As it is shown in the specialty literature, there is a series of empirical studies which aim at capturing the effects of public expenditure on the economic growth. To the empirical level, one may notice a reverse correlation between the economic growth and public expenditure, which is clearly explained by the omission of the structure of public expenditure within the analysis of its effects. Considering these aspects, our paper tries to reveal the applicability of the explanatory variable as educational expenditure. Thus, the paper empirically examines the correlation between the budget expenditure allocated to education and the economic growth in Romania, using Matlab to test statistical correlations between the variables submitted to this study.economic growth, budget expenditure, education

Mirela CRISTEA

Raluca DRACEA

English

Research Papers in Economics

144                                                                       Finance – Challenges of the Future 
 
CHANGES IN JAPANESE CORPORATE 
GOVERNANCE 
 
Lect. Ioan Alin NISTOR, PhD 
“Babeş – Bolyai” University, Cluj – Napoca 
1. Introduction 
 
Corporate governance systems 
vary around the world. These differences 
result from different legal systems, 
systems of corporate finance and 
corporate ownership as well as divergent 
norms around the firm’s responsibilities 
to its various stakeholders. (Dore 2000). 
While much research has considered 
how these differences originated and why 
they persist (Hall and Soskice 2001, 
Jackson 2002), less research has 
considered what happens when different 
systems of corporate governance come 
into direct contact. These different 
systems of corporate governance came 
into direct contact in Japan. Perhaps the 
latest example would be the acquisition 
of the Lehman Brothers brokerage 
operations by Nomura in 2008.    
Foreign ownership of shares of 
Japanese firms increased from about 
10.5% in 1996 to 27.6% in 2008 (TSE   
2009). This increase in foreign ownership 
came as shareholders, primarily banks 
and insurance companies – slowly sold 
their shares as a response to financial 
crisis and changing of accounting 
standards. While financial institutions 
held  41.1% of all shares in 1996, by 
2008, their share ownership had dropped 
to 30.9% (TSE  2009). 
This change in ownership 
brought two very different notions of 
corporate governance into direct conflict. 
In Japan, shareholders tend to be 
stakeholders with long term interest in 
the firm, in addition to the expected 
return on their equity investment. Banks, 
for example, held shares as part of a 
broader relationship of managing 
financial transactions and supplying 
loans.  Corporations held shares of their 
suppliers and buyers. These 
interconnected and complementary sets 
of relationships supported the 
fundamental attributes of the corporate 
Japanese system.   
Foreign portfolio investors, on 
the other hand, had very different 
interests. They stood apart from the 
Japanese corporate relational system 
and had less interest in ongoing business 
relationships with Japanese firms. These 
foreign portfolio investors were familiar 
with the shareholders movements from 
USA and Europe.   
 
2. Trends in foreign investment in 
Japan 
 
From 1996 to 2008, the 
percentage of publicly listed Japanese 
shares held by foreigners increased from 
10.5% in 1996 to 27.6%. The increase in 
foreign share ownership in Japan 
reflected a larger worldwide trend. 
Foreign ownership of listed French firms 
increased from approximately 12% to 
42.3%, while ownership of shares in the 
UK by foreigners increased from about   
17.2% to 36.3% in the 2007. These 
numbers indicate that this increase in 
foreign investment was not limited to 
Japan, but was a worldwide 
phenomenon. One of the reasons could 
be the rise of the institutional investors, 
especially pensions funds. (P. Druker 
1997). This trend accelerated as the 
money managed by institutions increased 
and as pensions became more willing to 
invest their funds in equity.  Year VIII, No. 10/2009                                                                                              145 
 
In the 1990s, US investors 
invested 94% of their assets 
domestically, while UK investors kept 
82% of their assets in the UK (Useem 
1998). Slowly moving into the 2000 
years, institutional investors began to 
move their money abroad, as investors 
were looking to diversify their portfolios 
across currencies and economies.  
The leading foreign investors in 
Japan were American and European, 
especially UK funds (Shirota 2002). Most 
foreigners were institutional investors. In 
2008, only 0.5% of foreign investors in 
Japanese publicly listed equities were 
individual investors. (TSE 2008).  
Foreign direct investment, where 
foreign investors take a large and 
strategic stake in a Japanese firm or set 
up their own operations, received much 
publicity. Among the one that received 
the most attention was the Renault’s 
purchase of a controlling stake in Nissan. 
Signed in 1999, the Renault-Nissan 
Alliance has built a unique business 
model that has created significant value 
for both companies.  These investments 
made by foreign funds had effect on 
corporate governance and other 
economic and financial reforms.  
A study made by the American 
Chamber of Commerce in Japan 
indicated that foreign direct investment in 
Japan, defined as strategic investment 
with the intention of transferring 
management resources and know-how, 
was quite low in an international 
comparison. In 2006, foreign direct 
investment in Japan was 1.1% of GDP, 
while that in the UK was 32.4%, 
Germany was 22.4% and US 27.9%. 
 
3. Composition of Ownership 
 
To further explore the identities 
and objectives of foreign stockholders we 
examined the ownership of the Tokyo 
Stock Exchange First Section non-
financial firms in 2008. In 11 firms, 
foreigners had controlling stakes of over 
50%, while foreigners owned over 33.3% 
of an additional 34 firms (this is the level  
that allows for veto rights over board 
decisions). In a substantial number of 
firms, foreign ownership was over 10%. 
We indentified cases in which the 
purpose of the foreign shareholder could 
be classified as strategic. These were 
cases in which a foreign corporation (not 
a bank or investment fund) was one of 
the top 10 shareholder and the 
investment was for strategic, rather then 
portfolio purposes. Especially in auto and 
pharma sectors, foreign investors could 
be considered strategic. These leaves a 
substantial number of large and well-
known firms of whose shares 30% or 
more were in the hands of foreign 
portfolio investors, including Sony or 
Canon, tabel 1.  
Foreign investors had very 
different interest from the majority of 
Japanese investors. They had different 
set of obligations to their beneficiaries 
than Japanese funds. The US pensions 
had clear obligations of fiduciary duty 
mandated by law, as well as the UK 
funds. Furthermore, in most cases 
foreign investors were investing purely 
for return on investment, where 
Japanese investors were often wrapped 
in a web of other ties and obligations with 
the firms whose shares they held, and 
their own affiliated banks and 
corporations. Japanese institutional 
investors tended to be closely linked to 
banks or to corporations that had other 
interests in the firms that they were 
investing (Hiraki 2003). 
 
 
 
 
 
 146                                                                       Finance – Challenges of the Future 
Table 1: Share ownership by Market Value (All Listed Companies) 
Financial Institutions 
Trust Banks 
 
Year 
 
Go
vt.  
Finan
cial 
Instit
ution
s 
Total 
City 
& 
Regi
onal 
bank
s 
Trust 
Bank
s 
Total 
Inve
stm. 
Trus
ts 
Annu
ity 
Trust
s 
Life 
Insura
nce 
Co. 
Non-
life 
Insura
nce 
Co. 
Other 
Fin. 
Instituti
ons 
 
Busin
ess 
Corp. 
 
Securit
ies 
Corp. 
 
Individ
uals 
 
Foreign
ers 
1996 0.3 41.1 15.1 10.3 2.2  1.8  11.1  3.6  1.0  27.2  1.4  19.5  10.5 
1997 0.2 41.9 15.1 11.2 2.0  2.4  11.1  3.6  0.9  25.6  1.0  19.4  11.9 
1998 0.2 42.1 14.8 12.4 1.6  3.8  10.6  3.5  0.9  24.6  0.7  19.0  13.4 
1999 0.2 41.0 13.7 13.5 1.4  4.7  9.9  3.2  0.8  25.2  0.6  18.9  14.1 
2000 0.1 36.5 11.3 13.6 2.2  5.0  8.1  2.6  0.9  26.0  0.8  18.0  18.6 
2001 0.2 39.1 10.1 17.4 2.8  5.5  8.2  2.7  0.7  21.8  0.7  19.4  18.8 
2002  0.2  39.4 8.7 19.9 3.3 6.0  7.5  2.7  0.7  21.8  0.7  19.7  18.3 
2003  0.2  39.1 7.7 21.4 4.0 5.8  6.7  2.6  0.7  21.5  0.9  20.6  17.7 
2004  0.2  34.5 5.9 19.6 3.7 4.5  5.7  2.4  0.9  21.8  1.2  20.5  21.8 
2005  0.2  32.7 5.3 18.8 3.9 4.0  5.4  2.2  1.0  21.9  1.2  20.3  23.7 
2006  0.2  31.6 4.7 18.4 4.4 3.6  5.3  2.1  1.0  21.1  1.4  19.1  26.7 
2007  0.3  31.1 4.6 17.9 4.7 3.5  5.4  2.2  1.0  20.7  1.8  18.1  28.0 
2008  0.4  30.9 4.7 17.5 4.9 3.5  5.5  2.2  1.0  21.3  1.6  18.2  27.6 
Source: TSE 2009 Statistical Highlights 
 
Institutional investors, such as 
trust banks, tended to have close equity 
relationships with banks, and would vote 
according to the interest of its affiliated 
bank, which was likely to have close 
lending relationship with the firm. A 
corporate pension fund might hold shares 
in an important business partner of the 
corporation and would not dare to press 
too hard as a shareholder. Thus, 
Japanese domestic institutional investors 
were part of a system of close 
relationships that went beyond 
shareholding stakes and thus were 
unlikely to demand the same level of 
returns, as an investor that was looking 
only at the return on investment, tabel 2.  
 
 
Tabel 2. Share ownership by type of investor 
Share ownership (100 mil Yen) 
  Year 2007  Year 2008 
 Value  %  Value  % 
Total 5.686.052 100.0  4.002.313  100.0 
Govt & Local Govt.  18.634 0.3  15.646  0.4 
Financial Institutions  1.768.762 31.1 1.237.432  30.9 
City & Regional Banks  263.395 4.6  189.341  4.7 
Trust Banks  1.017.036 17.9  702372  17.5 
   (Investment Trust)  264.979 4.7  195.035  4.9 
   (Annuity Trust)  200.547 3.5  140.545  3.5 
Life Insurance Co  308.280 5.4  219.017  5.5 
Non-life Insurance Co  124.536 2.2  88.531  2.2 
 
Other Financial Inst.  55.513 1.0  38.168  1.0 
Business Corporations  1.175.278 20.7 851.372  21.3 
Securities Companies  102.178 1.8  62.214  1.6 
Individuals & Others  1.028.338 18.1 729.476  18.2 
Foreigners 1.592.860 28.0  1.106.171  27.6 
Source: TSE 2009 Statistical Highlights 
 
 
 Year VIII, No. 10/2009                                                                                              147 
Foreign investors in Japan could 
influence firms to adopt their desired 
corporate governance practices through 
exit – the threat of selling their shares – 
and through formal and informal exercise 
of voice – exercising voting rights and 
making their opinions known through less 
formal channels. The threat of exit, as 
well as more informal channels, exercise 
of voice, provided more effective ways of 
influence. Foreigners were less likely to 
wield influence through exercising voting 
rights, though this had begun to change 
in the 2000s (figure 1).  
  Figure 1. Long term trend of ownership structure 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Source: TSE: Long term trend of ownership structure   
  Insider: Aggregate shareholdings by banks, insurance firms and other 
     businesses 
  Outsider: Aggregate shareholdings by individuals, mutual/pension  
     funds and foreigners 
 
4. Corporate governance practices 
 
For the past 7 years, the Japan 
Corporate Governance Index Research 
Institute surveyed Tokyo Stock Exchange 
First Section firms in their corporate 
governance practices. Based on these 
surveys, the JCGIndex measures how 
close a firm’s governance adheres to 
Anglo-American standards. Practices 
evaluated include how a firm sets it 
performance objectives, accountability of 
the CEO, structure of the board of 
directors (size, independence, 
responsibilities), compensation system, 
management of subsidiaries, internal 
audit and control, and disclosure and 
transparency.  
The JCGIndex ranges from 0 to 
100. A firm that would receive 100 points, 
would have a significant number of 
independent directors on its board, and a 
board that had adopted a committee 
structure (of audit, compensation, and 
nominating committees dominated by 
independent directors). The firm would 
set its performance goals based on 
matrices valued by  shareholder (return 
on invested capital) and the CEO would 
 148                                                                       Finance – Challenges of the Future 
be accountable for achieving these goals, 
tabel 3. 
Firms that scored higher on the 
JCGIndex tended to have larger 
percentages of foreign ownership. 
Another important aspect would be that 
firms that scored high in board structure 
and function, had higher levels of foreign 
ownership than low scoring firms. Firms 
that received high scores on this 
component had relatively high levels of 
board independence as measured by 
presence of independent directors, 
criteria for board appointments and the 
ability and authority of the board to 
monitor de CEO.  
 
Table 3. JCGIndex Japan 2008 
 
Category Mean/Total 
possible points 
Achievement rate 
(mean/total possible 
points) 
Corporate objectives and CEO 
responsibility 
10.6/28  37.9%  (36.9%) 
Structure and function of the board of 
directors 
10.7/25  42.8%  (36.9%) 
Management system  17.2/27  63.7%  (61.7%) 
Transparency and communication with 
shareholders 
13.4/20  67.0%  (67.3%) 
  Source: JCGR Corporate Governance Survey 2008 Final Report 
 
These correlations between the 
JCGindex and its various 
subcomponents and foreign ownership 
demonstrate an association, but not 
causation. In other words, it is not clear 
from these results whether foreign 
investors gravitated to firms that were 
closer to an Anglo-American ideal of 
governance. We can only presume that 
corporate governance issues were a key 
focus of questions by foreign investors, 
suggesting that at least some of the 
causation was due to foreign investors 
pressuring firms to change. 
 
5. Conclusion 
 
We examined the foreign 
portfolio investors and their effect on 
corporate governance in Japanese firms 
and observed that: 
- Foreign portfolio ownership of Japanese 
equity increased significantly 
- Foreign investors were advocates of 
Anglo-American style corporate 
governance 
- Foreign investors influenced Japanese 
firms both through exit and voice. Their 
propensity to buy and sell shares gave 
them strong influence over share price in 
general and made exit a particular threat 
to firms.  
- There has been a clear relationship 
between foreign investors and practices 
related to corporate governance  
Though it is impossible to 
establish a definitive direction of 
causation between foreign ownership 
and corporate governance practices, it is 
clear that the increase in foreign 
ownership was linked to the 
transformation of corporate governance 
practices in Japan since the early 1990s. 
Whether foreigners actually influenced 
firms to change their governance 
practices or firms changed their 
governance practices to attract more 
foreign investors, increased board 
independence, disclosure and 
transparency, downsizing and asset 
divestiture occurred in response to an 
increase in foreign portfolio investment in 
Japan. 
While the research presented 
suggested that foreign investors are 
associated with a shift towards Anglo-
American governance practices in Japan, 
this does not mean that there is likely to Year VIII, No. 10/2009                                                                                              149 
be wholesale convergence and that 
Japan is on course to be exactly like the 
US. How much is Japanese corporate 
governance going to change is hard to 
tell, there are several scenarios, but for 
sure we will see changes in the years to 
come.  
 
 
REFERENCES 
 
Dore, R  Stock Market Capitalism. Welfare Capitalism: Japan and Germany 
versus the Anglo-Saxons. New York, Oxford University Press, 2000; 
Druker, P  The Unseen Revolution: How Pension Fund Socialism Came to 
America. New York: Harper and Row, 1997; 
Hall, P.A. and D. 
Soskice 
An introduction to Varieties of Capitalism, Varieties of Capitalism: The 
Institutional Foundations of Comparative Advantage. New York: 
Oxford University Press, 2001; 
Jackson, G  Corporate governance in Germany and Japan: Liberalization 
Pressures and Responses during the 1990s’, in W. Streeck and K. 
Yamamura, The Future of Nationally Embedded Capitalism in a 
Global Economy. Ithaca, NY: Cornell University Press, 2002; 
Miyajima, H., K. 
Haramura, Y. 
Konan   
‘Sengo Nihon kigyo no kabushiki shoyu kozo’ – (The structure of 
Shareholding in Japanese Companies), 2002; 
Shirota, J  Foreign Investors in the Japanese Stock Market.Tokyo: Toyo Keizai, 
2002; 
Useem, M.  Investor Capitalism: How money Managers are Changing the Face of 
Corporate America. New York: Basic Books/HarperCollins, 1998; 
*****  ACCJ – American Chamber of Commerce in Japan – From Goals to 
Reality: FDI Policy in Japan. Tokyo, Japan, 2009; 
*****  JCGR – Japan Corporate Governance Research Institute – JCGR 
Index Report, 2008; 
*****  TSE – Tokyo Stock Exchange website; 
 
 
 
 
 

Is there any correlation between the economic growth and budget expenditure allocated to education? Case study Romania

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