Are Japanese companies with female board members more innovative?

“Japan is becoming a super-ageing society, even as the number of children is falling. You might find yourself asking, ‘In such a country, where will you find those innovative and creative human resources?’ Ariana Huffington once said that if Lehman Brothers had been ‘Lehman Brothers and Sisters,’ the firm would have survived. Japan’s corporate culture, by contrast, is still one of pinstripes and button-downs. After all, the female labour force in Japan is the most under-utilised resource. Japan must become a place where women shine. By 2020 we will make 30% of leading positions to be occupied by women.”

— Shinzo Abe, Prime Minister of Japan, World Economic Forum Annual Meeting Speech, 22 January, 2014

The recent bottleneck facing Japanese economic growth is the labour shortage and low productivity growth. According to the growth accounting results from the Japan Industrial Productivity Database for 2014 by the Research Institute of Economy, Trade and Industry, average economic growth rate in the total economy (excluding housing and activities not classified elsewhere) was 0.94% per annum for the period 1990-2011, a substantial decline from 4.53% per annum in the period 1970-1990. This large decline in economic growth over the recent two decades was caused mainly by the negative labour service input growth and the sharp decline in total factor productivity (TFP) growth. The average labour service input growth rate was 1.17% per annum during 1970-1990, and -0.04% per annum during 1990-2011. With regard to TFP, the average growth rate slowed from 1.76% per annum during 1970-1990 to 0.20% per annum during 1990-2011.

The three arrows and ‘womenomics’

Prime Minister Shinzo Abe is trying to revitalise the Japanese economy through Abenomics, a set of economic policies which consists of an aggressive monetary policy, a flexible fiscal policy, and a growth strategy that promotes private investment. Most economists agree that the third arrow (growth strategy) is a key component for the long-term revival of the economy, and through implementation of the strategy, both private investment and labour productivity are expected to increase.

In order to achieve this policy aim, he advocates the so-called ‘womenomics’ that aims to support an increase in the female labour participation and boost the percentage of women in leading positions to 30% by 2020. The practical policy pledged by the government is to ensure that all parents can access childcare, and to request every Japanese listed company to appoint at least one female director to its board.

The growth accounting results clearly imply that in order to achieve sustainable economic growth, Japan requires more efficient use of its labour force. However, one of the problems in the Japanese labour market is the insufficient effort in utilising the abilities of female workers, especially highly educated ones. McKinsey and Company (2013) showed that the percentage of women on boards of directors in Norway (34%), Sweden (27%), France (27%), Denmark (20%), and Germany (19%) is higher than that of Japan (2%), which is considerably low (see Figure 1).

Figure 1. Percentage of women directors and CEOs of Japanese limited firms

Moreover, the percentage of women who hold board member positions in Japan according to data in “Yakuin Shikiho” compiled by Toyo Shimposha shows only a moderate rise of 1.1 percentage point between 1999 (0.6%) and 2011 (1.7%).

In previous literature, Hsieh et al. (2013) estimated the effect of race and gender discrimination in the labour market on US economic growth. They concluded that an improvement in resource allocation through a decrease in occupational discrimination against black and women workers in the period 1960-2008 explains 15%-20% of growth in the aggregate output per worker over this period. Tang and Zhang (2014) examined micro evidence on the cost of discrimination by using Chinese firm data. They also looked at the impact of foreign direct investment (FDI) on the gender culture of Chinese local firms and found cultural spillover from FDI, especially from countries with less bias against women. Female employment in domestic Chinese firms increased after more foreign firms entered a sector or region.

Østergaarda et al. (2011) examined the effect of employee diversity on innovation in terms of gender, age, ethnicity, and education. They used firm-level data from a Danish innovation survey in 2006, and concluded that there is a positive relation between diversity in education and gender and the likelihood of introducing innovation. In addition, they also found that there is a positive relationship between an open culture toward diversity and innovative performance.

New evidence from Japan

In our recent work, we empirically examined the impact of board diversity on firms’ innovative activity, by taking advantage of the unique Japanese firm-level dataset in the period 2000-2011 (Inui et al. 2014). We constructed measurements of the degree of board diversity by using various characteristics of board members such as gender, age, tenure, and education. We found no significant impact on firm innovative activity after controlling for the firms’ fixed effects. However, when we restricted the sample to a group of firms with a high foreign ownership ratio or globalised firms, we found that the presence of female board members is positively associated with promoting firms’ innovative activity as measured by research and development (R&D) intensity.

• This finding suggests that board diversity is not associated with innovation across firms in general, but that if a firm has already accumulated the management skills to handle the diversified voices and opinions from board members, this helps it become more innovative.

The previous studies suggest that increasing diversity among Japanese firms’ employees and board members or improving resource allocation in the labour market through reducing the potential misallocation of talent among Japanese women may lead to an increase in the Japanese economic growth rate. That is, if Japan can succeed and become a place where women can shine, Japanese economic growth could return and rise again. However, our work suggests that Japanese women cannot shine without the necessary business environment for women and other minorities to play leading roles (Inui et al. 2014). Especially, Japanese firms should acquire diverse management skills and increase the level of creativity and innovation. Much of Japanese corporate governance today still relies on a homogeneous board system, and that may lead to a negative influence on innovative activity in Japan.

The Japanese government’s effort to attract foreign firms, especially from countries with less gender bias, may contribute to increasing the chance for Japanese firms to learn diverse management techniques from them and may increase their innovative performance. Tang and Zhang (2014) show that wholly-owned FDI pronounces higher cultural spillover to domestic Chinese firms than joint ventures. Higher participation by foreign investors in Japanese firms might contribute more management spillover to Japanese domestic firms.

This article is published in collaboration with Vox EU. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Kazuma Edamura is a Research Fellow at the National Institute of Science and Technology Policy (NISTEP). Tomohiko Inui is a Professor, Preparatory Office for the Faculty of International Social Studies, Gakushuin University. Makiko Nakamuro is an Associate Professor in the Faculty of Policy Management, Keio University. Junko Ozawa is a Private Finance Initiative (PFI) Promotion Office, Cabinet Office.

Image: A woman is silhouetted next to a solar panel display by solar module supplier Upsolar at the fourth International Photovoltaic Power Generation (PV) Expo in Tokyo. REUTERS/Yuriko Nakao