# Workers, Managers, Productivity

# Kaizenin Developing Countries

Edited by Akio Hosono · John Page · Go Shimada

Workers, Managers, Productivity

Akio Hosono • John Page • Go Shimada Editors

# Workers, Managers, Productivity

*Kaizen* in Developing Countries

*Editors* Akio Hosono JICA Research Institute Tokyo, Japan

Go Shimada School of Information and Communication Meiji University Tokyo, Japan

John Page The Brookings Institution Washington, DC, USA

#### ISBN 978-981-15-0363-4 ISBN 978-981-15-0364-1 (eBook) https://doi.org/10.1007/978-981-15-0364-1

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# Foreword

Development practitioners and researchers have long been confronted to the reality of a productivity gap between developed and developing countries. However, the role of management methods as an important determinant for quality and productivity outcomes has only surfaced in the recent past, and little is known about the effectiveness of initiatives that aim to increase managerial capital and improve productivity in the private or public sector in developing countries. *Kaizen*, as a model that has attracted much attention and captured imaginations from the 1960s on, and that has been adopted in many firms all over the world, provides an interesting lens to study the mechanisms at stakes. *Kaizen* can be defined as an inclusive and participatory approach to continuous improvement in quality and productivity, rooted in a distinctive philosophy and using specific tools and methods.

In 2015, the Japan International Cooperation Agency—Research Institute (JICA-RI) and the Global Development Network (GDN) felt that there would be high value in taking stock of the experiences of the various initiatives that disseminated and implemented *Kaizen* in different contexts and hence decided to join forces to document the adoption of *Kaizen* approaches.

This partnership was based on shared interests and strong complementarity. JICA-RI, the research arm of JICA, had invested much in private sector development. It was particularly interested in assessing how a now famous Japanese innovation, dating back to the 1960s and that it contributed to disseminate, can unleash innovation and productivity gains in developing country firms. GDN, a public international organization devoted to building research capacity in social sciences in developing countries, had supported research on productivity and industrial policies. It reckoned that a firm-based approach would provide both ample ground for capacity development and an opportunity to learn more about the driving forces underpinning the adoption of new managerial practices and their impact as a complement to research work on the conduct and impact of industrial policies.

This book is the product of this cooperation, which involved researchers from developing countries and *Kaizen* practitioners who worked on specific case studies and three co-editors, Akio Hosono, John Page, and Go Shimada who took the leadership in directing the book toward a coherent and meaningful object. It also involved researchers who advised research teams while they conducted their research, and we are grateful to Jocelyn Olivari, Aniceto Orbeta, and Tetsushi Sonobe for their comments and reviews. Because a book like this is more than a collection of individual studies, the contributors gathered several times in Tokyo, Nagoya, Bangkok, and Washington to discuss their research, identify commonalities and differences across context, and learn from the experience of each other. We hence hope to have planted the seed of a community of researchers in developed and developing countries interested in the dissemination and implementation of *Kaizen* approaches.

Through the voices of its co-editors, developing country researchers, and *Kaizen* practitioners, the book aims to present the diversity of *Kaizen* approaches in firms in developing countries and to address a number of a questions related to their effectiveness. Going beyond a traditional theory of firms, and by providing a deep dive into the intervention mechanisms used to introduce and sustain *Kaizen*, it also aims to put in the organizations- and countries-specific context the different experiences it describes. Such a book usually raises more question than it answers, but we hope it will provide the reader with an understanding of the mechanisms through which *Kaizen* initiatives may or may not work, how is *Kaizen* shaping the relations between workers and managers and the conditions for its adoption in a variety of firms from SMEs to Multinational corporations.

We would like to thank the book's chapter authors for their unerring dedicated involvement and the three co-editors Akio Hosono, John Page and Go Shimada for their invaluable analytical and editorial contributions. We would also like to add here a special word for our colleague, Professor Nestor Raneses who led the work on Chap. 13 on the MPex Program in the Philippines and express our deep sadness at his passing before the publication of this book.

# Acknowledgments

The editors are most grateful to the Global Development Network (GDN), Japan International Cooperation Agency Research Institute (JICA-RI), and the Brookings Institution, which provided efficient logistical support for our research, the organization of authors' workshops, and the preparation of this volume. The editors would like to extend their deepest gratitude to the President of GDN, Pierre Jaquet, and former and current directors of JICA-RI, Ichiro Tambo, Naohiro Kitano, Nobuko Kayashima, and Izumi Ohno, who all supported us during the process of conceiving, proposing, and carrying out the research project.

The editors would like to express their sincerest thanks to advisers to the research and writing of case-study chapters: Tetsushi Sonobe, the National Graduate Institute for Policy Studies (GRIPS), shared many valuable insights with us in the course of the project. The editors deeply appreciate valuable suggestions from Tsuyoshi Kikuchi, Japan Development Services Co., Ltd., Hiroyuki Tomita, JICA, and William Maloney, the World Bank.

The editors would also like to express special gratitude to several organizations that allowed us and the chapter authors to learn about the implementation, significance, and nature of *Kaizen* on site: Toyota Motor Corporation, Tahara Plant, Aichi, Japan, Denso (Thailand) Co., Ltd., Samrong Plant, Samutprakarn, Thailand, and Thai-Nichi Institute of Technology, Bangkok, Thailand. We appreciate the support of the JICA Offices in Bangkok, Nagoya, and Washington as well.

The editors and chapter authors would like to express their deep appreciation to those who supported the research and writing of individual chapters: members of the Malaysia Productivity Corporation (MPC), Petaling Jaya, Malaysia; Leo Guzman-Anaya, University of Guadalajara, Mexico; members of the Brazilian Development Bank (BNDES); members of the Institute of Applied Economic Research (IPEA), Brazil; members of the Inter-American Development Bank (IDB); Fekadu Nigussie Deresse, Agriculture Transformation Agency (ATA); Ethiopia; Girum Abebe Tefera, Ethiopian Development Research Institute (EDRI); Mekonnen Yaie, and Seblewongel Hargawin, Ethiopia Kaizen Institute (EKI); Nigusse Gebre Gebremedhin, Federal TVET Agency (FTA), Ethiopia; Gebeyehu Benti, Yasuto Kikuma, and Hiroyuki Tanana, JICA Ethiopia Office; Getafun Tadesse Mekonnen, Ethiopia; members of the Automotive Industry Development Centre (AIDC), Rosslyn, South Africa; Jocelyn Olivera, Universidad Alfonso Ibanez, Chile; Aniceto Orbeta, Philippines Institute for Development Studies, Philippines; members of the National Board for Small Scale Industries of Ghana; members of the JICA Ghana Country Office; the Samahan ng mga Rizaleño sa Sektor ng Agrikultura at Pagkain (SARAP), the Philippines; and members of the Department of Science and Technology and the Department of Trade of Industry, the Philippines.

The editors are especially grateful to Pierre Bertrand, Naotaka Yamaguchi, Eriko Sakamaki, Ritsuko Yamagata, and Kimiaki Jin for their continuous support of the research, authors' workshops, and other related meetings as well as for providing professional assistance during the preparation of this volume. Their tremendous support at different moments throughout the three years of this research project is greatly appreciated.

# Contents

#### **Index** 317

# Notes on Contributors

**Charles Godfred Ackah** is a director of the Centre for Social Policy Studies and a senior research fellow at the Institute of Statistical, Social and Economic Research, University of Ghana. He is also an external research fellow at the Centre for Research in Economic Development and International Trade, University of Nottingham.

**Johnson Appiah Kubi** just finished his PhD in Development Economics from the University of Ghana (results published, formal award in July 2019). He is a research associate on two research projects in the University of Ghana and a consultant on one project elsewhere in Ghana.

**Richmond Atta-Ankomah** is a research fellow at the Institute of Statistical Social and Economic Research, University of Ghana. He received his PhD from the Open University, UK, in 2014. He has a research background in economics and development, particularly the economics of innovation, and poverty and inequality analysis.

**Nelson G. Cainghog** is Assistant Professor of Political Science at the University of the Philippines Diliman, Philippines. He was the Director of the Public Service Office that led to the development of a university-wide service reporting system. He completed his Master's degree in International Relations from the Australian National University.

**Mauricio Canêdo-Pinheiro** is a professor at Rio de Janeiro State University (UERJ) and in Getulio Vargas Foundation (FGV)—Brazilian School of Economics (EPGE). He worked at the Brazilian Ministry of Economy between 2001 and 2002 and was a researcher at the Brazilian Institute of Economics (IBRE) of the FGV between 2004 and 2017. He holds a PhD in Economics from the FGV/EPGE. Canêdo-Pinheiro has written academic papers on topics related to industrial organization, regulation, economic development, industrial policy, and innovation.

**Quang Hung Doan** is a lecturer at Foreign Trade University, Vietnam, and a researcher at Development and Policies Research Center (DEPOCEN), Vietnam. He completed his Master's in Development Economics from the International Institute of Social Studies (ISS) at Erasmus University Rotterdam, Netherlands, and National Economics University, Vietnam, in 2015. He is now a PhD candidate at LUISS University, Italy. His research topics are social capital, innovation, and development economics. He has a strong background on data analysis and econometric models.

**Kristine Mae C. Gotera** is a research staff of the *Kaizen* and Innovation Makerspace in the Department of Industrial Engineering and Operations Research, University of the Philippines Diliman, Philippines. She is also an instructor in the Environmental Science Department at Ateneo de Manila University.

**Toru Homma** is a senior adviser on private sector development (Investment, Trade and Industry), Japan International Cooperation Agency (JICA), since 2010. He served as JICA Investment Promotion Advisor in the Myanmar government from 2014 to 2017, OECD Investment Policy Analyst at its headquarters in Paris from 2006 to 2009, JICA Project Formulation Advisor in JICA Indonesia Office from 2003 to 2006, JICA SME Development Expert in Indonesian government from 1999 to 2002, and other relevant assignments on private sector development, in particular industrial development, investment promotion, *Kaizen*, and others. He holds MSc in Industrial Strategy and Trade Policy and BEng in Administration Engineering.

**Akio Hosono** is a senior research adviser at the Japan International Cooperation Agency Research Institute (JICA-RI). He was a professor at the Institute of Policy and Planning Sciences, Tsukuba University; at the Research Institute of Economics and Business Administration, Kobe University; and at the National Graduate Institute for Policy Studies (GRIPS). He was a former director of JICA-RI.

**Keiji Ishigame** is the Director of Partnership Program Division, Yokohama Center, Japan International Cooperation Agency (JICA), Japan. He served as a senior representative of JICA in South Africa and an adviser of Private Sector Development Group and managed *Kaizen* projects in Africa and Latin America. He holds MA in International Development and Business.

**Kimiaki Jin** is a senior assistant chief, JICA Research Institute. He served as a chief representative of JICA in Ethiopia during 2013–2017 and in the UK during 2009–2013. He published a book titled *Applying the Kaizen in Africa* in 2018 as a co-editor. He served for two more periods with JICA in Ethiopia, during 1990–1993 and 2003–2006.

**Keiji Katai** is a director for Private Sector Development Group, Japan International Cooperation Agency (JICA). He is managing JICA's operation and strategy on private sector development in Latin America and the Caribbean, Africa, Middle East, and Europe. He received MIA from Columbia University and ME from Kyoto University.

**Filipe Lage de Sousa** is a senior economist at the BNDES and lecturer of Microeconomics at the Fluminense Federal University with 20 years of working experience. He holds a PhD from the London School of Economics, and his areas of expertise include productivity, innovation, and economic development.

**Thi Tuong Anh Nguyen** is an associate professor at Foreign Trade University, Vietnam, and a researcher at Development and Policies Research Center (DEPOCEN), Vietnam. She completed her Master's degree in Economics from the University of Birmingham, United Kingdom, in 2004 and her PhD in Economics at Foreign Trade University in 2012. Her research interests are firm's behavior, international economics, and foreign direct investment.

**John Page** is a senior fellow in the Global Economy and Development Program at the Brookings Institution, Washington, DC, and a nonresident senior fellow of the United Nations University World Institute for Development Economics Research (UNU-WIDER). He is a research associate at the Centre for the Study of African Economies, Oxford University, and the Oxford Centre for the Study of Resource Rich Economies.

**Bernardo Pereira Cabral** is a professor at the Faculty of Economics of the Federal University of Bahia. He holds a PhD in Economics from the Economics Institute of the Federal University of Rio de Janeiro. His works focus on innovation-related topics, and he specializes in qualitative research methods.

**Nestor O. Raneses** is Professor of Systems Thinking and Systems Dynamics at the Department of Industrial and Operations Research University of the Philippines Diliman. His academic and research interests are in total quality and productivity improvement, lean six sigma, operational excellence, and *Kaizen* methods. He is a practicing academic with extensive work experiences in process improvement and lean implementation in both industry and the public sectors.

**Eriko Sakamaki** was a deputy chief of Research Program Division of JICA Research Institute until March 2019. She has working experience in West African countries such as Benin, Burkina Faso, and Senegal. She holds a master's degree in Education and International Development from Institute of Education, University of London.

**Go Shimada** is an associate professor at Meiji University and a visiting scholar at Columbia University and Japan International Cooperation Agency (JICA) Research Institute. Prior to these, he was an associate professor at the University of Shizuoka, and worked for JICA for more than two decades as a senior research fellow, JICA Research Institute; a special assistant to the president, Office of the President; and a first secretary, Permanent Mission of Japan to the United Nations, New York. He holds a PhD from Waseda University.

**Glaucia Estefânia de Sousa Ferreira** is a research assistant from the Brazilian Economic Research Institute. She holds a bachelor's degree in Statistics from the National School of Statistical Sciences and a master's degree in Electrical Engineering from Catholic University in Rio (PUC-RJ). She has more than 10 years of working experience with large datasets for econometric models.

**Momoko Suzuki** is a senior deputy director of Private Sector Development Group, Industrial Development, and Public Policy Department of Japan International Cooperation Agency (JICA). She is leading the Africa *Kaizen* initiative which was launched together with the New Partnership for Africa's Development (NEPAD) in 2017. She holds a master's degree from Sussex University, Institute for Development Studies (IDS).

**Mili-Ann M. Tamayao** is an assistant professor in the Department of Industrial Engineering and Operations Research and Energy Engineering Program Faculty Fellow of the University of the Philippines Diliman. She is a visiting researcher at Chalmers University of Technology and holds a PhD in Engineering and Public Policy from Carnegie Mellon University.

**Hoang Nam Vu** is Associate Professor of Economics at Foreign Trade University, Vietnam. He completed his PhD from the National Graduate Institute for Policy Studies in Japan in 2008. His research interests include human capital, industrial cluster development, small- and mediumsized enterprise promotion, and economic development.

# List of Figures

gained from someone outside their companies, such as their customers (such as the companies that order the surveyed companies to make products/components), their suppliers (such as the companies that supply material/parts for the surveyed company's production), and others listed in the (b) above. *Note 2*: The sample size was 262 except for the following: 922 for (3) and (4) and 786 for (5) and (6), because the 262 respondents were asked to list their multiple major customers/suppliers at maximum five (5). *Note 3*: In the items from (7) to (16), Type 1 refers to a company within the same province with the surveyed company; Type 2 means a company in a different province but within the same island with the surveyed company; Type 3 means a company on a different island as the surveyed company but within Indonesia; Type 4 means a company outside Indonesia; SOE means State-owned enterprise; and NGO/CSO means nongovernmental organization/civil society organization. *Note 4*: 5S is a working environment improvement methodology including *Seiri* (Sort/orderliness), *Seiton* (Set in order/tidiness), *Seisou* (Shine/cleaning up), *Seiketsu* (Standardize/cleanliness), and *Shitsuke* (Sustain/discipline) (Shimada et al. 2013). *Note 5*: This JICA-LPEM Survey inquires about *Kaizen* and 5S separately in some parts (such as the data used for Fig. 6.2(a)) and aggregately on *Kaizen* and 5S, and furthermore includes other types of management activities such as QC, ISO, and others in other part (such as the data used for Fig. 6.2(b)). This is because this survey was not necessarily designed for this chapter but for other purposes. However, the survey is still useful for discussions on *Kaizen* dissemination in Indonesia in this chapter. (Source: Processed by Author, data derived from JICA-LPEM Survey) 125 Fig. 6.3 Relationship between *Kaizen* engagement and labor productivity (*n* = 262). Note: IDR means Indonesian rupiah (Indonesian currency). (Source: Processed by Author, data derived from JICA-LPEM Survey) 126 Fig. 6.4 Stakeholders' roles and relations in *Kaizen* dissemination (possible standard model). (Source: Author) 132 Fig. 6.5 *Kaizen* dissemination path model: Paths of *Kaizen* dissemination in a country: (a) dissemination stage outline and (b) dissemination stages and stakeholders' major roles (Source: Author) 134

# List of Tables

#### xxvi LIST OF TABLES

# Overview

# *Akio Hosono, John Page, and Go Shimada*

# 1 Introduction

Productivity and quality are critical to success in international markets and, in particular, to entering global value chains (GVCs). Yet, despite a growing body of research on managerial capital, we still do not fully understand how to improve productivity and quality in the private and public sectors in developing countries. *Kaizen* is a widely adopted practice developed in Japan to improve productivity and quality, but empirical studies analyzing its effectiveness in developing countries—especially in Africa and South East Asia—are limited. This book presents a collection of essays on efforts to introduce *Kaizen* to developing countries and use it to enhance productivity and quality in both small and large firms. Our

A. Hosono (\*) JICA Research Institute, Tokyo, Japan

e-mail<EMAIL_ADDRESS>
J. Page The Brookings Institution, Washington, DC, USA

G. Shimada School of Information and Communication, Meiji University, Tokyo, Japan e-mail<EMAIL_ADDRESS>
© The Author(s) 2020 1 A. Hosono et al. (eds.), *Workers, Managers, Productivity*, https://doi.org/10.1007/978-981-15-0364-1\_1

objective is to give readers some new insights into how *Kaizen* can play a role in making developing countries more globally competitive.

The book is structured in the following way. Following this introductory chapter, Chaps. 2, 3 and 4 take up how *Kaizen* addresses three important issues in contemporary development policy—industrial policy and firm capabilities, creating a learning society and dealing with income inequality. The rest of this book consists of three parts: (1) introducing and implementing *Kaizen*; (2) the effectiveness of *Kaizen* in large companies; and (3) effectiveness of *Kaizen* for micro, small and medium enterprises. Part 1 presents three case studies of how *Kaizen* has been introduced and disseminated in developing countries. Part 2 addresses the impact of *Kaizen* on the performance of larger companies, including its role in efforts to upgrade firms' position in global value chains. The final part of the book consists of three chapters that assess the effectiveness of *Kaizen* in micro, small, and medium enterprises (MSMEs). Our introduction follows the same structure as the book.

# 2 Defining *Kaizen*

There is a consensus among experts, practitioners, and academics regarding a number of intrinsic attributes that define *Kaizen*. These central concepts shape our understanding of how *Kaizen* is conceived and how it is used.

# *2.1 Five Key Attributes of* **Kaizen**

First, Kaizen *is an approach to continuous improvement*. This notion comes from the Japanese word *Kaizen* itself and is used by most of the leading institutions engaged in disseminating and implementing *Kaizen* activities such as the Asian Productivity Organization (APO) and the Japan International Cooperation Agency (JICA). Continuous improvement is a core concept of *Kaizen*.

Second, Kaizen *is about increasing quality and productivity*. When *Kaizen* was developed, Japanese companies introduced statistical quality control (SQC) in parallel with efforts to improve productivity. Because any reduction in defective products enhances yield rates (known in Japan as *budomari*), more effective quality control (QC) not only improves quality; it also increases productivity. Thus, the principal aims of *Kaizen* are improving quality and productivity at the firm level. Central to this objective are the elimination of *Muda* (waste), *Muri* (overloading), and *Mura* (inconsistency). These three elements—or "3Mus"—have become central concepts of *Kaizen*.

A defining characteristic of *Kaizen* is that it does not seek to improve productivity through investments in machinery. Rather it does so through reductions in costs—based on 3Mus—making it a low-cost approach to raising productivity, especially for smaller firms.1 In addition, the elimination of 3Mus improves the safety of workers and reduces environmental burdens. Thus, *Kaizen* may be more comprehensively understood as the improvement of quality, productivity, safety, and sustainability.

Third, in Japan, *Kaizen* developed inclusive and participatory approaches to improving quality and productivity by aligning and adapting statistical quality control and productivity movement methods that were introduced from the United States to a higher level of worker participation. As Shimada argues in Chap. 4, the participatory approach developed in part to reduce confrontations between labor and management. The inclusive and participatory approach constitutes another core element of *Kaizen*.

Fourth, many *Kaizen* tools and methods have developed over the more than half a century of its dissemination and development in Japan. For example, 5S, quality control circles (QCC), and just-in-time (JIT) inventory are well-known *Kaizen* tools and methods, often used synonymously with *Kaizen*. The so-called *Kaizen* mindset, which places an emphasis on teamwork, communication, and learning attitudes—or the *Kaizen* philosophy—is essential for the effective application of the tools and methods.2

Fifth, as *Kaizen* has spread through firms, it has come to be referred to as total quality control (TQC) and total quality management (TQM). The Toyota Production System (commonly called TPS) is one of the most systematic and advanced Japanese TQC or TQM systems. TQM and TPS are not *Kaizen per se* but are management systems based on *Kaizen* (or that use *Kaizen*). Some systems that developed outside of Japan, like lean production, are based on TQM and TPS. The fact that *Kaizen* is the basis of such management systems is an important spillover. It has contributed to the design of new approaches in countries outside of Japan.

### *2.2 The Definition of* **Kaizen** *Used in This Volume*

The first three of the five key attributes of *Kaizen* discussed above are its most important characteristics. With these in mind, we can give a basic, brief definition of *Kaizen*. Kaizen *is an inclusive and participatory approach to the continuous improvement of quality and productivity*.

Our brief definition, however, fails to reflect two of *Kaizen*'s other attributes. If we add them to the definition, we reach a somewhat longer but more complete one. Kaizen *is an inclusive and participatory approach to continuous improvement of quality and productivity, resting on its distinctive philosophy and tools/methods. It forms the basis of multiple management systems, including TQM and TPS, developed in Japan and adapted for use in other countries*.

# 3 *Kaizen* and Three Issues in Development

In this section, we draw on the three opening chapters and on the countrylevel research to explore how *Kaizen* addresses three major issues in economic development. The first is the role of *Kaizen* in industrial policy and the development of firm capabilities. The second issue is how *Kaizen* contributes to learning by individuals and institutions and to the capacity to learn in society more broadly. The third is how *Kaizen* can contribute to equitable growth. These issues are covered in detail in the essays in Chap. 2 by Page, Chap. 3 by Hosono, and Chap. 4 by Shimada. This section draws on key results from the country-level research to explore *Kaizen*'s contribution in each area.

# *3.1 Industrial Policy, Capabilities, and the Learning Firm*

Chapter 2 by John Page analyzes the relationship between industrial policy, *Kaizen*, and firm capabilities—a key determinant of international competitiveness. He argues that industrial policy is finally reaching the development policy mainstream and that one of its major objectives in low-income countries should be to build knowledge in the firm. Traditionally, economists have viewed the firm as a black box, responding to changes in its external environment, as prices and incentives change. Recent work at the intersection between management studies and economics is beginning to pry open the black box and gives us greater insight into how workers and managers impact such critical outcomes as productivity and quality (Sutton 2012).

Productivity is one dimension of capability. The other is quality. Because *Kaizen* is "an inclusive and participatory approach to the continuous improvement of quality and productivity," it is intrinsically related to building firm capabilities. Page concludes that "*Kaizen* is a promising and uniquely Japanese approach to capability building," but he cautions that firms often fail to respond to opportunities to raise productivity and quality due to lack of perception or motivation. Competitive pressure must complement training initiatives, whether based on *Kaizen* or not. Moreover, *Kaizen* is not the only approach to training. Further evaluations of the impact of capability building efforts—ranging from collective action by private firms to structured training programs—will be essential to understanding the costs and benefits of industrial policies targeted at improving firms' performance.

*Kaizen* supports the learning of capabilities in firms by helping workers and managers to identify and resolve production and quality problems. In their studies of firms attempting to enter and move up the automotive value chains in Mexico and South Africa, Keiji Katai (Chap. 8) and Keiji Ishigame (Chap. 9) provide a number of examples of how *Kaizen* promoted capability building in medium- to large-scale firms. In Mexico, Katai found that in addition to making changes in the production lines targeted under the project, automotive firms expanded *Kaizen* activities to other production lines, leading to internal spillovers, evidence that they applied the knowledge gained to other areas of the enterprise. Katai also found evidence of knowledge spillovers between supplying and purchasing firms. The most successful Mexican suppliers were entering into longerterm partnerships with Japanese buyers that involved the transfer of knowledge to the supplying firm. Ishigame's surveys of firms in South Africa found that *Kaizen* contributed to learning not only in companies that participated fully in the project but also in companies that dropped out and failed to finish. He suggests that by giving workers greater voice, *Kaizen* encouraged learning. Managers noted that as firms implemented *Kaizen*, many operational staff began to identify problems in production and propose improvements in plant-level processes to solve them.

In Chap. 11, Vu Hoang Nam evaluates a *Kaizen* training program for MSMEs in garment production in Vietnam. One key finding of the evaluation was that in addition to the direct impact of training on targeted enterprises, there were important spill-over effects on learning by nontreated firms. The improved management practices that were adopted by participants were also acquired through an informal channel of networking among the proprietors of similar firms. Ackah, Atta-Ankomah, and Kubi evaluate the effect of *Kaizen* training offered to small manufacturing enterprises in Ghana in Chap. 12. Their results show that firms receiving *Kaizen* training had a statistically significantly higher probability of engaging in daily cleaning at the close of work, placing tools in the right place, having a *Kaizen* committee, and having a floor plan than firms that did not introduce *Kaizen*. Workers' suggestions to management for process improvements, employees' knowledge of the firm's sales targets or policies, and knowledge of the mission of the firm were significantly higher in treated firms. The Philippine experience outlined in Chap. 13 shows a number of similarities with the firm-level learning that took place in Ghana and Vietnam.

The case studies suggest that by including all members of the firm in the process of learning and problem-solving, *Kaizen* promotes the exchange of information between workers, managers, and engineers and helps to develop "learning organizations." However, they also point to a number of lessons with respect to sustainability. Katai and Ishigame conclude that in larger firms, leadership from top management is essential to keep workers and managers moving in the same direction. Among MSMEs, smaller size may promote closer engagement, but in Ghana and Vietnam, managers reported problems with the attitude to work and discipline of workers—the majority of whom had little prior organized work experience.

#### *3.2* **Kaizen** *and the Learning Society*

Noman and Stiglitz (2017) argue that "perhaps the most important 'endowment' of a country [is] institutions and learning capacities that [are] embedded in local institutions." In Chap. 3, Akio Hosono examines the learning dimension of *Kaizen*, emphasizing that it differs from other approaches to achieving better quality and productivity because of its distinctive focus on inclusive and participatory learning. *Kaizen*, total quality management (TQM), and related approaches contribute to growth—and in particular to high-quality growth—by enhancing learning capacity, an essential endowment for industrial transformation.

Many *Kaizen* tools and methods have developed over more than half a century to address the three productivity dimensions of cost, quality, and speed. "The core concept of *Kaizen* is to eliminate *muri* (overloading), *muda* (waste), and *mura* (inconsistency) from the worksite through efficient utilization of labor, materials, and equipment" (APO 2015, 10). These approaches require participation and learning by all. Hosono argues that *Kaizen* differs from other approaches to achieving better quality and productivity—especially those based on monetary incentives or sanctions—due to its distinctive focus on inclusive and participatory learning.3

The case study evidence shows that *Kaizen* changes the mindset of managers and workers, fosters personnel who can think and act for themselves, and promotes teamwork by encouraging team-based problemsolving (JICA 2016). Ishigame's interviews with workers and managers of automotive suppliers in South Africa in Chap. 9 show that 88 percent of the respondents believed that *Kaizen* had a positive impact on learning. Respondents indicated that major changes took place with introduction of *Kaizen*. As operators participated in training, management and engineers encouraged them to express their opinions. Production workers learned to think for themselves and take the lead in improving factory operations. Managers and engineers, on the other hand, learned the importance of involving workers in quality and productivity improvements.

In Chap. 5, Jin also takes up the relationship between *Kaizen* and learning. He finds that the changes of mindset observed in workers in Ethiopia consisted of enhanced teamwork, communication, and learning attitudes. Jin argues that these changes are the result of collective activities of *Kaizen*, such as 5S, quality control circle (QCC), and *muda* elimination. He argues further that *Kaizen* addresses not only the development of the technical capacity of workers and management but also the development of "core capacity." Core capacity includes the ability to commit and engage, to identify needs and key issues, to plan, budget, execute, and monitor actions, and, most importantly, to acquire knowledge and skills.

Core capacity is closely related to employability. In Chap. 7, Suzuki and Sakamaki look at *Kaizen*'s role in employability training in Ethiopia and South Africa. They note that there is no unified definition of what specific skills are core employability skills, but that skills and abilities that consistently appear in employer surveys fall into four categories: learning to learn, communication, teamwork, and problem-solving. These skills are what many company managers expect from workers when implementing *Kaizen* activities.

In Chap. 10, De Sousa, Canêdo-Pinheiro, Cabral and de Sousa Ferreira suggest that in Brazil, *Kaizen* has played an important role in innovation. They find that both product and process innovation increases following the implementation of *Kaizen*. In their view, these innovations—with a lag of some years—eventually impact productivity. This is an important, but somewhat controversial finding. The relationship between *Kaizen* and innovation deserves special attention. We need to understand how *Kaizen* differs from the widely accepted notion of "innovation."

Masaaki Imai's view is well known and clearly highlights the main characteristics of *Kaizen*. He argues that effect of *Kaizen* is long-term and longlasting but undramatic. "Innovation," on the other hand, is short-term and dramatic. *Kaizen* is based on group efforts and a systems approach; "innovation" is based on individual ideas and efforts. *Kaizen* requires little financial investment but great effort to maintain momentum, while "innovation" requires large financial investments (Imai 1986).

However, there are many definitions of innovation. Innovation can be incremental (JICA 2018, 9 of Part 1), and more recently some experts have associated *Kaizen* with incremental innovation (JICA 2018, 10 of Part 1). The *Kaizen* mindset and many *Kaizen* tools can be considered innovation inputs, enabling firms to take innovative actions, experiment, adopt new technology, and hence achieve innovation outputs.4 The MIT Commission on Industrial Productivity notes that the cumulative effect of successive incremental improvements and modifications to established products and processes can be very large and may outpace efforts to achieve technological breakthroughs (Dertouzos et al. 1989).

#### *3.3* **Kaizen** *and Equitable Growth*

Chapter 4 by Go Shimada analyzes the implications of *Kaizen* for inequality, one of the most important global issues we face today. This chapter draws on Japanese experience to argue "*Kaizen* is essential knowledge, a missing piece to achieve equitable growth." Japan introduced *Kaizen* at a time when labor relations were very conflictive. In order to secure worker participation in a process designed to improve productivity and quality, firms adopting *Kaizen* committed themselves to share the profits derived from such improvements equitably between labor and management. Several key features of the emphasis on equity, such as life-time employment and the growth of company-specific labor unions—most of Japan's labor unions are not organized by industry—increased employee loyalty to firms and strengthened firm-level competitiveness. The equity orientation of *Kaizen* was not a technological innovation. It was a social innovation that contributed to achieving economic growth and equality. Shimada argues that both developing and developed countries can adapt the social innovation embodied in *Kaizen* to address inequality.

As Shimada points out in Chap. 4, in most cases, productivity growth means that firms need fewer people to produce the same output. This is not the usual experience under *Kaizen*. Because *Kaizen* requires the long-term commitment of both managers and workers to implement behavior change, it has the potential to improve labor-management relations. In other words, *Kaizen* seeks to maximize long-term social return rather than short-term private return.

Our country studies paint a mixed picture of *Kaizen*'s impact on employment. In Ghana (Chap. 12), Ackah, Atta-Ankomah, and Kubi found that *Kaizen* firms increased average employment relative to non-*Kaizen* firms. Beyond the impact on the number of jobs, they also found managers reporting that workers' attitude toward work was more positive in treated firms. On the other hand, De Souza, Canêdo-Pinheiro, Cabral and de Sousa Ferreira (Chap. 10) found that in Brazil the employment impacts of *Kaizen* were mixed. Firms implementing *Kaizen* tended to hire more total employees, because production expanded compared to those not implementing *Kaizen*. More detailed analysis revealed, however, that *Kaizen* increased the total number of workers and the number of R&D-related workers, while reducing the number of workers on the production line. They also found that the expansion of employment was biased toward high-skilled workers.

Other case studies—Ethiopia, Mexico, the Philippines, South Africa, and Vietnam—do not address employment but give us some insights into how *Kaizen* impacts worker-management relations. It is a mixed picture. In Vietnam (Chap. 11), Nam et al. found high turnover rates and low worker commitment to be key problems. Set against that, managers reported not knowing how to motivate workers. In contrast the case study of the Philippines (Chap. 13) by Raneses et al. found that *Kaizen* empowered workers to assume a greater role in the operations of the firm. Managers promoted teamwork and introduced plant-level changes based on workers suggestions. In Ethiopia (Chap. 5), Jin observed that once workers were convinced of the usefulness of *Kaizen*, they used it even in their homes. His interviews of managers, however, found that workers participation in *Kaizen* represented a challenge to its sustainability. Ishigame in Chap. 9 finds similar difficulty with workers' attitudes and attributes the difficulty in changing mindsets among workers to the structure of labor-management relations in South Africa. Although it was a condition for firms to receive *Kaizen* support under the JICA project not to reduce the number of employees, workers refused to accept many proposed changes due to the perception that they would increase their burden of work.

How should we interpret this mixed picture? Japan's experience suggests that improving manager-worker relations takes a long time. Our case studies of Vietnam, Ethiopia, and South Africa show the same pattern. In each case, changing the mindset of managers and workers took time, but the change resulted in an improvement in labor-management relations. This improvement is essential for the sustainability of *Kaizen*, and if the change is successfully sustained, *Kaizen* will bring social innovation to the firm.

# 4 Introducing and Implementing *Kaizen*

Today, *Kaizen* is practiced in many countries. Part 1 of this volume focuses on case studies of how *Kaizen* was introduced and disseminated. Both the public and private sectors have introduced and disseminated *Kaizen*, sometimes working together. The country studies find that success in implementation depends on the development of specialized agencies, the level of industrialization of the economy, the presence of foreign firms, and the level of participation in global value chains (GVC).

In countries such as the United States and Japan, initiatives by the private sector were decisive. In Japan, manufacturing companies were strongly motivated first by the urgent necessity to become competitive in the world market after World War II (in the 1950s and 1960s) and later by the necessity to address challenges caused by the oil crises of the 1970s and 1980s.5 In the US automobile industry, intense competition from Japan was one of the most important triggers to introduce new management systems, including total quality management and lean production, in the 1980s.

Among Southeast Asian countries, Singapore was the first to introduce *Kaizen*. The government led the process of nationwide introduction and dissemination of *Kaizen* in the 1980s. Later as public-private institutions directly charged with this process developed, the public sector's engagement diminished. In the other "ASEAN 5" countries (Indonesia, Malaysia, the Philippines, and Thailand), the introduction of *Kaizen* has been led by both public and private initiative, depending on the country context. Most other ASEAN countries have followed a similar trajectory. In North Africa, Tunisia and Egypt were pioneers in introducing *Kaizen* in the mid-2000s, while in sub-Saharan Africa, Ethiopia was the first country that promoted *Kaizen*, beginning in the late 2000s.

### *4.1 A Government-Led Process in Ethiopia*

In Chap. 5, Jin analyzes how Ethiopia, a country at a very early stage of industrial development, introduced *Kaizen* from scratch. Ethiopia has few foreign firms and little participation of local firms in GVC. The Ethiopian case is relevant to understanding the process of introducing *Kaizen* when the concept is almost totally unknown. The process began with a pilot project, followed by sequential programs of scaling-up. In 2009, the Ministry of Industry created a *Kaizen* Unit with ten staff to test its effectiveness in the manufacturing sector. Once *Kaizen*'s effectiveness was established, the Unit expanded in 2011, to become the Ethiopia Kaizen Institute (EKI) with sixty technical staff. EKI provided training to 68,954 trainees and established 9658 *Kaizen* Promotion Teams (KPT)—a customized version of the quality control circle (QCC)—in 473 institutes in Ethiopia from 2012/2013 to 2016/2017.

As the EKI scaled up the introduction of *Kaizen* programs to a wider range of targets, it also communicated with sector-specific industrial development institutes (for example in the textile, leather, and metal industries) in order to mainstream *Kaizen* training. In 2014, the government established the National Kaizen Council chaired by the Prime Minister and started creating regional *Kaizen* institutes to strengthen dissemination across the country. In addition, the government incorporated mainstreaming *Kaizen* into its five-year national development plan, the Growth and Transformation Plan II. Recognizing that *Kaizen* could also play a role in the public sector, the government changed the supervising ministry of EKI from the Ministry of Industry to the Ministry of Public Service and Human Resource Development in 2015, and then to the Civil Service Commission in the Prime Minister's Office in 2018.

In more than half of the workplaces, the *Kaizen* methods taught were 5S, KPT, and Muda elimination, which are basic *Kaizen* tools that can target several bottlenecks in the production process. These activities do not require high-level technical skills, but the participation of people in all levels of management, supervisors, and workers is essential. Jin conducted interviews intended to analyze how practitioners in companies understood the impact of introducing *Kaizen*. More than half of respondents ranked: (i) changing the mindset of workers, (ii) improving the flow of materials, (iii) greater efficiency of machinery, (iv) better communication flow, (v) increased technical skills of workers, and (vi) leadership by management in descending order as the major impacts of introducing *Kaizen*.

Eighty-seven percent of the respondents chose "the mindset of workers" as the feature that most changed in the workplace. The most common three changes in mindset reported were better teamwork, communication, and learning attitudes, followed by self-confidence and activism. Punctuality and obedience ranked relatively low. Jin concludes that the egalitarian approach of *Kaizen* was a major factor in its successful dissemination.6 He concludes "people do not want to be treated like a disposable workforce by employers through a reform process. This point has critical importance in societies with limited dynamism in labor markets, such as Ethiopia, because it is difficult to find new job opportunities once people are dismissed. Workers don't appreciate any reform activities that affect their job security negatively, which is the other side of the coin of productivity improvement."

### *4.2 Diverse Dissemination Profiles in Southeast Asia*

In Chap. 6, Homma describes how government, public-private organizations, and the private sector contributed to the introduction and dissemination of *Kaizen* in three ASEAN countries, Malaysia, Indonesia, and Myanmar. In Malaysia, *Kaizen* and associated approaches were introduced in 1983 through the National Productivity Center (NPC)—later renamed the Malaysia Productivity Corporation (MPC)—under the "Look East Policy," a government initiative to learn from the experiences of Japan.

Having introduced *Kaizen*, MPC/NPC adapted *Kaizen* tools to suit the Malaysian context; 5S was adapted and renamed "Quality Environment" and QCC "Innovation and Competitiveness Circle" (ICC). In Malaysia, *Kaizen* has generally been integrated into a comprehensive productivity improvement system, together with total quality management (TQM) and related approaches. Homma summarizes MPC's strengths as follows: (i) a strong mandate to lead productivity improvement in Malaysia, (ii) appropriate and timely adaptation of MPC's function to adapt to changing requirements, (iii) customization of foreign practices such as *Kaizen* to the Malaysian culture, and (iv) a wide variety of approaches designed to deliver services efficiently.

In Indonesia, the private sector played a significant role in introducing *Kaizen*, and it has been actively disseminating *Kaizen* mainly through two channels: (i) Japanese manufacturers have introduced local suppliers to *Kaizen* via their supply chain management systems and (ii) private sector organizations have implemented productivity- or quality-related programs and training. The Directorate General of Training and Productivity Development under the Ministry of Manpower and Transmigration acts as Indonesia's National Productivity Organization, and has contributed to *Kaizen* dissemination as well.

The private sector has occupied a more central role in disseminating *Kaizen* in Indonesia than in Malaysia. The private sector supply chain (customer companies and supplier relationships) effectively disseminates *Kaizen* by providing information, services, and support. Homma finds that a company's engagement in *Kaizen* either on its own initiative or with information, services, and support from its customers through its supply chain increases labor productivity.

Myanmar, like Ethiopia, is a latecomer. *Kaizen* dissemination is still at an early stage, but there have been some attempts to introduce *Kaizen* in the private sector. The Myanmar Productivity Center (MPC) was created in 2016 as a small unit in the Union of Myanmar Federation of Chambers of Commerce and Industry (UMFCCI) with the support of the Japan Productivity Center (JPC).

Homma highlights two factors that help to determine whether government or the private sector takes the lead in the introduction and dissemination of *Kaizen*—the prominence of GVCs in the economy and the level of institutional quality. In Indonesia, a deep, long-lasting, and firmly established supply chain structure was already in place. Indonesia has the largest population in ASEAN and its market potential is huge. For that reason, almost all major Japanese automobile assemblers established factories under joint venture agreements and their presence provided impetus for *Kaizen* development along the supply chain. In Malaysia, a more centralized economy with stronger public institutions, the government under the Look East Policy took the initiative to develop a professional governmental body (Malaysia Productivity Corporation) which has become a leading productivity organization. Although Japanese car manufacturers contributed to *Kaizen* dissemination in Malaysia, they had less impact, in part due to the national car program.

#### *4.3 Developing the Employability of Youth Through* **Kaizen**

A new approach to introducing *Kaizen* is through training to enhance students' core capacities in vocational education and training (TVET) institutes or universities. In Chap. 7, Suzuki and Sakamaki assess the role of *Kaizen* in enhancing employability. Core employability skills fall into four broad categories: learning to learn; communication; teamwork; and problem-solving. These attributes are what many company managers expect from workers, and many Japanese companies use *Kaizen* to develop their workers' capabilities.

Ethiopia has expanded the number of TVET institutions from 17 in 1996/1997 to 505 in 2011/2012, and *Kaizen* has been incorporated into the Ethiopian TVET curriculum since 2012. The results of a survey conducted by Suzuki and Sakamaki confirmed that the *Kaizen* course fosters learning to learn (self-confidence, self-awareness, and willingness to learn) and teamwork. The survey also shows that *Kaizen* has had an impact on the mindset of students. Awareness toward learning to learn, especially self-awareness and willingness to learn, was higher for those students who had received *Kaizen* training in TVET.

South Africa has implemented Employability Improvement Training in universities to improve students' employability. JICA's Employability Improvement Project (EIP) uses *Kaizen* to address employability issues. Suzuki and Sakamaki surveyed a sample of recent graduates of the program and found positive results of the training on seven core employability skills. These included changes in critical/logical thinking, teamwork and communication, self-management, and identifying and solving problems. Students had more difficulty in demonstrating leadership and creativity, perhaps as a result of the structure of the training.

#### *4.4 Summing Up*

The experiences of Ethiopia and Myanmar suggest that an active government role is important when *Kaizen* is not widely known, FDI is limited, and local companies do not participate in GVCs. In other circumstances, a private sector-led process can be effective. In both cases, public and private collaboration can facilitate the introduction of *Kaizen*. An active government role may be particularly important when there is strong distrust between workers and employers regarding the distribution of benefits from any increase in productivity.7 The main site of learning and implementing *Kaizen* has been at workplaces (factory floors), and the main pathway of introducing *Kaizen* has been training managers and employees and providing advice at site. More recently, the introduction and dissemination of *Kaizen* through formal education, such as TVET and universities, has proved effective in enhancing the employability of younger workers.

# 5 The Effectiveness of *Kaizen* in Large Companies

Initially pioneered in large manufacturing enterprises—where Toyota remains one of its foremost exponents—*Kaizen* spread through the manufacturing sector in Japan during the period of high economic growth after World War II. Many of *Kaizen*'s early adopters were larger firms. Today, as reflected in the studies in this book, *Kaizen* has found its way into training for micro, small, and medium enterprises (MSMEs) and even into the public administration in developing countries. In this section, we examine three country case studies of the impact of *Kaizen* on larger scale firms in middle-income countries.

#### *5.1 Moving Up the Value Chain: Mexico and South Africa*

The 1990s and 2000s witnessed an explosion of complex value chains spanning the globe. Labor costs drove many decisions about the location of production, but today only 18 percent of goods trade involves laborcost arbitrage—defined as exports from countries with GDP per capita one-fifth or less than that of the importing country.8 Lead companies in global value chains, however, still require suppliers to deliver high-quality inputs at competitive prices. Productivity and quality depend in turn on the knowledge possessed by the individuals who make up the firm. *Kaizen*'s goal is to help enterprises make higher quality products, reduce costs, and achieve timely delivery through continuous collaboration between managers and workers. Two of our country studies assess the effectiveness of *Kaizen* in helping domestic suppliers integrate into the automotive value chains of Mexico and South Africa.

Since the ratification of the North America Free Trade Area (NAFTA), Mexico has attracted major global carmakers, which use it as a base for export to the US market. In Chap. 8, Keiji Katai examines the effectiveness of a *Kaizen* training program designed to increase the integration of domestic Mexican suppliers into the automotive value chain. From 2012 until 2015, JICA supported supply chain development between Japanese automakers and domestic Mexican parts supplying firms. *Kaizen* experts with experience in the automotive industry conducted diagnoses of each firm, set targets for improvement in collaboration with buyer firms, and supported implementation for one year. Typical *Kaizen* interventions were 5S, reducing defective product ratios, improving job throughput, and reducing down time and inventory.

Twenty-seven domestic firms engaged in or wishing to enter the value chain received training. Katai examines the impact of the training on changes in the position of seventeen firms in the GVC and attempts to relate these changes to changes in their production capabilities. He defines the stages of participation in the value chain as ranging from the nonsupplier stage (stage 1) to the level of global partner supplier (stage 6). Movement from stages 1 to 6 represents progress by domestic firms in upgrading their position in the value chain. Lead automotive firms rank suppliers based on quality, cost, and delivery (QCD). Higher level suppliers (stages 5 and 6) develop new products in collaboration with the buyer or collaborate with the Original Equipment Manufacturer (OEM) to supply and develop products for global markets.

Using information from both supplier firms and purchasing firms, Katai attempts to associate changes in lead firm's evaluations of suppliers before and after *Kaizen* training with measures of productivity and quality. He measures quality by changes in defective product ratios and productivity by reductions in mold-changing times. In the automotive industry, quality is assessed by the number of defective parts per million (PPM). After the intervention, the defect rate in firms receiving training declined substantially. Of fifteen firms, twelve firms reduced their defect rates to less than 100 PPM, lower than the average for domestic automotive parts makers in Mexico. He also finds that low defect rates are positively associated with lead firm's evaluations of quality.

Reduced mold-changing time enables firms to produce products with minimum machine stoppage and improve productivity. Each auto uses about 30,000 parts, and manufacturers carefully control assembly of each model to minimize inventory. Parts makers are therefore required to adjust production volumes of individual parts weekly. This creates frequent changes of molds, and each change can consume hours. The JICA project attempted to reduce mold-changing times. Katai does not find a clear and direct relationship between improved productivity, as measured by reduced mold-changing times, and buyer firms' evaluations of cost.

He does, however, find some evidence of a positive relationship between lead firms' evaluations of QCD levels after *Kaizen* training and the supplier firms' position in the GVC. Of seventeen supplier firms, eight (47 percent) improved their position in the supply chain, five (29 percent) maintained their position, and four (24 percent) experienced a deterioration. Further, there is a positive relationship between supplier firm positions in the GVC and business volumes. However, Katai's data are restricted to the treated group of firms and their corresponding lead firms. As he notes, without information on a control group or on the overall Mexican automotive parts industry, it is difficult infer a causal relationship.

In Chap. 9, Keiji Ishigame attempts to measure the impact of *Kaizen* popularly known as the Toyota Production System (TPS) in South Africa—on the competitiveness of automotive suppliers. In doing so, he asks an important supplementary question: does the effectiveness of *Kaizen* differ among suppliers, and what factors contribute to these differences? In 2015, JICA launched an Automotive Industry Human Resource Development Project in South Africa. The purpose of the project was to enhance the capacity of human resources in the automotive industry and to improve the productivity and quality of domestic suppliers. The automotive industry is the largest manufacturing sector in South Africa. It is composed of six major vehicle assemblers, thirteen assemblers of heavy and medium commercial vehicles, and approximately 360 component manufacturers.

Under the project, two Japanese experts working with the South African Automotive Industry Development Center (AIDC) trained AIDC trainers and jointly with the AIDC trainers provided technical advice to local suppliers. Eight supplier firms were selected to receive *Kaizen* training. Because one of the goals of the project was to increase the capacity for *Kaizen* training in South Africa, Japanese experts visited the selected supplier firms five to ten days per year jointly with AIDC trainers. In addition, the AIDC trainers independently visited suppliers every two weeks on average. The training program itself consisted of a number of *Kaizen* tools associated with the Toyota Production System. The first stage taught suppliers to implement 5S.

An innovation of the project was that, contrary to normal practice, 5S was used in the initial stages of implementation, to create a foundation for other *Kaizen* activities. In the second stage, trainers and the supplier firms prepared a diagnostic to identify problems in the flow of information and materials. The third stage consisted of JICA experts, AIDC trainers, and the supplying firms jointly developing *Kaizen* activities to improve quality and productivity. The Japanese experts advised not only on 5S but also on the diagnosis of quality and productivity problems.

Ishigame presents three company case studies of impact. In the first case, a layout change significantly improved quality and productivity, with corresponding increases in sales and profits. The firm moved large machinery into correct positions and implemented one-piece flow, thereby shortening lead times. It achieved increases in quality by moving from batch production to one-piece flow, allowing operators to identify defects in the course of production. In the second case, a company producing textile-based automotive acoustic and trim components introduced gradual improvements to workflow and production processes, based on 5S. Over two years productivity and quality improved, costs were reduced by about US\$1.6 million, and revenue increased by 25 percent with the same labor force. In the third case—a company making plastic injection molding parts—the introduction of a one-piece flow system produced improvements in quality and productivity and reduced production leadtime from 24 hours to 1 hour. With only a limited number of participating companies and no control group, however, there is insufficient evidence to determine whether the project made a meaningful change in the productivity and quality of supplying firms.

The results of the Mexico and South Africa studies are suggestive, but hardly definitive. Small sample size, lack of a control group, and the absence of benchmark data on the automotive sector make it impossible to answer the question of whether *Kaizen* increased the integration of domestic suppliers into complex global value chains. Some qualitative results provide grounds for optimism. One common thread among the successful cases was the level of commitment of senior management and engineering staff to *Kaizen*. Where managers were committed, implementation of such *Kaizen* tools as 5S and continuous flow led to substantial improvements in quality and productivity, and because *Kaizen* engages all members of the firm, it contributed to learning. The Mexico results further suggest that these are key elements enabling domestic firms to break into and move up the value chain.

# *5.2 Shortening the "Left-Hand Tail" in Brazil*

Empirical microeconomic studies repeatedly find that there are large productivity differences among enterprises in quite narrowly defined industries. Even in rich countries, the magnitudes involved are striking. In the US manufacturing, on average a plant in the 90th percentile of the productivity distribution produces about twice as much output of the same product as a plant in the 10th percentile, using the same measured inputs (Syverson 2011).9 While poorer countries have some firms that achieve world-class productivity levels, there is also a long "left-hand tail" of poorly performing firms.

In Chap. 10, De Sousa, Canêdo-Pinheiro, Cabral and de Sousa Ferreira evaluate whether *Kaizen* has improved firm-level performance in Brazil, using both quantitative and qualitative evidence. Put differently, they ask if *Kaizen* can shorten the "left-hand tail." They draw firm-level data from two sources—The Brazilian Innovation Survey (PINTEC) and the Annual Manufacturing Survey (PIA) and construct an unbalanced panel of firms. PIA surveys all manufacturing firms over thirty employees, on average around 30,000 firms annually. In PINTEC, the size threshold is much higher, 500 employees.

The researchers confront the considerable challenge of identifying *Kaizen* adoption. Neither data set includes questions on whether a firm has implemented *Kaizen*. However, the authors use the innovation survey to identify firms that have adopted management practices based on *Kaizen* principles. Examples of management practices using *Kaizen* tools are reengineering, knowledge management, total quality control, training, and enterprise resource planning. The innovation survey also asks if the firm has introduced new methods to delegate responsibilities and decisionmaking to workers. Because in *Kaizen* participation by workers is central, the response to this question reflects a second *Kaizen* characteristic. A third strand of *Kaizen* is continuous improvement, which the authors argue should be reflected in continuous changes in management practice. Thus, they classify a firm answering all three questions affirmatively in repeated years as using a *Kaizen* approach. Using these criteria, the authors select a sample of 2541 firms of which some 63 percent are identified as having implemented *Kaizen*. As a counterfactual they choose firms that do not carry out innovations in management practices.

The authors use a number of econometric approaches to assess the impact of *Kaizen* on firm-level productivity, growth, and innovation. They find that *Kaizen* does not improve firm-level productivity, whether measured by labor productivity or total factor productivity (TFP). They do, however, find a robust positive relationship between *Kaizen* and the growth of the firm. Of greater interest is the finding of a positive impact on process innovation. To reduce potential selection bias, they perform a propensity score matching to restrict the group of untreated firms to only those similar to treated firms. Results using only matched firms in the control group indicate that the relationship between *Kaizen* and process innovation remains robustly positive. Comparing similar firms, *Kaizen* increases innovation in Brazilian manufacturing. Interpreting their results as a whole, the authors conclude that the channel in Brazil by which *Kaizen* raises productivity may be through its impact on innovation. Because *Kaizen* is an incremental approach, they further conclude, it is possible that the time period between observations in the data is too short to observe this indirect effect.

# *5.3 Summing Up*

The results of these studies of the impact of *Kaizen* on larger firms may disappoint its advocates. Small sample sizes and lack of counterfactual evidence limit what we can conclude from the Mexico and South Africa case studies. Clearly, *Kaizen* interventions were perceived by sponsoring managers and engineers as successful. There is also limited evidence of *Kaizen* contributing directly to improvements in quality and productivity. In both countries, the firms that persisted in the implementation of *Kaizen* appear to have moved up the value chain in the automotive sector.

Using a broader sample of firms, research in Brazil leads to similar ambiguity. It fails to find a significant relationship between the introduction of *Kaizen* and subsequent improvements in either labor productivity or total factor productivity (TFP). The authors speculate that this may be the result of observing the firm over too short a time period. More encouragingly, they find a strong relationship between *Kaizen* and process innovation. The firms that practice *Kaizen* in Brazil innovate more than similar firms.

Productivity is not the sole determinant of competitiveness, however. In fact, low wages can in some cases compensate for low productivity, but they cannot compensate for inferior quality. The Brazil surveys fail to tell us anything about quality. In the Mexico and South Africa cases, there is some evidence that quality was the capability most directly impacted by *Kaizen* methods.

# 6 Effectiveness of *Kaizen* for Micro, Small, and Medium Enterprises

The three essays in Part 3 measure the impact of *Kaizen* training on the performance of micro, small, and medium enterprises (MSMEs) in Vietnam, Ghana, and the Philippines. MSMEs are quite important to the economic growth of low-income countries (for example in Africa) since almost all firms in those countries are of this type. Of course, even in developed economies most firms are SMEs (small and medium enterprises). The number of large firms among all firms is just 0.3 percent in Japan, 0.3 percent in the United Kingdom, and 0.5 percent in Germany (Shimada 2017). This section summarizes the results of the country studies.

#### *6.1 Rural MSMEs in Vietnam*

In Chap. 11, Nam, Anh, and Hung analyze the impacts of a *Kaizen* management training program on the management practices and performance of small and medium sized enterprises in a rural village in Northern Vietnam. The research is interesting in two ways. First, as rural areas have more dense social capital, the training impact could spread through their social network. Second, the chapter examines whether *Kaizen* can have impact in rural settings. This latter point is important for countries attempting to achieve balanced economic growth while avoiding excessive urbanization.

Nam, Anh, and Hung choose to focus on the local trainers because the dissemination of *Kaizen* is often constrained by the availability of these resources. Even if a donor such as JICA sends foreign experts, the number of those experts is relatively limited, and the donor cannot continue sending those experts forever. As the authors correctly argue, the role of local trainers and how they can be trained are important unanswered questions. The JICA project sponsored Japanese experts to provide trainer training to five lecturers at Vietnam's Foreign Trade University. Of the five participants, two lecturers successfully completed the program.

The study site was a village, on the outskirts of Hanoi. The main products of that village are blankets, bed sheets, pillows, and bed mattresses, sold in the domestic market. The authors obtained a list of 816 enterprises from the local government office, and selected 195 bedding-related firms (59 registered, 136 unregistered). Applying a stratified sampling method, they randomly selected 32 formal enterprises out of the 59, and 68 out of the 136 unregistered firms. Because they could not collect complete data from three of the firms, the total number of final respondents was 97 enterprises. Firms were provided both classroom training and on-site training. Each local trainer was randomly assigned to the on-site training of treatment firms.

Since the sample size was small, the authors employed a pair-wise matching technique, following Bruhn and McKenzie (2009). The variables selected for matching were the gender of the owner, sales revenue, and the registration status of the enterprise. The treated enterprises increased the use of *Kaizen* practices significantly, and *ex-post* indicated greater willingness to pay for the management knowledge gained. The authors also found that the local trainers were successful in training micro, small, and medium sized enterprises. This suggests that it is feasible to scale up *Kaizen* training in the future through the use of local trainers.

An important result was that the *Kaizen* training had spill-over effects to non-treated enterprises. Discussion of *Kaizen* within the social network of the enterprise owners (family relatives, friends, and neighbors) in the village led to the adoption of good management practices by untreated firms. The findings are important because they show the possibility of scaling up and spreading *Kaizen* practices and tools to MSMEs in rural areas. Rural social networks may, in fact, encourage the dissemination of good management practices.

#### *6.2 Raising Manufacturing Productivity in Ghana*

Micro, small, and medium firms are the backbone of Ghana's manufacturing sector. In Chap. 12, Ackah, Atta-Ankomah, and Kubi evaluate a *Kaizen* project to raise productivity in MSMEs. The project has been implemented by Ghana's National Board for Small Scale Industries (NBSSI) in collaboration with JICA since 2012. It provides basic *Kaizen* training on principles and methods such as 5S, waste reduction and visualization, and basic accounting. The NBSSI's Business Advisory Centers (BACs) administer the training. To ensure the continuity and sustainability of the program, Japanese experts train local trainers who, in turn, assist firms independently.

Ackah, Atta-Ankomah, and Kubi focus their analysis on whether the project intervention had any impact on the performance of enterprises. They employ a Propensity Score Matching (PSM) method to examine the average treatment effect of the training (matching variables are educational background of the manager, subsector of manufacturing, age of the manager, and region and legal status of the enterprises). They also use random effects analysis to complement the PSM results. In total, they interviewed 184 enterprises (Treatment firms: 98, Control firms 86) from three administrative regions—Ashanti, Northern, and Brong Ahafo.

The empirical findings are twofold. First, *Kaizen* had a significant impact on the key performance indicators of these enterprises. Specifically, the authors found evidence of a statistically significant impact of the training on the number of workers, sales, profit, and output of the enterprise. Second, they observed significant differences in behavioral variables—such as workers' attitudes, daily cleaning practices, placing tools in the right places—and process indicators between the treated firms and firms that did not implement the training.

#### *6.3 A* **Kaizen***-Like Intervention in the Philippines*

In Chap. 13, Raneses, Cainghog, Tamayao, and Gotera take up the case of a program implemented in the Philippines. Their case study is the government initiative known as the Manufacturing Productivity Extension Program (MPEX), which aims to increase the productivity of manufacturing firms by making their products more competitive in terms of price and quality. The MPEX program is a part of the Philippines Development Plan 2017–2022. Firms in the program cover a variety of sub-sectors such as agriculture and food processing, furniture, gifts and holiday decorations, information technology, materials science, metals and engineering, and microelectronics.

While MPEX is not *Kaizen*, the structural foundation of the program is based on *Kaizen* principles. The program aims to assist MSMEs in the manufacturing sector to get higher productivity through improvements in operations. Under the program, MPEX consultants examined major elements of firm operations such as manufacturing processes, materials management systems, and quality control systems. Based on their assessment, the consultants made recommendations in at least three priority areas. After two to three months, the consultants returned to each firm to see if the recommended improvements have been made.

Out of 300 MSMEs in the food manufacturing sector, 177 firms were selected and 64 firms were interviewed after the program. Using PSM, the authors analyzed the matched data using the difference-in-difference regression model. However, they did not find significant differences in the number of workers and sales per worker between treated and untreated firms. With a relatively small sample size there were not enough respondents in every category to give robust statistical results.

To supplement the quantitative work, the authors undertook two detailed case studies, one a bakery and the second a food products producer. In the bakery, the MPEX consultants provided a half-day training on 5S and hygiene methods to employees. One of the *Kaizen* practices introduced by the owner was promoting teamwork through team-based competitions. The firm also reduced unnecessary procedures in production, making the process faster. *Kaizen* brought a change in the mindset of the workers as well, making continuous improvements possible.

In the food products firm, the MPEX recommendations included changing layout, and contrary to *Kaizen* philosophy, purchasing new machines, which allowed the firm increase productivity and reach the hygiene standards required to access major supermarkets. These changes resulted in a tenfold increase in production and sales. Workers now process orders from clients independently from the owners and keep records. The authors conclude that successful implementation of *Kaizen* depends on the mindset of workers, the enthusiasm of the entrepreneur, and the managerial capital and time management skills of the owner.

# *6.4 Summing Up*

As we have already seen, the evidence of the impact of *Kaizen* on large enterprises is mixed. It is the core principle for Toyota, one of the largest firms in the world, but the evidence in other chapters in this volume from Mexico, South Africa, and Brazil is inconclusive. The evidence is more persuasive with respect to micro, small, and medium enterprises. *Kaizen* works for MSMEs in developing countries. This is important not only for business performance but also for improvements in the living standards of workers. The cases of Vietnam and Ghana are of particular interest, because local trainers, initially trained by Japanese experts, conducted both programs successfully. They provide evidence that *Kaizen* can improve the performance of MSMEs and can be implemented by local human resources in a sustainable way.

# 7 Conclusions and Policy Implications

The country studies in this volume provide a fuller—but not a comprehensive—picture of *Kaizen*. This picture largely confirms the results of other research indicating *Kaizen* has the potential to make an important contribution to efforts to raise productivity and quality in poorer economies. We found evidence in both large and smaller firms that *Kaizen* resulted in productivity and quality improvements and in some cases, that it enabled firms to upgrade their position in global value chains. Our case studies gave multiple examples of *Kaizen*'s role in promoting learning. Innovation is essential for an economy to grow, and recent literature suggests that *Kaizen* tools are innovation inputs, enabling firms to take innovative actions, experiment, adopt new technology, and achieve innovation. We also found that through its emphasis on continuous participation by all members of the firm—workers and managers alike—*Kaizen* has the potential to improve relations between workers and management. Our case studies and *Kaizen*'s history in Japan suggest, however, that it takes time to establish a win-win relationship between managers and workers through dialogue.

Managerial capital has recently become an object of interest of development scholars and practitioners. How does *Kaizen* fit into public policies directed at building managerial capital in developing economies? Traditionally, economists have viewed the firm as a black box—responding to changes in its external environment. The case studies in this volume take us some distance in opening up that black box. They show that productivity and quality depend on the knowledge and working practices possessed by the individuals who make up the firm, both managers and workers. Put in Anglo-American economic terminology, these are "firm capabilities." Improved capabilities increase the potential productivity of all firms. *Kaizen* is a promising and uniquely Japanese approach to capability building. Thus, it has a role to play in industrial policies directed at enhancing the performance of firms.

Beyond industrial policy, the research in this volume underlines the need for an active state. There is increasing recognition that market imperfections are widespread in low-income countries, and that many markets are incomplete and suffer from coordination failures. These are often reflected in barriers to learning. For that reason, government support is important when *Kaizen* is not widely known, where FDI is limited, and where local companies' participation in global value chains is not commonplace. An active government role may be particularly important when lack of trust between workers and employers regarding the distribution of benefits from any increase in productivity is strong.

Finally, workers are critical to the success of *Kaizen*. *Kaizen* makes them active participants in solving problems and pushes managers at all levels to listen to their suggestions for productivity and quality improvements. In that sense it contributes not only to better business performance; it is a social innovation that may help to reduce inequality through improvements of workers' living standards.

# Notes

# References

McKinsey Global Institute. 2019. *Globalization in Transition: The Future of Trade and Value Chains*. New York: McKinsey and Company.

Labour". In Akbar Noman and Joseph Stiglitz, eds. *Efficiency, Finance and Varieties of Industrial Policy*. New York: Columbia University Press.

Sutton, John. 2012. *Competing in Capabilities*. Oxford: Clarendon Press.

Syverson, Chad. 2011. What Determines Productivity? *Journal of Economic Literature* 49 (2): 326–365.

World Bank. 2015. *World Development Report 2015: Mind, Society, and Behavior*. Washington, DC: World Bank.

**Open Access** This chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/ by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence and indicate if changes were made.

The images or other third party material in this chapter are included in the chapter's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the chapter's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.

# Industrial Policy, Firm Capabilities, and *Kaizen*

*John Page*

# 1 Introduction

Industrial policy is finally moving away from the longstanding but sterile debate between "picking winners" and "levelling the playing field." There is increasing recognition that the market imperfections on which theoretical arguments for industrial policies rest are widespread in low-income countries and that many markets are incomplete and suffer from coordination failures.1 As Rodrik (2008) points out, today a strong case can be made for "normalizing" industrial policy in developing economies. Information failures, learning, and geography combine to underpin the case for policies to support industrial development and structural change.

As the consensus that well-designed industrial policies can contribute to improving economic outcomes has strengthened, new insights have also challenged the top-down model of economic policy-making. Traditionally, economists have viewed the firm as a black box, responding to changes in its external environment, as prices and other incentives change. Recent work at the juncture of management studies and economics is beginning to pry open the black box and give greater insight into how workers and managers impact such critical outcomes as productivity

J. Page (\*)

The Brookings Institution, Washington, DC, USA

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and quality. Using these insights, new initiatives in industrial policy have begun to focus on the role of management in industrial development.

This chapter considers how firm-level management training fits into industrial policy in low-income countries. Section 2 briefly summarizes the growing consensus that the debate over industrial policy has moved on from decades past toward recognizing that well-designed public policies can improve economic performance in low-income countries. Section 3 introduces the concept of "firm capabilities"—the knowledge and working practices used by firms in the course of production and in developing new products—and discusses how they are acquired and transmitted. Section 4 makes the case that *Kaizen* is a uniquely Japanese approach to capability building, based on the continuous interaction of workers and managers within the firm. Section 5 explores some arguments for capability building as a part of industrial policy, and Sect. 6 concludes.

# 2 The Case for Industrial Policy

The dominant view among Anglo-American economists during the past thirty years has been that industrial policy is a bad idea. Two lines of reasoning underpin this argument. The first is that the allocation of resources in an economy is too complex and too information intensive to be handled effectively by the public sector.2 Where market failures are present, the mainstream view has been that policymakers should identify the distortions and then design taxes or subsidies to reduce the gaps between market prices and social costs or benefits. The second line of argument is that, even if governments could solve the information problem, rent-seeking behavior by private agents would undermine their well-meaning efforts. Governments should keep the private sector at arm's length, because it will lobby for actions that serve its own interests (Krueger 1974).

There has been pushback against both of these arguments. Rodrik (2009), among others, has argued for closer links between policymakers and the private sector. Industrial policy must, in practice, identify and respond to the need for public actions across a very broad front of industries and interventions. Because firms hold much of the information relevant to policy-making, he argues some form of structured engagement between the public and private sectors is essential. Stiglitz (2017) responds to the rent-seeking argument by noting that the incentives embodied in the price system often favor the interest groups that shape the institutions and regulations governing market transactions. Indeed, as he puts it: "not having an industrial policy—leaving it to the market, structured as it is by special interests—is itself a special interest agenda" (Stiglitz 2017, 24).

There has also been considerable rethinking of the theory underpinning the arguments for industrial policy in the last decade, and there is a growing consensus that market imperfections in low-income countries are widespread and impede structural change.3 Many markets are incomplete and suffer from coordination failures. Collateral constraints combined with asymmetric information in credit markets limit investment, and there are potentially large spillovers associated with learning, not just among firms, but also among institutions. Imperfections in risk and capital markets mean that individuals, who should move from old to new sectors in low-income countries, cannot get access to the resources needed to make the shift; yet they have to bear the inevitable risks associated with the transition (Stiglitz 2017). In addition, the new economic geography has drawn attention to a major collective action problem—agglomeration (UNIDO 2009). Taken together, these arguments make a strong theoretical case for industrial policy.

# 3 Firm Capabilities

Empirical microeconomic studies repeatedly find that there are large productivity differences among enterprises in quite narrowly defined industries. Even in rich countries, the magnitudes involved are striking. In US manufacturing, on average a plant in the 90th percentile of the productivity distribution produces about twice as much output of the same product as a plant in the 10th percentile, using the same measured inputs.4 In developing countries the differences in plant level productivity within well-defined industries are even larger. While poorer countries have some firms that achieve world-class productivity levels, they also have a much higher percentage of low productivity firms. There is a long "left-hand tail" of poorly performing firms in the productivity distributions of developing countries. In China and India, for example, average 90-10 total factor productivity (TFP) ratios are more than 5 to 1.5 Large differences in productivity at the firm level reflect, in turn, profound differences in firm capabilities.

#### *3.1 What Are Firm Capabilities?*

Firm capabilities are the knowledge and working practices used by firms in the course of production and in developing new products. The term is relatively new, but management experts and businesspeople have known for a long time that firms differ markedly in the knowledge and working practices of both managers and workers. Productivity is one dimension of capability. The other is quality. To use Sutton's (2012) terminology, quality is a "demand shifter," shorthand for anything that moves the demand schedule outward at every price, including such things as after-sales service, or brand image. Used in this way, "quality" embraces a much wider range of characteristics than the technical excellence of the product itself.6 Productivity, on the other hand, is a "cost shifter." Modifications in such things as the organization of production, reductions in wastage or better supervision of the workforce can lower unit production costs at every quantity level.

Globally, firms are competing in capabilities. The differences in the contributions of quality and productivity to international competitiveness are subtle, but important. To some extent, low productivity can be offset by low wages.7 Shortfalls in quality on the other hand may make it impossible for firms to break into global markets. At some price-quality combinations, firms can succeed in entering a market, local or global; at others higher capability competitors will exclude them.

Productivity and quality depend in turn on the knowledge possessed by the individuals who make up the firm. In this respect, capabilities are fundamentally different from technology. Technology can be codified and purchased. Capabilities are mainly embodied in people and in working practices, so they are more difficult to codify and measure. They reflect the capacity of managers and workers to work effectively together within some framework of rules, routines, and tacit understandings that have been put in place or have evolved over time.8

### *3.2 Building Capabilities*

Capability building takes place in two phases. The first phase involves the introduction of a higher level of capability into an economy, either because of the entry of new, more capable firms or as a result of learning by existing firms. Foreign direct investment (FDI) is one—and some would argue for countries at low levels industrial development the most important way of introducing higher capability firms. The foreign investor brings the technology, managerial knowledge, and working practices it has developed elsewhere. A majority of researchers find that firms with foreign equity participation in developing countries typically have higher output per worker or higher levels of TFP than similar domestically owned firms.9

"Learning by exporting" is an example of how domestic firms build capabilities through learning. Two of the key mechanisms by which firms learn higher capabilities are:

Demanding buyers and repeated relationships are characteristic of global markets, spanning the range of industries from traditional manufacturing to tradable services and agro-industry. These inter-firm relationships are the means by which suppliers and purchasers exchange knowledge.

The empirical literature strongly suggests that exporting strengthens capabilities through improvements in working practices. One recent study of Vietnam, for example, found that the sources of productivity improvements differed markedly between foreign and domestic exporters (Newman et al. 2016). Foreign firms experienced an early surge of productivity growth upon entering export markets, attributable to increases in scale. Domestic firms on the other hand had longer-term productivity improvements, mainly from introducing process innovations. This pattern is consistent with the initial presence of higher capabilities in foreign firms and the greater opportunities for learning by domestic enterprises.

Once a higher level of capability has been introduced—say through a new foreign direct investment or through a newly successful export activity—its potential benefit to the host economy at large will depend on the extent to which the technical knowledge and working practices held by the firm are transmitted to other firms. Most of what we know about how capabilities are transferred comes from case studies or from econometric analyses of "spillovers" from foreign direct investment (FDI). Both types of evidence point in the same direction: buyer-seller relationships along the value chain are effective ways to transfer both technological knowledge and better working practices.

There is econometric evidence of positive productivity spillovers from foreign firms to domestic suppliers and from foreign suppliers to domestic firms. Surveys show that spillovers are often due to spin-offs by former employees of FDI firms and labor movements from foreign to domestic companies (Newman and others 2016). One-third of multinationals interviewed in Vietnam, for example, reported that employees left their company to set up local enterprises directly connected to the multinational, as customers or suppliers. Linked domestic firms reported that they, in turn, hired employees initially trained by the multinational companies.

#### *3.3 The Role of Management*

Intuitively, managers must largely be responsible for productivity and quality differences, either because of innate differences in their abilities or differences in management practices. Managers must be able to identify and develop new products, to organize production activity, to motivate workers, and to adapt to changing circumstances. Bloom and Van Reenen (2007) use interviews to score managerial practices from best to worst practice across a wide range of day-to-day operational management activities. They have by now undertaken surveys of more than 6000 firms in seventeen countries, including China, India, and Brazil.11 They find that better management practices (measured by higher scores) are strongly correlated with several measures of productivity and firm performance, including survival. A particularly interesting finding is that China, India, and Brazil all have much lower average management scores than the higher-income countries in their sample.12 This is due mainly to a very large left-hand tail of low scoring firms in the management practice distribution; a pattern that parallels closely the productivity distributions in these countries relative to higher-income countries.

One problem with the survey approach is that it is difficult to establish the causal direction of the relationship running from better management to higher productivity. To address this, Bloom, Van Reenen, and their associates (2013) randomly assigned a sample of large, multi-plant Indian textile firms to treatment and control groups. The treated firms received a month-long analysis of thirty-eight aspects of operational management followed by four months of intensive follow-up in the plant from a large international consulting firm. The control plants received only one month of diagnostic consulting. Within the first year, productivity increased on average by 17 percent in treated firms. In addition to increasing productivity, the intensive training led to significant improvements in quality and inventory control. The better-managed firms also grew faster and voluntarily spread the management improvements from their treated plants to other plants they owned.

# 4 Capabilities and *Kaizen*

Capabilities reflect two closely related elements. The first is technical knowledge or engineering expertise, the element that has been most studied by economists.13 The second is improvement in "working practices." This has traditionally been the domain of management studies. Working practices are always critical to achieving high quality, but the relative importance of technological knowledge shifts as countries move into more sophisticated products. Engineering good practice is far more important in manufacturing pharmaceuticals or machine tools than in making t-shirts.

*Kaizen*—"continuous improvement"—while based originally on US principles of industrial engineering and quality management has a uniquely Japanese twist. It is incremental, continuous and involves all levels of workers within the firm, from top management to the factory floor (Imai 2012). *Kaizen* was mainly developed and spread through the manufacturing sector in Japan during the period of high economic growth after World War II, a period when Japanese productivity levels converged rapidly toward those in the United States. Initially developed in large manufacturing enterprises—Toyota remains one of its foremost exponents—through the efforts of the Japan International Cooperation Agency (JICA) *Kaizen* has found its way into training for large-scale firms, micro, small and medium enterprises (MSMEs) and even into the public administration in developing countries.

Imai (1997) defines *Kaizen* as a commonsense, low-cost approach to management. Its goal is to help enterprises attain higher quality products and services, lower costs, and achieve timely delivery by the continuous collaborative effort of managers and their workers (Imai 2012). It is a process-oriented approach based on the belief that "processes must be improved for results to improve" (Imai 1997, 4). Key *Kaizen* elements include:

• *Good housekeeping*: Tools and raw materials used at the workplace are put in good order.

Through these elements, firms are able to improve quality and productivity, cut costs, reduce lead times, and create a better work environment.

*Kaizen* often involves the so-called 5S system of seiri (sorting), seiton (setting in order), seiso (systematic cleaning), seiketsu (standardizing), and shitsuke (sustaining adherence to rules) to improve the efficiency and overall quality of the work environment. Experience indicates that it is not difficult for many enterprises to adopt the first three of the 5S. They will, however, revert to their original state unless efforts are made to institutionalize the behavioral changes learned. The fourth and fifth Ss are therefore focused on longer-term efforts to turn good housekeeping into habit.

Given their shared heritage in management studies, it is not surprising that *Kaizen* and capabilities are closely related. Imai (2012) stresses the concepts of quality, cost, and delivery (QCD). In his terminology, quality refers not only to the quality of finished products or services but also to the quality of the processes that go into those products or services. In the terminology of capabilities these are "working practices." Cost reflects the overall cost of designing, producing, selling, and servicing the product, and delivery means delivering the requested volume on time. All of these elements can be mapped into the quality and productivity dimensions of firm capabilities. Quality and delivery are "demand shifters," while cost is a "cost shifter." In fact, *Kaizen* is a Japanese approach to building firm capabilities.

Ethiopia provides a case study of *Kaizen*'s relevance to improving capabilities in larger firms. JICA provided *Kaizen* training to selected large manufacturing firms in Ethiopia from 2009 to 2011. The first part of the training was in the classroom and a second phase was onsite. Thirty large firms were selected by the Ethiopian government based on their ability to use the training effectively. Gebrehiwot (2013) compares the performance of these "treated" firms and 40 large comparator firms that did not receive training. Because the treated firms were selected due to their high growth potential, issues of bias cannot be ignored. Nevertheless, statistically significant increases in labor productivity, declines in production costs, and improvements in the quality of products were observed in treated firms.

JICA has invested significantly in *Kaizen* as a way to increase the capabilities of micro, small and medium enterprises, and a growing number of evaluations have been undertaken. Shimada and Sonobe (2017), for example, attempt to assess the impacts of *Kaizen* training on workers, using survey data collected from firms in eight countries in Central America and the Caribbean. *Kaizen* appears to have induced a number of important behavioral changes at the firm level. Managers in *Kaizen*trained firms developed a greater understanding of the importance of sharing basic information with workers. Shimada and Sonobe also found that *Kaizen* improved employees' attitudes toward work, increased the number of productivity-enhancing suggestions from workers, and resulted in the introduction of more measures to prevent accidents. Better attitudes toward work were associated with more rapid wage growth. A majority of managers found *Kaizen* useful within three months, although some took considerably longer, and employees were initially more skeptical than management. Shimada and Sonobe conclude that the gradual pace of adoption reflects the fact that *Kaizen* is predicated on building a cooperative relationship among workers and between managers and workers, a process that takes time and validation.

In a recent contribution, Mhede et al. (2018) assess the durability of *Kaizen* training and provide some insight into its relationship with more standard MSME training curricula. Using a randomized controlled trial (RCT) of garment manufacturing firms in Dar es Salaam, Tanzania, the authors found that three years after the training intervention treated firms had adopted a statistically significantly larger number of good management practices than their untreated counterparts, and their business performance had improved. They found a slight difference in scale of adoption of *Kaizen* and non-*Kaizen* management practices, favoring the non-*Kaizen* practices, but they also found that the educational attainment of the owner was significantly correlated with which management practices were adopted. Non-*Kaizen* practices, such as planning and recordkeeping, were more likely to be adopted by better educated owners.

# 5 Some Implications for Industrial Policy

For the industrial transformation of low-income countries to succeed, industrial policy must address three objectives. First, while some firms in some countries are already sufficiently productive to be competitive internationally, a larger share of existing firms must become more productive. Second, because the manufacturing sector in most low-income countries is quite small, governments need to create the conditions to attract new firms able to compete in regional and global markets. Finally, governments may wish to encourage firms to move into promising new areas of potential comparative advantage, what Rodrik (2009) has labeled "industrial policy in the large."

Of the three industrial policy objectives, management training falls most squarely into the first category, reducing differences in firm-level productivity. A change in management practices, for example, can increase the potential productivity of all firms. This is equivalent to shifting the entire productivity distribution uniformly to the right. With the growth of global value chains, it has become increasingly important for domestic firms to engage effectively with the multinational lead firms that drive them.14 This means that management training also has the potential to contribute to the second industrial policy objective by attracting new value chains.

Placing management training in the broader context of industrial policy raises important questions regarding when and for which types of firms management interventions are appropriate. The mixed results of evaluations of management training interventions for MSMEs—whether *Kaizen* or other types of training—offer evidence that context is important. Not all firms may be able or willing to benefit from training. This in turn raises the question of why firms fail to adopt good management practices in the first place.

### *5.1 Why Do Firms Fail to Adopt Good Management Practices?*

One of the central questions concerning management training is why managerial good practices are not taken up more rapidly. There are at least three answers to this question. First, incumbent managers may have problems of perception—they do not know they are ineffective. Second, managers may have problems of inspiration—they know they are ineffective, and do not know what to do about it. Third, managers may have problems of motivation—they know they are not effective; they know what to do; but they fail to act because of lack of competition or lack of incentives (Gibbons and Henderson 2012).

Interestingly, Bloom and his collaborators observed all three of these problems in their India case. Their evidence suggests that information constraints were the greatest impediment to better managerial practice. Firms apparently did not believe that such basic practices as measuring quality defects or machine downtime and keeping track of inventory would improve profits. Owners claimed their quality was as good as that of other local firms, and because they were profitable, they felt they did not need to introduce a quality control process. Managers were often simply unaware of such common practices as daily factory meetings, standardized operating procedures, or inventory control norms. Competition in India was heavily restricted by high tariffs in the case of imports and in the case of new entry by lack of finance. Barriers to entry and the family structure of enterprises acted as a disincentive for firms to adopt better management practices.

#### *5.2 Options to Improve Management Practices*

*Kaizen* is not the only way in which governments can address the need to increase the productivity of existing firms. Organized efforts to acquire good management practices could take the form of collective actions by firms or a public-private partnership to seek out information on managerial good practices and make it available as a public good. In India, for example, the Confederation of Indian Industries, which is almost wholly funded by the private sector, provides services of this kind at fees that are within the reach of India's smaller manufacturing companies. The Fundacion Chile is another example of a public-private partnership for building capabilities. Its success in helping to establish Chile's world-class wine and salmon export industries has been widely documented. Initiatives of this type might be undertaken at lower cost, and with a greater share of the cost borne by the private beneficiaries, than training interventions. They also face a market test.

Management training of large-scale firms of the type offered in India by Bloom and his associates or in Ethiopia by JICA is another means of improving capabilities. The expertise of the international consultants certainly proved highly valuable to the firms trained. In addition to increasing productivity, the intensive training led to significant improvements in quality and inventory control. In the case of larger firms, however, care must be taken to put in place complementary policy changes to promote competition. In the absence of competitive pressure, firms may fail to recognize that improvements in management practices will be beneficial and any changes may be short lived.

Business training is one of the most common forms of support to micro, small and medium enterprises (MSMEs) around the world. There are a large number of programs offered by governments, aid donors, microfinance organizations, and NGOs. This is a very different target group for training than medium- to large-scale plants, and the results of most training programs have been disappointing (McKenzie and Woodruff 2012). The evaluations of *Kaizen* as a method of MSME management training are encouraging, but have not yet reached the point of being conclusive. Otsuka and Sonobe (2014) suggest that the reason for the disappointing results of evaluations of *Kaizen*—and of MSME training more generally—may be due to an excessively optimistic view of the types of firms that can benefit from training.

The literature on MSME often misses the fact that there is an enormous amount of heterogeneity among firms.15 Recent research using nationally representative samples of MSME firms shows that there is a small but significant subset of MSME firms that have productivity levels higher than economy-wide manufacturing productivity (McMillan et al. 2017). These are the high capability firms in the MSME sector. Otsuka and Sonobe argue that these firms are the relevant target for management training. They further suggest that management training can be used to screen for promising entrepreneurs, because, if effective, it should produce visible changes in the way in which owners manage their firm.

# 6 Conclusions

Firm capabilities determine productivity and quality—the two key components of international competitiveness. Intuitively, they are closely related to management. Historically, economists have neglected management, preferring instead to focus on factors external to the firm. Recent work at the intersection of economics and management studies, however, very strongly points to the conclusion that management matters. Differences in management practice between firms and countries are responsible for much of the difference in measured productivity.

Building firm capabilities is a complex process. The capability transfer consists of both "hardware"—technological knowledge and engineering—and "software"—the working practices that are crucial to master technology and achieve higher quality. The relative importance of these two factors changes as countries move toward more complex, technologically sophisticated products. In low-income countries, for the time being, working practices are likely to be more important.

Capability building—including management training—is well within the mainstream of contemporary industrial policy. It is a means by which two of the major objectives of industrial policy in low-income countries increasing the number of more-productive firms and attracting new firms along global value chains—can be pursued. *Kaizen* is a promising and uniquely Japanese approach to capability building, but it is not the only one. Further evaluations of the impact of capability building interventions, ranging from collective action by private firms to structured training programs, will be essential to understanding the costs and benefits of management interventions.

# Notes

# References

———. 2012. *Competing in Capabilities*. Oxford: Clarendon Press.

**Open Access** This chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/ by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence and indicate if changes were made.

The images or other third party material in this chapter are included in the chapter's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the chapter's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.

# *Kaizen* Toward Learning, Transformation, and High-Quality Growth: Insights from Outstanding Experiences

# *Akio Hosono*

*Kaizen* is a Japanese word that literally means "improvement" but is also commonly referred to as "continuous improvement." Now a well-known concept worldwide, it normally refers to the Japanese approach toward improving quality and productivity. What distinguishes *Kaizen* from other approaches is that these goals are attained through its process—one in which learning and inclusiveness are essential. The sustainable development goals (SDGs) call on member states to promote sustained, inclusive, and sustainable economic growth and decent work for all. *Kaizen* can contribute to achieving the kind of growth characterized by these attributes. In this chapter, I begin by providing an analytical perspective and discussion of key issues related to *Kaizen* (Sect. 1). Based on this discussion, I then review the goals, tools/methods, and process of *Kaizen* (Sect. 2). In Sect. 3, I discuss the relationship between *Kaizen* and the targets of the SDGs as well as learning, transformation, and quality of growth. In Sect. 4, I analyze outstanding experiences of some countries that have

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JICA Research Institute, Tokyo, Japan e-mail<EMAIL_ADDRESS>
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introduced *Kaizen* or similar approaches to gather insights on the relationship. Finally, I provide some concluding remarks.1

# 1 Analytical Perspective and Key Issues

In recent policy debates on growth and development, increasing attention is being paid to the "quality" of economic growth.2 In Asia and the Pacific region, APEC leaders at Yokohama in 2010 agreed on the "APEC Growth Strategy."3 This strategy stresses that "the quality of growth" needs to be improved so that it will be more balanced, inclusive, sustainable, innovative, and secure. In 2015, the Japanese government announced the *Charter of Development Cooperation*. It stated that one of the most important challenges of development is " 'quality growth' and poverty eradication through such growth" while also stressing inclusiveness, sustainability, and resilience (Government of Japan, Cabinet Office 2015, 5–6). In that same year, the United Nations passed a resolution adopting "Transforming Our World: The 2030 Agenda for Sustainable Development" as its post-2015 development agenda. This outcome document sets out "The Sustainable Development Goals (SDGs)" and targets as integrated and indivisible, global in nature, and universally applicable (UNGA 2015). Among the 17 Global Goals and 169 targets, Goal 8 calls on member states to promote sustained, inclusive, and sustainable economic growth, full and productive employment, and decent work for all, while Goal 9 calls on governments to "build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation." As such, the SDGs—in particular Goals 8 and 9—largely overlap with the abovementioned attributes of "quality growth."

Together with quality of growth, another feature of the SDGs is the importance placed on transformation. The above-cited United Nations 2030 Agenda declares that "We are determined to take the bold and transformative steps which are urgently needed to shift the world on to a sustainable and resilient path" (UNGA 2015, 2). Transformation-led growth is distinct from, for example, commodity price hike-led growth. Transformation-led growth could be high-quality growth and could generate further transformation. This implies that a virtuous circle of transformation and high-quality growth could take place. The ADB report on transformation (2013, 5) argues that, when structural transformation creates a virtuous circle, it leads to high growth and higher income per capita, and these induce further changes in the structure of the economy.

Regarding ways that such transformation can be achieved, there seems to be a growing consensus in the academic literature that structural transformation is closely related to changes of endowments or assets, changes in comparative advantage, and, finally, increasing innovation and technological progress. As Noman and Stiglitz emphasize, "the essence of development is dynamic. What matters, for instance, is not comparative advantage as of today, but dynamic comparative advantage" (Noman and Stiglitz 2012, 7). Lin, likewise, discusses "changing comparative advantage," arguing that "the more effective route for their learning and development is to exploit the advantages of backwardness and upgrade and diversify into new industries according to the changing comparative advantages determined by the changes in their endowment structure" (Lin 2012, 73).

Accordingly, endowments are extremely important for transformation based on changing or dynamic comparative advantage. In this regard, recent studies identified critical endowments for transformation. Drawing from many previous studies, Stiglitz and Greenwald (2014) present a systematic and holistic analysis of what constitutes a learning society, concluding that "the most important 'endowment' from our perspective, is a society's learning capacities." They further state that a country's policies have to be shaped to take advantage of its comparative advantage in knowledge and learning abilities, including its ability to learn and to learn to learn, in relation to its competitors and to help develop those capacities and capabilities further (26). Noman and Stiglitz (2017) reaffirm the importance of learning capacity, together with institutions: "Perhaps the most important 'endowment' of a country was assets that were not mobile—institutions and learning capacities that were embedded in local institutions. It was these that countries needed to take into account as they struggled to shape their long-term (dynamic) comparative advantage" (13).

Stiglitz and Greenwald also emphasize the relationship between learning capacity and inclusive growth. Inclusive growth has two interrelated aspects: all people participate in inclusive growth and, at the same time, benefit from it. But, from a "learning society" perspective, inclusive growth goes far beyond the above-mentioned aspects and has an intrinsic relationship with innovative growth. Growth can be really inclusive—and, at the same time, innovative—when such growth takes full advantage of the talents of all. Stiglitz and Greenwald (2014) state that "our argument for why inclusive growth is so important goes beyond the standard one that it is a waste of a country's most valuable resource, its human talent, to fail to ensure that everyone lives up to his or her abilities" (468). They suggest that policies to promote more inclusiveness may promote more learning (381).

# *1.1 Research Question and Structure of This Chapter*

The overarching research question of this chapter is: what benefits can we expect from *Kaizen* and related approaches in terms of learning, transformation, and quality growth? The next sections discuss goals, tools/methods, and process of *Kaizen*, and their relationship to learning, transformation, and quality of growth. In order to obtain deeper insights into these relationships, we examine the experiences of several countries where *Kaizen* and related approaches/systems have been introduced.

# 2 Goals, Tools/Methods, and Process of *Kaizen*

# *2.1 Goals of* **Kaizen** *and Process to Achieve Them*

Much of the literature on *Kaizen* concurs that the utmost goal of *Kaizen* is the improvement of quality and productivity. For example, JICA's brochure, "*Kaizen* as a 'Japan brand ODA,' " states that *Kaizen* is Japan's approach toward improved quality and productivity (JICA 2016). However, it should be emphasized that *Kaizen* is distinctive in its approach to improving quality and productivity and that there are other approaches to improving productivity. For example, employers typically turn to monetary incentives: performance pay, bonuses, or the threat of dismissal (World Bank 2015, ch. 7). Nevertheless, any increase in productivity resulting from these approaches over a short period is normally not accompanied by learning. Where *Kaizen* differs from these approaches is in its process for achieving better quality and productivity through its distinctive focus on inclusive and participatory learning. Stiglitz and Greenwald (2014) contend that "if it is true that productivity is the result of learning and that productivity increases (learning) are endogenous, then a focal point of policy ought to be increasing learning within the economy" (5–6). I will discuss the learning aspects of *Kaizen* in the next section.

#### *2.2* **Kaizen** *Tools/Methods*

Many *Kaizen* tools and methods have been developed over more than half a century. They are essential for the process of achieving the goals of *Kaizen*. For example, the Asian Productivity Organization (APO) states that "*Kaizen* approaches employ various tools including 5S, quality control circles, total quality control, total preventive maintenance, just-intime inventory, standard work, and automation, among others. These have all been useful in improving the three productivity dimensions of cost, quality, and speed. For example, the core concept of *Kaizen* is to eliminate *muri* (overloading), *muda* (waste), and *mura* (inconsistency) from the worksite through efficient utilization of labor, materials, and equipment" (APO 2015, 10).

Among typical *Kaizen* tools and methods, 5S and Quality Control Circles (QCC) are well known. 5S represents "Sort, Set in order (or *Systematic arrangement*), Shine (*or Sweep*), Standardize, Sustain," which corresponds to five simple actions that can be taken to obtain discernible results of *Kaizen* in a short period of time (JICA 2016; italics added by author). "Sort" refers to sorting necessary items from un-necessary items and tidying up any items that aren't needed. "Systematic arrangement" indicates the need to place items in their set positions so that they can be used immediately when needed (Kikuchi 2009). These activities are practiced with simple methods such as the tag method, color display, visual controls, and dividing lines. As such, 5S is an easy activity to start with and enables the participation of all.

Quality Control Circles (commonly called QC circles) are voluntary small-scale groups that solve onsite problems through teamwork (JICA 2016). This Japanese way of QCC was gradually consolidated when it was applied at the factory floor level. In QC activities, participants frequently collect data and identify the causes of defective products and possibilities for improving products or production methods based on information collected. The basic tools used to read various kinds of information from data are referred to as the seven tools of QC, which include Pareto diagrams, check sheets, histograms, scatter diagrams, control drawings, graphs, and cause and effect diagrams (Kikuchi 2009, 45).

Many other tools, especially those of easy application including "layout planning" based on transfer distance analysis and process proximity analysis, improvement of work/human hours balance, shortening of setup times, are implemented during the *Kaizen* process (Kikuchi 2009).

# 3 *Kaizen*, Learning, and Quality of Growth

#### *3.1* **Kaizen** *as a Participatory and Inclusive Approach*

The APO explains that the inclusiveness of the *Kaizen* process is centered around improvement efforts through the participation of all. Its "Handbook of Productivity" asserts that "*Kaizen* means improvement and encompasses the concept of never-ending efforts to improve by all of the people working in an organization. Problem-solving in the *Kaizen* approach is cross-functional, systematic, and collaborative. It is a strategy that puts every member of the organization, from top management down, continuously on the watch for improvement options" (APO 2015, 9–10). JICA (2016) succinctly states that "*KAIZEN* is an incremental effort starting from small steps involving all individuals from top managers to those working on the factory floor. However, commitment from the top management is essential."

#### *3.2* **Kaizen** *and Learning*