Does Restructuring Increase a Firm's Value-Added/labor Productivity

What kind of influence does corporate restructuring have on a firm's real value-added, labor productivity, employment figure and wages?

It is said that the result of corporate restructuring in Japan was massive job losses and redundancies in the 1990s. Indeed, looking at the specific reasons for leaving one's job out of all of those unemployed, the number of people who left work involuntarily - for reasons attributable to the workplace or business - rose by almost five times from 320,000 in 1992 to 1.51 million in 2002 (according to the "Labor Force Survey" conducted by the Ministry of Public Management, Home Affairs, Posts and Telecommunications). Furthermore, 64% of those involuntarily dismissed from work were core household breadwinning males aged 25 to 64. Today's insecurities over household income and employment have been attributed to firms, which had hitherto placed emphasis on job security, changing their principles and rapidly restructuring.

However, what if these firms had not been restructured - would it have really stopped unemployment from increasing? If a corporation did its utmost to safeguard jobs, that action in itself would hike up product costs and discard competitive power, making the firm liable to suffer a management crisis and increasing the chances of bankruptcy. In actual fact, many companies, even if they manage to avoid bankruptcy, have been suffering from falling orders and forced to cut back on payrolls. In the end, exactly what sort of influence does restructuring have on a firm's competitiveness, the number of its employees and their salaries?

One uses the word "restructuring" in a general sense, but exactly what it encompasses will differ from firm to firm. We want to compare two types of firms - those that have made changes to organizational structure and those that have not - and investigate the effects that restructuring has on value-added and labor productivity. Furthermore, by comparing subsequent changes in the number of employees and the level of their wages in the respective firms, we would like to analyze the effect of organizational restructuring. Of course, depending on the scale and kind of restructuring conducted, the effects will differ, but by analyzing an average case, we hope to provide resources for conducting debate hereafter on realignment of corporate organizational structure.

The trouble with this sort of analysis, though, is the time that must pass once restructuring measures are carried out before the effects are realized. The period immediately after restructuring has taken place is seen by employees as all bad - redundancies have been made and wages decreased. However, in restructuring, if the firm's competitiveness has been increased, bankruptcy avoided, and large lay-offs have been prevented, then the final conclusion will be very different. Conversely, if no impacts are felt immediately following restructuring, once a certain amount of time has passed and those effects have filtered through, then it is quite possible there will be adverse effects on employment.

Owing to the fact that the effects of restructuring change over time, there is a strong chance that the results of analysis will be distorted if they are based on data from only one point in time. Accurate investigation of the long-term effects absolutely requires panel data derived from follow-up surveys on the same firm throughout a number of years. The quantitative analysis conducted in this paper uses corporate panel data that RIETI has developed based on the "Basic Survey of Japanese Business Structure and Activities" conducted hitherto by the Ministry of Economy, Trade and Industry (METI) (see note 1).

Panel data from the "Basic Survey of Japanese Business Structure and Activities"

The "Basic Survey of Japanese Business Structure and Activities" was begun in 1992 and is being continued even today. Those businesses surveyed by it include the manufacturers, mining operations, wholesale retailers, and businesses in the services industry - all with 50 or more employees and capitalized at Ґ30 million or more - that fall within the jurisdiction of METI. This survey is notable for two characteristics. Firstly, it differs from the conventional "Census of Manufacturers" and other surveys focused on individual establishments - factories, works, plants, etc - in that it is a survey that targets company-wide activities. If this were an analysis of production activities, looking at raw materials and production volume in individual establishments, would suffice. However, when analyzing the influence of economic activity tackled by an enterprise as a whole - the effects that organizational restructuring, expansion overseas, research and development have on profitability, competitiveness and employment - conventional establishment-based statistics alone will not do. Statistics targeting the firm are essential.

The second characteristic of this survey is that it has been designed so that each firm is assigned a permanent corporation code, allowing the same firm to be traced throughout many years. Using this data, we analyzed time-series changes in the effects of corporate restructuring by comparing the changes in performance, employment and salary of corporations that had carried out organizational restructuring with those that had not.

Organizational restructuring and corporate growth

The very first round of the "Basic Survey of Japanese Business Structure," which was implemented in 1992, asked companies whether they had made any changes to their organizational structure in the three years prior to that. In conducting our analysis, we would like to borrow the same questionnaire.

In doing this, it was important to bear in mind if there were any other factors apart from organizational restructuring that could be affecting the firm's performance. For example, the performance of each firm differs according to the type of firm it is, and a firm's technological capability can even be affected by factors such as research and development. Consequently, we analyzed the effects of organizational restructuring with econometric techniques, specifically, by adding all such factors that could be thought of to explanatory variables and expressing the growth rate of each type of company in respondent or explained variables.

For a long time now, corporate performance has been analyzed by investigating what growth factors influence it. According to this kind of research, the bigger and older a firm is the lower the firm's chances of going bankrupt but so is the growth rate of surviving corporations (see note 2). Taking this previous analysis into account, the research conducted for this