Japanese executives
about the ideal economy has little in common with
present US practices. This would seem to speak
against the likelihood that much momentum for
more than superficial convergence is present in the
Japanese business community. Hybridization may
occur in this context, as it has in virtually all areas
of Japanese life, at least since the opening of Japan
to the West in 1868 (Gordon, 2002; Hirschmeier &
Yui, 1981), though executives gave no specific clues
as to the specific areas in which this may happen.
Interpretation of the German case is considerably
more difficult. The thinking of German executives
may be consistent with a possible movement
toward greater institutional similarity between the
German and US business systems. As in the
Japanese case, hybridization of German and US
practice may occur, as it has in contexts such as
management (Guille
´n, 1994) at least since the 19th
century; as in the Japanese case, our interviewees
did not identify any specific areas for this to
happen. Yet executives’ attempts at distancing their
ideas from US practice suggest that even full
translation of their views into institutional practice
may merely mark a one-off move producing greater
similarity that would not be followed by a further
push for convergence. To complicate matters
further, German executive thinking is consistent
not only with greater similarity with the United
States, but also with past German practice: that is,
what may look like partial convergence could
equally be seen as a regression to the German
model as it used to be.
From a theoretical perspective, this raises the
question of what can be called (partial) conver-
gence. While the outcome may look like conver-
gence, the underlying mechanism driving
developments would be considerably different from
that envisioned in the convergence literature,
which tends to emphasize normative and economic
pressures. This ambiguity underlines the need for
research on the theme of convergence to examine
not only outcomes, but also the underlying deter-
minants of the evolutionary trajectories of different
economies, and especially the realm of meaning,
and thus culture.
ACKNOWLEDGEMENTS
We thank Hildy Teegen and the anonymous reviewers
for their insightful feedback and valuable suggestions,
and Arie Y Lewin for his guidance and encouragement.
Susan J Pharr, Wolfgang Streeck, and participants at
the SASE 2007 conference provided valuable com-
ments on earlier versions of this paper. We further owe
great thanks to the Lee Foundation, Singapore, for its
generous financial support of our field research; to the
interviewees for making time for us in their busy
schedules; and to our many contacts who helped us
arrange interviews, especially Yuko Unoki.
NOTES
1
Readers will note that we are following standard
ethnographic practice in retaining expression as close
as possible to the original, whether grammatically or
stylistically correct or not.
2
South Korea provides a good example of how top-
down, exclusive decision-making contributes to belli-
gerence in company unions.
3
We do not include in this discussion the construct
of ‘‘crossvergence’’ (Ralston et al., 1993, 1997)
because the definition of crossvergence seems to be
so encompassing that virtually any outcome can
qualify as crossvergence (Witt, 2008).
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
880
Journal of International Business Studies

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APPENDIX A
LIST OF INTERVIEWEES
Positions indicated as of the time of the interview.
Germany
Dr. Uwe-Ernst Bufe, former CEO, Degussa
Leonhard H Fischer, exec. board member, Allianz &
Dresdner Bank
Peter Fischl, CFO, Infineon
Dr. Carl Hahn, former CEO, VW
Dr. Wolf Klinz, exec. board member, AGIV
Hilmar Kopper, former CEO, Deutsche Bank
Dr. Dietmar Kuhnt, CEO, RWE
Dr. Ulrich Middelmann, Vice CEO, ThyssenKrupp
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
883
Journal of International Business Studies

Dr. Werner Schmidt, former CFO, VW
Dr. Ronaldo Schmitz, former exec. board member,
Deutsche Bank
Dr. Harald Schro
¨der, former Vice CEO, Merck
Dr. Henning Schulte-Noelle, CEO, Allianz
Dr. Heinrich v Pierer, CEO, Siemens
Kurt F. Viermetz, Chairman of the Supervisory
Board, HypoVereinsbank
Dr. Herbert Wo
¨rner, former exec. board member,
Bosch; former CEO, Bosch Siemens Haushalts-
geraete
Dr. Ju
¨rgen Zech, former CEO, Gerling
Anonymous, CEO, DAX firm (i.e., one of Germany’s
30 largest public firms)
Japan
Yoshikazu Hanawa, Chairman, Nissan
Toru Hashimoto, former Chairman, Fuji Bank
Terukazu Inoue, Special Auditor, Toyota
Takeo Inokuchi, Chairman and President, Mitsui
Sumitomo Insurance
Masami Ito, President, Ito Ham
Tetsuro Kawakami, former Chairman, Sumitomo
Electric
Yorihiko Kojima, Senior Executive Vice President,
Mitsubishi Corp.
Akira Uehara, President, Taisho Seiyaku
Kaneichi Maehara, former board member, Sumito-
mo Life Insurance, Chairman, Sumitomo Life
Research Institute
Minoru Makihara, Chairman, Mitsubishi Corp.
Hiroshi Nagata, Executive Vice President & board
member, Mitsui & Co.
Taizo Nishimuro, Chairman, Toshiba
Akira Nishikawa, President & CEO, Mitsubishi
Materials
Koichi Ohmuro, Senior Managing Director & Senior
Executive Officer, Mitsui Fudosan
Masahiro Sakane, President, Komatsu Machinery
Teruo Shimamura, President & COO, Nikon
Yasuhiko Watanabe, former board member, Bank
of Tokyo Mitsubishi, Senior Managing Director,
Mitsubishi Estate
APPENDIX B
INTERVIEW SCHEDULE
Purpose of the firm
If you had to choose the most important reason
for your firm being in existence (beyond operat-
ing efficiently to survive), what would it be? Why
is it important for it to survive?
What is the firm ultimately for? Accepting a list
of reasons, what comes first and why?
What firms do you admire most and why?
What business leaders do you admire most and
why?
When you retire, what will you look back on as
having achieved?
What should the contribution of the economy be
to the society at large, in addition to generating
wealth?
How should the wealth be distributed and why?
Institutional structure of the economy
Around the world there are many ways of
constructing an economy. Given a free choice,
which formula do you prefer and why?
What are the three most significant principles,
on which it should be built, in order of
importance?
In implementing the above design principles,
what main practical means are necessary?
What is needed to make it work, and what is
the process which allows such components
to contribute? What are the main vehicles
needed?
Describe a serious weakness in the structuring of
an economy that you have observed.
Describe an important contributing aspect
of a successful business system that you have
observed.
How does your own business system work so
well? Main strengths and weaknesses as a
system.
ABOUT THE AUTHORS
Michael A Witt (Michael.WITT@insead.edu)
earned his PhD at Harvard University. He is Affiliate
Professor of Asian Business and Comparative Man-
agement at INSEAD, Fellow at INSEAD’s Euro-Asia
and Comparative Research Centre, and Associate in
Research at Harvard’s Reischauer Institute of
Japanese Studies. His work focuses on comparative
business systems and institutional change. A German
native speaker, he majored in Japanese and in
international relations as an undergraduate at
Stanford University.
Gordon Redding (Gordon.REDDING@insead.edu)
did his PhD at Manchester Business School after a
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
884
Journal of International Business Studies

managerial career in the UK, then spent 24 years at
the University of Hong Kong, where he was
founding director of the Business School. At
INSEAD since 1997, he has been Director of the
Euro-Asia Centre, and Senior Affiliate Professor of
Asian Business and Comparative Management. His
research interest is the evolution of the Chinese
forms of capitalism seen against the comparison of
systems of capitalism globally. He is a British
citizen, born in the UK.
Accepted by Hildy Teegen, Departmental Editor, 25 February 2008. This paper has been with the authors for one revision.
Executive rationale in Germany and Japan Michael A Witt and Gordon Redding
885
Journal of International Business Studies