Japan's Economy Gains Steam From Manufacturing Heartland

To maintain a pipeline of new high-end products for its Japanese factories to build, Nagoya-area firms spend amply on research and development. The intricate web of cross-shareholding that ties many of them together makes it easier for them to set aside capital for such long-term purposes.

Toyota, for example, holds shares of many of its suppliers. These suppliers in turn own shares of Toyota. If Toyota decides to spend money developing new products instead of reporting it as profit or returning it to shareholders as dividends, it is unlikely to hear complaints from supplier shareholders. Many of Toyota's U.S. competitors, in contrast, focus more sharply on the quarterly bottom line to satisfy shareholders and analysts.

The Nagoya approach "doesn't necessarily mean you don't generate returns for shareholders," says Paul Sheard, an economist at Lehman Brothers in Tokyo. "It means you have the freedom to make the best cars, and you don't have the capital markets breathing down your neck."

During the 1980s, many Japanese companies ran into trouble by borrowing against appreciating real estate to make trophy acquisitions, from antique cars to landmark New York real estate. When the stock and real-estate bubbles popped in the early 1990s, those loans went bad, causing a slump from which big parts of Japan have yet to recover.

While Nagoya too experienced a slump in the early 1990s, it bounced back quickly. One big reason, executives say, is its frugality, a Japanese version of New England thrift. When Nagoya recently built a new airport, it was finished two months early and nearly $1 billion under budget. In an article entitled "The DNA of Nagoya's Almighty Prosperity," weekly news magazine AERA noted that the average Nagoya family spends $1,200 a year on entertainment, compared with a $2,100 nationwide average. Nagoyans spend less on their cellphones, and they tend to save more than the rest of the nation.

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In R&D, Brains Beat Spending In Boosting Profit

A study expected to be released today challenges the widely held belief that more is better when it comes to corporate spending on research and development.

Booz Allen Hamilton Inc., a consulting firm, analyzed six years of financial results by 1,000 publicly traded companies responsible for the bulk of R&D spending globally. The firm found the companies that spent proportionately greater sums than their industry peers didn't enjoy greater revenue gains or better profits.

The finding flies in the face of academic studies and accepted wisdom on the value of corporate research. It also comes as researchers warn that U.S. companies need to increase spending or risk falling behind rivals in China and India, which are rapidly industrializing.

Booz Allen concluded that once a minimum level of research and development spending is achieved, better oversight and culture were more significant factors in determining financial results. The study calculated the percentage of a company's revenue spent on R&D and compared it with sales growth, gross profit, operating profit, market capitalization and total shareholder result.

It found "no statistically significant difference" when comparing the financial results of middle-of-the-pack companies with those in the top 10% of their industry, said Barry Jaruzelski, Booz Allen's vice president of Global Technology Practice. The result was the same when viewed within 10 industry groups or across all industries evaluated.

"It is the culture, the skills and the process more than the absolute amount of money available," he said. "It says tremendous results can be achieved with relatively modest amounts" of spending.

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